Tower Limited (TWR) Earnings Call Transcript & Summary

Hello, and welcome to the Tower Limited Announcement H1 2022 Conference Call. [Operator Instructions] It is now my pleasure to introduce to your first speaker, Michael Stiassny. Please go ahead.

Morena, good morning, and thank you for making the time to join us for this investor call and presentation of our 2022 half year results. With me in Auckland is our Chief Executive Officer, Blair Turnbull; and our Chief Financial Officer, Paul Johnston, who will take you through the results and answer your questions. This half year for Tower is characterized by a strong business performance, which is delivering returns to shareholders. The actions we've taken to address the inflation challenges of 2021 are working. The underlying business is strong, Tower remains well capitalized and well positioned for long-term growth. The insurance industry is not alone in facing a number of pandemic-induced challenges, including inflationary pressures and supply chain issues. However, those issues are likely to be temporary. The biggest challenge we have collectively faced is how we help protect our world in the face of climate change. At Tower, managing risks is what we do. We are committed to protecting both the things our customers love and the interest of our shareholders for the long term. We are acutely aware of the ways climate change is affecting our communities. Our data clearly shows the frequency of large events and the severity of the damage they cause increasing over time. Large event costs over this half year were substantial. However, Tower's reinsurance program provides protection from this volatility. The reality of climate change is that we continue to plan for increased large events, both operationally and in our guidance. Importantly, we have taken and will continue to take actions to future proof our underwriting capability. Last year, this included the introduction of a risk-based pricing for inland flooding, a transparent and considered approach to communicating this change ensured it was well received by customers. These substantial actions will continue to have an impact throughout FY '22 and beyond. Tower remains a resilient, strong and well-capitalized business. We are mitigating risks from large event costs and inflation, and we are growing well. Therefore, we affirm our full year guidance of between $21 million and $25 million underlying net profit after tax. And I am pleased to announce that based on Tower's ordinary dividend policy of paying 60% to 80% of cash earnings, where it is prudent to do so, the Board has declared an interim dividend of $0.025 per share to be paid on the 30th of June. Tower's financial strength was reaffirmed at A-, excellent, last month by rating agency, AM Best. And in the last 12 months, Tower has returned $51 million to shareholders through dividends and a capital return. We continue to look for value-accretive investments that will deliver strong shareholder value. To that end, over the half, we have purchased the minority interest in National Pacific Insurance and entered into an agreement to purchase a back book from Westpac. Our unique technology and distribution footprint have positioned Tower well to continue delivering GWP growth. It is clear that Tower is delivering on its strategy of innovation and growth. Our flagship Tower Direct business and unique partnership distribution capability continue to go from strength to strength. The Pacific business has proven remarkably resilient through COVID and digitization will lead to further improvements in efficiency and competitiveness. Before I hand over to Blair, I'd like to acknowledge the Tower team. As we all recognize, it's been a very particularly difficult period on many fronts. However, despite this, Tower is paying a dividend, we remain strong and well capitalized, and we have achieved sustained premium growth. This is a credit to Tower's solid strategy and the dedication of all our people that implement it. I'll now hand over to Blair and Paul, who will take you through the results and outlook before we take questions.

