Annual report

Annual report
For the year ended 31 December 2015
Issued: 23 March 2016
Table of contents
Page
General
3
Recent Developments
3
Presentation of financial and other information
6
Forward looking statements
7
Summary unaudited pro forma financial information and other data
8
Business review
11
Management’s discussion and analysis of financial condition and results of operations
21
Risk factors
27
Management
32
Principal shareholders
36
Related party transactions
36
Description of share capital
36
Appendices
1.
Detailed unaudited pro forma financial information and other pro forma data
38
2.
Consolidated statutory information
45
3.
Consolidated financial statements
48
2
General
This annual report should be read in conjunction with the audited consolidated financial statements of TIG
Finco Plc (Finco) and TIG Topco Limited (Topco) for the year ended 31 December 2015. The consolidated
financial statements can be found in appendix 3 of this report.
On 2 April 2015 the Group completed a financial restructuring in relation to the senior secured creditors and
senior unsecured creditors of Towergate Finance Plc (a former intermediate parent company of Towergate
Insurance Limited). Historical consolidated results are presented for Towergate Insurance Limited together
with its subsidiary companies, forming the predecessor group (TIL or TIL Group). As part of the Group’s
financial restructuring Finco, a newly formed holding company, acquired TIL. Topco, also a newly formed
holding company, is the indirect parent company of Finco. Sentry Holdings Limited (Sentry) is the ultimate
parent company and is the largest group in which the results will be consolidated.
This annual report presents consolidated unaudited pro forma financial information and other pro forma data
for the period ended 31 December 2015 for Finco and Topco and its subsidiary companies, together with the
results of TIL and its subsidiary companies for the period prior to 2 April 2015 (together, Towergate or
Group). For comparative purposes, the results of TIL and its subsidiary companies have been used for the
years ended 31 December 2014 and 31 December 2013. Unless otherwise stated the results and financial
position of Finco and Topco are the same.
This annual report has been prepared under International Financial Reporting Standards as adopted by the
European Union (IFRSs as adopted by the EU).
Recent developments
The following items have been noted as updates to ongoing matters or items to bring to the attention of the
reader:
 Continued discussions with the Financial Conduct Authority (FCA) in relation to client money and advice
provided by the Towergate Financial (TF) business
 Acquisitions and disposals
 Group financial restructuring
 Impairment
 Senior management changes
 Financial review
 Post balance sheet events
FCA
During Q3 2013 the Group identified that £15.0 million (m) of client and insurer monies had been
misallocated to an unrestricted account between November 2007 and January 2011. As soon as the
misallocation was confirmed management transferred £15.0m to the relevant client and insurer accounts. The
FCA was notified.
The Group is continuing discussions with the FCA in connection with past advice provided by the Towergate
Financial business on pension Enhanced Transfer Values (ETV) and Unregulated Collective Investment
Schemes (UCIS).
During the year £19.8m has now been recognised as management’s best estimate of future obligations to pay
UCIS redress costs. Further information is provided within the provisions and contingent liabilities discussion
on page 26.
Acquisitions and disposals
No acquisitions were made during the year ended 31 December 2015. During the year TIL disposed of three
businesses, of which two were small portfolios. On 16 March 2015 TIL disposed of its Towergate Financial
business to Palatine Private Equity for a gross consideration of £8.6m. TF was a provider of independent
financial and mortgage advice and operated outside the Group’s core UK specialist personal lines and SME
markets. Provisions and contingent liabilities in respect of ETV and UCIS were not transferred to Palatine
Private Equity and remain with the Group.
3
Group financial restructuring
On 2 April 2015 the Group completed a financial restructuring in relation to the senior secured creditors and
senior unsecured creditors of Towergate Finance Plc (a former intermediate parent company of TIL). As part
of these arrangements, Finco acquired TIL for the consideration of £735.0m. This was made up of the issue of
£425.0m of senior secured notes by Finco and the issue of new shares in Finco’s indirect parent company,
Topco, valued at £310.0m.
As a result of these arrangements, on 2 April 2015 funds controlled or managed by Highbridge Principal
Strategies LLC (Highbridge) became the Group’s majority shareholder.
