Good day to you all and thank you for standing by. Welcome to the Tower Half Year Results Call. Please be advised that this conference is being recorded. I would now like to hand the conference over to your first speaker, Michael Siasni, Chairman of Tower. Thank you.
Please go ahead.
Good morning, and thank you for making the time to join us for this investor call and presentation of our half year results. With me in Auckland is our Chief Executive Officer, Blair Turnbull and our Chief Financial Officer, Jeff Wright, who will take you through the results and answer your questions. When presenting our full year 2020 results in November last year, I noted that no company is immune to the ongoing challenges posted by the COVID pandemic. Our digital first strategy has positioned TAO well and is continuing to deliver solid GWP growth and reduced management expenses. However, these positive results have been offset by an increase in large event and large house claims and general claims increases due to rising building costs.
There is no question that the insurance industry, like all of New Zealand, is facing inflationary pressures emerging as a result of supply chain and other pandemic induced challenges. Tower has taken decisive action to address these factors, which have impacted profits in this half. Blair will take you through these comprehensive measures shortly. Our strength in digital and data is assisting us to respond quickly, and we anticipate seeing some improvement in the second half, acknowledging that it takes time for the mitigations to have full effect. Accordingly, last week, we revised our guidance on underlying profit for the 2021 financial year to between $25,000,000 $27,000,000 Despite these unprecedented times, Tower remains a resilient, strong and well capitalized business with a solid base for continuing investment and growth.
The business is increasingly nimble, and we have acted swiftly when solid growth opportunities have been identified, including the purchase of the ANZ legacy portfolio and Club Marine. Following settlement of the EQC receivable, Tower now has a solvency ratio of 309%, dollars 97,000,000 above regulatory minimums and the Reserve Bank has also lowered Tower's solvency condition from $50,000,000 to $25,000,000 The business is in good heart, and I'm pleased to announce on behalf of the Board a resumption in dividend payments. Based on Tower's ordinary dividend policy of paying 60% to 80% of cash earnings where it is prudent to do so, a dividend of $0.025 per share will be paid on 14 July. This is a watershed moment, and I'd like to acknowledge you, our shareholders, who have supported Tower through 5 tough years. It is good to be able to reward your patience.
Tower has successfully shared its legacy issues and has entered a new accelerated phase of innovation and growth. Blair has an exciting strategy that he will share with you and is wasting no time in implementing it. Innovation is at the heart of tower in 2021, a far cry from where we sat a decade ago. I'd like to acknowledge everyone in the Tower team. Sustained premium growth and a downward trend in management expenses is testament to a solid strategy and the discipline and dedication of the people that implement it.
In short, despite the COVID induced breeze, Tower continues to be well positioned for sustainable long term growth. I'll now hand over to Blair and Jeff, who will take you through the results and outlook before we take questions.
Kia ora. Thank you, Michael, and good morning, everyone. I'm delighted to be here sharing our half year results for 2021, which sees Tower in a very solid capital and solvency position. We have a technology and distribution advantage that sets us apart from our competitors and affords strong long term customer and premium growth prospects. Tower has reported a sound result for the half year, although as indicated by our updated guidance last week, we are facing emerging external factors such as claims inflation, which has impacted profits.
Underlying net profit after tax, excluding large events, was €18,000,000 and reported profit for the half year was €12,000,000 down from $14,900,000 in the prior year. Offering customers a simple and rewarding experience through our leading technology platform has helped grow Tower's gross written premium for the half year to 31 March to $194,000,000 up 6% on the same period last year. This was a strong result achieved despite the Pacific business declining 16%, primarily as a result of economic challenges related to COVID-nineteen. Disciplined cost control and further efficiency have seen Tower's overall management expense ratio further improve by 2.5% to 36.5%. Customer numbers have showed healthy growth, up 2.8% to 306,000 and market share has now climbed from 8.6% to 9.3%.
