TOWER LIMITED — Annual Report 2013

Nov 25, 2013

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26 November 2013

Market Information NZX Limited Level 2, NZX Centre 11 Cable Street Wellington NEW ZEALAND

Company Announcements Office Australian Stock Exchange Limited Exchange Centre Level 6, 20 Bridge Street Sydney NSW 2000 AUSTRALIA

TOWER Limited Results Announcement Presentation attached.

For further information, please contact: Tracey Palmer Head of Corporate Communications DDI +64 9 369 2017

A customer focused general insurer

Full year results to 30 September 2013

26 November 2013

A customer focused general insurer

This presentation has been prepared by TOWER Limited to provide shareholders with information on TOWER’s business. This document is part of, and should be read in conjunction with an oral briefing to be given by TOWER. A copy of this webcast of the briefing is available at http://www.tower.co.nz/company/investor-centre/webcasts/

It contains summary information about TOWER as at 30 September 2013, which is general in nature, and does not purport to contain all information a prospective investor should consider when evaluating an investment. It is not an offer or invitation to buy TOWER shares.

Investors must rely on their own enquiries and seek appropriate professional advice in relation to the information and statements in relation to the proposed prospects, business and operations of TOWER. The data contained in this document is for illustrative purposes only. Past performance is not a guarantee of future performance and must not be relied on as such.

Forward looking statements

This document contains certain forward-looking statements. Such statements relate to events and depend on circumstances that will occur in the future and are subject to risks, uncertainties and assumptions. There are a number of factors which could cause actual results and developments to differ materially from those expressed or implied by such forward-looking statements, including, among others: the enactment of legislation or regulation that may impose costs or restrict activities; the renegotiation of contracts; fluctuations in demand and pricing in the industry; fluctuations in exchange controls; changes in government policy and taxation; industrial disputes; and war and terrorism. These forward-looking statements speak only as at the date of this document. Solvency estimates contained herein are yet to be reviewed by the Reserve Bank of New Zealand.

Disclaimer

Neither TOWER nor any of its advisers or any of their respective affiliates, related bodies corporate, directors, officers, partners, employees and agents (other persons) makes any representation or warranty as to the currency, accuracy, reliability or completeness of information in this presentation.

To the maximum extent permitted by law, TOWER and the Other Persons expressly disclaim any liability incurred as a result of the information in this Presentation being inaccurate or incomplete in any way.

The statements made in this presentation are made only as at the date of this presentation. The accuracy of the information in this presentation remains subject to change without notice.

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2

transition complete, foundations being laid

TOWER Group presentation highlights

Full year reported profit of $34.4 million

A final dividend of 6 cents per share (unimputed), bringing the total to 11 cents per share for the year. Payout ratio reconfirmed at 90-100%

Three business sales realised a total of $370 million

Three business sales realised a total of $370 million Industry leading settlement of earthquake claims and on track to complete at the end of 2015 Costs to complete the sale of the retained Life business Strategy and operating model refreshed have been provisioned

Confirmation and details of capital return of $70 million. Foundation being laid for realising TOWER’s growth A commitment to continually focusing on capital potential management

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3

What we are covering today

+ Financials

Profit

Balance sheet

Solvency

+ Strategy

Positioning for growth Operating structure

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4

Full year results to 30 September 2013

TOWER Group summary Profit

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NPAT
$34.4m
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|||||||
|---|---|---|---|---|---|
|Full year ended September|
|2013|2012|2011|
|General Insurance|19.0|26.8|24.7|
|Life|12.0|23.7|19.9|
|Health|0.9|13.3|9.7|
|Part year contribution|
|Investments|4.0|7.0|6.8|due to sale of|
|business units|
|Business unit net profit after tax|35.9|70.8|61.1|
|Finance and corporate expenses|(7.2)|(10.4)|(6.5)|
|Profit excluding the impact of discount rate and abnormal items|28.7|60.4|54.6|
|Discount rate effect|(9.0)|9.0|2.4|
|Net impact of abnormal items|[1]|14.7|(13.6)|(23.6)|
|Reflects gains on sale of|
|Reported net profit after tax|[2]|34.4|55.8|33.4|business units and Canterbury|
|earthquake provision|
|$ millions|

