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Edited Transcript of TWR.NZ earnings conference call or presentation 19-Nov-19 9:00pm GMT

Full Year 2019 Tower Ltd Earnings Call

WELLINGTON , Nov 29, 2019 (Thomson StreetEvents) -- Edited Transcript of TOWER Ltd earnings conference call or presentation Tuesday, November 19, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey Wright

Tower Limited - CFO

* Michael Peter Stiassny

Tower Limited - Independent Chairman

* Richard Harding

Tower Limited - CEO

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Conference Call Participants

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* Andrew Buncombe

Macquarie Research - Insurance and Diversified Financials Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Tower Limited Full Year Results Announcement 2019 Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I'd now like to hand the conference over to your first speaker today, Mr. Michael Stiassny, Chairman. Thank you. Please go ahead.

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Michael Peter Stiassny, Tower Limited - Independent Chairman [2]

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Good morning, and thanks to you all for making the time to join us this morning. With me in our Auckland office is our Chief Executive Officer, Richard Harding; and our Chief Financial Officer, Jeff Wright, who will shortly speak to you and take you through our full year results and hopefully answer any questions you have.

I'm exceedingly pleased to open today's call with the news that we have reported a full year's profit. We have long held the view that Tower is undervalued. Today's result reflects the work done to remove legacy issues, to refocus and grow the business and implement core insurance fundamentals.

The business has been simplified by identifying a clear strategy and executing it well. Our goal is to recreate a profitable company that delivers shareholder value. We are succeeding. The business is returning to profitability by continuing to successfully implement its ambitious plan to have New Zealanders and Pacific Islanders see us in a new light and setting the bar for how insurance should be.

How the insurance industry should be was also the focus of the recent Australian Royal Commission and the RBNZ and FMA conduct and culture review, both of which have made it clear that change is needed. Tower has taken this to heart and will lead by example. The Board has received and endorsed Tower's conduct and culture review. There are aspects of practice that need further investigation and will be improved. However, the Board is also confident Tower is not starting from a standing stop. We are a customer-centric business, we have a customer-centric approach, which is embedded in our DNA.

Tower's strategy is focused on making things easier and better for customers, which provides the business with a unique platform on which to rebuild trust. The Board strongly supports Tower's challenge to the industry to regain the trust of the New Zealand public and is keen to see all insurers respond to the culture and conduct review with action, not rhetoric.

Interestingly, the Conduct and Culture Review did not take into consideration the impact the EQC's response to the Canterbury earthquakes may have had on public perceptions of the insurance industry. One suspects it was, and continues to be, significant. Tower has made no secret of the fact that we believe the system remains fundamentally broken despite some recent improvements. A true step change in conduct and culture would see the industry join forces with the government for an honest and transparent appraisal of the EQC and agreement on a sustainable future model for the agency. An EQC that delivers fair customer outcomes would have the single greatest impact on restoring New Zealanders' trust in our industry.

On behalf of the Board, I'd like to thank Richard, the management team and our frontline staff and all staff, actually, for their sustained efforts to deliver a strategy that has seen Tower finally return to profitability.

I'll now hand over to Richard and Jeff, who will take you through the results and outlook before we take questions. Richard?

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Richard Harding, Tower Limited - CEO [3]

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Thank you, Michael, and good morning, everybody. I'm afraid you have to put up with me, I've got the flu again, and I might be a bit croaking, a bit scratchy. So please bear with me.

Tower has returned to profit and delivering a full year reported result of $16.8 million. This is a significant achievement and a $23.5 million improvement on last year, proof that our strategy is paying off. Underlying profit after tax increased $13.8 million to $27.4 million, a result of our relentless focus on improving all aspects of the business.

Over the past 4 years, we have worked to completely transform Tower by fixing foundations, and we're now growing the business by challenging and breaking industry norms. These results demonstrate the enhanced strength of the business and the future potential that exists in the Tower brand. Our determination to deliver something better to customers has been noticed and we continue to deliver solid growth. Gross written premiums in the core New Zealand portfolio increased by 9.1% and total GWP reached $356 million across New Zealand and the Pacific.

