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Tower faces uphill battle

By David McEwen

Friday 24th January 2003

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The latest communication from insurance group Tower for the year ended September 2002 lays bare some of the serious mistakes the group made, culminating in a collapse in its share price late last year.

A report to clients called The Investor gives the impression of a ship with no captain, as no one comments in person on the litany of problems or attempts to accept responsibility.

Of course, that's what Tower has become since chief executive James Boonzaier walked out late last year after failing to revive its faltering image and falling share price. No one has been appointed yet to replace him, despite assurances from the company that the search would be over by Christmas.

Tower essentially has two distinct stories to tell, one emanating from Wellington and the other from Sydney.

In Wellington there appears to be a well-respected operation with a prominent brand. It has market leadership in several segments, including wealth management and is profitable.

In Sydney one finds a struggling collection of businesses, with poor brand recognition, trying to make headway against much larger Australian competitors.

Tower launched into the Australian market when the local market became too small for its aspirations. But in doing so, Tower's management underestimated the difficulty of taking on a cut-throat market in financial services with an unknown brand in a country with a natural antipathy toward New Zealand businesses.

The problems culminated in a net loss after tax for Tower of $74.9 million for the year ended September 30, 2002, compared with a profit the previous year of $77.2 million.

Tower accounts for the bulk of this $152.1 million turnaround as follows: poor investment markets, $26.1 million loss; write-off of capitalised IT and other expenses, $31.2 million; write-down in carrying value of its Australian financial services company, Bridges, $35.8 million; operational and experience losses in Tower Australia, $44.0 million; and restructuring costs, $10.1 million.

A closer look at the report reveals, in one way or another, that most of these losses emanated from Australia. The carrying value of Bridges was reduced by $35.8 million as a result of an expected drop in future margins.

The Investor explains that "a new pricing structure for the Bridges master trust (the Portfolio Service) has been adopted and new income-sharing arrangements have been agreed with financial planners." The story behind this is reported to be that Bridges staff had demanded higher commissions to sell Tower's products.

This raises the question of whether the reason is that it's harder for an Australian financial adviser to sell a Tower product in Australia than a well-known local brand.

The large writedown of Australian IT expenditure resulted from a change of direction in Australia. When the company launched there five years ago it set up legacy systems that would cover all areas of Tower's life business. Subsequently, it decided that its future in Australia lay in wealth management and not life but the technology was not as suited to wealth management.

"The cost of migrating existing products and data is not proving to be cost-effective relative to ring fencing and maintaining closed legacy systems," the Tower report explains.

All this reinforces the view that the company simply did not have direction in Australia or had never properly assessed the competitiveness of that market. More than Mr Boonzaier's head deserves to roll over this.

The Australian problems notwithstanding, Tower's overall operating performance last year was not a disaster and no worse than many of its competitors.

Income declined 17% to $580.6 million over the year, due largely to falling investment markets. Assets under management fell 2% to $20.7 billion compared with the previous year. It even managed to increase its market share in the risk businesses in New Zealand while Tower Asset Management produced a strong investment performance.

Tower's share price remains on the deck. Part of the problem is that Tower needs Australian investor support but Australian investors are particularly hard on New Zealand companies that don't perform.

It will take competent leadership and an effective strategy to rebuild faith in Tower's shares but right now there is precious little evidence of either.

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