Kia ora. Thank you, Michael, and good morning, everyone. I am delighted to be here sharing our half year results for 2022, which see Tower in a positive position. And today's results demonstrate the resilience of our customer, people and digitally led strategy. We are continuing to grow to drive down expenses and to respond quickly to the changing external environment. Our technology and distribution advantage sets us apart from our competitors and affords strong long-term customer and premium growth prospects. Our performance, good business performance achieved through growth and efficiencies, and Tower has seen good business performance for the half year, which has been achieved through strong growth and efficiencies, offering customers a simple and rewarding experience through our leading technology platform has helped grow Tower's gross written premium for the half year to 31 March to $216 million, up 11% on the same period last year. Contributing to this was good customer growth with Tower welcoming 18,000 new customers in the past 12 months. And as the Chair referenced, the decisive actions taken last year to address claims inflation are delivering results with Tower's BAU loss ratio being brought back to a more normal level of 48.6%, after reaching 52.1% in the second half of the 2021 financial year. Disciplined cost control and further efficiencies have seen Tower's overall management expense ratio further improved by 1.3% to 35.8%. And this has been achieved in what is still a highly inflationary environment. Reflecting our positive business performance, underlying net profit after tax, excluding large events, was $18.2 million, up 6.4% from $17.1 million at the half year 2021. Another half year of unprecedented large events has seen a $17.9 million impact, which Tower has planned for within our guidance and has actions in place to mitigate the effects on profitability at the full year. I'll take you through these actions shortly. These large event costs have contributed to our combined operating ratio increasing to 94.8% and the reported profit, including large events of $3 million, down from $11.1 million in half year '21. Climate change, managing increasing large event frequency and severity. Now Tower is proactively managing the increasing frequency and severity of large events that are linked to a change in climate. And as you can see in the graph, the 5-year rolling average of large event costs for Tower has increased by around $5 million a year compared to the 10-year average. We are continuously monitoring these trends and have important mitigations in place to help manage these risks, primarily through our risk-based pricing approach and a robust reinsurance program, which provides $20 million of aggregate cover and up to $862 million of catastrophe cover. Outlook for the second half is expected continued business performance, large events impacts mitigated. And for the second half, we are expecting a sound business performance to continue. We are growing both in customer and premium. We are controlling inflationary pressures on claims expenses well, and our increasing scale is continuing to deliver efficiencies. We have also ensured Tower remains in the strongest possible position to continue protecting both our customers and shareholders interest via robust reinsurance. Tower's reinsurance program has been designed to reduce the volatility of large event costs. And under these arrangements, Tower pays the first $20 million of large event costs in the year, which totaled $17.9 million at the end of the first half, and reinsurance covers large event costs between $20 million and $40 million. Tower's catastrophe cover is triggered by a single event of over $11.25 million and covers for us up to $862 million. Large event costs of $20 million have been planned for within the FY '22 guidance range. This means that additional large events will not impact our full year guidance underlying NPAT unless the $20 million aggregate reinsurance cover is exhausted. Therefore, we affirm our guidance of between $21 million and $25 million underlying NPAT, including large events. And as the Chairman mentioned, we are pleased to confirm an interim dividend of $0.025 per share. Based on our full year profit guidance and subject to Tower's ordinary dividend policy of paying 60% to 80% of full year cash earnings where it is prudent to do so and all legal requirements being met, we anticipate a total dividend of $0.055 per share for the full year. I will now get into the details of our performance this half. Strong core business performance. Our business fundamentals continue to improve as we continue to grow and our investments in our core technology platform and actions to control inflationary pressures continue to deliver efficiencies. When taking into account the external factors of large events and net investment income, our core business performance has improved substantially with underlying NPAT, excluding large events and net investment income increasing 13% year-on-year to $18.9 million. Similarly, despite our combined operating ratio being impacted by large events this half, we continue to improve our operational performance with our combined operating ratio, excluding large events, reverting back to levels we have seen in prior years before record inflation. Offering customers a simple and rewarding experience through our leading technology platform and distribution model is delivering consistent growth in both customers and premium, and this has helped to grow Tower's gross written premium to $216 million, up 11% on the same period last year. And this was achieved through a balanced mix of market premium ratings and attracting new customers to Tower, particularly in our Direct business, which has seen 11% underlying GWP growth year-on-year. Our total customer base grew 6% to 312,000 in the year, reflecting improvements in customer satisfaction as evidenced by our Net Promoter Score increasing to 40% versus 34% in the prior year. And these new customers have been brought on board at a lower cost to acquire at 11% of net earned premium versus 12% in half year '21. Digitization, driving customer engagement and growth. Our digitization strategy is driving deeper customer engagement and growth as our platform continues to go from strength to strength recording 165,000 My Tower registrations in half year '22 compared with 99,000 last year. In the year, the number of online quotes issued by the Tower Direct business grew by 41% versus half year '21. This was helped in part by optimizing our customer quote-to-buy journey last year to deliver the quickest insurance quote in the market. The proportion of sales through our digital channels also showed year-on-year increases with 63% of Tower Direct's sales now digital, up 5% on this time last year. And this means that customers are more engaged in buying more products from us online with 42% of our New Zealand sales going to