Better business policies at two Towers

By ADAM BENNETT


A year ago, former Tower NZ chief executive Jim Minto was turning Tower Australia around. But an increasing number of policy lapses and surrenders during the September half-year has proved disappointing.

Tower's New Zealand business has remained "strongly profitable" but the company is still dealing with problems at its Australian operations which account for 70 per cent of its business.

Tower Australia lost $6.6 million during the September half year, slightly more than in the first half of the year. But the company expected the operation to be profitable in the September 2004 year.

Minto quickly realised that Tower Australia was in worse shape than previously thought.

"It had been run down, its sales had run down, its costs had exploded and in the year 2000 it had high levels of lapses and I quickly discovered it had compliance issues."

The past year had been one of "huge change".

"The entire senior management team has now gone. I replaced all the managers and most of the sales managers, and we've re-energised the team."

In all, 130 jobs at Tower Australia went over the past year and $4.5 million was spent addressing compliance issues and compensating affected policy holders.

Meanwhile, the company has cut running costs by a quarter as it discontinued product lines and narrowed its area of focus to the "logical strategic opportunities" and profitability of specialist life insurance and wealth management business.

Although the company is a relatively small player in the Australian insurance market, a June survey showed it still has a 6 to 7 per cent share.

"When you've got to that 5 to 6 1/22 per cent market share, you have a very credible business," Minto said.

But Tower Australia's insurance business has been hit as disgruntled customers pulled out.

Although the issue of lapses was highlighted last Wednesday when Tower reported a disappointing full-year loss of $149 million, Minto said it was not the over-riding concern.

"The adverse effect of lapses was about A$12 million [$13.6 million] to our profit so it was bad, but if lapses were not a problem we would only have made a profit of A$5 million - the problems in Tower Australia were far more than just lapses, there were lots and lots of other things."

For the company's pure life-insurance business, Minto said sales had increased by 15 per cent over the past year and had exceeded lapses.

For the company's disability insurance business the lapses exceeded sales.

Meanwhile, lapse figures for Tower Australia's investment business were not so relevant because the company had discontinued a lot of product lines in the sector "and we're trying to lapse them".

An investigation into lapses had found poor service was a factor, and something that also affected sales. Other reasons were the perceived high cost of Tower Australia's products and concerns about the company's financial state, especially after the substantial writedowns earlier in the year.

"That's no longer an issue," Minto said.

The company was the subject of a review early this year by Australian insurance regulatory body Apro.

"Apro put in an investigation team from KPMG and they gave the business a really good review."

Following this, the company received a A$30 million capital injection from its parent. The result was that Tower Australia's solvency levels went from 1.2 times the minimum solvency the Australian regulator requires to 1.9 times.

"So that's been an absolutely outstanding achievement ... probably the biggest success this year."

Minto said the perception that Tower Australia's risk products were pricey was a result of improving mortality figures reducing the cost of life insurance.

The problem was industry wide.

But he remained positive about the outlook for both Tower Australia and the insurance industry in general.

The property boom seen in Australia as well as New Zealand meant homeowners were interested in insurance as mortgage protection. Other products such as income replacement and trauma or crisis insurance were increasing in popularity.

"We think that there's a strong further demand for risk and that it's an attractive area ... that's where we've got a credible market."

Meanwhile, Minto said last Wednesday's news was not all bad.

"To have grown our premium by 15 per cent in a year where our solvency was under question and we had a huge loss problem tells you that we have a position we can build on."

While not about to say anything "super bullish" about Tower Australia, he was convinced it was on the mend.

"This company has produced solid levels of profit before and if the right work is done ... and it's repositioned correctly for the future, it can produce good value for its shareholders.

- NZPA