Continued implementation of risk-based pricing along with improved underwriting and a benign weather environment has significantly reduced claims costs. Over the last year, our total claims ratio has reduced to 48.8%, a 7.6% reduction from the 56.4% in 2018, thanks to benign weather and improved underwriting. Our claims costs, excluding large events, has decreased to 48.4%, a 3.9% reduction from 52.3% in 2018, which demonstrates the strength of our underwriting.

Our Pacific business has returned to historical norms, with solid and profitable growth, improved underwriting and a benign weather environment, delivering better results. In the second half, an increase to Canterbury provisions resulted in a $1.3 million after-tax expense, bringing the full year impact to $6 million. This is principally due to the ongoing receipt of EQC overcaps. Jeff will provide further detail on this shortly.

We have successfully delivered and launched our new IT platform. New business is on sale on the new system, and customers are now migrating over. As we signaled earlier in the year, operating expenses are slightly elevated than previous year as our IT transformation draws to an end. The successful delivery of our IT platform is an exciting milestone for Tower, and we are now well positioned to maximize the benefits and opportunity this system has to offer.

Our business has transformed, and the company is vastly different to what it was 4 years ago. Our results demonstrate the long-held belief of the Tower Board and management team, that Tower offers an exciting platform for growth and we are now about to accelerate.

In a market dominated by overseas-owned and controlled insurers, we are now offering customers a generally different, better alternative. And this focus is driving solid growth in our core book. We've added over 17,000 new risks to our core New Zealand portfolio over the past year. This level of growth is expected to increase now that we have completed the delivery of the IT platform. This continued momentum has driven GWP growth in the core New Zealand portfolio, 9.1% with total GWP in New Zealand growing 6.8%.

GWP is growing across all New Zealand products. New Zealand House growing 7.3%, with the majority being attributable to rating; New Zealand contents growing 4.8%, split between rating and volume; and New Zealand motor growing 12.1%, with the majority being attributable to volume.

This is being achieved through a combination of factors, including continued execution of risk-based pricing and simpler policies that customer can understand; constant refinement of underwriting criteria enabling a more granular assessment; strong retention through our digital and phone channels; and attracting new profitable customers with improved and targeted offerings.

The growth we have achieved is a result of offering customers simple insurance at a fair price. Through the approach, we are starting to realize the potential that exists in the Tower brand.

Growth in the Pacific has returned to historical levels and following a number of years of remediation, we are now growing sustainably in the region. Over the coming 12 months, we see a positive growth and pricing environment in New Zealand and the Pacific, which will lead to further improved profitability.

In 2016, we began our digital transformation journey. And since then, I've consistently said that digital will drive the future growth of Tower. We've continued to place significant effort into attracting new customers and improving this channel's performance. Our efforts to become a digital insurer continue to pay dividends, with 51% of new business coming through our digital channels in September, increasing to 53% in October. This compares to less than 10% during 2016.

In the last 12 months, we've delivered significant growth, with GWP through digital channels reaching $20 million in the second half. This is thanks to continuous improvement of our digital channels. Our recently improved digital claims lodgment prices and innovations like our claims chatbot, Charlie, has resulted in 27% of claims being lodged online in September 2019.

This has been achieved before our new platform functionally has been turned on and is proof that our investment in digital channels is well made. We expect a number of claims lodged online to increase significantly as our new system, with its self-service and improved claims capability, hits its strides. Digital remains one of the most crucial foundations of our business. It enables differentiation, agility, innovation and growth, and our new platform will accelerate our progress.

Underwriting and claims are intrinsically linked and sit at the heart of what an insurance company is and does for its customers. The focus on achieving underwriting excellence is a constant for Tower and it continues to play a vital part in the delivery of our strategy. We have taken significant steps towards achieving our underwriting excellence goal, and we have implemented best risk -- better risk selection and underwriting processes; continue to focus on claims leakage and recovery; launched and continue to refine our plain language products that have won awards and provide clarity to our customers and employees at claims time; and implemented new data practices to enable us to accurately monitor the portfolio.