existing customers. And the proportion of My Tower customers holding multiple products, increasing 8% year-on-year to 55%. Our Partnership business is continuing to deliver positive growth as we transform from a more traditional, higher commission portfolio to a new generation of partnerships. Partnerships GWP has increased by 13% year-on-year, largely driven by Trade Me in our advisory network. Our renewed agreement with our cornerstone partner, Trade Me, is helping to scale our business faster than ever before and the partnership reaching a new milestone of 40,000 risks in force, an increase of 35%, thanks to the addition of new products like boat online. And advisers are increasingly seeing the customer benefits in working with Tower. We have seen the growth of our network accelerate by 21% to 1,400 active advisers in this half alone. We continue to attract new partnerships, and we were pleased to welcome one of New Zealand's largest sellers of used car imports, New Zealand Automotive Investments Ltd, as a preferred insurance referrer. We remain focused on solid growth opportunities with our partners such as the purchase of the ANZ legacy book last year and the acquisition of a book from Westpac in February 2022. This time last year, I noted that the full benefits of the ANZ buyout would flow through from the first half of the 2022 financial year. We are certainly seeing these results now with the migration contributing towards Tower's commission payments almost halving to 2.3% of gross earned premium. And we expect further reductions in commission payments as we continue to scale. Pacific digitization delivering enhanced efficiencies. We continue to focus on investing in Pacific digitization to align our Pacific business more closely with our New Zealand operations to deliver enhanced efficiencies. Our goal for 2022 is for Tower to offer a world-class digital experience on one core leading platform for all of our personal line customers across New Zealand and the Pacific. We have taken several important steps towards the same in the past year with the launch of our cloud-based technology platform in Fiji, Tonga, Vanuatu and Samoa. The full rollout is due to be complete by the end of 2022. And this is already delivering benefits whereby now in Fiji, some 88% of all new business is handled via our digital platform versus 23% in the prior year. And we have launched industry-leading offerings like the ability to pay premiums online, an industry first in the Pacific. Thanks to the technology and digital investments we've made in the past 2 years, we're also achieving efficiencies. Our Pacific management expense ratio has dropped by 5% to 41% in the past year alone. And following our acquisition of National Pacific Insurance, we've begun rebranding NPI to Tower, which will see us operating under one Tower brand across New Zealand and the Pacific by the year-end. We're also continuing to streamline our business. Our domestic products in the Pacific are now aligned with our New Zealand suite and have been further rationalized from 33 products down to 13. Our Pacific business remains resilient to the challenges posed by the riots in the Solomon Islands, the volcanic eruption and subsequent tsunami in Tonga, and of course, COVID, which has significantly impacted Pacific economies. Core to our strategy is leading with a quality, innovative, balanced product range, which enables us to deepen our relationships with customers and improve revenue and increase retention and underpinning this is our disciplined and agile approach to underwriting, enhanced through our use of data analytics. This dynamic pricing and underwriting capability enabled us to quickly implement risk-based pricing for flooding in November last year, as we have already done with earthquake risks. Tower is not only sharing flood risk ratings with all New Zealanders, but using this data to align premium pricing more accurately with risk which supports Tower's ability to manage our loss ratio. And to date, we have transitioned around 70,000 customers to this new pricing model as their home insurance policies have come up for renewal. We plan to add other climate-related risks to our ratings tool in the coming year, including coastal inundation and erosion and windstorm. We are staying ahead of inflationary pressures by ensuring accurate sum insured amounts for our customers' homes. Now almost 100% of our house customers' policies are updated automatically either by the Consumer Price Index or the Cordell calculator compared to only 57% a year ago. Our underwriting capability is becoming increasingly automated with 95% of risks in New Zealand now sold without requiring a manual underwriting review. And we are continuously monitoring our pricing to ensure we stay both competitive and profitable. Our agility and data-driven capabilities have enabled us to make more than 70 pricing and underwriting adjustments in the year. Taking decisive actions to address claims inflation and delivering. So in 2021, we identified emerging challenges related to supply chain issues and inflation and quickly took a number of decisive actions. As evidenced through our BAU claims ratio, now returning to a more normalized levels, these actions are delivering improvements. Our digital capability to streamline the claims lodgment process has seen the number of New Zealand claims lodged online increased 16% to 48%. And by working with suppliers, to optimize our supply chain, we are seeing efficiencies with 76% of New Zealand motor repairs now being completed by our preferred supplier network. A new feature launch this month will allow us to further automate the process of detecting genuine and suspicious claims in real time to allow for a faster process for customers and more accurate screening, improving EMEA through platform efficiency. So with My Tower, weekly log-ins growing by 80% year-on-year and more than half of all tasks and transactions in New Zealand now completed digitally, the customer and efficiency benefits from our leading digital and data technology platform are being realized. We remain focused on decommissioning legacy systems, and anticipate just 2 remaining by the end of 2022. And this focus on platform efficiency has seen our management expenses continuing to trend downwards with our MER improving a further 1.3% to 35.8% over the year. Strong capital and solvency delivering shareholder returns. Now our strong capital and solvency position saw us return $30.4 million of excess capital to shareholders in the half. We were pleased to see the strength acknowledged last month by rating agency AM Best, which reaffirmed Tower's financial strength rating at A-, excellent. Our New Zealand parent solvency ratio is 210%, which is $72.2 million above our minimum solvency capital after the $0.025 dividend is paid. I will now hand over to our Chief Financial Officer, Paul Johnston, who will take you through the details of the financials.

