The PB Interview: Riding out the storm

Although few have been immune, the last few years have been particularly difficult for expanding companies who took the acquisition and debt model further than most, clearly encouraged and supported by our bankers. Towergate is one such company that has needed to readjust and redefine its banking arrangements as economic growth reversed following the collapse of Lehman Brothers on 15 September 2008.

The office where I meet Andy Homer, is part of the grand vision of chairman and majority owner Peter Cullum. Although not extravagant, its purpose-built head office in Eclipse Park, Maidstone, has plenty of space across three floors and high-quality furnishings, although there are signs of the recession outside. Built by the Irish firm the Gallagher Group, the surrounding development seems strangely empty and there is plenty of land where developments have never started.

Homer, who appears in a particularly good mood - perhaps because of West Bromwich Albion's promotion to the Premiership - is dismissive when I suggest to him that broking may have been one of the more attractive sectors to work in during the recession. "I don't think insurance broking has been a good place to be," he says. "Customers' downsizing has had a 10% negative impact on existing growth giving us a considerable head wind. The only helpful element is that we have been carrying some rate during the period on motor, and some package and small liability." He doesn't hold any hope of a protracted hard market calling this in his typical no-nonsense way a "fantasy".

Towergate had a painful experience of renegotiating bank loans towards the end of 2008 as interest rates climbed, and profits didn't match predictions - the economic downturn came after some significant acquisitions. Towergate had also been leading the acquisition frenzy in 2007, where it seemed not a week went by without a couple of brokers being snapped up. Of course, none of this would have materialised if the banks had not been so ready to lend large sums of money, with changing attitudes to risk and debt rife in the personal and corporate worlds.

Banks lost billions as they wrote off huge volumes of bad debts. Towergate, however, has a strong revenue and ebitda ratio which means it is very much in the banks' interests - there are 28 altogether - to help the broker out. This help came at a price. Homer is not backward at coming forward when describing the banks: "As a breed they wanted every which way, and are ruthless when times get tough. I don't mind them getting bonuses but can see why they can't attract popular support. They could be seen as being exploitative, they lend money when it is cheap and take money when it is expensive."

Towergate does have one strong ally, Bill Cooper, managing director of financial institutions at Lloyds Banking Group, who became especially important after one of Towergate's largest lenders HBOS became part of Lloyds.

Although Homer says the banks were flexible over its covenants, at the same time they charged a huge fee to change things and Homer and Cullum reinvested £10m of their own money into the business.

The story is a familiar one over the last few years. Although on a different scale to Towergate's issues, Jim Ratcliffe, the chief executive of chemicals group Ineos, recently told the Sunday Times (25 April 2010) of his battle with the banks to keep control of the £30bn turnover business after the profits tumbled during the recession, and it struggled to service debts of £6bn.

Homer and Cullum are now determined to learn more about finance and perhaps give themselves more knowledge when negotiating with the banks.

He continues: "Peter and I have learned to become mini-experts in corporate finance and have been a lot more involved in looking at how to structure the balance sheet, debts and shares of the company."

The company has hired restructuring specialists lawyers Shearman & Sterling, who advised Cadbury on its takeover by Kraft, as reported in sister title Post magazine (22 April), and has set up several new holding companies as a result.

"Our job is to get as much finance as possible and as cheaply as possible," he says, and hints at trying to raise another £100m for acquisitions.

Nowadays Towergate has a credit rating from Moody's of B2, which means it is "high risk". Most recently the outlook has been changed to negative from stable citing that "relatively high levels of financial leverage/interest expense are likely to pressurise bottom-line profitability in the near-term". As a positive, it cited: "healthy levels of free cashflows and excellent levels of profitability, at least on an earnings before interest, tax, depreciation and amortisation basis".

Unsurprisingly, Homer doesn't feel that banks lent too much money to Towergate. He says: "We have faith to use their money to make good acquisitions. However, the days of big deals are gone and we are far more attracted to buying smaller businesses across the UK than larger brokers."

Deals
Homer defends its acquisition approach saying they didn't rely on a hard market or a year-on-year increase in commissions from insurers as it deals with over 200 products, and some deals were struck for three to five years. He also says it is "not unreasonable" to amortise a purchase over 20 years, a method that some accountants have criticised for building up the process of paying off the full purchase value of a business. He also reminds me that Towergate has "already" been around for 13 years.

