Towergate Underwriting turns after-tax loss into small profit

Towergate Underwriting pulled out of the red last year by posting a small post-tax profit. The managing general agency made a £4.1m post-tax loss in 2009 but turned that into a £233,461 profit in 2010, according to the latest accounts.

Towergate Underwriting’s pre-tax profits increased from £5m (2009) to £8.5m (2010). The underwriter has been fighting the headwinds of a soft market, but still managed to increase turnover from £204.4m to £209.8m.

Towergate group results for 2010 were released earlier this year, but this is the first time accounts of its subsidaries – CCV, Paymentshield and Hayward Aviation – have been posted.

Broker consolidator CCV made a profit after tax of £2.4m in 2010, down 61% in the £6.1m profit it made in 2009. The results also reveal that chairman Peter Cullum relinquished control of CCV in February 2011 after fellow Cullum-backed consolidator Towergate’s new ultimate holding company, Towergate Partnershipco Ltd, bought CCV.

In addition, CCV borrowed £2m from Cullum during 2010 under a loan facility totalling £10m.

CCV’s earnings before interest, tax, depreciation and amortisation (EBITDA) fell 5% to £16.4m (2009: £17.3m). No dividend was paid (2009: none).

CCV’s 2010 turnover increased 3.5% to £48.5m (2009: £47m). However, administrative expenses rose 11% to £36.7m (2009: £33.1m). Interest payable by CCV was up 19% to £4.3m (2009: £3.6m).

Furthermore, it made a £144,423 loss on the sale of subsidiary CCG Financial Services Ltd during 2010. This compared with a £1.8m profit on the sale of operations in 2009.

CCV attributed the turnover increase both to organic growth and acquisitions. The company completed 16 general insurance purchases in 2010: eight full brokers and eight business portfolios.

The company added that it would continue expanding through acquisition because it is well placed to take advantage of situations where owners are looking to sell their businesses. CCV bought an 80% stake in Welsh broker Antur this month.

CCV directors’ pay in 2010 fell 20% to £543,163 (2009: £676,536). However, total staff payroll costs, including directors, increased 5.4% to £20.7m (2009: £19.6m). The total number of employees in the group increased from 549 to 732.

Towergate Partnershipco bought all the ordinary share capital of CCV for a combination of new shares and cash. CCV is now an intermediate holding company.

Towergate Partnershipco was created to receive the £200m that private equity firm Advent invested in Towergate. Cullum’s stake in Towergate fell to around 40% from 65% following Advent’s investment.

Paymentshield also saw a decline in profits. Pre-tax profits decreased from £40.1m (2009) to £35.5 (2010). The payment protection business was affected by a decrease in turnover from £120.8m to £107.4m.

The number of staff reduced from 314 to 267, triggering a decrease in wages and salaries from £9.48m to £7.48m. Shareholders’ funds also fell sharply from £92.7m to £18.9m in 2010.

Paymentshield was affected by bank loans and overdrafts increasing from £7.8m to £21.58m and by the amount owing to group undertakings shooting up from £3.68m to £67.7m.

The post-balance sheet events show that, following Advent’s £200m investment, Paymentshield repaid all debt related to bank facilities, shareholder loan notes and issuer loans.

Relatively, Hayward Aviation was one of the strongest performers in the group as pre-tax profits increased from £5.1m to £5.7m and turnover rose from £12.1m to £12.8m. Equity shareholders’ funds were beefed up from £16.85m to £21m.

CCV chief executive Micheal Rea said the firm’s 2009 result was slightly flattered by the sale of two business that generated £1.8m. He added that there were increased amortisation and interest payments in 2010 compared to 2009.

“For us, with a debt-financed vehicles, the key pick is the EBITDA number, which was broadly flat at £16m. It’s not completely apples for apples, as all those business we have brought will not have seen a large EBITDA impact in 2010, but they will in 2011.”

Pass notes: Towergate Insurance’s current position

What is the latest with Towergate Insurance?

The breakdown of the individual accounts show a relatively stable group of companies without any poor performers. Paymentshield continues to make a healthy profit, but its shareholders’ funds have been eroded considerably, meaning its balance sheet strength has depleted.

What challenges does it face?

Advent invested £200m with the idea of floating the company and getting a good return for itself and shareholders. In normal times, Towergate Insurance would represent a prospect for investors as it is cash generative and would represent an income stock. However, the instability in the global markets means flotation might have to be delayed. How long can Advent and shareholders wait?

What about its debts?

Towergate has net debts coming in at just under half a billion pounds at the end of 2010. Towergate’s operating profit was £139m, which was two and half times greater than interest payments, meaning its solvency is comfortable enough. Those figures will have changed, probably for the better, with the refinancing in February. It remains to be seen what appetite investors have in view of these levels of debts and interest payments when the markets calm.