Tower's combined operating ratio has increased 4.9% over the prior year to reach 90.3%, reflecting the inflationary pressure on claims and higher large events. And New Zealand's parent solvency ratio was 309%, which is €97,000,000 above the regulatory requirements and reflects a strong capital position. Tower's journey of focus in streamlining our business has entered an exciting new phase. Following the process of transformation and replatforming, we've made positive progress in resolving legacy issues. In the past 6 months, we reached a $42,100,000 settlement with EQC.
The Reserve Bank reduced our licensing condition from $50,000,000 to $25,000,000 and we simplified our structure. This has made TAO a far more robust and transparent business and one that is very well placed to enter a new exciting new phase of growth and innovation while also strengthening our claims, pricing and underwriting insurance fundamentals. The key to our success is leveraging a new cloud based scalable digital and data platform for our 3 businesses: our flagship TAIL Direct business, a unique partnership business, which includes leading retail brands, advisory businesses and more recently, the addition of InsurTechs and the Pacific business with operations in 8 countries. Strengthening the business remains a priority, and this is particularly heightened as we face claims inflation and wider environmental macro pressures. Jeff and I will talk about these in more detail shortly.
We have a technology advantage and a data focus, which sets us apart from our competitors and affords strong long term growth prospects. A cloud based digital platform enables us to scale quickly as we acquire new business and migrate customers to our advanced technology. And as a business, we have shared legacy issues, and we're acting decisively to address emerging external pressures. Tower ends this half year in a very solid capital insolvency position with attractive growth prospects and a clear strategy to deliver sustainable shareholder value. Over the last 6 months, we have achieved gross written premium of 194,000,000 up 6% year on year, and this brings our total GWP for the past 12 months to 395,000,000.
Dollars Our flagship TAIL Direct business has delivered very strong growth of 14% year on year, and this has been achieved by focusing on new and existing customers with nearly half of those now holding multiple products with us. When combined with digital marketing and automated campaigns, we have also reduced our cost to acquire new business to 12% of net earned premium. Our partnership business has delivered positive 3% growth, but the true value is in the quality of the business where we have transformed our partnership portfolio from a traditional higher commission portfolio to a new generation of partnerships such as corporate, retail and advisory referral partnerships and InsurTechs. All of the key partners are now on our cloud based digital platform at more sustainable commission levels and we have a strong partner pipeline. Our Pacific Business GWP declined by 16% primarily as a result of economic challenges related to COVID-nineteen.
However, we remain committed to the Pacific. We have launched a digital platform in Fiji, and we have a robust plan to progressively roll it out to other countries over the coming 18 months, while also simplifying and streamlining our product set to align our Pacific business more closely with our New Zealand businesses. Continued improvement in cost efficiencies. So our flagship TAO Direct business continues to lead the way and highlights the customer, financial benefits and efficiency afforded from a leading digital and data technology platform. With a management expense ratio of 31%, a 4% improvement on half year twenty twenty, this compares favorably with Tower's overall combined expense ratio of 36.5%.
We remain very focused on decommissioning legacy systems and we are targeting a move from 6 to 2 systems by the year end. Commission is also reducing as a result of our ANZ acquisition and the full benefits of this will flow through from the first half of the twenty twenty two financial year. The UE portfolio acquisition is now complete and it is pleasing to note that our retention rates are in line with our initial expectations. Emerging claims inflation. Now in the later stages of the first half, we have seen an increase in large events and large house claims as well as rising building costs.
Large events in this half included the large fire at Lake Ojao Village and the severe flooding in Napier in late 2020, resulting in a $9,300,000 impact before tax. This is a significant increase over the $2,800,000 in large event claims in the 2020 half year and should be viewed against historical data, which reflects that 2019 2020 had an unusually low incidence of large events. The frequency of large house claims, which are those claims that total more than 50,000 has doubled to 52 in this half compared with the same period last year. The average cost of all house claims has risen 8% to 4,620 per claim, reflecting the rising cost of building materials. As a result of these factors, our claims ratio excluding large events is 4% higher than the prior year at 48%.
In insurance, there will always be volatility in claims. It's the nature of our business. What sets Tower apart is our ability to identify emerging trends and quickly address them, utilizing the digital and data technology we've invested in. We are working with our supply chain to enhance efficiencies and moderate the increases in claims costs. We're also working with data science and risk partners to better understand the links between large events, climate change and large house fires in order to help mitigate and reduce such events in the future.