This relentless focus on underwriting excellence has helped us shift our portfolio to a more balanced mix and improve claim frequency. This is particularly noticeable in our New Zealand house product with sustained improvement in claims frequency over the past 4 years, a result of clear products and benefits for our customers.

18 months ago, we led the way with risk-based pricing and removed cross-subsidization between low and high-risk customers. Risk-based pricing has resulted in growth of our portfolio in Auckland, while also reducing our exposure to high-risk areas by 16%. Our fairer approach to pricing has allowed us to grow our exposure by 4% in the larger, low-risk areas like Auckland, Hamilton and Taranaki. Through this process, we work closely with our impacted customers to support them, and we have received positive feedback about our open and transparent approach.

The reduction of extreme risk policies, combined with the already completed changes in our Wellington portfolio has led to the reduction in the amount of reinsurance cover we require. This has all been achieved under the constraints of the old technology system. As customers migrate onto the new platform, we will utilize the improved rating engine, more granular segmentation and pricing approach to drive further growth and underwriting improvements. It is clear this strategy is working and will continue to deliver growth and reinsurance efficiency in the future.

At our half year results, we signaled that an uplift in expenses in the second half was likely as our IT transformation concluded. As you can see, the finalization of this piece of work has increased our group management expense ratio by 1.4%, which includes increased headcount in our frontline teams, the running of dual systems and the delivery of a tailored customer migration process.

We are investing in the business to drive long-term value. And as we've outlined previously, a major component of this is new technology and moving customers to the new platform. Managing customers through the migration process is one of the most important parts of our technology transformation, and we have invested appropriately at our frontline teams and a tailored customer management approach to reduce risk, maximize retention and manage customer impact.

These costs will continue over the next 12 months as the migration comes to conclusion. Following this, we expect these costs of between $5 million to $7 million pretax to be removed from our expense base along with other activity gains we expect to be operating at or near our target MER of less than 35%.

Just under 1.5 years ago, we announced our commitment to invest in a new technology platform that will deliver a step change in results. We've been working at pace to deliver against aggressive time frames. And I'm pleased to advise that we have successfully delivered and launched our new platform and the IT transformation is now concluding.

In May this year, we launched the first phase, which enabled us to sell new business on the new system. It was a core foundation piece of the program and continues to run well. Delivery of Phase 2 has now been completed and it includes the rationalization of our products; commencing the 12-month migration of our existing customers onto the new platform; launching a customer self-service portal, allowing customers to manage their own insurance online just like we do with banking every day; and implementing online claims benefit modules, enabling customers to lodge and manage claims online.

We started migrating customers to the new platform early this month. We are managing risk closely through a ramp-up approach that is working well and is nearing full velocity. Customer migration will be complete by the end of 2020 calendar year.

Moving around 350,000 customers to a core set of 12 products will deliver significant benefits to our customers and the efficiencies of our business. Costs for the program were in line with the previously advised amounts. And at this stage, the total costs delivered to core platform is estimated to be $47.6 million. We expect benefits to start being realized over the coming financial year, with full benefits delivered after finalizing customer migration and decommissioning legacy systems. Post finalization of the IT transformation this quarter, capital expenditure for future years will revert to normalized levels of between $5 million to $7 million.

Our transformation and the new platform underpin everything we do. It will accelerate our growth opportunities by combining our existing data with that of our partners to get a full understanding of our customers, and actively targeting niche customer segments with compelling and appropriately priced propositions. We'll improve the customer experience with simpler, improved products; reduce wait times; and fully digital self-service capability. Our operating model is changing response to our new technology and the types of outcomes we are now delivering. We are shifting our organization to a more agile way of working that puts customer demand right at the center.

We are moving away from traditional hierarchical structures and have implemented a platform operating model with 3 distinct layers. The first layer is the customer, which interacts with our customers and generates products and service demand into the business. This is supported by an insurance layer that builds new products, systems and processes to deliver on that customer demand. All of which is underpinned by an efficient business support layer who maintain our core systems and support our people.

