Tower Limited (TWR) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Tower Full Year Results Conference Call. [Operator Instructions] Please be advised that this conference is being recorded. I would now like to hand the conference over to your first speaker, Michael Stiassny, Chairman of Tower Limited. Thank you. Please go ahead.

Morena, good morning, and thank you for making the time to join us for this investor call and presentation of our results. With me in our Auckland office is our Chief Executive Officer Blair Turnbull; and our Chief Financial Officer, Jeff Wright, who will take you through our full year results and answer questions. The transformation we embarked on 5 years ago has seen the tower business turnaround and deliver continued profit growth. In an uncertain world, where many businesses are now having to pivot, our digital-first strategy has positioned Tower well. Tower has emerged, from the initial response to the pandemic, strong and resilient, and this is demonstrated by the continued improvement in results over the past year. Whilst no company is immune to the ongoing challenges presented by COVID-19, the insurance industry is inherently resilient, and the team have guided Tower well. Our reported results are at the top end of our guidance and provide a strong base for continued investment in growth. Our new IT platform continues to deliver benefits for both customers and the business. And with our new CEO Blair joining us, we are ready to embark on our next ambitious phase. Our strategic direction, which is servicing us well, does not change. Our relentless focus on customers and driving our digital and data program forward remains vital for us, as we continue to disrupt insurance industry norms. But the speed of change, our momentum is accelerating. Tower's response to COVID-19 focused on putting customers and people first. Dedicated teams supported those people suffering hardship, and we were the first general insurer to refund customers to the tune of $7.2 million for the lower claims due to the COVID-19 lockdown. I'd like to pay tribute to the Tower team who have led the business so well through COVID-19. Our investment in digital has enabled our people to work remotely when needed and has allowed us to maintain full operations despite numerous lockdown periods. Yesterday, we announced that we entered into a settlement agreement with the Earthquake Commission regarding an outstanding receivable resulting from the Canterbury earthquakes. Under the settlement agreement, Tower will receive $42.1 million after disbursement to reinsurers and cost. The write-off of the residual amount will result in an impact of approximately $9.5 million on our FY '20 reported net profit. In recent years, we have progressively been removing legacy risks from the business. And removing this significant one is an important milestone and provides the management team with clear air to move the business forward and to accelerate. The Board determined that reaching this settlement agreement gives certainty to you, our shareholders, who will be pleased to see this risk removed from our business. It further increases the strength of our capital position and provides us with a solid foundation to keep driving the business forward, innovating and ultimately delivering growth. The Board and management remain strongly committed to paying dividends and to the efficient management of capital. Earlier this year, the Reserve Bank of New Zealand advised the financial sector to protect solvency positions and preserve capital in light of the COVID-19 disruption and uncertain economic outlook. The Reserve Bank has more recently updated their guidance, thanks to a stronger-than-expected economy and recovery from COVID-19. So whilst no dividend will be paid for FY '20, Tower intends to resume dividend payments in FY '21, subject to market conditions and the careful consideration of any growth opportunities that may arise. This year, we also amalgamated multiple entities to further simplify the business and remove complexity and additional administration. Change has no impact on our shareholders or our insurance license or to our customers, but it is another important step in creating the Tower of the future. On behalf of the Board, I'd like to welcome Blair, to thank Blair, the management team and our frontline teams for their resilience, their sustained focus on delivering good outcomes for customers and improving profitability. I'll now hand over to Blair and Jeff who will take you through the results and outlook before we take questions.