As part of the financial restructuring, additional capital of £122.0m was received by the Group through the
issue by Topco of new shares for £50.0m and the issue by Finco of £75.0m of super senior secured notes at a
discount of £3.0m.
The additional funds provided liquidity to the Group and have enabled it to fund the costs of the restructuring
of £40.9m, the vesting of long term incentive plans which have crystallised or will in the future crystallise as a
result of the restructuring of £30.5m, retention bonuses of £8.0m and minority interest buy outs of £1.6m.
Impairment
International accounting standards require that a full impairment review of goodwill is performed annually.
The carrying value of goodwill at 31 December 2015 has been assessed based on its value in use. This has
resulted in an impairment of £86.4m which has been recognised in the consolidated statement of
comprehensive income. The impairment arises as a result of a fall in expected future cash flows from the Small
Business Unit (SBU) in Manchester which forms part of the Retail segment.
Senior management changes
There have been a number of senior management changes since 1 January 2015 including:
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Alastair Lyons resigned from his role as Non-Executive Chairman as of 29 June 2015.
John Tiner was appointed as Non-Executive Chairman with effect from 29 June 2015.
It was announced that Pat Butler would be joining as Non-Executive Director on 22 February 2016.
Scott Egan changed his role from Chief Financial Officer to Interim Chief Executive Officer on 10
February 2015. He resigned from this position as of 14 September 2015.
David Ross joined Towergate on 2 November 2015 as Chief Executive Officer.
Mark Mugge was appointed as Chief Operating Officer on 26 February 2015. He subsequently accepted
the position of Chief Financial Officer with effect from 6 July 2015. Mark continued with his
responsibilities as Chief Operating Officer until Adrian Brown joined on 14 September 2015.
Oliver Corbett was appointed Interim Chief Financial Officer on 10 March 2015 and resigned from this
role on 31 July 2015.
Adrian Brown joined Towergate on 14 September 2015 as Interim Chief Executive Officer. Following the
appointment of David Ross, Adrian was appointed as Chief Operating Officer and Chief Executive Officer
for Underwriting.
Janice Deakin joined as Chief Executive Officer of Insurance Broking on 12 August 2015.
Steve Wood was appointed as Chief Executive Officer of Paymentshield with effect from 16 March 2015.
Clive Nathan resigned from his position as Chief Executive Officer for Underwriting as of 30 October
2015.
Mike Lawton resigned from his position as Chief Executive Officer for Broking as of 9 October 2015.
James Tugendhat was appointed Chief Commercial Officer with effect from 15 October 2015 and has since
resigned with effect from 1 April 2016.
Keith Jackson resigned from his role as Chief Risk Officer with effect from 31 August 2015.
Sarah Dalgarno joined as Strategic Risk Officer on 4 September 2015.
Jill Lucas departed from her role as Group Chief Information Officer with effect from 31 December 2015.
Gordon Walters was appointed as Interim Group Chief Information Officer on 14 August 2015, a role he
was appointed to on a permanent basis from 31 January 2016.
Carole Jones resigned from her role as Interim Group HR Director with effect from 31 July 2015.
Steve Pratt was appointed Interim Group HR Director with effect from 1 August 2015, pending the arrival
of Catherine Lynch, who arrived on 9 November 2015.
Catherine Lynch was appointed Group HR Director with effect from 9 November 2015.
Jennifer Owens resigned from her role as of General Counsel with effect from 29 February 2016.
Geoff Gouriet was appointed as General Counsel with effect from 1 March 2016.
4
Financial review
Despite the challenges faced during 2015, Towergate remains the UK’s largest independent insurance broking
platform, the largest SME focused UK broker and largest underwriting managing general agent that continues
to serve over two million customers.
We go into 2016 with the entire new Executive team in place, plus new senior hires in key leadership roles to
support the business turnaround. Towergate is focused on creating the UK’s most trusted and recommended
adviser, leveraging a fully integrated operating infrastructure underpinned by the right control and conduct
framework.