Our people who work in cross-functional teams to test, learn and deliver outcomes for customers in short sprints. This test-and-learn capability will see us look and act like a digital challenger and realize the benefits of the opportunity our new platform offers. We will now be able to rapidly test and learn on all aspects of insurance. What used to take weeks and months can now be tested and delivered almost instantly. Pricing changes that used to take months of coding can now be made, delivered and monitored in the same day. It allows us to quickly build products, test them with customers and modify them on an ongoing basis. We can now understand what part of a product customer really relies on and put new niche offerings into the marketplace.

We will utilize our new capability and functionality to develop a commercial and small business offering and trial usage-based insurance. We'll be able to do this quickly by constantly testing and learning along the way. These teams will also drive our push to move 50% to 70% of all transactions online, which deliver better outcomes for customers and significant cost savings and productivity gains. The reduction in the number of products from over 400 to just 12 core products, along with automation and moving low-value transactions online will help drive improved efficiency.

It's pleasing to deliver this -- to have delivered this significant piece of work successfully and with benefits being realized progressively over the coming year, the full run rate will be achieved in FY '21.

I'll now hand over to Jeff, who will take you through our financial results in more detail.

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Jeffrey Wright, Tower Limited - CFO [4]

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Thank you, Richard, and good morning, everyone. Looking at the consolidated results, we can see that continued growth, improved claim costs and the benign weather environment have all contributed to Tower's pleasing results. We have continued to deliver strong growth this year, with gross written premium increasing $20.7 million and net earned premium increasing $21.9 million. At the same time, claims costs have reduced $10.6 million, with underlying profit after tax improving by $13.9 million to $27.4 million.

As a result of new overcap claims from the EQC, we have increased provisions for the potential receipt of further overcaps. This second half increase resulted in a second half impact of $1.3 million after tax, which resulted in a full year after-tax impact on reported profit of $6 million. In all other respects, the Canterbury portfolio is performing well and in line with expectations. You can see more information on Page 29, but at a high level, over the past year, we have closed 117 claims while receiving 45 completely new overcap claims from the EQC. As at the 31st of October, we are down to 95 Canterbury claims remaining.

While we continue to make progress closing these claims, the continued receipt of overcaps from the EQC is frustrating and has hampered our efforts to close out claims once and for all, and we continue to push for a permanent fix.

Overall, our reported profit of $16.8 million after tax is a significant improvement, up $23.5 million on last year. In addition to the strong reported results, our combined ratio has decreased to 88.8%, 6.6% lower than last year.

Slide 13 details the key drivers of the increase in underlying profit before tax from financial year 2018 to 2019. The strong growth is reflected in the $20 million increase in net earned premiums, a combination of growth in our core portfolio and our risk-based pricing approach. On this slide, you can also see the improvement in both large event claims and BAU claims costs.

Growth in our risk count has resulted in an increase in our claims expenses for New Zealand, but benign weather and remediation across key Pacific portfolios has delivered an overall decrease in claims cost.

As Richard mentioned earlier, management expenses are higher due to the completion of our IT transformation and investment in our customer migration. As you can see, this is a strong result delivered by an ongoing focus on our strategy.

Our strategy is driving real and strong improvement in our New Zealand business, with positive results across the board, showing the strength of the core business. The majority of growth in Tower's GWP occurred in our New Zealand markets, with an increase of $18.9 million achieved in gross written premium. A change in mix and more efficient reinsurance is seeing more gross earned premium flow through to net earned premium, with a $19.3 million improvement in net earned premium in 2019.

We have improved and stabilized our loss ratio, reducing at 5% to 52.2%. This is a result of ongoing underwriting excellence, pricing improvements and of course, benign weather environment. You can see here that our management expense ratio in New Zealand is flat. This 37.9% includes our additional investment in IT, which highlights our ongoing focus on reducing management costs. Underlying profit improved $9.3 million to $22.1 million and along with a combined ratio of 90.1%, demonstrates the success of the strategy we have in place and the work we are doing.

New Zealand claims expenses have decreased significantly over the past 12 months, with a number of underwriting and pricing initiatives helping to offset inflation. As you can see on this slide, there are 4 key factors that have contributed to this positive result. Last year, we informed you of an adjustment relating to the 2017 financial year, which had increased our base claims ratio, this was a one-off for FY 2018.