Thank you, Blair. And good morning, everyone. Looking at the consolidated results, we can see that growth in GWP continued to be a highlight, up $22.2 million or 11% on half year 2021. Reinsurance expense increased $5.2 million following adjustment to aggregate sums insured and higher aggregate reinsurance. The net of these 2 resulted in a pleasing increase in net earned premium of $6.6 million on half year 2021. Encouragingly, management expenses as a percentage of NEP were down 1.3% and from 37.1% in HY '21 to 35.8% as benefits of the EIS platform and our increasing scale continue to be realized. In addition, we released the Liability Adequacy Test provision implemented in September 2021 as expectations about future policy administration expenses have reduced. Net commission expenses also decreased by $3.4 million, driven by both the acquisition of the ANZ portfolio and an increase in proportional reinsurance profit share. Investment income continued to be a detractor, down $1.4 million. Underlying NPAT before large events increased 6.4% to $18 million, demonstrating strong business performance. The timing of large events saw a $17.9 million pretax impact on the half year resulting in underlying net profit after tax of $5.4 million, down $5 million or 48% on half year '21. After adjusting for non-underlying items, reported net profit after tax was $3 million, down 73% on half year '21. Contributing to this was a Canterbury Earthquake valuation increase of $2.3 million after tax. As previously noted, underlying NPAT of $5.4 million is $5 million below half year 2021. The main driver of this reduction was timing of large event costs of $17.9 million in H1 2022, as I've just mentioned. This was an increase on H1 2021 of additional large event costs of $8.6 million or $6.2 million after tax. Reduction in net investment income of $1.4 million or $1 million after tax also contributed to the decrease in earnings. A $2.6 million increase in expenses includes the ANZ purchase amortization and an increase in staffing costs due to wage inflation and an increase in growth in regulatory compliance initiatives. Positive business growth underpinned by 11% growth in GWP, along with a $2.5 million after-tax reduction in commissions from the ANZ back book purchase helped to offset these impacts. As Blair has said, we have taken positive actions to address the rapidly accelerating inflationary pressures we identified last year. While inflationary pressures continue to pressure the cost of fulfilling claims, our BAU loss ratio highlights that we have taken appropriate rating actions to prevent profit erosion. Frequency and severity are the 2 key components of total claims costs. The severity charts show both average motor and house claims have continued to increase since the 2021 half year and are up 12% and 7%, respectively. Frequency of motor claims is slightly down due to the lockdown we saw at the start of the half year and house claims frequency is relatively flat year-on-year. Tower has applied premium increases across motor and home to offset inflation and continues to work closely with supply chain partners to moderate the impact on customers as much as possible. Our new artificial intelligence-based antifraud tool is expected to further improve our claims ratio. By identifying and separating claims with a high risk of fraud, it will standardize and further speed up claims screening at greater accuracy. We are pleased to see our management expense ratio continue to reduce with an improvement over the year of 1.3% to 35.8%. While management expenses increased in absolute terms by $3.6 million before tax to $57.6 million from $53.9 million in half year 2021, this was due to an increased investment in marketing and projects aimed at driving GWP, increased staff costs and increased amortization due to the acquisition of the ANZ portfolio. The increase was offset by positive growth in GWP, a decrease in net commission expenses due to the purchase of the ANZ portfolio and an increase in reinsurance profit share income in half year 2022. In addition, the liability adequacy test provision made at 30th of September 2021, resulted in the release of an additional $2.1 million this half as we reduced our expectations of future policy administration costs. The timing of several large events has challenged reported profit in the first half with $17.9 million of large event costs incurred so far during this year. This includes $7.6 million from the volcanic eruption and tsunami in Tonga, $3.6 million from Cyclone Dovi and $6.7 million from the North Island Rainstorms. Our robust reinsurance program provides protection from volatility caused by large events. Under our aggregate reinsurance cover, Tower pays the first $20 million of large event costs as an excess and reinsurance