Post balance sheet events
Additional funding
During Q1 2016 Towergate secured two sources of additional funding totalling up to £65m from Highbridge
Principal Strategies LLP (Highbridge). Binding heads of terms have been signed for both of these transactions.
Details are as follows:
•
Disposal of the entire issued share capital of The Broker Network Limited and Countrywide Insurance
Management Limited, both wholly owned subsidiaries of the Group, and the assets of Broker Network
Underwriting, a trading style of Towergate Underwriting Group Limited. The consideration for the
acquisition shall be satisfied in part by the allotment to Towergate of approximately 19.9% of the shares
(subject to adjustment) in the acquisition vehicle; and;
•
A five year facility from Highbridge secured by certain legacy assets of the Group.
Both initiatives remain subject to appropriate consents and / or approvals and will result in a cash injection to
the Group.
In addition to the above, the Towergate secured a short term loan facility from Highbridge for an amount of up
to £28m which will result in a cash injection to the Group if it is drawn.
Proceeds from these initiatives will be largely applied towards an acceleration of the strategic investments in
the group transformation plan.
IT Transformation
During February 2016 the Group signed a contract with Accenture under which Accenture will become the
Group’s information technology (IT) strategic partner, overseeing its IT Transformation change program.
Under the contract Accenture will also manage service support across the whole IT Infrastructure estate for a
period of five years. The Group is currently undertaking a number of major change programs designed to
improve efficiency across the business, to build regulatory resilience, to position the Group to exploit future
scale advantages and to enhance the customer proposition.
5
Presentation of financial and other information
This annual report is prepared by the Group in connection with the indentures relating to the £425.0m senior
secured notes and £75.0m floating rate super senior secured notes (together the Notes) issued by Finco on 2
April 2015 and the shareholders’ deed relating to Topco and the Group dated 2 April 2015.
In accordance with guidance issued by the Institute of Chartered Accountants in England and Wales, the
independent auditor’s report in the consolidated financial statements for Finco and Topco (together, the
Companies) state that: they were made solely to the members of Finco and Topco as a body in accordance with
Chapter 3 of Part 16 of the UK Companies Act 2006; the independent auditor’s work was undertaken so that
the independent auditor might state to the members of Finco and Topco those matters that were required to be
stated to them in an auditor’s report and for no other purpose; and, to the fullest extent permitted by law, the
independent auditor does not accept or assume responsibility to anyone other than the Companies and their
members as a body for its audit work or the opinions it has formed. The independent auditor’s reports for the
Companies for the period ended 31 December 2015 was unqualified. KPMG LLP was the auditor of the
Companies for the accounting period ended 31 December 2015.
Investors in the Notes should understand that in making these statements, the independent auditor confirmed
that it does not accept or assume any liability to parties (such as the purchasers of the Notes) other than to the
Companies and their members as a body with respect to the report and to the independent auditor’s audit work
and opinions. The US Securities and Exchange Commission would not permit such limiting language to be
included in a registration statement or a prospectus used in connection with an offering of securities registered
under the US Securities Act or in a report filed under the US Exchange Act. If a US court (or any other court)
were to give effect to such limiting language, the recourse that investors in the Notes may have against the
independent auditor based on its report or the consolidated financial statements to which it relates could be
limited.
The consolidated financial statements of the Group have been prepared in accordance with IFRS’s as adopted
by the EU.
On 2 April 2015 the group completed a financial restructuring in relation to the senior secured creditors and
senior unsecured creditors of Towergate Finance Plc (a former intermediate parent company of TIL). The
unaudited financial information has been presented in this annual report on a pro forma basis as if this group
structure had been in place form 1 January 2015. However in the financial statements of Finco and Topco the
transaction has been presented as an acquisition of the TIL group and accounted for in accordance with IFRS3
Business Combinations.
The unaudited financial information of the Group presented in this annual report and discussed in the
management’s discussion and analysis of financial condition and results of operations has been prepared on a
pro forma basis in order to present a two-year financial track record. Adjustments have therefore been made in
respect of:
 Subtraction of the results of disposed businesses:
o Hayward Aviation Limited for the period 1 January 2013 to 23 December 2014.
o Folgate Insurance Company Ltd (FICL) for the period 1 January 2013 to 29 August 2014.
o TF for the period 1 January 2014 to 16 March 2015.
