Consumers pay for insurance brokers' trips

By NZPA

This is the view of Grant Samuel in its analysis of insurer Tower in the midst of Guinness Peat Group's partial takeover bid for the company.

"The broker community is accustomed to incentive driven targets for putting in place policies that can result in elaborate travel and holiday awards that have become the market norm," Samuel said in its independent report to shareholders.

"Ultimately the customer is funding this arrangement through higher premiums."

The report said general insurance is not as profitable as it was and premiums will have to increase in the next 12 months. The market leader in home insurance, IAG, has said it expects premium increases of 10% to 20% in the next year. Tower has about 5% of the general insurance market in New Zealand.

One of the keys to profits in general insurance is managing claims. Tower had outsourced this but was in the process of bringing 80% of it back inhouse.

Tower has 15.5% of the health insurance market in New Zealand based on total premiums paid, making it second to Southern Cross.

Samuel said health insurance is a relatively low margin business for insurers and relies on volume to make a profit.

Tower's medical insurance business has not performed well despite its strong market share.

Again one of the problems is the high commissions being paid to generate new retail business.

Another problem is that the price inflation for health procedures is currently more than double the rate of inflation.

Tower's sales of new health insurance policies in the last 18 months have fallen short of budget but higher premiums have bolstered premium revenue.

For funds management Tower is currently ranked fourth with 8.5% of the market.

In 2007 Tower lost two key executives and this resulted in the loss of some key funds. The Government Superannuation Fund has withdrawn funds and Frank Russell Company removed Tower from its recommended list.

Samuel said Tower's fund management business has a high cost base. It employs 80 people to manage $4 billion of funds.

"Unless the funds under management base of the business can be expanded in the short to medium term, management acknowledges that the cost base of the division may need to be reduced," he said.

But as a default provider for KiwiSaver, Tower is well-placed to benefit form expected consolidation among the 54 KiwiSaver schemes in New Zealand.

Tower has spent "considerable sums" in the last 18 months to establish KiwiSaver compliant superannuation schemes and to comply with the PIE tax structure.

It had to do this to remain competitive but "whether the expenditure will contribute to additional funds under management is not clear at this stage", Samuel said.

In the absence of a major claim the results for the second half of the year for Tower are likely to be similar to the first half and be in line with current forecasts.

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