Automation and data management are at the forefront of our response through optimizing digital claims management to improve quality of claims assessment, repair and settlement. We also have the ability through our leading technology capability to act swiftly to adjust ratings and underwriting if necessary. These actions will take time to gain traction. However, we expect to begin realizing benefits in the second half. The fundamentals of Tower's performance are strong.
We have 3 focused and unique businesses: Tower Direct, Tower Partnerships and Tower Pacific. We are growing ahead of the market, thanks to investments in our scalable, efficient digital and data technology platform, and we have steadily reduced management expenses with clear actions to further improve going forward. While large events and large house claims have offset premium growth, this has been actively addressed. Our underlying NPAT before large events was $18,000,000 and reported profit after tax in large events was $12,000,000 And in short, TAO is a solid business and well positioned for long term growth, Delivering shareholder return. We're pleased to resume dividend payments after a 5 year hiatus.
The board has confirmed an interim dividend payment of $0.025 per share. The total interim dividend payment is $10,500,000 and will be paid on 14th July 2021. Subject to the ordinary dividend policy of paying 60% to 80% of cash earnings, we're prudent to do so. And based on achieving FY 2021 guidance of between $25,000,000 to $27,000,000 the indicative combined full and half year dividend will be between $0.05 and $0.055 per share. I will now hand over to Jeff Wright, who will take you through our financial results in more detail.
Thank you, Blair, and good morning, everyone. Looking at the consolidated results, we can see that GWP growth continued to be a positive feature in the first half, up $10,300,000 on the same period last year. This growth was offset by increasing BAU claims expense, resulting from a higher volume of large house claims and emerging house claims inflation. Management expense ratio improved by 2.5% as the benefits of the EIS platform are realized. Underlying NPAT before large events was $18,000,000 a decrease of 5% on the first half of twenty twenty.
Profit was also impacted by lower investment income. Reported profit of $12,000,000 is a decrease of 19% on half year twenty twenty, primarily impacted by the $6,500,000 before tax increase in large events. Slide 15 details the key drivers of underlying profit before tax from the half year 'twenty to the half year 'twenty one. Compared with the 2020 half year underlying profit before tax and large events of 28,000,000, net earned premium increased by 8,000,000 in half year twenty twenty one through the UE acquisition and growth in the tower direct and tower partnerships. Management expenses have reduced, but the increase in BAU claims driven, as we have said, by an increase in frequency of large house claims and house claims inflation exceeded the growth in net earned premium.
In addition to the lower investment income, large events that we have previously noted was $9,300,000 well above the half year of 2020. Slide 16 provides additional detail on the impact of the previously mentioned claims issues on towers loss ratio. The increase in frequency of large house claims added 2.3% to towers loss ratio compared to first half of twenty twenty, while emerging inflation on other house claims added 1.1%. While large house claims are historically volatile, Tower is working with data science partners to analyze the Slater's experience, and we will review rating and underwriting for house policies. Supply chain pressures resulting from COVID have contributed to increase in building materials cost.
This led to a 1.1% increase in loss ratio due to other house claims. We continue to monitor the emerging signs of building cost inflation and are working with our supply chain to ensure we minimize these increases. With 62% of New Zealand's new business written being motor, there was also an expected impact of 1.9% on a loss ratio due to the change in mix, offset partially by a 0.4% lower motor claims expense. Lower Pacific's claims expense reduced the overall loss ratio by 1.4%. Finally, the higher large event experience added 5.6% to the first half twenty twenty loss ratio, bringing the first half twenty twenty one loss ratio to 53.8%.
Towers management expenses reduced $1,500,000 on the prior year to $61,000,000 in the half year twenty twenty one. Our management expense ratio has improved by 2.5% down to 36.5%. This improvement in management expenses is largely due to the completion of the EIS project and the scalability of that platform to enable growth without a corresponding increase in expenses. This is reflected in the reduction of salary expenses by $4,900,000 following the completion of the EIS project and May 2020 reorganization. Net commission expenses increased due to the inclusion of a reinsurance profit share income in the corresponding period of 2020.