While in prior years, we've borne the brunt of severe weather. This year, we've benefited from an improved weather conditions, which have resulted in a 2.7% decrease in our claims ratio.

Our new simpler products have contributed to a reduction in New Zealand contents claims frequency, while our risk-based pricing approach is delivering benefits in New Zealand house. This has been offset by a high-frequency in-house fires in the second half of FY 2019.

Good weather also means more people are out exploring New Zealand. And as a result, in our motor portfolio, we have seen an increase in claims frequency.

While the result is pleasing and we have delivered significant improvements, we remain focused on refining our products and pricing approach to ensure we continue addressing claims costs.

We are very pleased to see contributions from our Pacific business return to historic levels. Vanuatu, Tonga, Samoa, American Samoa and the Cook Islands have returned to growth, thanks to additional underwriting, pricing and marketing support for our local teams. This growth was offset by a more disciplined growth in Papua New Guinea, remediation of the Fiji motor portfolio and the nationalization of the workers' compensation and comprehensive third-party schemes in Fiji.

Overall, Pacific growth written -- gross written premium was slightly up, increasing to $60.2 million. However, the underlying quality of the business has improved significantly.

A benign weather environment and less commercial fires across the islands have resulted in a significant improvement in claims cost. Total claims costs across the Pacific reduced by $9.2 million. The slight increase in management expenses is primarily due to the continued investment in the Pacific operations center. While the overall result for the Pacific is returned to historic norms, we are confident that there remains opportunity in the Pacific business and that will continue to contribute significantly to group profit.

Having been impacted by a number of severe weather events across the past few years, claims ratios and contributions from our Pacific business have now returned to historic levels. Improvement in claims costs have been delivered through targeted underwriting and pricing initiatives across our key markets, and combined with the benign weather environment, have resulted in a 22.7% decrease in our Pacific claims ratio.

Continued repricing of the Fiji motor book has led to improved profitability. Although slightly softer growth than we had previously seen, this was an important step to ensure our future growth remains sustainable and claims costs are controlled. Remediation of the Papua New Guinea portfolio to reduce risk and exposure is now complete, and this portfolio has returned to profitability. Our recently launched operation center in the Pacific has helped bring greater discipline and consistency across the region, ensuring we grow within our risk appetite.

In September 2019, Tower announced that additional capital of 20 -- $47.2 million was needed to facilitate a change in Tower Insurance's license condition and to affect the acquisition of the Youi New Zealand portfolio. Tower Insurance consulted with the RBNZ to understand likely capital requirements to support the acquisition and ongoing business of Youi, with discussion also covering Tower Insurance's existing solvency capital. This included conversations on Tower Insurance's EQC receivable, which at that time, formed part of Tower Insurance's solvency capital.

Tower remains confident in the recovery of the EQC receivable and is firmly committed to its collection to the maximum extent possible. However, it was agreed that given the likelihood of litigation and the associated delay in receiving funds, the EQC receivable will be excluded from Tower Insurance's solvency calculations going forward. Accordingly, the RBNZ modified Tower Insurance's license condition to remove the receivable from its solvency calculation with effect 31st of October 2019.

Following the successful completion of the capital raise and this change in license condition, Tower Insurance remains in a strong capital position with actual solvency capital well above RBNZ minimum requirements. This will reduce by $13 million following the completion of the Youi purchase.

In September, we announced that Tower Insurance Limited had signed a portfolio transfer agreement for the purchase of Youi New Zealand Proprietary Limited's insurance portfolio, subject to regulatory approvals. Under this agreement, Tower Insurance will acquire Youi New Zealand's approximately 34,000 in-force policies for a purchase price of $13 million. We have completed a number of steps in this process and a formal application has been lodged with the RBNZ. We are hopeful to receive approval before the end of the year.

The purchase of Youi New Zealand's portfolio will accelerate our growth. The portfolio is well underwritten and utilizes a risk-based pricing approach, which is in line with our own underwriting excellence, and will also deliver a positive shift in the mix of our portfolio. The acquisition drives shareholder value through the realization of scale benefits, with the intention of incorporating the portfolio into Tower's existing reinsurance cover and management expenses at a marginal cost.

