By Jenny Ruth
Monday 5th July 2004
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In late May, Tower reported a significant turn-around in profitability with a $20.5 million first-half net profit compared with a$148.9 million net loss in the same six months a year earlier. The improvement mostly reflected much smaller write-offs and the problematic Tower Australia moving from losses to profits. In June, international ratings agency Standard & Poor's recognised the improvement by upgrading the outlook for the company's various ratings from negative to stable.
ShareChat: How has Tower Australia been able to increase its risk business volumes?
Chief executive Keith Taylor: One of the issues that Tower Australia had has been the break-down in the relationships we had with our traditional writers of risk products. We've put a lot of effort into our existing relationships but we've also put our efforts into building up new relationships. We've also upgraded our risk insurance products. We've reviewed them and made them more competitive in some areas. Some of the features have been changed.
SC: What is driving the improvement in lapse and surrender rates in Tower Australia?
KT: We looked back and tried to work out what caused our lapse rates to go up ... two or three years ago, our lapse rates were in the acceptable range. One of the major reasons seemed to be the break-down of relationships with some of our advisers. The advisers were told two or three years ago that we were going to focus on wealth management and that risk was going to be less important to us. They started selling other risk products. The second reason was we had a couple of periods where we had very bad profit results. That caused some uncertainty with some clients and our client servicing was below the standard we would want it to be. We've obviously moved to a period where our profit results, whole not outstanding, are certainly showing an improvement. We have improved customer relations in terms of response times. We have about 20 key activities (we're working on). We've put a lot of time and effort into our retention strategy. At the moment, the amount of business we're losing in lapses takes out a reasonable proportion of our new sales. Keeping our lapse rates down is a key strategy.
SC: Can the improvement in Tower Australia in the first half be sustained? If so, why?
KT: There's still some way to go in terms of restoring the profitability of Tower Australia. We would only see ourselves as part way through that period. Even in the first half year result, there were still a number of one-off expenses. We're still reducing our levels of expenses further. The benefit of recent improved sales levels doesn't come through immediately either. It's good to see it back into profit but we still want to build quite significantly on that profit in the next couple of years.
SC: Are corporate expanses now as low as they can be? Where else can you cut?
KT: We have four divisions and the head office. In Tower Australia, we've reduced management expenses running at $102 million down to something like a $68 million running rate. There's a little more to be done there, but not too much. Most of the improvement from here on is seeing the benefits of new sales coming through.
SC: Some people have questioned whether you've pruned the tree too hard to allow new growth.
KT: That's always an issue. We're getting to the situation now with Tower Australia that if there was significantly more pruning ... if future, we will be seeing our unit costs going down but our overall costs will probably start to go up as the overall size of the business increases. I don't thing we've pruned the tree back too hard. At head office we've probably gone as far as we can go in terms of significant cutbacks. There are probably some areas in the other divisions where we can make cost savings. Over the last 12 months, reducing costs has been a major strategy. Going forward, there's much more emphasis on growth. There will be continued cost cutting, but not anywhere near to the same extent.
SC: You said at the first-half presentation that Tower was 15 months into a two-year rebuilding process. What is still to be done?
KT: To get our sales levels back to the level they should be. We've seen good growth in sales in most of our businesses. There's still some simplification of our businesses required. We have similar functions in parts of our business doing the same things. Increasingly the emphasis is on growth. That's certainly the message we're giving to staff.
SC: Is Tower's best option to become a takeover target? Why do you think analyst's persist in this view?
KT: As a listed company, you're always a takeover target. We could have a knock on the door any time. But that's not the strategy we're following. We're trying to make our business one that's valuable to shareholders. Obviously, the better you do, the more attractive you are to outside players.
SC: Doesn't the company need much greater scale in Australia?
KT: Obviously they see the size of Tower makes it an acquisition that's feasible for a number of players in the market place. I think you need to look beyond that. In New Zealand we have a viable sized business both in the investment and insurance aspects of our business. In Australia, our focus is very much on two things. One is the insurance risk business, life insurance. We've got about a 6% market share in that business. The largest players in the Australia market are only at 12%. Certainly, in the last 12 months we would have been one of the fastest growing in that market. We're focusing on the non-bank alligned part of the market. There are a lot of non-alligned risk distributors who prefer not to deal with the banks. We're already one of the good medium sized players and we think we can be a major player in that market. In that area, scale is particularly significant. In wealth management, we're reasonably sized players, in the top 10 in master trusts and number one in self-managed small superannuation scheme business. We're the number one provider of that business through Tower Trust. We've got good businesses that are viable and are making good profits. We do want to grow them. There will be some rationalisation in the market and we plan to participate in that.
SC: Does Standard & Poor's upgrading of Tower's outlook have any practical implications?
KT: I think it's a good signal to the market place and particularly to our distributors. It's something our distributors are conscious of. It's made them feel more comfortable about Tower. It doesn't have any practical implications in terms of reducing debt servicing.
SC: What will the money from the $80 million capital notes issue be used for?
KT: The information memorandum was released last week. Most of the issue's done on a broker-firm basis. We can be confident it will actually be placed with investors. We're using the money to repay senior bank debt - we have about $80 million.
SC: So then all your debt will be capital notes and bonds?
KT: Yes. We won't have any bank debt left. The reason for going that way is that the marginal extra cost isn't that significant and it's more flexible. Bank debt is usually much shorter. We have a long-term business and the board felt longer-term funding was more appropriate.
SC: When do you think it likely that Tower will resume dividend payments?
KT: That's something the board has to decide. Their statement on that is once they're confident improved profit levels will be maintained. We're obviously getting much closer to that. We're conscious we have a large retail base and they're usually more sensitive to dividend payments than the institutional investors. It's likely to be sooner rather than later, but I can't make any predictions or promises.
SC: To what extent does Tower's return to profitability and profitability in future depend on rising world share markets increasing the value of its managed funds?
KT: That's certainly a factor. It's not that significant. We make a reasonable proportion of our returns out of insurance and also out of the services we provide around wealth management and insurance. The funds going up in terms of investment returns is felt in fee revenue.
SC: What level of profitability are you expecting from Tower three years from now and what strategy have you put in place to ensure that the objective is achieved?
KT: I think we would see our current level of profitability relative to shareholders' equity is unsatisfactory. It only represents about a 5% or 6% return on equity on an annualised basis. We obviously need to do much better than that. We're growing the business and we've taken a lot of costs out of the business. We're hopefully at the end of significant one-off costs that have been seen in the last three half-year periods. We're confident of improving profitability over the next three years but I'm obviously unable to put specific figures on that.
KT: Is there anything else you would like investors to know?
CN: We were very happy with our profit in the first-half. Equally important to us is seeing some of the key underlying business issues going in the right direction. The key one is growth in sales. We've seen good sales growth in much of our business and expenses are coming down and lapse rates are coming down. They're probably the three key indicators of how our business is going. There has been a strong turn around in those indicators in the last six months.
KT: What about your share price?
CN: On a one-year basis it looks pretty good, but not looking back further. Our shareholders who have been in for a long time have lost value. We're working very hard to restore that value but we've certainly got some way to go yet. Most shareholders now will have got half their shares at 90 cents.
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