Tower policyholders get reduced, but adequate, security under demutual
Details of Tower's demutualisation proposal.
Monday, April 12th 1999, 12:00AM
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Who is entitled to shares? |
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Tower has 400,000 members who are eligible for shares. To be entitled policies must have been held before December 8, 1997 and up to July 31 last year. Parent company policyholders are those who own: Life insurance, endowment or children's policies Superannuation or investment plans (such as Vital and VIP) Group investment policies provided by Tower's Main Life Insurance fund. Subsidiary company members are holders of a life insurance, disability or annuity policy, or a superannuation contract which confers membership, but is not of the type mentioned in the parent company definition above. Members get to vote on the demutualisation scheme at a meeting to be held in Wellington on May 10. To succeed the scheme will require approval of 75 per cent of each class of member. If the proposal is approved the company plans to issue shares and list on the Australian and New Zealand Stock Exchanges in the third quarter of 1999. |
One of the distinguishing features of Tower Corporation's demutualisation, compared to other life office conversions, is that it includes a capital raising exercise so it can transfer investments in subsidiary companies from policyholder funds to shareholder funds.
Details of the demutualisation proposal are outlined in an information memorandum released last week. Under the proposal Tower plans to distribute 53 million fully paid shares to 160,000 parent company members and another 43 million in 50 per cent partly paid shares to policyholders in subsidiary companies. A further 37 million shares will be made available to issuers of debt and members wanting to purchase additional shares.
The conversion involves transferring the life and superannuation business (including the main fund) of the present Tower Corporation to a Tower Life, wholly-owned subsidiary of Tower Retirement Investment, which itself is a subsidiary of the new holding company.
To enable the transfer Tower has to transfer sufficient assets to meet the obligations and liabilities to meet "policyholders' reasonable expectations and to provide an appropriate level of solvency and capital adequacy."
Tower needs to raise about $500 million of new capital to fund the transfer. It plans to do this through the issue of partly paid shares to subsidiary company members, and ordinary shares in a public offering.
The target capital raising for the public offer is $260 million. Of this $260 million Tower has to raise at least $200 million for the demutualisation and it has the ability to use a stand-by debt facility of $60 million to make up the balance.
If things go well the board has the ability to accept over-subscriptions up to $350 million.
The remaining $240 million in capital will be raised through the issue of partly paid shares to subsidiary company members. As payment of these shares is deferred for two years in consideration of the surrender of membership rights this amount will initially be funded by debt.
Following the capital raising exercise, and assuming $260 million of new equity capital is raised at $7 a share, all the subsidiary company members take up their partly-paid entitlements and all members retain their shares the company's shareholding will be as follows:
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Type of |
No of shares |
% of shares |
% of initial votes |
% of votes preconversion |
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Parent company member |
53mill |
40 |
48 |
15 |
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Subsidiary company member |
43mill |
32 |
19 |
85 |
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New shareholders from capital raising |
37mill |
28 |
33 |
0 |
Tower says under the new structure policyholders will have reduced, but adequate, security of their policies. It says the new Tower Life company, which takes over the policies issued by Tower Corporation will have total assets $200 million, plus earnings from October 1997, less than were held by Tower Corporation.
The company's actuary Daryl Hayes says the issue of solvency of life insurance businesses has been subject to much discussion recently.
He has used the capital adequacy standard of the Australian Life Insurance Actuarial Standards Board to determine the issue and concluded assets available to the new Tower Life exceed the standard by $48.6 million or 5 per cent of liabilities.
"While there can be no absolute guarantee of security of benefits, I am satisfied that this standard is appropriate," Hayes says.
As an on-going protection for Tower policyholders several safeguards have been built into Tower Life's constitution. For instance no distribution may be made to shareholders unless the board of Tower Life is satisfied that appropriate capital adequacy standards will be meet immediately after the distribution, likewise Tower Life's board has to obtain the advice of its actuary before declaring any policyholder bonuses or shareholder dividends, before making any allocation of revenue and outgoings as between participating and non-participating businesses and before making changes to certain aspects of its insurance policies or business.
Thirdly, the amount transferred to shareholders' funds in any year in respect of any participating business written in the life fund transferred under the scheme cannot exceed 25 per cent of the total cash value of the amount allocated to declared policyholder bonuses.
Tower has, in its information memorandum, upped the expected value of its shares from between $5 and $7 to between $6 and $ 8. On this basis the company expects to have a market value of more than $1 billion after demutualisation. In its proforma statement Tower would have reported a profit of $65.3 million in the year ended September 30, 1998.
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