 Addition of the trading results of TIL for the period 1 January 2013 to 1 April 2015.
 Inclusion of the new debt structure for the period 1 January 2013 to 1 April 2015.
Certain data contained in these financial results, including financial information, have been subject to rounding
adjustments. Accordingly, in certain instances, the sum of the numbers in a column or a row in tables may not
conform exactly to the total figure given for that column or row.
These financial results include certain financial measures and ratios, including EBITDA, Adjusted EBITDA,
Adjusted EBITDA margin and certain leverage and coverage ratios that are not presented in accordance with
IFRS.
EBITDA
 In these financial results, references to EBITDA are to profit / (loss) on ordinary activities before interest
payable and similar charges, tax, depreciation and amortisation of intangibles. Accordingly, EBITDA can
be extracted from the consolidated financial statements of Finco, Topco and TIL by taking profit / (loss) on
ordinary activities and adding back interest payable and similar charges, tax, depreciation and amortisation
of intangibles.
6
Adjusted EBITDA
 References to Adjusted EBITDA for Finco, Topco and TIL represent EBITDA as adjusted for acquisition
and financing costs, group reorganisation costs, regulatory costs, loss on disposal of business, asset writedowns in connection with business restructuring, long term incentive plan charges, business investment
costs and acquisition costs.
EBITDA-based measures
 EBITDA-based measures are not presented as measures of the results of operations. EBITDA-based
measures have important limitations as an analytical tool, and should not be considered in isolation or as
substitutes for analysis of the Group’s results of operations. Management believes that the presentation of
EBITDA-based measures is helpful to investors as a measure of the operating performance and ability to
service debt. EBITDA-based measures may not be comparable to similarly titled measures used by other
companies.
EBITDA, Adjusted EBITDA, Adjusted EBITDA margin and leverage and coverage ratios are not
measurements of financial performance under IFRS and should not be considered as alternatives to other
indicators of the Group’s operating performance, cash flows or any other measure of performance derived in
accordance with IFRS.
The discussion includes forward looking statements, which, although based on assumptions that are considered
reasonable, are subject to risks and uncertainties which could cause actual events or conditions to differ
materially from those expressed or implied herein. Undue reliance cannot be placed on these forward looking
statements. These forward looking statements are made as of the date of this report and are not intended to
give any assurance as to future results.
Segmental analysis is presented in this financial information. From time to time structural changes are made
within the business and trading businesses may move between the reported segments. When this occurs
financial information is restated in respect of the corresponding prior year period to facilitate the discussion
and analysis of the results.
Forward looking statements
This report contains statements under the caption management’s discussion and analysis of financial condition
and results of operations, and in other sections that are, or may be deemed to be, forward-looking statements.
In some cases, these forward-looking statements can be identified by the use of forward-looking terminology,
including the words “aims”, “believes”, “estimates”, “anticipates”, “expects”, “intends”, “may”, “will”,
“plans”, “predicts”, “assumes”, “shall”, “continue” or “should” or, in each case, their negative or other
variations or comparable terminology or by discussions of strategies, plans, objectives, targets, goals, future
events or intentions.
Many factors may cause the Group’s operations, financial condition, liquidity and the development of the
industries in which it operates to differ materially from those expressed or implied by the forward-looking
statements contained in this annual report. The Group treats these as risks to its objectives, as discussed in the
Risk factors section of this annual report. The Group takes a systematic approach to the management of risks,
as described in the Risk management section on page 16.
Any forward-looking statements are only made as of the date of this report, and the Group does not intend, and
does not assume any obligation, to update forward-looking statements set forth in this report. Readers of this
document should interpret all subsequent written or oral forward-looking statements attributable to the Group
or to persons acting on its behalf as being qualified by the cautionary statements in this report. As a result,
readers of this document should not place undue reliance on these forward-looking statements.
7
Summary unaudited pro forma financial information and other data
The pro forma financial information presented in this section has been prepared in accordance with the
information given in presentation of financial and other information.