Youi will contribute approximately $2 million to underlying NPAT and $4 million pre the amortization of goodwill, over the 9 months that will be in effect in 2019. This firmly positions us as a challenger brand, and together with the successful completion of the IT transformation, will deliver growth, build scale and leverage our investment in IT.

As Richard said earlier, managing risk is at the heart of what we do as an insurer and a continued focus on underwriting excellence has allowed us to provide increased protection and certainty on favorable terms. We have taken significant steps to ensure our exposure to large events and the resulting volatility is reduced by reinvesting savings back into our reinsurance program.

We have catastrophe cover to $783 million for catastrophic events, covering us for in excess of 1 and 1,000 year events. We've increased prepaid catastrophic event cover from 2 events to 3. We have added additional drop down cover to minimize any potential impacts of subsequent events. Tower Limited's exposure to catastrophe is $10 million per event. And Tower's exposure to storm and other events is capped at $10 million, up to a limit of $30 million. Savings from the improved efficiency of our reinsurance program will continue to be reinvested, and we expect ongoing modest improvements in our reinsurance ratio.

Thank you for listening, and I will now hand back to Richard, who will provide an update on our strategic plan.

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Richard Harding, Tower Limited - CEO [5]

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Thanks, Jeff. Over the past 4 years, we have fixed the business and turned Tower around despite the distractions of takeovers, legacy issues and unprecedented weather events. We now have a strong base to work from and implementing our strategy that leverages technology and allows us to truly challenge the market. We now have the clear air necessary to create a company that challenges traditional insurance industry norms, and uses this differentiation and challenger positioning to drive substantial growth.

Our customers have told us that New Zealand insurers are complacent and lack transparency, which has led to a lack of trust. We believe that people deserve better. Our strategy is built on this belief, and we're now creating a company that sets the bar for how insurance should be. It's a right thing to do and it is going to drive industry-wide change and deliver growth for Tower. Our belief that people deserve better means we need to create stunningly simple products, new systems and simpler processes that enable amazing claims experiences.

We're going to turn industry norms on their head. We're getting rid of big words and complex policies. We're increasing transparency around risk and insurance information and knowledge. We're simplifying pricing and confusing discounts. And we're creating an employee culture that always pushes for better and is there to help set things right when they go wrong.

We'll set the bar for how insurance should be. You've already seen and heard some evidence of this. Our simple policies have won plain English awards, so customers can now easily understand what they're covered for. We implemented risk-based pricing, so you pay fairly for the specific level of risk your property faces. We're committed to removing the catch-all duty of disclosure question. And internally, we've seen significant shifts in our culture and our engagement, and our people are passionate about doing things differently, and that is delivering good outcomes.

And this is just the start. Tower is radically different from the company it was 4 years ago. We're now positioned to take on the New Zealand insurance market and challenge the larger incumbent organizations who are slow to adapt. We're offering customers something better, which will drive growth and real value for our shareholders.

Our plan has driven change and transformed the business. The work we have completed over the past few years has set us up well for the future and our focus is now firmly on delivering shareholder value. The coming 12 months is a transition year that will ensure we deliver the full benefits of the IT platform from FY '21.

As I mentioned earlier, one of our biggest priorities this year is to migrate our 350,000 customers to our new platform, which will be completed by the end of the 2020 calendar year. We continue to drive growth, building on the past 7 consecutive halves of growth by continuing to price more fairly, delivering amazing claims experiences, improving efficiency and profitability. Along with our shift to a more agile operating model, we'll achieve benefits progressively over the coming year.

But FY '21 is where the full benefits of our investment technology will be fully realized. In FY '21, we can decommission complex legacy systems that currently take significant resources to manage and maintain. We'll be able to accelerate growth opportunities, improve customer experience, and combined with our push to move 50% to 70% of all transactions online, deliver significant cost savings and productivity gains. The new platform enables innovation and rapid response to customer needs. It will also allow us to take new products to market faster, to test and learn and drive growth in new areas.

