Towergate boss says 2007 loss just ‘technical’.
See analysis: Towergate: results uncovered
Towergate chief executive Andy Homer has moved to explain the company’s £14m loss in 2007 as a “boring and technical” consequence of accounting rules.
Homer said the broker had renegotiated its banking covenants for 2009, and still had £40m available for acquisitions. But he insisted Towergate would not buy businesses for more than two times their annual brokerage, and hinted that he had his eye on a network deal.
He also admitted that insurers were attempting to drive down commissions and said the broker had slashed its Norwich Union book by one-fifth as a result.
Towergate’s annual report, revealed by Insurancetimes.co.uk this week, recorded a £14m loss after tax. Earnings before tax, depreciation and amortisation (EBITDA) were £108.5m.
The consolidator spent £13m on executive bonuses, £34.8m on servicing debt and £20.4m on financing preference shares.
Homer said this final figure had pushed the broker into a technical loss. Under current accounting rules, Towergate has to count the dividend payable on the preference shares, held by private equity backers Och Ziff and Reservoir, as debt, although it will not be paid until a future date.
Homer said: “It’s just accounting, frankly. Do you know how much EBITDA we made? The trading profit was £108m. What we do with the trading profit is raise debt to make 150 acquisitions since we began.
“Accounting demands that we have to pay interest, if you deduct the interest we have to pay on the money that we reinvest, that’s a deduction from the trading profit. Then we have to amortise goodwill on everything that we buy, so if you include interest and the amortisation of goodwill, you end up with a much lower number, which in 2007 is a technical loss because of the way preference shares are accounted for. But that’s the Towergate model. We make a lot of money and we buy businesses with the profits.”
Homer added that bonus payments were likely to be significantly lower in 2008.
Homer dismissed speculation about Towergate’s banking covenants, but admitted it had been slower to spend its war chest than expected, because of the high prices in the market.
“Whether we spent that fund or not might have made a difference to the way our covenants operated. That was the debate,” said Homer.
He added Towergate would consider taking further private equity investment as a precursor to a stock market flotation, but was “in no hurry”.