Towergate: results uncovered

See also: Homer: 14m loss boring

Towergate’s 2007 results make interesting reading. But what do they reveal about the performance of the business?

The first thing that can be seen is that the business has clearly grown. Fee and commission income rose to £268.9m from £237.6m in 2006, an increase of 13%.

Earnings have also risen with earnings before interest, tax, depreciation and amortisation (EBITDA) rising 14.9% to £108.5m in 2007. This is positive result in terms of growth, particularly in an environment of softening rates - but then so it should be as Towergate made 16 acquisitions in 2007, including aviation broker Hayward and Broker Network.

It is difficult to determine how much the acquisitions have contributed to Towergate’s growth and how much has been derived from organic growth. Towergate claims it achieved 19% underlying organic growth in EBITDA, against acquisition-based growth of 8.7%. It is not clear how this sits with an overall growth in EBITDA of 14.9% and Towergate is not willing to elaborate. Nonetheless an increase of nearly 15% in earnings compared to a 13% rise in fee and commission income indicates it is increasing margins and cutting costs.

One issue for Towergate is the level of debt it has. Towergate has loans and facilities worth around £580m. These facilities, while essential to its acquisition strategy, are certainly a drag on its financial performance. The cost of interest payments on this debt in 2007 was over £37m, just shy of the company’s operating profit of £38m

One of the loans (for £79m) is charged at 9.75% above Libor, while the others range between 2.3% and 3% above Libor, the interbank interest rate. It is no surprise that the company is looking at options to reduce its debt levels and is reported to be considering raising fresh private equity capital.

It would not be the first time Towergate has looked to private equity to raise money. Earlier in the year it attempted to sell as 25% stake to Candover for £800m. The deal fell through, reportedly over earnings projections. Towergate later sold a £100m stake to US hedge fund Och-Ziff, which had already invested in the business through an earlier purchase of £100m in preference shares with Reservoir Capital. Och-Ziff is likely to be the first port of call for further investment.

Looking ahead, the results for 2008 will be interesting. The 2007 results were only partly affected by the credit crunch which hit in late summer. The 2008 results will feel the full impact of the banking crisis and the subsequent upward move in Libor, which will have adversely affected the cost of servicing Towergate’s debt.

The 2008 results will also be impacted by insurers’ examination of their distribution costs and their efforts to rein in commissions. Norwich Union and AXA are no longer on the panel of Towergate’s Fusion business. Towergate says it has cut its book of business with NU by 20% in total.

Beyond 2008, the economic slowdown and expected recession, is likely to have an adverse effect on claims frequency, which could hit Towergate’s profit share deals in its underwriting business.

On a positive note, next year could see the financial markets begin to loosen up as government intervention and monetary policy begin to oil the cogs. There is also a growing expectation that that the economic slowdown will help to turn the pricing cycle, which will provide a welcome boost. “How they [Towergate] must pray for a hard market,” comments one insurance executive.