In the Pacific, our new operations center will support local teams to improve product, pricing and underwriting capability to ensure we grow sustainably. In short, we will continue to drive our customer-center strategy forward, trying hard to raise the bar for the industry by putting customers first, using our new technology.

Our strategy and the work we are doing are closely aligned with the outcomes of the recent conduct and culture reviews. While we know we're not perfect and there is a lot of work yet to do, we are making progress and working hard to maintain and build trust with our customers and our stakeholders. What we have achieved and the plan we have in place sets us up well for the future and we'll build trust, drive growth and deliver shareholder value.

We are confident in the strength of our strategy and the performance of the underlying business. While FY '20 is a year of transition, we expect solid growth and profitability to continue and are providing a guidance for FY '20.

Guidance for Tower's underlying NPAT in FY '20 is a range of between $27 million to $30 million based on the following assumptions: insurance market conditions remain positive for growth and pricing, allowing GWP growth consistent with FY '19, in addition to growth generated by the acquisition of Youi; a return to long-run average event loss -- costs of $8 million per annum pretax compared to FY '19 of $1.3 million pretax.

Youi will contribute approximately $2 million to underlying NPAT, $4 million preamortization of goodwill, reflecting the pro rata inclusion of 9 months of its full year.

The FY '20 guidance also includes a heightened level of management expenses of between $5 million to $7 million pretax due to the transition to the new IT platform, including additional costs of operating an additional IT platform, in parallel, during the period of transitioning of policies to the new EIS system, and the subsequent decommissioning of the old platform; additional resources to ensure the effective transitioning of policies to the new EIS platform; and to handle the more manual processes on the old platform.

In addition to other productivity gains, the Board expect these costs to be removed from Tower's expense base in the year after migration is completed. And by early FY '21, Tower will be operating at or near its target MER of less than 35%.

In respect to the 2019 financial year, and as previously advised, no dividend will be paid. Tower's Board has determined that FY '20, Tower will pay a dividend of between 50% to 70% of reported NPAT, where it is prudent to do so.

Today's reported profit demonstrates the strength and opportunity that exists in the Tower business. You can be confident that our strategic plan is solidifying our position as a digital challenger and will deliver you significant long-term value.

Before I ask for questions, I'd like to thank the Tower Board for their continued support and the whole Tower team for the effort they have put in, and the continued improvement we have seen as a result.

Thank you all for listening.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today comes from the line of Andrew Buncombe from Macquarie.

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Andrew Buncombe, Macquarie Research - Insurance and Diversified Financials Analyst [2]

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Congratulations on the results. Just 2 questions from me please, both on the reinsurance, actually. Just in relation to Slide 20, can you just confirm the level of catastrophe losses assumed within guidance? I assume that it's the $10 million storm exposure that falls out of this cover or is it different?

And then the second question was just on the reinsurance ratio for FY '20. Just a bit confused by some of the terminology in the pack. Is it safe to assume that the cost of dollar -- the cost dollar of the reinsurance is going up in FY '20, but the ratio is coming down because of the strong growth?

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Jeffrey Wright, Tower Limited - CFO [3]

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To the first question, that the longer-term assumption we've used is $8 million. We do have exposure to $10 million, but the $8 million reflects sort of a 5 to 6-year long run average.

In regard to the second question, the absolute cost is relatively flat on a growth basis. We might need to get back to you with a bit more detail on that one, Andrew, as to respond to that question.

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Andrew Buncombe, Macquarie Research - Insurance and Diversified Financials Analyst [4]

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That's fine. And get well soon, Richard.

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Richard Harding, Tower Limited - CEO [5]

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We'll speak to you shortly anyway.

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Operator [6]

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(Operator Instructions) There are no further questions at this time. I would like to now hand the conference back to today's presenters. Please continue.

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Michael Peter Stiassny, Tower Limited - Independent Chairman [7]

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Just like to thank everyone for being on the call. Once again, to thank everyone at Tower for ensuring that we have a good announcement today, which is very pleasing for everyone and hopefully, for shareholders, and thank you all.

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Richard Harding, Tower Limited - CEO [8]

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Thank you, everybody.