Share dip as Tower loss hits $148.9m

By PAULA OLIVER

Shares in embattled financial services group Tower took a hit yesterday when its annual result showed signs of a change in fortune - but not as quickly as some in the market would like.

Analysts and investors had been keenly awaiting the numbers so that they could gauge whether the company had improved in the second half of the year, particularly in its struggling Australian arm.

What they got was a sizeable loss for the year to September 30 of $148.9 million.

Slightly more than some analysts had predicted, the loss was rooted in a disastrous first half-year when one-off costs relating to a change in accounting methods and writedowns plunged Tower deep into the red.

It has since gone through a tumultuous capital raising, culled several directors and senior management staff, cut back on expenses, sold a business, shut off others and overhauled the structure of its divisions.

Yesterday Tower chairman Olaf O'Duill and managing director Keith Taylor were keen to point to a $5.5 million profit in the second half of the year as evidence of a turnaround.

"Twelve months ago Tower's position was a difficult one. Today it has been significantly improved through decisive remedial action," O'Duill said. "We are rebuilding Tower from the ground up and this takes time."

The profit came largely from the company's reliable New Zealand insurance business, while the troublesome Tower Australia division still lost money - this time $6.6 million, slightly more than in the first half of the year.

Analysts had been keen to see signs of a significant turnaround in Australia, but an increasing number of lapses and surrenders from customers in that country meant the jury was still out on a recovery.

"The key to this will be whether or not they've stopped the haemorrhaging," said Macquarie Equities NZ investment director Arthur Lim. "From what they're saying though, there is still a lot of costs to be incurred to turn Australia around."

Taylor admitted that the increase in lapses and surrenders across the Tasman was a concern.

"It's probably the one disappointing thing among a number of good things in the result."

He blamed it partly on poor investment returns, but said that high relative pricing of products and concerns about the company's financial condition also played a part.

The issue was predominantly an Australian one and was not being repeated in New Zealand.

Asked if Tower's brand had been damaged during the financial dramas of the past year, Taylor said that was not high on a list of reasons for customer lapses and surrenders.

Research of departing customers showed other factors.

However an investor report released by the company yesterday states that pressure had gone on to the Tower brand after loss announcements and speculation over the company's financial situation - and that pressure had affected retention.

Elsewhere, the Australian business showed better signs of turning around after a year of change.

Expenses have been cut significantly, a charge taken on restructuring costs and the division now has a stronger balance sheet and assets well over solvency requirements.

Sales of risk products in Australia were up and the wealth management business made a profit in the second half year of $6.3 million.

Taylor said he wanted to see the Australian arm return to profit in the next financial year, but there would continue to be costs in repositioning the business and in fixing up the issues of compliance that have dogged some products.

O'Duill said Tower was into the ninth month of a two-year rebuilding process and it would take time for the figures to reflect that.

"We are still cleaning house," he said, pointing to the annual loss as evidence of the tough decisions that had been taken. "The board and management are clear about the demands of the year ahead and our response to them will continue to have an absolute sense of urgency."

The $210 million capital raising earlier this year has left the company with a stronger balance sheet and reduced its gearing from 36.6 per cent to 21.8 per cent. Operating revenue across the group was up in the second half of the year, as were assets under management.

Asked if further asset sales were likely, O'Duill said Tower had a desire to be a wealth management and risk business.

The businesses it held now fitted into those two categories. Sales could not be ruled out, but they did not necessarily need to happen.

Tower's result saw its shares fall 5c to close at $1.29.