Towergate pre-tax loss jumps to £41m in 2013 as operating profit falls 7%

Broking group Towergate made a pre-tax loss of £41m in 2013, almost seven times its £6.1m loss in 2012.

Operating profit fell 7% to £144.9m (2012: £156.2m) – the biggest drop since Mark Hodges became chief executive in 2011 –  as four of the group’s five divisions reported lower profits.

The network division had the worst year, with a 42% fall in profit, while the underwriting division’s profit dropped 9%.

Operating profit margin fell by 3.2 percentage points to 32.7% (2012: 35.9%).

Group revenue grew 2% as 4% growth from acquisitions countered a 2% fall in organic revenue. Towergate made 16 acquisitions in 2013, ending the year with the purchase of classic car broker Footman James.

The company blamed the increased pre-tax loss on exceptional items and one-off costs relating to its refinancing in May 2013.

The exceptional costs included redundancies, pilot schemes and money spent on attempted acquisitions that did not come to fruition.

It said the 7% drop in operating profits was caused by rising expenses, which pushed its expense ratio to 67.3% in 2013 from 64.1% in 2012.

Expenses were boosted by three factors: the short-term impact of business acquired, investments made in the group’s risk, audit and finance functions and increased expenses in the underwriting division.

Speaking to Insurance Times about the increased expense and reduced profit, Hodges said: “We are spending money on investing in the business. We are not ashamed or embarrassed about that.

“We have spent money on things we think we need to have in this business to make it a great long-term business, such as risk, compliance internal audit and finance. We have to have a well-controlled and well-disciplined business. We are a big business, not a small broker. We have to adopt and work to exacting standards and we need to invest to make sure we do that.”

Hodges added that the changes and investments Towergate is making, such as restructuring retail broking and setting up the Manchester call centre for smaller premium SME business, would start to pay off in 2014 and 2015.

He also pointed out that the company’s ability to convert operating profit into cash had improved. Operating cash conversion increased to 79% in 2013 from 64% in 2012.

Divisions

The underwriting business grew gross written premium by 9% but its margin worsened as it handed most of that back in the form of broker commissions. The result was a 9% decrease in operating earnings to £38.6m and a 2% increase in underwriting income to £89.6m.

Hodges said: “Our expenses went up more in line with the premium than the income that we retained. Externally it’s been a bit more competitive and we’ve had to pay more money to win business”

He said that plans to divide the underwriting division into two arms – Volume and Bespoke Underwriting – would improve profits.

“Growing a business is fantastic. If expenses have grown too quickly as a result, we can come back around and deal with it, and that’s where underwriting is right now,” he said.

“Bringing more organisation, optimisation and discipline will mean we don’t need a new cost or person to go with a new piece of premium.”

Towergate has changed how it reports the results of its retail broking after it split the segment into advice-based Insurance Brokers division and Direct.

Operating earnings from Direct rose 7% to £28.3m on income up 6% to £66.4m.

However the Insurance Brokers division saw a 1% drop in operating profits to £48.7m despite a 5% rise in income to £200.2m.

Hodges said: “The broking business is shrinking at a smaller rate in 2013 than it was in 2012, so we have seen improvements in performance, but it is still not growing in the way we would like it to.”

The Networks division deteriorated the most in 2013, with operating profits down 42% to £6.1m and income down 22% to £14.5m as the business felt the full effects of Aviva’s withdrawal late in 2012.

Its Paymentshield business, which sells home insurance and mortgage payment protection insurance through mortgage brokers, experienced a 4% decline in both operating profits and income.

Debt

The reduced operating profit and increased investment has boosted Towergate’s debt leverage to 6.2 times operating profit from 5.6 times.

Hodges stressed that the debt leverage was increased knowingly and would reduce in the future. For example, the Footman James acquisition is included in 2013’s leverage, but there is no offsetting profit or revenue from the acquisition included in the 2013 numbers because the deal was completed late in the year.

Hodges said: “Leverage is up because we decided to take action to drive future value. We should now see that pay back through 2014 and 2015.”