Tower gets over its annus horribilus

Friday 15th February 2002

Share prices of insurance companies were particularly badly hit after September 11 last year, even when they were not exposed to reinsurance losses on the World Trade Centre. One reason was the value of many of their assets exposed to equities went into free fall for a while.

Reassuring investors of the underlying soundness of the business is obviously a priority in Tower's annual report, which covers its financial year to September 30, 2001.

It does this remarkably well; partly by putting the terrorist attacks in context with major disasters of the world but also by devoting considerable space to the performance of its various divisions. Such willingness to divulge information, at a time many companies might have been tempted to bunker down and reveal as little as possible, goes a long way to establishing trust and credibility in the minds of investors and policyholders.

It points out that the assassination of Archduke Franz Ferdinand in 1914 that sparked World War I, the dropping of an atomic bomb on Japan in 1945 and the oil crisis that started in 1973 were all major events in their time.

"If you take just those three instances - and they are only three of many" - their impact at the time was immense. But in a continuum - and with the luxury of hindsight - the changes wrought by these events have in time been absorbed. We adapted, we moved on. That seems to be the human condition."

Cleverly, Tower also points to its 132-year-history, mainly as Government Life, and indicates that one year of September 11-influenced poor performance (investment returns on shareholders‚ funds fell by 36% to $17.5 million) is not the end of the world.

"While we may be buffeted by the winds of change we are not deflected by them. We have a constancy of vision and that has led to a constancy of progress," it trumpets.

As it happens, Tower's bottom line was not severely affected by September's slump.

Net profit was $77.2 million against the previous year's $80.8 million (not counting a one-off reinsurance profit of $18.9 million in 2000). This is despite income falling by nearly half to $1.2 billion with proceeds from investments plunging from $523 million in 2000 to $94 million.

However, net operating cash flow took a big hit, falling to negative $56 million from a $270 million surplus.

Segmental figures make no delineation of abnormals and show net profit from its savings and investment operations fell by 14% to $73.9 million, risk insurance by nearly a third to $12.1 million and asset management by 23% to $3.9 million. Only trustee services showed an improvement, of 32%, to $31.5 million.

One of the reasons its bottom line was relatively insulated was that Tower booked a benefit of $318 million from a category called "Change in policyholder liabilities." In 2000, this change wiped $226 million from its earnings, a significant turnaround.

Unfortunately, notes to the accounts do not clearly show how the difference came about. Neither number in the statement of financial performance corresponds with those in the relevant note to the accounts.

A note to the notes reads: "The movement in policyholder liabilities in the statement of financial position does not equal the movement in policyholder liabilities in the statement of financial performance due primarily to the impact of translating Australian opening policy liabilities.."

Again, this is confusing and more explanation would have been useful.

A breakdown of earnings by country shows Tower's New Zealand assets are twice as profitable as its Australian ones. They produced a net margin on sales of 9.7% against 5.3% across the Tasman.

The difference is even more marked when calculating comparative returns on assets.

New Zealand operations produce a 2% net return on $1.6 billion while the poor old Aussies could only generate 1.1% on $4.2 billion. If anything, this gap has widened in the past year.

Like most New Zealand companies that have expanded into Australia, Tower has yet to demonstrate it can match local with international success, it's horrible year notwithstanding.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. Internet: www.mcewen.co.nz, Email: davidm@mcewen.co.nz

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