Towergate underlying profit halves in first quarter

Towergate’s underlying profit almost halved in the first quarter of 2015 – its last quarter under its old financial structure.

But interim chief executive Scott Egan insisted the broking group is now over the worst, and pointed out that the results cover the period just before the completion of the company’s takeover and refinancing by its creditors on 2 April, when it was at its lowest ebb.

Towergate reported earnings before interest, tax, depreciation and amortisation (EBITDA) of £12m in the first quarter of 2015, down 47% on the £23m it reported in the same quarter last year.

Revenue fell 8% to £86m (Q1 2014: £93m) as the uncertainty surrounding the future of the business before the completion of the takeover hit business retention and new business levels.

The EBITDA margin suffered as a result, dropping by 10.5 percentage points to 14.4% from 24.9%.

Organic revenue fell 10.1%, which the company said was ’broadly consistent’ wil the fall seen in the fourth quarter last year.

EBITDA fell at all five of Towergate’s operating divisions, with the network unit performing worst. Revenue fell in all units except the Towergate Underwriting managing general agency division (see tables below for full breakdown).

Falling revenue, stable costs

The EBITDA dropped so sharply because costs remained virtually unchanged while revenue fell. This pushed Towergate’s expense ratio up by 10.5 percentage points to 85.6% from 75.1%.

The EBITDA numbers exclude the costs associated with Towergate’s takeover and restructuring.

Speaking to Insurance Times about the results, Egan said: “These results were before the [takeover] deal was signed.

“It was when trust and confidence in the group was at its lowest point.”

But he added: “We are now through the eye of the storm.”

 No cuts

While the sharp drop in EBITDA was caused by costs not keeping pace with the fall in revenue, Egan insists that Towergate will not respond with further cost-cutting.

He said: “The circumstances in which our income has shrunk are exceptional, in that [the drop] has been caused by the restructuring and loss of confidence, and it has happened very quickly.

“My aspiration for this business is for us to grow back into our cost base. The last thing I want to do is take short-term, knee-jerk reactions.”

Egan said that while the effects of the changes Towergate has been through will continue to be felt throughout 2015, there are positive signs that the company is on the road to recovery.

These include new hires, the recent five-year deal signed with Allianz, a 12% year-to date growth in Towergate’s direct business and an increase in Paymentshield’s household policy count.

He also pointed out that the first quarter results were roughly in line with those reported in the fourth quarter of 2014, meaning the business is stabilising rather than declining further.

He said: “It could have kept on going down but it didn’t. What we are seeing in the second quarter is little pale green shoots.”

Towergate’s takeover by its creditors – Highbridge, KKR and Sankaty –was triggered by a potential cash shortage that threatened to sink the broking group.

The broker revealed the cash shortage in its third quarter results last year.

The company was worried that it might not be able to keep up with the interest payments on its £1.05bn of debt.

The takeover and financial restructuring has cut Towergate’s net debt by 60%.