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1 Refer page 8 for overview

2 A number of items are classified as discontinued operations in the Group financial statements

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6

Analysis of profit General Insurance

sustained premium growth

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Full year ended September
2013 2012 2011
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 events [1] (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 19.0 26.8 24.7
earthquakes and revaluation of Australian liabilities
Impact of Canterbury earthquakes [2] (15.2) (13.6) (22.2)
Loss from Australia discontinued operation [3] (7.1)
Profit (loss) after tax [4] (3.3) 13.2 2.5
$ millions
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• Sustained premium growth

• Reinsurance outlook stabilising

• Large claim events reflect New Zealand weather events and the impact of Cyclone Evan in the Pacific

• Foreign exchange losses and increased sales costs impacted management and sales expenses

• Second half results in line with proforma NPAT previously provided

Half year to: Sept 13 $13.1m Mar 13 $ 5.9m

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

1. Includes $6m revaluation of Australian liabilities

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

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7

Overview of abnormal items

Investments sale	79.7
Gain on sale	73.0
Sale related costs	(6.4)
Net gain on sale	66.61
Health sale	102.3
Gain on sale	24.5
Sale related costs	(6.9)
Net gain on sale	17.61
Non-participating Life sale	71.8
Gain on sale	(1.4)
Sale related costs	(11.1)
Net gain on sale	(12.5)1
Remaining Life sale related costs	(2.4)1
Australian liabilities	(7.1)
Impact of Canterbury earthquakes	(15.2)
IT systems write down	(32.3)1
Net impact of one off items	14.7
	$ millions (net of tax)

1. Classified as profit from disposal of subsidiaries in the Group financial statements

one offs impacts

Remaining Life sale related costs

• Costs associated with the sale and separation of the remaining Life business

Australian liabilities

• Loss on sale of Australian workers compensation liabilities, subject to final approvals

Canterbury provisions

• No changes in second half to key February 2011 event provisions

IT system writedown

• Reflects reassessment and writedown of groupwide IT systems following group restructure

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8

Canterbury earthquake update

TOWER continues to lead the industry in settling claims, with 74% of all claims now settled and closed. Our rebuild phase is accelerating and we are working closely with customers, stakeholders and suppliers to ensure this continues at pace, providing certainty to affected customers and the wider community. We are on track for substantially completing claim settlement by the end of 2015.

TOWER is taking a prudent approach to provisioning with quarterly actuarial reviews, and will advise the market of any material changes.

Updates on our progress on Canterbury earthquake claims are published monthly at www.tower.co.nz/company/canterbury-earthquake

TOTAL PROPERTY CLAIMS AS AT OCTOBER 2013

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10,412 8,594
83%
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Cash settled 65% Work completed 6% In construction 1% Pre-construction 11%

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REBUILD PROPERTY CLAIMS
AS AT OCTOBER 2013
1,080 867
80%
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Cash settled 47% Work completed 5% In construction 4% Pre-construction 24%

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providing
certainty
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Key statistics - Oct 2013

• 10,412 properties have lodged claims

• 83% of total property claims are either settled or underway

• 74% (by number) of total claims have been settled and closed which represents 62% (by value) of total incurred claims

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9

Analysis of FY13 profit Other divisions

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other
results
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Analysis of FY13 proft Other divisions other results	Analysis of FY13 proft Other divisions other results	Analysis of FY13 proft Other divisions other results
Life1 Health1 Investments1 Sep-13 Sep-13 Sep-13 Net premium/income 62.7 24.8 18.1 Total incurred claims (66.8) (16.4) - Premium payback payments - (2.3) - Management and sales expenses (30.0) (6.5) (12.5) Movement in policy liabilities 34.6 0.7 - Investment income on assets backing policy liabilities (8.5) 0.4 - Insurance profit (8.0) 0.7 5.6 Investment income on shareholders’ funds 9.8 0.6 - Profit before tax excluding the impact of discount rate 1.8 1.3 5.6 Income tax expense 10.2 (0.4) (1.6) Includes: • Two month contribution from Health • Six month contribution from Investments • 10 month contribution from sold Life business
Profit after tax excluding the impact of discount rate 12.0 0.9 4.0 Discount rate effect (9.0) - - Profit after tax 3.0 0.9 4.0		Includes $2.8 million from the remaining Life business
$ millions