Kia ora, and thank you, Michael. A warm welcome to everyone joining us today. I'm delighted to be here sharing with you a very good set of full year 2020 results, which have been achieved while navigating a very challenging year for all of us. As well as updating you on the past year, I would also like to take this opportunity to give you a high-level overview of Tower's plans to continue growing and innovating in the future. There is no doubt that Tower has had quite the journey. From over a decade ago, we transitioned from a composite insurer with multiple lines of business to a mono-line, general insurer. And this was an important first step in creating the Tower of today. Then around 5 years ago, we embarked on a significant transformation program to modernize the business from its multiple legacy systems with complex product offerings, while also dealing with the aftermath of the Canterbury earthquakes. The transformation has been successful with the implementation of a new cloud-based technology platform, rationalized product set and migration of customers onto the platform close to complete. This transformation has delivered improved results each year. And today, we are well placed to accelerate our strategy, driving for higher growth and increased innovation. The next step in our journey is a logical one. It's the same path we've been on, but faster, more focused, more energetic and more creative. Perhaps one of the most symbolic recent shifts is the creation of 3 new businesses: Direct, Partnership and Pacific, each with end-to-end accountability. I'll talk to this more in more detail later, but the key to our success is leveraging and new cloud-based scalable digital and data platform for our flagship Tower Direct business and also our Partnership and Pacific businesses. So let's now turn to a summary of our full year 2020 results. When you exclude the impact of large events, you can see that our underlying business is performing strongly, up 23% on the prior year to $34.7 million. We are growing the business while closely managing claims, underwritings and operating expenses. Importantly, underlying NPAT has just surpassed the top end of our guidance at $28.4 million. And our combined operating ratio is steady at 88.5%, demonstrating the strength of our core insurance fundamentals. The EQC settlement is an important step forward for us, allowing us to focus fully on driving growth and value. Reported profit is $12.3 million, including the $9.5 million impact from the EQC settlement of $42.1 million after cost and reinsurance. This is a good set of results for Tower and demonstrates our ability to deliver consistent growth and profitability. A continued focus on customers and building a compelling digital offering has seen our customer numbers increase to 300,000, up 11% on the prior year. And this growth in customer numbers has driven a strong GWP result of $385 million, up 8% on the prior year. And this has also helped to increase our market share in New Zealand personal lines to 9.1%, up from 8.3% in the prior year. Thanks to more effective and efficient marketing, we have seen steady increases in the number of people visiting us online. This combined with competitive pricing, plain language products and self-service offering is driving customer growth. Our task is to further engage with our customers to build deeper relationships by leveraging data and providing more personalized offers. Our self-service portal, MyTower, has passed the 50,000 registration mark, which is a significant achievement, given it launched less than a year ago. Its growth highlights the increasing importance of easy online access and customers being comfortable with transacting online to purchase insurance and make claims. Migration of our Tower Direct customers to our new platform is almost complete. We are also well underway with the migration of Youi New Zealand customers, both of which are achieving strong retention rates. Youi New Zealand contributed around $12.6 million in GWP to a total of $385 million. Youi was the first test of our digital and data platform capability to onboard customers effectively and efficiently, and it has been very successful. We now have a proven, scalable blueprint to migrate other books, and we will continue to seek value-accretive bolt-on acquisitions. Claims. Claims sits at the very heart of everything we do, and it's a core insurance fundamental alongside underwriting, product and pricing. Over the past 12 months, we have taken significant steps forward in improving the way we underwrite business, which is delivering improving results. And key actions include: continued focus on claims leakage and recoveries; refinement of our plain language products that provide clarity to customers at claims time; implementation of new data practices to support risk selection and to enable us to more accurately monitor our portfolio; refinement of our online claims capability that has seen 45% of our claims lodged online in September, up from 27% at the same time last year; and the launch of straight-through claims processes that enable low-value, low-risk claims straight through to our suppliers, enabling us to reduce costs and customer wait times. The result of all of this work is an ongoing improvement in our claims ratio, excluding large events, to 46%, 2% better than the prior year. We are seeing some inflation in our motor book, but we are managing this closely through ongoing product and pricing reviews and supplier engagement. This inflation is mostly due to a higher number of expensive cars being on the road with increased levels of technology in windscreens and bumper bars. Tower is focused on creating a risk portfolio that is well balanced and profitable. In New Zealand, almost 2/3 of our new business is motor, which brings them the total percent of motor on our book to 43% of all risks. A key strategic priority to support our growth and innovation is to deepen our customer relationships and increase the number of policies they hold with us. On average, each of our customers insure 2 risks with us. Rationalization of our products from hundreds of variations to a core set