Clearly though leveraging commissions was a key factor in the hurry for growth of consolidators such as Towergate and Smart and Cook. Prices of brokers reached their height in 2007, and Towergate itself was rumoured to be worth close to £3bn, although the latest figure cited in the Sunday Times Rich List published 25 April is £600m, with Cullum worth circa £350m. This does not include all his business interests.

Homer does admit to some poor judgement such as the timing of the decision to start consolidating the regional IFA market in the middle of 2008. Originally spearheaded by ex-Norwich Union leader Patrick Snowball and with a large war chest, the investment and pension market "went off a cliff" after the collapse of Lehman Brothers.

Snowball left and the IFA consolidator was placed in a pre-pack administration and reinvented under Towergate Financial, with Cullum losing millions in equity but with a chance to recoup his loss. Cullum's appetite for risk or deals has not diminished with the quick fire acquisition of high profile mortgage broker John Charcol in March, another victim of the recession.

Cullum and Homer are slowly but surely putting the broking group back on track after hitting more modest targets for 2009 and for the first quarter of 2010. Organic growth and small acquisitions are the order of the day.

So has this made business in general less attractive for somebody used to chasing big deals? Homer claims that he had the "most fun" when buying small businesses at Folgate which he describes as more "entrepreneurial" rather than the more formalized corporate structures of the likes of Open GI and Broker Network.

He still very much believes in the local broker model saying they should differentiate themselves by offering great service and out of hours availability. The acquisition of so many brokers by Cullum Capital Ventures in the last few years has seen Homer and Cullum, both shareholders, take on a new approach to acquisition by keeping the local shop names, and not necessarily buying all the equity. Meanwhile, Broker Network has a network of over 250 independent brokers.

Organic growth
In addition to buying brokers, Homer is attempting to extract more organic growth out of the group. Having hired 100 account executives, he is upping cross-selling and has introduced a bespoke Microsoft customer relationship management system in order to help. He admits it will take time to produce results, but Towergate is already looking to the future by integrating its financial services.

One of the challenges is getting the right service attitude at each broker. He says: "We have put 100 of our managers through leadership courses. We can get staff motivated if they understand the mission. Happy staff delivers happy customers. You need clear goals, the right tools and a focus on what the customer wants."

He has been able to keep motivation at Towergate by paying out performance bonuses for last year, despite a pay freeze, which has now been reversed.

In the past Towergate has been criticised for being too focused on acquisition rather than on harnessing its existing businesses.

Homer has also overseen a restructuring of offices and capabilities. In the last 18 months, 300 jobs have been shed, and some offices have been closed, changed or merged. In Bournemouth 80 jobs were lost when its SME Riskline phone business was merged with Oxted.

He stresses if it is not working then they are keen to change and wants to invest in areas to improve service and grow business. He insists the changes at the retail division at TLRS, acquired through the Broker Network, are a natural part of bringing Towergate's network of offices into a more structured capability. He is determined to remain local: "Our research says our customers love the fact we are local. We speak their dialect and they want local decision makers."

There has also been criticism of its use of its own managing general agency Towergate Underwriting. He says his brokers work under the Treating Customers' Fairly principle and that Fusion, for example, which it owns, should "compete like hell" for business.

He says household insurance is the one area where there is no choice for its brokers having developed a scheme with a consortium of insurers led by Axa, and has one product which provides an improved price and underwriting structure.

Homer is determined to keep focusing on "niche and specialist" items such as caravans with Bakers. They also have deals with Swinton and BGL to provide non-standard cover for customers with thatched roofs or overseas homes.

Homer says: "We always want to be specialist niche, non-standard." Type overseas home insurance, entertainment or thatched roofs into Google and Towergate features prominently on the search results page.

The emphasis on technology does not stop there as its EDI tool for commercial lines, Powerplace, develops and hopes to service the whole broking community. There are ambitious expansion plans and it is a key part of Towergate's efforts to grow revenue over the next five years.

With the markets still in flux, and a general election to boot, expect Homer and Cullum to be in the insurance space for at least the next couple of years, and for them to spring more surprises.

Source: PB – May 2010