• 10 month contribution from sold Life business

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1. A number of items are classified as discontinued operations or held for sale in the Group financial statements

10

Balance sheet summary

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Year ended
2013 [1] 2012 2011
Cash and call deposits 350.0 199.7 152.9
Health and Life [1] 678.2 882.1 861.3
General Insurance 143.1 154.6 168.4
Investments - - 0.1
Total investment assets 821.3 1,036.7 1,029.8
Deferred acquisition costs 18.2 45.8 42.4
Intangible assets 30.2 81.9 72.7
Other operational assets (liabilities) 476.9 601.3 678.7
Total assets 1,696.6 1,965.4 1,976.5
Policy liabilities and insurance provisions (1,161.1) (1,262.3) (1,326.3)
External debt (82.8) (82.0) (81.3)
Other operational assets (liabilities) (71.6) (122.3) (113.4)
Total liabilities (1,315.5) (1,466.6) (1,521.0)
Total equity 381.1 498.8 455.5
$ millions
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1. A number of items are assets or liabilities of disposal groups classified discontinued operations or held for sale in the Group financial statements

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increased
cash on
hand
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• Reflects the return of $120 million of capital in April 2013

• Excludes the impact of the announced $70 million capital return

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Solvency

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focus on
capital
management
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TOWER is currently holding additional capital within its licensed insurers as part of the Reserve Bank of New Zealand licensing process. This covers risks associated with the Canterbury rebuild and the run-off of the remaining Life business.

TOWER will continue to work proactively to manage these risks and to allow movement to a more efficient capital structure.

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General
Solvency capital overview [1] Insurance Life Total
Actual solvency capital (ASC) 196.0 29.8 225.8
Minimum solvency capital (MSC) 78.8 6.1 84.9
Solvency margin 117.2 23.7 140.9
Minimum solvency margin requirement (MSM) 80.0 15.0 95.0
Current capital above regulatory minimum 37.2 8.7 45.9
$ millions
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• Further cash and investments of $156.9 million is held outside the licensed insurers to cover capital return and debt repayment

• Capital of $21 million will be released from Australia, subject to final court and regulatory approval

• Reinsurance being utilised to minimise adverse impacts on capital and earnings

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1. Solvency has not been reviewed by the Reserve Bank of New Zealand

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Strategy

Market overview

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growth
opportunities
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NEW ZEALAND TOTAL GWP MARKET SHARE[1]

Year ended 30 September 2013:

2 . $ 79 3m

TOWER’s GWP

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New Zealand 80% Pacific Islands 20%

1 Source: ICNZ September 13 market share report

1. Includes American Samoa and Tonga

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TOWER's FY13 GWP BREAKDOWN WITHIN THE PACIFIC ISLANDS

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IAG 41.7% AIG 3.7% Vero 25.4% Allianz 2.8% Lumley 9.5% ACE 2.5% TOWER 4.7% Zurich 1.4% FMG 3.8% QBE 1.1% Other 3.4%

PNG 35% Fiji 27% Samoa[2] 21% Cook Islands 9% Solomon Islands 8%

TOWER’s share in personal lines

• House 10.5%

• Contents 10.3%

• Motor 6.4%

Pacific Islands

Focus on:

• Building brand

• Engaging with customers and partners

• Leveraging technology

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General Insurance key highlights

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strong
[base]
for growth
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Year ended 30 September 2013:

2 . $ 79 3m

GWP

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New Zealand 80% Pacific Islands 20%

$19.0m

1 NORMALISED NPAT

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New Zealand $14.4m Pacific Islands $4.6m

266 2 1 499,707 , 7 Inforce policies Clients2

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New Zealand 87%
Pacific Islands 13%
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New Zealand 88% Pacific Islands 12%

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1. Only normalised for discontinued Australian business and Canterbury earthquakes

2. One customer can be comprised of multiple clients. Restated from half year to include additional contract types

15

Clear strategic direction

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realise
TOWER’s
value
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TOWER’s vision is to be the leading light in New Zealand general insurance.

We have a clear direction and a customer-centric strategy focused on five key enablers that position us for growth and the delivery of returns to shareholders.

We are a well capitalised business, with a highly recognised brand. This is not reflected in our market share.