of 12 is now complete for New Zealand and is delivering a consistent, simple and rewarding experience. We are now undertaking a similar process in our Pacific business with reduction of product variations by 30%. Complexity drives cost into insurance businesses and slows our delivery down. We remain vigilant to mitigating at every opportunity. Our Tower Direct business is our best example of what can be achieved through a new-generation insurance business. In Tower Direct, nearly all the work is completed on the cloud, which delivers significant efficiencies and sees us operating at a management expense ratio of 34% versus our overall Tower expense ratio of 39%. This continued digital and data push has seen us increase the effectiveness of our marketing, where we have reduced our cost to acquire a customer to 13% of net earned premium, 2% lower than the prior year. While our business has grown, our people numbers have reduced to 601, with the focus now on evolving new skill sets in key areas like digital and data, while also supporting flexible, remote working. Our digital platform is transforming and enabling agility in the way we do business and engage with our customers. And core to this capability is our agile cadence, our ability to make improvements and put these live quickly. We have more than doubled the number of digital releases in the past year to 117. Over 90% of all of our Tower Direct customers are now on our EIS cloud-based platform, and over 70% of our workloads are now cloud-based. 4 legacy systems have been decommissioned in the past 6 months, with another 4 to be decommissioned in the coming year, leaving us with only 2 to complete beyond that. This consistency of systems and use of the cloud means that all team members are now on the same operating systems, enabling sharing of work across the locations to drive efficiency. We are now leveraging our Pacific hub in Fiji to support claims and service operations for New Zealand Direct and Partnership. This supports workload flexibility, demand spikes and a lower cost to serve. Tower is a strong and sound business. Yesterday's announcement on settling the EQC receivable further strengthens our position while also removing a legacy issue from the business. Currently, we have significant capital above regulatory minimums. And following amalgamation, our financial strength ratings have been confirmed. Canterbury earthquake claims have reduced significantly, with more than 100 claims closed in the last 2 years, and Jeff will provide a further update on this. But it shows that this period of legacy risks is almost at an end. In the past 6 months, we have also repaid and closed a $15 million BNZ credit line. So we have no outstanding borrowings. This puts us in a strong position to resume dividends in 2021, subject to market conditions and the consideration of any growth opportunities that may arise. Like all businesses around the world, we are also navigating a COVID-19 world, and it is pleasing to see the resilience demonstrated by Tower and the team. Following the initial lockdown, we moved quickly to enable 100% of our workforce to operate remotely, and this capability is still in place, so we are ready to respond to any future changes. As I mentioned earlier, all of our team are now working from the same operating system, ensuring that all locations can assist with workloads in the event of further lockdowns. Our response for customers has been in place for a number of months now. We have a dedicated hardship team who are providing case-by-case customer support. Importantly, we were the first general insurer to refund our motor customers for lower claims due to the COVID-19 Level 4 lockdown. Proactively refunding our customers for a service they were not using was absolutely the right thing to do. I will now hand over to Jeff who will take you through our detailed financial results.

Thank you, Blair, and good morning, everyone. Looking at the consolidated results, we can see that continued growth was a key driver of Tower's full year results. This growth was offset by the impacts of Cyclone Harold and the Timaru Hailstorms along with lower investment income. We have continued to deliver solid growth, with gross written premium increasing by $28.4 million compared to the same period last year. Claims costs, excluding large events, rose $9.4 million. Underlying profit after tax increased slightly to $28.4 million, thanks to these improving key metrics. The Canterbury earthquake portfolio is performing in line with expectations in most areas. The after-tax strengthening of $2.7 million for FY '20 represents the lowest annual increase since 2014. Along with the settlement of the EQC receivable, this is a clear sign that we are nearing the end of the impacts of the Canterbury earthquakes. Our reported profit of $12.3 million after tax was impacted by the EQC settlement and is $4.5 million lower than the prior year. The motor refund of $7.2 million related to the COVID-19 lockdown is included in claims expense in this slide. In the financial statements, it's deducted from our GWP, as per the reconciliation in Page 34 of the appendices. Slide 16 details the key drivers of underlying profit before tax from financial year '19 to financial year '20. The solid growth is reflected in the $33.3 million increase in net earned premium, a combination of growth in our core portfolio and our risk-based pricing approach. On this slide, you can also see the impacts at $9.7 million of large events. While net claims expenses increased by $9.4 million, this is proportionately lower than the increases we achieved in net earned premium. Management expenses were higher in absolute terms due to the completion of our IT transformation and investment in customer migration along with the amortization of the Youi portfolio. Managing risk is at the heart of what we do as an insurer, and our reinsurance program provides certainty and protection. In November 2019, a large hailstorm hit Timaru, causing claims expenses of $4.7 million. $2 million of this was recovered from reinsurance, resulting in a before tax impact of $2.7 million. In April 2020, Tropical