And finally, amortization expense increased due to the addition of UE, ANZ and EIS. Along with other insurers, Tower continues to deal with the tail of Canterbury earthquake claims. We reduced open claims from 59 properties opened at 30 September 2020 to 43 at 31 March 2021. We closed 35 claims during the period and received 16 new overcaps from the EQC and reopened 3 other claims. This was in line with expectations.
While the pace of new overcaps and reopened claims continues to slow, the remaining claims are our most complex. Gross outstanding claims are now down to $26,500,000 following a strengthening of $2,200,000 due to tribunal claims settling for more than expected and Tower prudently increasing the allowance for future claims. We have been able to release $2,500,000 in additional risk margin, reflecting the continued runoff of Canterbury claims. Tower remains in a strong capital position with actual solvency capital of $180,400,000 and a solvency ratio of 309%. As we've said, this is $97,000,000 above our regulatory minimums.
The Reserve Bank also lowered our licensing condition from a minimum solvency ratio of $50,000,000 to $25,000,000 during the half, reflecting the diminishing risks associated with CEQ. I. M. Best have also recently reconfirmed our financial strength rating at A- excellent. Slide 20 provides an overview of our reinsurance program.
The Lake Bohau fire and the Napier flood events resulted in the half year twenty twenty one large event claims increasing $6,500,000 on the prior year to $9,300,000 Tower's aggregate cover takes effect once large events hits $14,000,000 So any increase in the second half to the first half figure of $9,300,000 for large events will reduce NPAT by approximately $720,000 for each 1,000,000 until the aggregate cover cuts in. Tower's long term average for large events is approximately $8,000,000 per annum. As we announced on Monday, 17th May, we have revised our guidance for Tower's underlying impact in FY 'twenty one to a range of between $25,000,000 $27,000,000 The change from the previous guidance of greater than $29,800,000 recognizes increasing house claims cost and lower investment income. The guidance assumes FY 'twenty one large events remains the same as FY 'twenty at $9,700,000 We have maintained this assumption to allow more ready comparison to the previous guidance. While Tower is undertaking a number of actions to address increasing house claims, claims inflation remains a potential risk to this guidance.
A 1% increase in loss ratio above Tower's assumptions will result in approximately $1,200,000 reduction in underlying NPAT. Thank you, and I'll now hand back to Blair, who will provide an update on our strategy and outlook.
Thank you, Geoff. Today's results demonstrate the resilience of a customer and digitally led tower business, even in the face of COVID and inflationary headwinds. We are continuing to grow to drive down expenses and to respond quickly to the changing economic environment. You can be confident that we are very focused on addressing the challenges we've identified, improving profitability and continuing to leverage our technology, customer and partnership advantage for growth. We have a clear and focused set of 5 strategic priorities.
We are relentlessly focused on our customers, deepening our relationships with them through rewards, new products and other offerings that make sense and drive value. Our core strategy is around personal lines in small to medium sized commercial in New Zealand and the Pacific region. As you have seen today, we are leveraging the full capability of our cloud based platform by using data and digital to attract more customers and partners to Tower. We are finding the best people to partner with and to get their help to keep innovating and delivering. And importantly, we are committed to maintaining a strong capital insolvency structure, demonstrating we are a strong and stable business that delivers value for shareholders.
In today's challenging world, we've all learned a critical success factor is being able to quickly analyze challenges and opportunities, pivot and adapt. And to this end, digital and data are central to tower. Our flagship business, Tower Direct operates fully on our new platform. It's paving the way for other businesses, partnerships and the Pacific. MyTower is at the center of our digital platform, a full online sales and service experience that now has over 100,000 registered users.
MyTower allows us to have a richer, deeper relationship with our customers. Our Tower Direct business is growing strongly with 60% of Tower Direct new business now sold online. Around half of Tower Direct's customers have 2 or more risks with us. They also stay with TAO significantly longer on average, around twice that of a single product holder. And furthermore, the cost to acquire a customer online is around half that of the telephone.