Key enablers

Growth and retention

Key metrics

––– ––– –––

• Value added services

• Product bundling

• Capital efficiencies

• Direct and alliance channels

• Data insights

• Differentiate on customer experience and are easy to do business with

• Customer segmentation and proactive engagement using data insights

• Consistency of service across channels – a collaborative approach

• Actively building and managing strategic relationships

• Capital efficiencies to fund growth

Financial performance

• Net profit after tax

• Gross written premium retention ratio

Customer satisfaction

• Net promoter score Staff engagement

• AonHewitt engagement survey

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Operating structure

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customer
focused
structure
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“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.”

Risk and finance Service enablement Customer proposition Sales and service Michael Boggs Debbie Eyre Mark Savage

We have reorganised our business to be more agile, responsive and customer focused. This has seen us create four collaborating divisions, working together to deliver shared goals. A number of key senior appointments have already been made.

“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.”

This new organisation design, with a focus on customers, not policies, will improve the delivery of our services to customers and drive value to shareholders.

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In summary

customer focused insurer

Give meaning to the TOWER brand – recognise its potential

Deliver new products and services to the market to drive value

Settle Canterbury earthquake claims, giving customers and the community certainty Continue to focus on cost efficiencies to deliver bottom line improvements Capital will remain an ongoing focus

Invest time and energy in stakeholder engagement to improve TOWER’s position

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18

Thank you, any questions?

Appendix A: Supporting information

Corporate governance and policies

TOWER continues to focus on improving overall Corporate Governance and policies:

• IPSA compliant governance structures in place for each licensed insurer

• Review of Board structure and size underway

• Diversity policy approved and implemented

• Enhanced disclosure and increased engagement with stakeholders

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21

Balance sheet summary Divisions

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As at September 2013
General Life Corp Total Group [1]
Cash and call deposits 189.1 8.4 152.5 350.0
Total investment assets 143.1 673.8 4.4 821.3
Deferred acquisition costs 18.2 - - 18.2
Intangible assets - - 30.2 30.2
Other operational assets (liabilities) 377.9 56.0 43.0 476.9
Total assets 728.3 738.2 230.1 1,696.6
Policy liabilities and insurance provisions (470.7) (679.3) (11.1) (1,161.1)
External debt - - (82.8) (82.8)
Other operational assets (liabilities) (45.6) (19.5) (6.5) (71.6)
Total liabilities (516.3) (698.8) (100.4) (1,315.5)
Total equity 212.0 39.4 129.7 381.1
$ millions
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1. A number of items are assets or liabilities of disposal groups classified discontinued operations or held for sale in the Group financial statements

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22

Investment assets breakdown

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As at September 2013
General Life Corp Total Group
Fixed interest securities (NZ) 127.9 482.0 4.4 614.3
Fixed interest securities (AUS) 12.5 - - 12.5
Total fixed interest securities 140.4 482.0 4.4 626.8
Equity securities (NZ) - 94.7 - 94.7
Equity securities (AUS) - - - -
Equity securities (International) 1.7 - - 1.7
Total equities securities 1.7 94.7 - 96.4
Property securities 0.9 49.0 - 49.9
Derivative financial instruments 0.1 48.1 - 48.2
Total investment assets 143.1 673.8 4.4 821.3
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$ millions

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Credit ratings for investment assets

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2013
Investment assets subject to credit rating
AAA 229.1
AA 652.2
A 21.5
BBB or below 12.8
Unrated investments [1] 56.7
972.3
Investment assets not subject to credit rating
Fixed interest securities 52.7
Equity securities 96.4
Property securities 49.9
199.0
Total cash and investment assets 1,171.3
Cash and call deposits 350.0
Investment assets 821.3
Total cash and investment assets 1,171.3
$ millions
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1. Includes derivative financial assets and cash

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General Insurance Analysis of profit