Cyclone Harold caused widespread damage in the Pacific Islands. While Vanuatu and Tonga were most impacted, we also received claims in the Solomon Islands and Fiji. This impacted results by $8 million before tax. Our total large event expense for FY '20 was $9.7 million before tax. This was $1.7 million more than the $8 million large event assumption we made in Tower's FY '20 market guidance. Already this year, we've experienced 2 large events and our thoughts are with everyone in these communities who have been impacted. A before tax provision of $6 million is in place for the Lake Ohau fires, and our preliminary estimates for the recent Napier floods show an impact on our FY '21 results of between $3 million and $4 million before tax. Our reinsurance program for FY '21 provides an increased catastrophe cover of $812 million, which has been secured on flat pricing and with a similar excess. Our aggregate insurance program was maintained at a lower cost, but with a higher excess of $14 million. This means that some exposure to large events remains until the total excess reaches that $14 million mark. Our claims ratio has improved over the past 12 months with a number of underwriting and pricing initiatives helping to offset inflation. As you can see on this slide, there are 4 key factors that have contributed to this positive result. The increase in mix of motor policies relative to lower loss ratio products contributed to an increase in the claims ratio. $9.7 million of large events were incurred in FY '20 compared to $1.3 million in FY '19. The higher average cost of claims is being driven by increasing technological changes in vehicles as well as supply chain pressures starting to be seen in '19. While it's pleasing to have improved our claims ratio, we remain focused on refining our products and pricing approach to ensure we continue addressing claims costs. Tower's group expense ratio improved 1% on the prior year, thanks to continued growth and close management of expenses. The main contributor to increased actual expenses were the amortization of the Youi New Zealand portfolio acquisition, the EIS digital platform and the implementation of lease standard IFRS 16. You'll notice slightly higher people costs, which was due to the increased resources required to manage customers through the migration and product rationalization process. These resources will now shift towards growth as we move forward. Our new cloud-based tech program -- platform will ensure that we can keep growing at scale. The proven model of Tower Direct, which Blair will address in more detail shortly, is our blueprint for the future. And this year, we are shifting our Partnerships and Pacific businesses to work in this way on our digital platform. Our new platform supports the efficient aggregation of other books of business similar to the Youi portfolio and will continue driving growth and scale benefits. The Canterbury earthquakes resulted in significant issues for customers and insurers, as we are all aware, and we are now nearing the final stages of these impacts. We have settled over 15,000 claims, and at year-end, we had less than 60 remaining. As of today, the number is below 50. Pleasingly, the pace of new over-caps and reopened claims slowed during the second half of FY '20. However, the finalization of claims also slowed during this period, due partly to COVID-19 restrictions and also because the remaining claims are the most complex. We continue making good progress, and our focus remains on achieving fair and efficient settlements for our customers. As we have already mentioned, settlement of the EQC receivable is a significant milestone for us, and clear demonstration legacy risks are being removed from Tower's business. Tower is in a strong capital position. At September 30, 2020, Tower Limited in New Zealand had $98 million of solvency margin. This is $48 million above the $50 million minimum solvency margin required under the RBNZ license condition. During the year, we amalgamated several corporate entities to remove complexity from our business, and our financial strength was reconfirmed at A- excellent following the amalgamation. The $15 million BNZ loan to Tower Limited was also finalized on amalgamation with Tower Insurance Limited. Thank you, and I'll now hand back to Blair who will provide an update on our strategy and outlook.

Thank you, Jeff. Tower's results this year are good and at the top end of expectations. We've achieved this despite some unprecedented headwinds and challenges. And as we start to move into a new era of Tower, though, the business will look and behave differently. To be clear, we don't just want to be a smaller version of a big global insurer. That is not the path we choose. At Tower, we're choosing a direction that leads to higher growth through a relentless focus on our customers. We're more determined than ever, more energized than ever. And over the coming months, we'll be demonstrating that we're far more dynamic than ever before. All of this work has been guided by a southern star or our guiding common purpose. It's a purpose to deliver beautifully simple and rewarding customer experiences that our customers rave about every time. We have a clear and focused set of strategic priorities. We will relentlessly focus on our customers, deepening our relationships through rewards, new products and other offerings that make sense and drive value. We will take a new cloud-based platform and leverage its full capability through the use of data and digital to attract more customers and partners to Tower. And importantly, we will find the best people to partner with and to get their help to keep innovating and delivering. These 3 pillars will contribute significantly to our higher growth and innovation ambitions. We also need to grow the capability of our business. Tower is a great place to work, and we want to keep attracting the best people to come and work for us so that we can keep innovating and leading the way. Our shift to agile is well underway, and this regular cadence of delivery has seen us move forward in leaps and bounds. And importantly, we are committed to maintaining