Our telephone strategy is to support customers with more complicated claims and service inquiries, ensuring the right inquiries and tasks are handled through the right medium. However, we want to be available to customers whenever and however they wish to connect with us, whether that's online or via the telephone. The heart of the Mitel strategy is that customers are more engaged and satisfied, buy more and stay longer, A unique partnership's distribution. A key element of our strategic focus has been on securing mutually beneficial partnerships that drive significant growth. In the half, we celebrated 30,000 insured risks with Trade Me Insurance customers, and we are in the process of renewing a special retail partnership with Trade Me for a further 5 years.
We are providing insurance for a range of new corporate partners, including CSC Vine Group, the New Zealand Defense Force and Auckland Council. And today, we also announced a partnership with a leading Australian InsurTech Open, which will see Tower underwrite their new personalized insurance brand, Huddle, which is due to market in late 2021. We are building what we believe is a truly unique new generation of insurance partnership model, one that relies less on higher commission and more on a technology capability, customer experience and more balanced and complementary referral arrangements with our partners. And core to our strategy is a quality, innovative, balanced product range, which enables us to deepen our relationships with customers, improve revenue and increase retention. Last year, we acquired the referral rights for Club Marine, and we will shortly launch an end to end online boat experience.
To keep pace with our customers' lifestyles and expectations around environmental concerns, we have also innovated our current products to cover electric vehicles, e bikes and e scooters. We're also creating new products in conjunction with partners. We were delighted to recently announce Tower is partnering with Allianz, one of the world's largest insurers to launch our new pets and travel products in the coming months. Continuing to grow, partner and innovate as a leading digital and data business will only be possible with support of our fantastic tower team and the communities we serve. And it's particularly pleasing to see the cultural diversity across our business is strong with well over half of our people identifying as non European.
We continue to put measures in place to not only celebrate diversity, but also track and measure our progress to ensure we are continually developing as a business. Our ongoing digitization has enabled us to increase the flexibility and agility of our workforce and 10% of our people now permanently work from home. For those of us in Auckland, we'll soon move to a new 6 Green Star rated building from August 2021. The new space will promote more agile ways of working, collaboration, creativity and a relentless focus on our customers. We've made progress positive progress on measuring our New Zealand carbon footprint, and we will measure our Pacific footprint over the coming months.
We'll also develop and report on a carbon action plan with a view to reducing our carbon footprint and developing transparent climate reporting. As we have previously noted, our work with data science partners will help to better understand risks and also increase transparency around the effects of climate change. We look forward to sharing this information in the future. Investing for the long term. TAO is continuing to invest in initiatives that will bring attractive long term growth and a stronger fundamentals to deliver shareholder value.
And year to date, we have committed investments totaling $22,000,000 and we will continue to seek opportunities to invest in the business and look for further sensible and prudent investment opportunities. Tower is a well capitalized business with a strong balance sheet in solvency margins. We have delivered a sound result with above market premium growth. We have further improved our management expenses and we are delighted to have resumed dividends in this half. However, Tower is far from the finished product and we know there is work to be done.
Looking forward, our focus is on driving shareholder value by accelerating growth and innovation through a relentless focus on customers, taking decisive action to address emerging challenges with claims inflation and continuing to invest in our digital and data platform to drive efficiency and support growth. We will be holding an Analyst Day in early September 2021, and we look forward to talking to you in more detail about our strategy to accelerate momentum. Thank you for your time this morning. I will now hand back to the operator to ask for questions.
Your first question comes from the line of Andrew Buncombe from Macquarie Bank.
Just the first one. You've mentioned average house claim costs are rising at about 8%. Do you feel like you're repricing enough to account for this and to hold margins? Any color on that repricing side would be helpful. Thanks.
Thanks, Andrew. Yes, the 8% growth was year on year to the 31st March. I think our announcement last week flagged that there's potential for that to continue through the second half. Obviously, repricing initiatives come from a couple of places. We see our primary obligation is to ensure we work with the supply chain to avoid having to pass through rating increases.