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Half year ended
Sep-13 Mar-13 Sep-12 Mar-12 Sep-11 Mar-11 Sep-10
Net premiums 111.2 107.3 103.8 93.9 78.0 89.2 92.4
- Gross earned premiums 136.4 130.8 125.0 113.9 106.2 102.1 104.8
- Reinsurance (24.4) (23.5) (21.2) (20.0) (13.3) (10.2) (11.0)
- - -
- Catastrophe reinsurance reinstatement (0.7) (14.9) (2.7) (1.4)
Net incurred claims (49.8) (58.6) (46.4) (44.9) (41.7) (44.6) (48.3)
- - -
Large claim events [1] (6.2) (3.4) (0.2) (1.1)
-
Impact of Canterbury earthquakes (20.4) (14.5) (4.4) (9.1) (5.0) (5.0)
Management and sales expenses (41.3) (41.7) (40.0) (38.8) (35.0) (35.9) (32.3)
Underwriting profit 13.9 (16.7) 2.7 4.7 (7.8) 3.7 6.8
Investment income 3.9 4.2 7.9 4.5 7.5 4.0 7.8
Profit before tax 17.8 (12.5) 10.6 9.2 (0.3) 7.7 14.6
Income tax expense (6.4) (2.3) (2.8) (3.8) (1.8) (3.1) (4.6)
Profit (loss) after tax 11.4 (14.7) 7.8 5.4 (2.1) 4.6 10.0
$ millions
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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

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General Insurance Key statistics

General Insurance – Gross Written Premiums (rolling 12 month) and lapses

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Half year ended
Sep-13 Mar-13 Sep-12 Mar-12 Sep-11 Mar-11 Sep-10
New Zealand 224.7 213.8 206.5 190.1 171.8 164.7 163.1
Pacific Islands 54.6 55.3 53.4 47.9 45.0 44.5 45.4
Total gross written premiums 279.3 269.0 259.9 238.0 216.8 209.2 208.5
Lapse rate [1] 13.5% 13.7% 13.7% 13.1% 13.1% 14.3% 15.7%
$ millions
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General Insurance – Net premiums and claims

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Half year ended
Sep-13 Mar-13 Sep-12 Mar-12 Sep-11 Mar-11 Sep-10
Net premiums 111.2 107.3 103.8 93.9 78.0 89.2 92.4
Claims including catastrophe events 56.0 82.3 61.1 50.4 50.8 49.6 53.3
Claims ratio [2] 50.4% 76.7% 58.9% 53.7% 65.1% 55.6% 57.7%
$ millions
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1. Premium lapse rate excluding FinTel

2. Includes Canterbury earthquakes, large claim events and $7.1m from Australian operations

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General Insurance Key statistics

General Insurance – Underwriting profits

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Half year ended
Sep-13 Mar-13 Sep-12 Mar-12 Sep-11 Mar-11 Sep-10
Underwriting profit (loss) 13.9 (16.7) 2.7 4.7 (7.8) 3.7 6.8
Combined ratio [1] 87.5% 115.5% 97.4% 95.0% 110.0% 96.0% 92.7%
$ millions
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General Insurance – Management and sales expenses

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Half year ended
Sep-13 Mar-13 Sep-12 Mar-12 Sep-11 Mar-11 Sep-10
Management expenses 32.5 33.2 32.1 30.8 27.6 29.1 27.4
Commissions 8.8 8.5 7.9 8.0 7.4 6.8 4.9
Total expenses 41.3 41.7 40.0 38.8 35.0 35.9 32.3
$ millions
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1. Claims and costs to net premium ratio

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General Insurance New Zealand overview

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FY13 GWP BREAKDOWN
BY PRODUCT
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Home 37%
Motor 29%
Contents 25%
Other 9%
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FY13 GWP BREAKDOWN
BY DISTRIBUTION CHANNEL
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Direct 56%
Fintel 4%
Alliances 40%
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FY13 NEW BUSINESS GWP BY DISTRIBUTION CHANNEL

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TOWER and FinTel phone sales 69% Online 2% Small and medium enterprises 6% Rural 4% Alliances 19%

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General Insurance overview Pacific Islands

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FY13 GWP BREAKDOWN FY13 GWP BREAKDOWN
BY PRODUCT BY DISTRIBUTION
Commercial 30% PNG 35%
Motor 34% Fiji 27%
Home & contents 19% Samoa [1] 21%
Workers comp 6% Cook Islands 9%
Accident 3% Solomon Islands 8%
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Commercial 30%
Motor 34%
Home & contents 19%
Workers comp 6%
Accident 3%
Other 8%
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1. Includes American Samoa and Tonga

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FY13 GWP BREAKDOWN
BY CHANNEL
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Alliances 17%
Broker 33%
Direct 50%
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29