The adjustments made in order to present the unaudited pro forma financial information have been made based
on available information and assumptions that the boards of the Companies, as applicable, believe are
reasonable. The unaudited pro forma financial information is for informational purposes only and does not
purport to present what the Group’s results would actually have been had the disposals of TF, Hayward
Aviation and FICL along with the restructuring transaction, and the application of the proceeds therefrom not
occurred on the dates presented, nor should it be used as the basis of projections of the results of operations or
financial condition for any future period.
The unaudited pro forma financial information should be read in conjunction with the consolidated financial
statements and the notes thereto for Finco and Topco for the period ended 31 December 2015, together with
management’s discussion and analysis of financial condition and results of operations. For comparative
purposes, the results of TIL have been used for the years ended 31 December 2014 and 31 December 2013.
Unless otherwise stated, the results and financial position of Finco and Topco are the same.
The following tables provide a summary of the pro forma consolidated statement of comprehensive income,
pro forma consolidated statement of financial position, consolidated cash flow and reconciliation of the loss on
ordinary activities to Adjusted EBITDA.
Pro forma consolidated statement of comprehensive income
Finco
2015
£000
Topco(1)
2015
£000
TIL
2014
£000
TIL
2013
£000
Commission and fees
Investment income
Salaries and associated expenses
Other operating costs
Depreciation and amortisation charges
Impairment of goodwill
351,838
351
(183,399)
(200,583)
(44,726)
(86,400)
351,838
351
(184,752)
(210,156)
(44,726)
(86,400)
375,921
480
(193,220)
(329,774)
(22,504)
(552,861)
409,601
858
(172,744)
(134,250)
(19,123)
(35,874)
Group operating (loss) / profit
(162,919)
(173,845)
(721,958)
48,468
(45,801)
498
-
(45,801)
498
-
(44,913)
336
-
(49,964)
135
(902)
(208,222)
(219,148)
(766,535)
(2,263)
6,734
6,734
878
(19,476)
(201,488)
(212,414)
(765,657)
(21,739)
Year ended 31 December
Finance costs
Finance income
Impairment of associates
Loss before taxation
Income tax
Loss on ordinary activities after taxation
(1) Topco includes additional costs associated with the Group board, primarily directors’ fees and the settlement with regards to the litigation by Arthur J. Gallagher
as discussed on page 25.
8
Pro forma consolidated statement of financial position
Finco
2015
£000
Topco
2015
£000
TIL
2014
£000
TIL
2013
£000
700,293
9,310
13,137
(1)
55,718
205,888
(242,227)
(566,465)
700,293
9,310
13,137
50,232
205,888
(2)
(247,667)
(566,465)
823,561
11,993
11,196
70,808
199,018
(285,893)
(503,304)
1,362,475
11,515
7,705
207,718
197,066
(255,316)
(522,756)
175,654
164,728
327,379
1,008,407
Finco
2015
£000
Topco
2015
£000
TIL
2014
£000
TIL
2013
£000
47,960
(81,651)
(10,181)
51,989
(85,680)
(10,181)
52,348
(45,001)
(3,135)
105,058
(24,996)
4,001
654
654
841
(305)
(47)
(47)
(1)
(675)
(43,265)
(43,265)
5,052
83,083
Cash flows from investing activities
Acquisitions and disposals
Purchase of software and commission buy outs
Purchase of property, plant and equipment
(63,634)
(4,441)
(1,386)
(63,634)
(4,441)
(1,386)
2,223
(14,873)
(5,701)
(16,156)
(14,064)
(3,063)
Net cash outflow from investing activities
(69,461)
(69,461)
(18,351)
(33,283)
Cash flows from financing activities
Issue of share capital
Debt financing
300,000
18,614
300,000
18,614
5,175
(46,572)
Net cash inflow from financing activities
318,614
318,614
5,175
(46,572)
Increase / (decrease) in net cash
205,888
205,888
(8,124)
3,228
As at 31 December
Intangible assets
Property, plant and equipment
Other non-current assets
Trade and other receivables
Cash and cash equivalents
Current liabilities
Non-current liabilities
Net assets
Statutory consolidated cash flow
Period ending 31 December(3)
Cash flows from operating activities
Net cash inflow from operations
Exceptional items(4)
(Decrease) / increase in net insurance broking
creditors
Net interest (paid) / received and investment
income
Taxation(5)
Net cash (outflow) / inflow from operating
activities
(1) The Finco balance includes additional costs in relation to Topco of £5.5m which is eliminated in the Topco statement of financial position.
