Towergate faces tough times despite H1 EBITDA growth

Towergate’s first-half 2012 results reveal that Mark Hodges still has much to do as he heads into his second year as chief executive of the consolidator.

Towergate’s performance in the first half of this year was an improvement over the same period last year, however. The broker cut its statutory loss before tax by 2% to £25.1m (H1 2011: loss of £25.5m) and grew operating earnings by 5% to £80.6m (H1 2011: £76.7m).

Growing operating income is one of the company’s main aims as it looks to fund further growth and keep on top of its interest payments.

The improvement was achieved largely by cutting costs rather than growing the business, however. Revenues were almost flat at £219.5m (H1 2011: £219.3m). The lack of revenue growth was caused by mixed performance at Towergate’s four main operating units.

Its underwriting division and Paymentshield businesses both grew revenues in the first half of 2012. But this was offset by a 2% reduction in Towergate’s core retail broking division, which makes up 59% of its revenue, and a 14% drop in revenue from the network division, which includes Broker Network and Countrywide (see page 6).

The flat revenues come despite the company making 10 acquisitions during the six-month reporting period and increasing the amount of GWP it places with insurers by 8% to £1.6bn from £1.5bn.

This suggests that Towergate is succeeding in growing the amount of business it handles, but is struggling to get paid for its work.

Hodges blamed the offset between the GWP growth and flat revenues in part on business mix, but also acknowledged that tough market conditions were squeezing commissions. The economic environment is proving a particular challenge for the small to medium-sized enterprises (SMEs) that make up a large portion of Towergate’s clients.

Hodges said: “We know the rating environment generally across the commercial landscape hasn’t moved much, and we know that SMEs are looking for value for money, so there are competitive pressures there.”

Some also suggest the company is facing calls from insurers to cut commissions and facilitate price rises. “I suspect there are real pressures in that business,” one source said.

The pressures of the economic environment are showing no signs of abating. But Hodges said there remains scope for cost-cutting at Towergate without harming client service.

For example, there is money to be saved by having a centralised procurement function, trimming the number of office buildings Towergate has amassed by buying other companies, and improving the shared services that the various Towergate companies all use.

Greater use of technology could also play a role. Hodges said: “There are parts of our business where we can bring either new technology or new processes to bear, and both reduce costs and improve the customer experience.

“Cost-cutting is happening across a wide number of areas. It is part of our overall change programme and my view is that there is more to come in terms of those kinds of areas of saving,” he said.

Hodges is also confident that Towergate can continue to grow through acquisition. The company has made five further acquisitions since the end of June, taking the year-to-date total to 15.

He said: “The acquisition pipeline is healthy. We are talking to a number of interested parties and I expect us to conclude some more deals as we go through the rest of the year.”