Tower in from the cold

The view from Tower’s Milson’s Point headquarters in Sydney is an impressive one. From the window of chief executive Jim Minto’s office you can see the harbour in all its glory, as well as the offices of Zurich, one of Tower’s competitors in the risk insurance business.

Both are getting their risk businesses back on track, so it’s likely they will be watching each other closely.

Today, Jim’s not in. Speaking to Money Management on the phone from New Zealand, he’s in the process of buying “fush and chups” for his family, but is happy to talk.

And why wouldn’t he be? He is one of the key figures responsible for bringing the trans-Tasman company back from the brink, although he is quick to say it is his team who should be congratulated.

“We’ve changed the entire management team in Australia and with two-thirds the number of people, have ended up turning the business around by producing far better products and services.”

By ‘two-thirds the number of people’ Minto is alluding to the 200 staff cut over the last 18 months. The business turnaround relates to Tower’s latest half yearly profit results.

For the half year to March 2004, Tower achieved an unaudited net profit after tax of $20.5 million. Quite a modest sum. But significant considering the group reported a loss of $154.4 million for the corresponding period in 2002-03.

Listing on the Australian Stock Exchange in 1999, Tower’s woes started in November 2002 when it announced a profit warning. Investors abandoned the company causing the share price to fall 40 per cent in one day.

Then in May 2003, after a small recovery earlier in the year, the company reported a first half loss of $160 million thanks to a $190 million New Zealand write-down. The share price fell 36 per cent from $1.96 to $1.25.

“I admit the situation was dire. It was very, very dire,” he says.

Minto is frank about why things went wrong, avoiding the temptation to blame Tower’s earlier troubles entirely on poor investment markets.

“In the two years before the last report we launched our risk products in a manner that was unacceptable to the market. The company just didn’t listen to or understand people in the risk insurance industry,” Minto says.

Since Minto took charge of Tower Australia, the company has cut $32 million out of its cost base and has made sweeping changes to its risk insurance policy, revising commission structures, product definitions and underwriting processes. Changes, which he says, have put the company on track to a full recovery.

“In the past, Tower had a reputation in Australia of having advisers of a lower quality who were attracting higher commission type business. So we went out and got better quality advisers and looked at providing better support in the dealerships in which they resided.”

Tower has changed its commission structure by offering hybrid commission options and lowering its headline rate.

“Launching hybrids means more of the commission is streamed out on a renewal basis. Most modern risk advisers are happier to do an in-force book business rather than just to create lots of one-off sales.

“We might have lowered our commission slightly but we’ve just lowered it to where it’s competitive in the market rather than being way up at the top.”

Minto says that since the disastrous events of 2002-03, the company has decided to concentrate more on risk than its wealth management business, which now operates independently.

“We’ve always had a strong risk heritage, so when we were looking for turnaround we had an existing core capability in risk and we had a substantial in-force book.”

Holding onto existing clients took precedence over finding new ones.

“If we just managed that in-force book better by managing our costs, holding onto lapses, cleaning it up, making it compliant — we knew that we could stream out good levels of profit from that existing risk book.”

Tower has also been placing more emphasis on providing support to life insurance dealers while streamlining product development. Previously life insurers were able to draw up their own plan for each individual client with no consistency between plans. This led to hundreds of different products being put out on the market, causing a compliance nightmare.

“We’ve also done some innovative things around underwriting,” Minto says. “That really means that we’ve got to challenge the way that niche market operates without widening unsustainable business.”

In February the group designed and launched a new life insurance offering called Fast-Track, enabling plans to be written with minimal medical and blood requirements. Minto says a further enhancement of Fast-Track will be released shortly.

Despite Tower’s return to profitability, it still remains to be seen whether the company has turned a corner. Minto says there will be challenges in the immediate future.

“Traditionally June has been the month of the year when our biggest level of maturity has been coming in. That means the biggest part of the books are vulnerable because that is when the policies were written.

“If there is a seasonal trend of increased lapse rates at this time of year, we just have to work very hard and try to manage that down.”

On the positive side, Standard & Poor’s has revised Tower’s outlook from negative to stable.

“Growth in the new business, combined with significant reductions in expenses and improved lapse rates bodes well for Tower Australia,” says S&P’s credit analyst, Carolyn Rajaratnam.

“However, Tower Australia’s challenge is to maintain its growth — to carve out a sustainable niche and write the required levels of business while retaining in-force business — so as to achieve acceptable levels of return.”

Minto says that in the future Tower will continue to focus on establishing a platform for non-bank aligned intermediaries and independent financial advisers.

“We’re a niche player. We’re looking to hold on to our existing investment book and in fact grow that — but we won’t be everything to everybody — we’ll do it in a very focused way.”