pays the next $20 million up to $40 million total. The total cost range for a large event is between $2 million and $10 million. We plan for the full use of the $20 million large event excess in our full year 2022 guidance. Given we are currently at $17.9 million, we expect to incur $2.1 million of large event costs in the second half with reinsurance covering any additional large event costs up to $40 million. It should be noted that the setting of an excess at $20 million implies reinsurers on average expect that level to be exceeded 1 in every 3 years. Our full year 2022 reinsurance cover also includes catastrophe cover of $862 million once Tower has paid the first $11.25 million of claims under a catastrophic event. Net investment income in half year 2022 was further reduced with losses of $900,000 before tax compared with income of $400,000 before tax in half year 2021. This was driven by increases in interest rates as Tower's portfolio was revalued to market values. However, these losses are expected to be recovered through higher yields as the portfolio matures, as evidenced by the running yield on the core investment portfolio increasing to 2.45% as at 31 March 2022, up from 1.32% at 30 September 2021. Tower maintains a conservative investment policy with a focus on high credit quality and liquidity bonds and a target duration for the core investment portfolio of 6 months. Our strategy has mitigated the impact on our profit from macroeconomic factors and market movements. We continue to settle open CEQ claims, Christchurch earthquake claims with 22 closed over the half. However, we received an additional 24 new overcaps and reopened claims bringing the total number of claims as at 31st of March to 35. This was a net increase of 2 from a total of 33 as at the end of September 2021, but still a material decrease from a total of 43 as at the end of March 2021. The number of new overcaps and reopens reflects the complexity of long-term claims as we are now down to the tail of our Christchurch earthquake claims. The expected cost for several of these has increased in half year 2022, driven by both inflation and more costly rectification approaches. As a consequence, half year 2022 has seen an adverse P&L charge of $3.2 million before tax and nonunderlying items, reflecting these increases in expected claims costs. The remaining gross outstanding claims provision is $22.3 million, which includes a risk margin of $4.9 million. These outstanding claims continue to be closely managed. In the last 12 months, Tower has returned dividends of $21.1 million and a capital return of $30.4 million. As a result of these payments to shareholders, Tower's surplus capital has decreased. However, with the solvency ratio of 224% as at 31 March, before any allowance for future dividends, it is clear that Tower remains in a strong capital and solvency position, and we will be paying an interim dividend of $0.025 on 30 June 2022. This strong capital position also provides Tower with sufficient capital to continue to invest in opportunities and initiatives that will provide accelerated growth and increased efficiency. The Tower Board sets a target solvency margin above minimum solvency capital that is reviewed quarterly. Above this target solvency margin is a target operating range. As at 31 March 2022 and after allowing for the $0.025 dividend, Tower New Zealand's parent total available solvency capital was $15.8 million above the target solvency margin, which provides a solvency ratio that is 210% of minimum solvency capital. Tower continues to anticipate underlying net profit after tax of between $21 million and $25 million for full year 2022. This range is based on the assumed utilization of the full $20 million excess of the aggregate program. It represents a $4.4 million after-tax increase in the impact of large events when compared to full year 2021. Additional large events will not impact NPAT unless the $20 million aggregate reinsurance cover is exhausted. As we have said, Tower will pay a half year dividend of $0.025 per share dividend. Tower's dividend policy is to pay out between 60% to 80% of cash earnings, defined as the reported full year net profit after tax plus acquisition amortization and unusual items, we are prudent to do so. While the proposed dividend is greater than this range based on first half cash earnings only, Tower expects to be able to pay a full year dividend of $0.055 a share in total based on the forecast full year profit while remaining within the 60% to 80% range. Accordingly, the Board considers that a $0.025 per share dividend in the first half is prudent. The record date is the 16th of June 2022, with the payment date being the 30th of June 2022. Thank you. I will now hand back to Blair, who will provide an update on our outlook.

