Chief Hodges points to fourth-quarter growth amid flat full-year earnings

Mark Hodges

Broking group Towergate made a statutory loss after tax of £75.5m for the full year of 2011 (2010: loss of £14.2m) as one-off restructuring charges took their toll.  On a pre-tax basis the loss was £77.5m (2010: loss of £792,000).  

However, pro-forma earnings before interest, tax, depreciation and amortisation (EBITDA), which Towergate considers the best measure of its operating performance, was flat at £152.4m (2010: £153.6m). Earnings growth in the company’s Paymentshield and Towergate Underwriting divisions was offset by a decline in the company’s core retail broking segment amid tough economic conditions.

The pro-forma numbers are reported as though CCV, PowerPlace and Countrywide, which became part of the group in February 2011, had been integrated for the full 2010 and 2011 years.

Total revenues increased 3.5% on a pro-forma basis to £430.1m (2010: £415.4m).

Towergate’s stated aim is to grow EBITDA, which the company considers the best proxy of its operating cash earnings, so it can service the interest payments on its debt and fund future growth and investment.

However, Towergate chief executive Mark Hodges said he is “positive” about the 2011 results despite the lack of EBITDA growth because of the challenging and eventful 2011 for the company.  He also pointed to the fact that in the fourth quarter of 2011 alone, Towergate’s EBITDA had increased 14.7% compared with the same period in 2010.

“If you think about everything going on last year from a business and market perspective, internally we had a lot of change, a new equity partner, reorganisation of the group, change of CEO, change of some other key management and you have had a lot of potential issues distracting the business. In addition the UK market was tough,” told Insurance Times. “Our operating income is the same as it was before and we built momentum in the fourth quarter so  we think that is something we should feel reasonably positive about.”

Hodges was also sanguine about Towergate’s 2012 prospects. “We had a good Q4. We have started to make changes to the business, we are building momentum and we feel we are carrying that momentum into this year in terms of performance of the business.”

Towergate has made nine acquisitions since the beginning of the year. Most recently it bought three regional brokers: Gill Knott Insurance, based in Wellington, Lloyd Manley Associates, based in Chesterfield, and West Yorkshire-based Airevalley Insurance Services.

Towergate’s statutory results were hit by a one-off deal cost of £15.7m, an increase in goodwill amortisation to £63.5m (2010: £53.2m) and a 78% jump in interest to £111.8m (2010: £62.9m). However,  only £93.2m of this interest (2010: £62.9m) is payable in cash. The remaining £18.6m is rolled up and payable to shareholders on an IPO or sale of the business.

Towergate’s interest coverage ratio (the number of times EBITDA covers the interest bill) was 1.6 times in 2011. Investors generally look for a minimum of 1.5 times.

Commenting on the statutory loss before tax, Hodges said: “If you back out the goodwill and the one-offs you would be into a small profit.”

Towergate 2011 results in £m (compared with 2010)

  • Loss  before tax: 77.5 (0.8)
  • Loss after tax: 75.5 (14.2)
  • EBITDA (as reported): 151.7 (138.8)
  • EBITDA (pro forma)*: 152.4 (153.6)
  • Revenue (as reported): 422 (360.6)
  • Revenue (pro-forma)*: 430.1 (415.4)

*pro forma numbers are reported as though CCV, PowerPlace and Countrywide had been part of the group for the full 2010 and 2011 years.