(2) Topco includes an additional provision of £4m and £1.2m accrued settlement and legal fees in the statement of financial position.
(3) The cash flows for Finco and Topco are for the statutory period from 5 February for Finco and 4 February for Topco to 31 December 2015. The
comparative TIL cash flow is for the statutory period from 1 January 2014 to 31 December 2014.
(4) Exceptional items include acquisition and financing costs, group reorganisation costs and regulatory costs as described on page 24.
(5) The taxation paid relates to corporation tax on profits arising in companies before being acquired by Towergate.
9
Reconciliation of loss on ordinary activities to Adjusted EBITDA
Finco
2015
£000
Topco
2015
£000
TIL
2014
£000
TIL
2013
£000
(201,488)
(212,414)
(765,657)
(21,739)
45,801
(6,734)
44,726
86,400
45,801
(6,734)
44,726
86,400
44,913
(878)
22,504
552,861
49,964
19,476
19,123
35,874
(31,295)
(42,221)
(146,257)
102,698
340
(1,456)
41,212
19,058
29,240
285
340
(1,456)
41,212
28,315
29,240
285
(75)
190,534
(9,127)
10,289
37,390
3,702
8,898
257
2,155
(1,132)
27,002
10,000
210
664
13
664
13
(984)
541
933
564
1,590
599
58,061
56,392
96,101
143,686
16.50%
16.03%
25.56%
35.08%
Year ended 31 December
Loss on ordinary activities after tax
Add back / (deduct from):
Finance costs(1)
Income tax
Depreciation and amortisation charges
Impairment of goodwill
EBITDA
Add back:
Loss / (profit) on disposal of business
Related party bad debt provision(2)
Reduction in value of contingent consideration
Acquisition and financing costs
Group reorganisation costs(3)
Finance legacy review
Regulatory costs
Asset write-downs in connection with business
restructuring
Long-term incentive plan(4)
Business investment costs(5)
Acquisition costs
Adjusted EBITDA
Adjusted EBITDA margin
(1) Finance costs are comprised of interest payable on bank loans, directors’ loans, the Notes, finance charges payable in respect of finance leases and hire
purchase contracts and certain other charges.
(2) The provision of £190.5m for impairment of related party debt due to the Group financial restructuring.
(3) Topco includes the settlement in relation to the litigation by Arthur J. Gallagher.
(4) Represents non-cash provisions charged in connection with potential future settlement costs of long-term incentive plans. Certain members of the Group’s
board of directors and senior management were entitled to a one-time cash bonus, in addition to any annual bonus, based on the value appreciation of
Towergate. The vesting conditions of the bonus were a 90% sale of shares of certain Towergate group companies or a listing of certain Towergate group
companies. As a result of the financial restructuring which completed on 2 April 2015 the existing long-term incentive plans were deemed to have a zero value
and amounts previously provided in relation to these have been credited to the statement of comprehensive income for the year ended 31 December 2014. The
remaining long term incentive plans in place relate to certain individuals with guaranteed amounts.
(5) Represents investment costs which are incurred for the purposes of generating future EBITDA and value growth. Business investments costs will include,
amongst other things: recruitment and compensation costs paid in relation to market professionals recruited from competitors for the period following their
resignation from such competitors and prior to when they are able to solicit clients on the Group’s behalf due to non-compete clauses in favour of such
competitors, and the costs of recruitment and appointment of executive, non-executive and specialist advisers.
10
Business review
Overview of Towergate
Towergate is a leading independently-owned insurance intermediary group distributing general insurance
products in the UK. In 2015 it distributed insurance products with an aggregated value (in terms of gross
written premiums) of approximately £2.9 billion. Towergate is not an underwriting business and does not
assume insurance risk in relation to the products it distributes. Its business model and capital requirements
reflect the agency (as opposed to principal) nature of its activities.