Thank you, Paul. Key to our strategy is a relentless focus on our customers, deepening our relationships with them through rewards, new products and other offerings that make sense and drive value, and we're acutely aware that we must earn the right to do this by building trust through fair and transparent insurance services. We know from our customer research that insurers traditionally do not make things easy for customers, only 1/4 of Kiwis told us they are confident they have the right cover for all their risks. We want to change this. 75% of people surveyed also told us that transparency of information is one of the most important factors for decision-making when selecting an insurance provider, and transparency is clearly also very important to us. And that's why when we changed our approach to pricing for flood risks last year, we launched a public tool, which gives anyone regardless of whether they're a customer or not a simple risk rating for their residential homes earthquake and flood risks. Through My Tower, we have also raised the benchmark around open and transparent pricing for customers. And by presenting visual breakdowns of customer premiums in a simple chart, customers can easily compare year-on-year changes for the various pricing elements. When the upcoming change to the EQC cap is implemented in October, we will include this in our pricing breakdowns, so customers can see for themselves how the reshaped government levy will impact their individual pricing. A key challenge for New Zealand businesses today is the tight labor market. We are in the fortunate position of continuing to attract high-caliber talent for our positions, and we were pleased to have welcomed both our CFO, Paul Johnston; and Chief Claims Officer, Steve Wilson to Tower in January. However, we are not complacent, and we are committed to tackling labor market challenges by leveraging a unique Pacific and New Zealand footprint and having a fantastic staff culture with high engagement. Our investments in digital technology are increasingly enabling us to move workflows across our Suva, Rotorua and Auckland operation centers, which also gives us access to talent in these markets. We are offering high-quality roles in the Pacific and in Rotorua, where our people appreciate the opportunity to progress their careers into senior roles while living in their own communities. This operational diversification enables us to manage workflow spikes and business interruption. At Tower, we understand that our people are the ultimate drivers of our success, and we pride ourselves on putting our people first. We believe in investing in a diverse, inclusive culture, where everyone can contribute and feel valued and this is reflected in the day-to-day operations at Tower and is now at the very core of our refreshed values, which we launched in February. Alongside our enhanced flexible working practices, we are launching a refreshed recognition program and a range of attractive new benefits in June. On International Women's Day, the 8th of March, along with other top corporates, we became a signatory to New Zealand's first pay gap registry, Mind the Gap, and we now disclose a gender pay gap on our website. New Zealand's gender pay gap has remained at the 9% range for the past few years according to Statistics New Zealand. In 2021, Tower's New Zealand gender pay equity gap was minus 1.4%. And which shows that women are paid 1.4% more than men for the same role. Within our senior leaders, men are paid 1.8% more than women. And this data shows that we've achieved near equality in how women and men are paid for doing the same work. However, we are only at the start of this journey, and there is still work to be done. Over the coming months, we will be working to further strengthen our gender pay gap transparency and actions by incorporating data from our teams in the Pacific. Another important focus will be to understand our pay equity position for Maori and Pasifika team members. We are proud to be a diverse business and committed to doing more to support transparency, fairness and equity for all of our people. All of this has contributed to our employee engagement scores continuing their positive trend upwards in half year '22 to 79%, a 6% year-on-year increase. Last year, we started a sustainability journey with the development of our strategy that guides how Tower manages its environment, social and governance issues. And further to our commitments to offering fair and transparent insurance services and supporting communities through climate change, we enhanced our home offering last year with a new sustainability benefit, which contributes $15,000 to sustainable products for a total rebuild. And by the end of 2022, we will also launch a pilot of a new parametric insurance product aimed at supporting Pacific resilience. We are also keeping pace with our customers' lifestyles and expectations around environmental concerns by innovating our products to cover electric vehicles, e-bikes and e-scooters, and this has resulted in sales of policies for EVs growing by 60% in the past 12 months. In the coming weeks, we will also present our GoCarma customers with personalized carbon usage data based on their vehicle type and driving style. And this year, we're pleased to award 2 scholarships to students of the world-first Bachelor of Climate Change studies degree at the University of Waikato. In FY '21, our carbon emissions totaled 378 tonnes of CO2 equivalent, having reduced 31% year-on-year, primarily due to lower emissions from travel from COVID-19 restrictions. We are committed to taking the lessons from the past 2 years of remote working and having a science-based target to reduce our Scope 1 and 2 emissions by 21% by 2025. Tower supports mandatory reporting requirements for sustainability and climate change issues, which will help increase transparency around what actions have been taken by businesses to prepare for these risks and increase the resilience of our communities and the economy. We will present our sustainability reporting in this year's annual report and are currently preparing for the introduction of the External Reporting Board's Climate-related Disclosures regime, which comes into effect from 2023. As we invest in our customers, communities and our people, Tower is continuing to invest in initiatives that will bring attractive long-term growth and efficiencies to deliver shareholder value. Following the completion of our digital transformation, the mix of our spend has moved from focusing on our technology platform systems and regulatory compliance towards customer acquisitions and growth, reflecting the maturity of our technology transformation. Our investments in leading technology partners like EIS, Oracle and Friss are enabling the business to be increasingly nimble in responding to challenges and capitalizing on opportunities. And we expect these opportunities to continue to scale as we complete our digital rollout in the Pacific. Meanwhile, as we become more agile and responsive in anticipating customers' needs, new technology releases continue to trend upwards, and we delivered 134 releases this year versus 96 in the previous 6 months. And we continue to seek opportunities to invest in further sensible and prudent investment opportunities, such as insurance portfolios that allow us to scale and reduce commission payments. We are investing in our enhanced sales capability with our automated marketing platform already sending 1.5 million personalized messages since this launch this half. Tower is well positioned to continue delivering dividends and growth. And it's clear that while the first half of the 2022 financial year has seen increased large events, Tower's business performance has been strong, and we have delivered customer and premium growth while further improving our management expenses. Tower is a well-capitalized business with a strong balance sheet and solvency margins, and we are delighted to have returned $51 million to shareholders in the form of dividends and the capital return. And in the coming second half of FY '22, our focus is on continuing a solid underlying operating performance and achieving positive customer outcomes and growth. And we will do this by deepening our customer relationships through digitization, innovative partnership model and by modernizing our Pacific business. We will continue to focus on claims inflation and enhancing claims processes or driving efficiencies through our scalable digital platform and focus on expenses. We remain committed to delivering positive returns to our shareholders through continued dividends and accelerating growth. So thank you for your time this morning. I will now hand back to the operator to ask for any questions.

