Towergate H1 operating profit drops 12% as job cuts reach 600

Towergate made an operating profit of £68.3m in the first half of 2014, down 12% on the £77.5m it made in the same period last year.

The broking group’s loss before tax worsened by 52% to £19.7m from £13m because of flat revenues, higher costs and one-off items.

The company has also added 100 net job cuts to the 500 already announced for 2014 as part of its transformation programme.

But chief executive Mark Hodges was sanguine about his company’s future performance, pointing out that the 600 net job cuts would bring annual cost savings of £20m by 2015.

He added that some of the cost savings would come in the second half of 2014, along with benefits from the company’s recent acquisitions of broker Footman James and underwriting agency Arista.

Hodges told Insurance Times: “We feel very positive about where the business is right now.

“We know the cost benefit will flow through as we go into the second half of the year and into 2015.”

Chief financial officer Scott Egan added: “We are satisfied with that level of performance given the level of change that is going on in the business.”

Flat revenues, higher costs

Towergate’s results were hit by a combination of flat revenues, higher costs and certain benefits coming to an end. 

Revenue was £223m in the first half of 2014, compared with £223.1m for last year’s first. Revenue growth through acquisition was offset by organic revenue shrinkage of around 2%.

Expenses rose by £9m to £155m from £146m. Egan said all of the additional cost came from acquired businesses and that organic costs were flat.

On top of this, Towergate’s operating profit suffered a £3m hit because the company stopped benefitting from an advance commission deal between its Paymentshield division and RSA. The full-year effect of this change will be a £7.5m profit reduction.

A further £3m was taken out of profits because a profit-sharing deal through its Fusion division came to an end.

While positive about the effects of the cost cutting on results, Hodges admitted that staff reaction to the job losses had been “mixed”.

He said: “There are people who are excited about the change, the future and the clarity. They want to be part of it.

“Then you get people who are losing their jobs. It’s disappointing for them. It’s unsettling for them, it’s frustrating for them, and that has an impact.”

Divisional breakdown

Towergate’s worsened first-half performance was mainly driven by its core broking unit and Paymentshield divisions, where operating profits fell by 15% and 20% respectively (see table below).

Hodges said the broking profit dip was because most of the change was occurring in the broking division, including 500 of the 600 job losses.

Paymentshield was hit by the closure of the advance commission deal as well as continued declines in mortgage payment protection insurance.

Towergate Underwriting’s operating profit fell 1% despite a 6% revenue boost because of rising costs.

One bright spot was the previously lacklustre networks division, which grew revenue by 4% and operating profit by 8%.

Towergate attributed this in part to new partnerships signed with insurers Ageas, Zurich and AXA.