Insurance products are distributed through Group and third party brokers as well as mortgage intermediaries.
Towergate’s end customers are primarily retail consumers and small and medium sized enterprises (SMEs).
The Group also provides services to members of its broker network. Historically Towergate has been an
acquisition-led business and since 1997 has acquired nearly 300 broking and underwriting agency businesses
however no acquisitions were made during the year ended 31 December 2015.
Towergate has five operating divisions or segments as follows:
Advisory: the Advisory division distributes personal lines and SME-focused products via 81 advisory offices
located across the UK. Brokers place the insurance policies of customers through underwriting agencies or
directly with insurance carriers depending on customer needs.
Historically, a part of Advisory offered regulated and unregulated financial advisory services to corporate and
private clients across the UK under the brand name Towergate Financial. The Towergate Financial business
was sold by the Group to Palatine Private Equity on 16 March 2015 and the Group ceased to offer these
services on that date although liabilities in relation to past sales remain with the Group.
Retail (previously known as Direct): the Retail division distributes insurance products to specialist customer
segments ranging from military personnel and high net worth individuals to caravan owners. Services are
provided to multiple niche retail markets, as well as to SME businesses including members of the Federation
of Small Businesses. The division operates from eight locations in the UK.
Underwriting: the Underwriting division provides insurance products to Group businesses and around 3,000
third party insurance brokers who in turn act on behalf of insured customers. The division prices insurance
coverage, issues insurance policies and in most cases handles insurance claims on behalf of the underlying
insurance companies on whose behalf it is acting. Insurance companies (and not Towergate) are ultimately
responsible for insurance claim costs and thus carry the associated principal risk. There are over 200 insurance
products within the Underwriting division covering a wide variety of risks. As in the Advisory and Retail
divisions, these insurance products are aimed both at personal lines customers and the SME marketplace. The
division has offices in 15 locations across the UK.
Paymentshield: Paymentshield is one of the UK’s leading providers of general insurance products to the
mortgage intermediary market. It is focused on the supply of household-related insurance products such as
buildings and contents, mortgage payment protection (MPPI), income protection and landlord insurance
products. Paymentshield’s principal route to market is the mortgage broking channel, where its relationships
include two of the UK’s largest mortgage networks as well as independent financial advisers and estate agents.
It also distributes a small amount of business direct to retail customers. As with the Advisory, Retail and
Underwriting businesses, underwriting or principal risk is carried by insurance partners.
Broker Network: the Broker Network division is the largest and longest established full service general
insurance network for insurance brokers in the UK. The Broker Network division provides community based,
independent insurance brokers with access to insurance products and a variety of business support services.
Members typically receive enhanced commission rates negotiated by the Broker Network. The business
support services provided to members assist them in managing their business and range from client money
under the FCA CASS rules, compliance services and advice, HR support, marketing, web design, e-trade
products and access to restricted markets.
Central: The Central division provides core support to the rest of the business divisions. It is made up of nine
functions: IT; Property; Finance, including IBA; Internal Audit; Human Resources; Legal; Compliance and
Risk; Communications; Executive costs. All costs are monitored centrally and are fully allocated out to the
businesses using various methodologies.
11
Strategy
The strategic focus concentrates on the remediation and streamlining of the back office support functions and
IT systems, with continued focus on revenue generation.
No acquisitions are currently planned for 2016.
Towergate’s key strengths include:
Its market position in a profitable industry: Towergate is one of the largest specialist personal lines and SMEfocused intermediary and insurance managing general agent in the UK. Towergate’s core proposition of strong
distribution and underwriting excellence offers compelling value for both consumers and insurers.
Its knowledge base and expertise in a highly regulated industry: insurance distribution is a regulated activity
in the UK. The Financial Conduct Authority (FCA) is the Group’s principal regulator. The intensity and
complexity of regulation is growing, providing a competitive advantage for large and well-resourced market
participants.