[Operator Instructions] And our first question comes from the line of Andrew Buncombe with Macquarie Bank.

Just 2 from me, please. The first one, can you just give us some direction on how much of your GWP you think you'll drop in '23 due to the changes to the EQC act? Any color on that would be great.

Andrew, look, at this stage, we're still forming a view on that. We're still thinking ahead around what our future strategic plan is. Fundamentally, we plan to keep growing this book, and I guess that's probably all that I can say at this stage on that from a finance point of view.

Yes. We're modeling it through, Andrew, and in terms of -- because of our risk-based pricing, we're very clear and transparent around how we manage at GWP. We think it will be nominal in the scheme of things, but we'll be clear to share that with the wider market as we model and finalize it over the coming months, and it comes into effect in October, as you know.

Yes. Sure. And then the other question that I had was just in relation to Slide 25. Can you give us some color on how much longer you expect to need to hold that additional $25 million of capital under the licensing condition?

Yes, that's a very good question. Thank you, Andrew. Look, we have a very strong relationship with the RBNZ. We are working with them on telling the story about our improved business performance and how we're really managing our capital. Now every year, we have a consultation with them on that license condition. And so we're going through that at the moment. And we'll see what happens. But obviously, Tower would like to move on from that because we are now very strong and well capitalized.

[Operator Instructions] And I'm showing we have a question from the line of Andrew Adams with Barrenjoey.

Okay. Can you give us a bit more color on premium rates and how are you thinking about that inflation? I guess just looking at Slide -- inflation slide, Slide 20. I mean you're kind of getting severity inflation, as you call out on the 7% to 12%. It kind of benefited this half, I guess, from the COVID restrictions. So as we kind of normalize that and frequency peaks up again, are we flagging some pretty heavy BAU claims ratio deterioration? Or how are you thinking about that in a normal world?

Thanks, Andrew. So look, as you point out, we've put -- we've had some good rate growth as well this year. We've made 70 changes to our rates in the last 12 months. And so we remain nimble and able to continue to do that to manage the bottom line. In addition, we are very focused on working with our suppliers, and we've also got our new antifraud tool going live, which will help us in FY '22. So you're absolutely right. We have seen that severity increasing, but fundamentally, I'm very happy that we've been able to keep on top of our claims ratio so far, and I see that continuing.

Just to add a little bit color to that, Andrew, and thanks for the question. We took a lot of decisive actions at this time last year. We saw the inflation coming through and we look to manage and absorb that through efficiencies in the business. That's through digitizing, and you can see the increase in the digital claims side of things. And so we through that and preferred networks, we're able to absorb some of that inflationary pressure. In terms of the overall GWP growth of 11%, which has been really strong, roughly around half of that is through rate and half of it through as good natural organic growth. So again, we've got the capability to look through and see where that inflation is coming through to rate quickly and to do it very targeted. And along with the efficiency improvements, we've been able to take that inflation on board while continuing to grow. And look, the loss ratio at 48% is really solid, and we're pleased with that. This time last year, it was around at 52%. So we've seen that come back to a more normalized level, and we're really pleased with how we're managing it. But look, we're not getting complacent. We watch it every single day and where we see opportunities to either improve our efficiencies or we see a need to rate, we'll do that quickly.

Yes. I mean do you think can you get more rate? I mean can you get kind of more than 5? Can you get a 10? or is it competitive pressures? Or is there other reasons why you're not pushing rates hard? Like you said, as with restriction easing and expectation the frequency goes up, I'm just struggling to see why my loss ratio is not back at 52%.

Look, it's always a balance between making sure we grow well, and we're growing with the right customers and not getting adverse selection and then matching that with -- on the loss ratio side. So we're balancing that with our rates, Andrew. We think we've got the mix pretty well at the moment. We can see that coming through with the underlying performance of the book at $18.2 million for the first half. That's the best result we've had in some years. So we think we're managing it quite well. But we'll continue to keep a really close eye on it. We break it down and look at it through the lens of both motor and also home. And on both sides, we have got both portfolios working really well for us.

Sure. And then just a quick one on the reinsurance. So can you just remind us how much of that [ ag ] is being used so far to date?

Yes, we've used $17.9 million of the $20 million excess in this first half.

Okay. Got it. From ground up there once you get over the $2 million. And then how are you thinking about that? Obviously, the reinsurance provides good protection into second half and allows you that guidance. But I guess you're expecting to exceed that retention. So how are we thinking about the renewal now into '23?

Yes, that's a great question. We're just starting our renewal discussions right now. We run from 1st of October. So yes, we're starting to speak with reinsurers about it. As we've said, we are fully anticipating to utilize that $20 million. Obviously, it would be beneficial for us if we don't. I think the other thing that's good for us as well is that despite the fact that we've had a 1-in-1,000-year event with that Tonga volcano, we didn't get into the limit of the cat treaty. So overall, we've got a really strong risk portfolio. We've introduced risk-based pricing as well, which helps us. So we think we've got a good story to tell to work with reinsurers on, and we're just starting on that now.

Yes. And just adding to that, Andrew, as well as we have had a number of discussions with them. And they do -- we're getting a very clear message back to us that they recognize our differentiated direct model, the fact that we can manage the margin really well in terms of the premium and the growth, as Paul mentioned, the risk-based pricing, that's -- now that's been extended to both earthquake and to flooding. That enables us to really manage the margin well. And I think that's been recognized in discussions so far with the reinsurers. But it's key for the coming months as we renewed that.