But ultimately, the market would expect that there would be some flow through. We also have to take into account the competitive landscape as well. We are actively working on that now. Generally speaking, there was always a cycle of rating increases going through any portfolio. We've just increased our focus now on the house claims in particular, but inevitably could be other areas over the coming weeks.
Sure. That makes sense. And then the next one, what do you think is an achievable MER over the medium term? You've obviously called out the direct portfolio in New Zealand that's currently printing $0.31 that's at a group level. What do you think is achievable?
Thanks again, Andrew. Look, I think we are trying to build the other two divisions into the image of the tower direct portfolio. We still think there's further room for improvement within the tower direct portfolio itself to get it below 30% in the medium term. As we've mentioned on several occasions, the EIS platform does allow growth without commensurate increase in management expenses. So we would be expecting all businesses to get closer to that 31 and the direct business itself to get below that over the medium term.
That makes sense. And then just the final one from me. There's been new sort of articles going around the last couple of weeks about EQC changing their building cap again. Can you just give us some thoughts on how that could potentially impact tower if they increase that earthquake cap again, please? Thank you.
I mean, obviously, the first impact would be that we no longer need to buy the same level of reinsurance cover that we do. And ultimately, that would reduce our component of customers' premiums. Of course, offsetting that is EQC would then have to pass through the cost of their increased program to all of New Zealand basically. I think Tower's view on that is that they need to be very careful if their assumption is that there would be a 0 net cost in New Zealand. So our preference would be a lower cap.
That's it for me. Thank you.
Your next question comes from the line of Zoe Regan from Forsyth Bar. Please ask your question.
Hello, Zoe here. Can you hear me? Hello. Zoe speaking.
Hello, Zoe. We can hear you.
Perfect. Thanks for taking my questions. Quick question for me. With the full year guidance, please, what claims ratio, so excluding the large events, do you assume? Because you've called out a 1% variance would cost or give it a variance in your guidance, but just interested what you're assuming for the full year, please.
There's various product lines. I mean, the overall piece, we expect about a 1% to 2% increase above what the first half was, excluding the large events.
Thank you. And so can you just provide us a bit of color around what are the thresholds for alerts around actual experiences versus what you might assume and typical normal trends? And how closely those are monitored, please?
Yes, thanks. Very good question, Zoe. Look, we're constantly monitoring the movements. The challenge for and ensure the size of tower is that, as we've mentioned through the presentation, there is always volatility, particularly in that the large event pieces and also the larger above $50,000 claims. So it is important while we can recognize movements and changes quickly, and we can also have we also have a platform that enables us to reprice quickly, you also don't want to overreact to those signals.
So there needs to be an element of tidying it through. I think the example in the presentation we've had is those large house claims, where there have been periods over the last 5 years where it is quite high, and it can just be statistical volatility. Part of the reasons for our guidance in this issue was that we've had 2 or 3 months of increasing large house claims, and we consider we owed it to shareholders to state that we need to work through that before being able to determine if this is a genuine change in structure that requires a rating and perhaps underwriting change or whether it is part of the volatility that an insurer of the size of Tower will experience.
Great. And final one for me, please. Ken, is there any stats you can share, please, around customer satisfaction or NPS type metrics?
Thanks, Zoe. Yes, look, we track Net Promoter Score NPS on a literally daily, weekly, monthly basis. I'm pleased to say that where we are at the moment is trending up towards high-30s on a telephony NPS. And when we're online, it's actually more towards 50% on the high-40s, and that's considerably higher than we were a year ago. That's not to say that we don't and will continue to look to improve those.
And we've added a number of people into our contact center more recently to bring our call waiting times down, improve our overall performance. And obviously, with over 100,000 people now registered on Miteau, we're getting more and more traffic and volume through that key medium, which helps to engage with customers and ultimately drive better customer satisfaction.
Great. Thanks very much.
We have no further questions from the telephone lines at this time. I would now like to hand the conference back to presenters. Thank you, and please continue.
Well, on behalf of Blair and Jeff and indeed the TAO team, thanks for making time this morning to be with us. And as always, everyone is available to answer questions at a later time if you so desire. So thanks very much.