a strong capital and solvency structure, demonstrating we are a strong and stable business that delivers value for shareholders. Our leading cloud-based digital and data platform enables us to adapt and grow at scale while achieving consistency and efficiency across our back office. When I joined Tower, I could see that there was an opportunity to service this platform differently for our core customer groups, Direct, Partnerships and the Pacific. As a result, 3 new business units have been created, each with end-to-end accountability for driving growth and reducing costs. As you can see, our Tower Direct business is growing strongly and affords our best expense and operating efficiencies. It operates almost fully on our new platform and is an example of what Partnerships and the Pacific will begin to look like going forward. The Tower Direct business is our flagship model. Moving forward, our focus here is around digital data and innovation to attract and convert more customers. We are simplifying the purchase journey by automating the process. We are partnering with data providers, so customers only need to answer a few questions. We're delivering new innovations and propositions such as a new safe driving app that we'll be launching to the market shortly. And at every opportunity, we are promoting MyTower, a full online sales and service platform that has over 50,000 registered users. We are now well underway with the migration of Trade Me and TSB customers to our new platform, all of which will contribute to an ongoing push to improve the customer experience, drive growth and reduce expenses. This year, our focus is on securing mutually beneficial partnerships that drive significant growth for this part of the business. In the Pacific, our business remained steady with GWP consistent for the past 3 years. The Pacific business generates 15% of our gross written premium, so plays an important role in our performance, but has historically suffered from complexity and remediation issues. We are well advanced on rationalizing our product set, and remediation work is mostly complete. We are now processing New Zealand customer claims from our Suva office, providing capacity overflow and business continuity options for New Zealand. But more importantly, before Christmas, we will begin selling our new motor products in Fiji on our cloud-based digital platform. Customers will be able to purchase and manage their motor policies online through MyTower just as they do in New Zealand. This is a significant achievement, and once complete, will act as a blueprint for our remaining product lines in Pacific countries. We will leverage our leading tech platform to accelerate growth and innovation. And as I mentioned earlier, new products will enable us to deepen our relationships with customers. And in the coming weeks, we will be launching a new marine product and, following that, an innovative pet product. We are also expanding our risk-adjusted pricing to ensure that every quote is tailored to the customer and the pricing accurately reflects the individual risk. The next step is to include flood risk, which will launch in the first half of 2021. Data is what fuels our new tech platform and a recently signed partnership with the University of Auckland's Science faculty will further help us leverage the skills and knowledge of bright minds to help us tackle insurance problems and opportunities. The recent agreement with EQC, to act as their agent following natural disasters, will ensure we have all the data we need to put things right for customers as quickly as possible after an event. It's a new proactive and partner-based way forward that will deliver better outcomes for customers. And importantly, this year, we will also develop and report on a carbon action plan. We are currently commencing a carbon audit. And by this time next year, we will be able to demonstrate the steps we have taken to reduce our carbon footprint and develop transparent climate reporting. These are all important parts of our strategy to ensure that our customers rave about us every time and we keep delivering growth and value for our shareholders. While we continue to operate in an uncertain environment due to COVID-19, we understand the market appreciates receiving guidance, and we have provided this detail to help you understand the shifts we are trying to achieve. In FY '21, underlying NPAT will exceed 5% on FY '20, assuming the same large event experience as FY '20. 2 key areas we are focusing on to achieve this are GWP growth of 5% or more and continued improvement in our management expense ratio. As you can see, we've delivered a good result, and what lies ahead is exciting. Looking forward, our focus is on driving higher growth through a relentless focus on customers, continuing to leverage our digital and data platform to drive efficiency and acquire growth, a commitment to delivering shareholder value. And as Michael mentioned earlier, it is our intention to resume dividends in FY '21 with careful consideration given to market conditions and any growth opportunities that present. We will be holding an Analyst Day in March 2021, and we look forward to talking to you in more detail on our strategy to accelerate momentum. Thank you for your time this morning. I will now hand back to the operator to ask for any questions.

[Operator Instructions] Your first question comes from the line of Andrew Buncombe from Macquarie.

Congratulations on closing the discussions with the EQC as well. My first question is just on the MER target for FY '21, please. My understanding was that previously, the business was targeting 35% MER in FY '21. That seems like the terminology around that has changed a little bit this time around. So is it fair to assume that you've walked away from that 35% target?

Thanks, Andrew. No, it's not that we've walked away from the target. We stated one of the objectives and benefits of the digital platform is that reduction in overall costs. And we are highlighting that through the focus on the Tower Direct MER and the objective of getting the Partnership and Pacific models to that type of level and beyond.