Yes. And is that -- maybe related to my pricing question. Is that something you've got to start thinking that now because I think when I'm looking out to my '23, '24 forecast, I'm thinking of the deterioration in the BAU loss ratio, I'm also thinking that [ ag ] is going to go up, it's going to go up, beat them out, maybe not as bad as last year, which is going to lead to an increased large claims allowance. So that's going to be a direct hit to my underlying NPAT unless I can price for it early. I mean am I accurate with those thoughts?

Yes. I mean, look, yes, we're obviously planning on growing the top line and our NPAT as well. We don't see too much of a deterioration in our claims ratio there. And yes, we're going to talk with our insurers about how we can ensure that we don't see material changes in the program and the protection that we're buying. But fundamentally for us, as Blair said, we think that we -- what we know that we've got a very good story around how we are unique compared to the market and risk-based pricing is a key part of that. So yes, we believe that we can get in front of -- in front of our growth and in front of that profit.

Yes. And it's a key one, Andrew, you look at the slide there with the total claims BAU ratio, what slide is that? What are we up to? So we've got a really good track record of -- at a BAU claims level and our ability to adapt to claims inflation, take those actions quickly, price rate quickly, we've got a really nice track record. We absolutely can see the large events coming through, but that's not unique to us, and we've been very clear about getting out and leading out that in the New Zealand Pacific context about how we're managing that, we've got good reinsurance cover. And it's something that we acknowledge we're managing to it. We're managing it well and risk-based pricing really does help us in terms of managing the margin.

Yes. Yes. No, I appreciate it. Yes. I guess it's a difficult environment to think about forecast in the next couple of years. But yes, I appreciate your comments and your disclosures.

Thank you.

Thank you.

And our next question comes from the line of James Lindsay with Forsyth Barr.

Two questions for me, if I may. Just the first one on the EQC sort of overcaps coming through. Just if there's any sort of conversations about how many more are close to that sort of overcap level? And as far as the restrictions on when the time of those start getting sort of removed from the time frames? And the second question just for Paul, just on the running yields, I thank you very much for that update. Just interested in the market-to-market [ as the divest ] in March and if there's going to be any further sort of market-to-market, where that level was struck [ for the divest ] of March for the full year?

James, let me do them in reverse order, if that's okay. So yes, I mean, that mark-to-market was at the 31st of March. It was based on the forward investment curve at that time. Since then, the curve has steepened slightly upwards as we've all seen in the market. And then what's going to happen after that is it becomes much more of a forecasting challenge for economists and the market. But yes, I mean, we're happy with where we're at and our 6-month duration of our portfolio has protected us well. And so with that high yield, I think we're riding out what the market is doing as best we can. With regards to the CEQ question. We do work closely with the EQC around looking at that pipeline of overcaps. And actually, we've been working with them in the last 6 months to actually try and accelerate that pipeline. And so that's one of the main reasons why we've seen that increase in overcaps come through. And then, yes, your point around limitation of [ lab ] is statute of limitations is a good one. There are a lot of complex rules in this area, and it's very much case dependent on the claim. So when the claim was first raised -- when it was first notified to the EQC versus the insurer. So there really isn't sort of a general rule that I can give to you about that.

What you can see, James, is a nice clear trend if you just take one step back over consistent periods, we are bringing the number of outstanding claims down. We'd like to get there as quickly as we can, but we accept we're working with the EQC and we're working with all the parties involved. But we're going to -- we expect to see that trend -- that longer-term trend continue. And hopefully, we'll get through them quicker.

And our next question comes from the line of Andrew Buncombe with Macquarie Research.

My follow-up question was just actually linked with the last one. So with inflation now running as hot as it is and probably for another 1 or 2 years to go. Does it not just make sense to settle all of the outstanding Canterbury earthquake claims immediately. Otherwise, inflation is just going to keep putting upward pressure on those provisions. Like what's the -- how should we be thinking about that?

Look, thanks, Andrew. And look, I'm sure you were we would -- as much as you mentioned, we would like to settle those claims. We really would. But in some -- to a large extent, we have to wait and we take direction from the customer, the Canterbury Claims Tribunal has worked very well, we believe, but that has to be initiated from the customer if we get to that point. So we're down to the last 30 plus. We're going to try and work through those as quickly as we can. And if -- over the long term that trend has been coming down steeply. But we do, to some extent, we have to look to the customer to initiate some of those next steps. But that's certainly what we're doing.

And I would also add, Andrew, that actually, we have included inflation or our appointed actuary has included inflation assumptions in that gross outstanding claims provision of $22.3 million.

Now I'm showing no further questions at this time. I would now like to hand the call over for any closing remarks.

I just like to thank everyone for attending this morning, and my apologies for not welcoming Paul to the call earlier. This is his first public outing, so to speak with us at Tower, and it's been great having him here to date, and we look forward to a long journey. So on that, thanks, everyone, and we'll be back to you with another positive result in the 6 months' time. See you later.