Demand for the insurance products it distributes is linked to economic activity: the continued improvement
in the economic performance of the UK is likely to present Towergate with opportunities for growth.
The strength of its financial characteristics and business model: the Group generates attractive operating
margins. It has the potential to be highly cash generative.
Significant organisational change is well progressed: Restructuring and operational changes in the
Manchester unit were completed by the end of 2015. Full integration into the Retail SME business will take
place as we move into 2016, as well as continued streamlining of the IT and Finance centres of excellence and
focus on cost efficiencies.
Towergate has an experienced management team: We go into 2016 with the entire new Executive team in
place, supported by a further 26 key new hires that strengthen the leadership of all areas of the business.
Support staff attrition levels are reducing and retention of key client-facing staff is high.
Disposal of non-core businesses: the disposal of non-core businesses has enabled the Group to improve its
strategic focus.
Advisory
Overview
The Advisory business places the insurance requirements of commercial and individual customers with
insurers. As part of the service, Towergate brokers offer advice on insurance needs and risk management to
customers and negotiate competitive policy terms with insurance companies on their behalf. Advisory also
offers customers access to certain third-party products and services such as premium financing arrangements
for the payment of premium by instalments, legal expenses insurance and claims assistance. With 81 broking
offices located across the UK, Advisory offers a local service with access to expert advice, risk management
and a wide selection of insurance products.
Products
The Advisory business offers a wide variety of specialist and non-specialist commercial and personal lines
products, including over 200 products available from the Underwriting division.
The Advisory business has offices throughout the United Kingdom. The national coverage is an advantage in
the preferred SME market, in which customers appreciate local contact and service. The (as it was then called)
Insurance Broking business set up a specialist unit in Manchester to service small premium business through a
dedicated contact centre with extended opening times. This has caused material disruption to the business.
Advisory distributes all types of personal lines business but has particular expertise in specialist lines such as
non-standard household, motor, caravans and park homes, and yachts and pleasure craft.
Competition
The Advisory business operates in a highly competitive market in which numerous national and local broking
firms actively compete for customers. Differentiation in the Advisory business is based on knowledge of our
customer’s needs, product breadth, innovation, quality of service and price. Some of the largest retail broker
competitors are Aon, Marsh, Willis, Arthur J Gallagher and Bluefin. In addition there is competition from
insurance companies that solicit customers directly without the assistance of a broker and with insurance
companies that have their own broker distribution capacity such as AXA, which controls Bluefin.
12
Retail
Overview
Retail is one of the leading providers of specialist personal lines and small business insurance in the UK. It
serves distinct communities such as caravan owners with products tailored to their needs and distributes via
both telephone and the internet. Retail markets directly to consumers through Towergate own brands and
works through affinity partners and aggregators such as comparethemarket.com.
Being in the specialist arena, the Retail business is less likely to come under price attack than the more
commoditised personal lines segment, particularly in the online mass market. Retail is looking to grow its
online channel over time, although currently most customers complete their sale via telephone. Strategically,
online sales and service will increase as consumer behaviour changes, even in the niche areas, but currently the
Retail business uses digital primarily for lead generation. Connecting with customers through affinity partners
with strong consumer brands also helps the Retail business access volume and this has been demonstrated
through a range of partnerships. The Retail business has relationships in place with Lloyds, the AA, SAGA,
comparethemarket.com, Ageas, Admiral, Confused, FSB, NICEIC and multiple IFA networks together with
smaller more localised trade associations and networks.
Products
The Retail business is compensated for its services through commissions paid by insurance companies and
these differ by product, market opportunity and other similar factors. As commission rates for specialist
products are typically higher than for other products it generates a greater margin than some of its competitors.
Retail’s main lines of business are:










Non-standard home and specialist household
Let property (residential and commercial)
Small business insurance
Van
Caravans and boats
Military insurance
Car hire insurance
Commercial care products
Fleet and large truck
Classic car / bike
Competition
Many of the markets in which the Retail business operates are fragmented without clear market leaders,
particularly in the small business sector. Although the Retail business is prominent in all its chosen markets,
there is headroom for growth in the majority of the segments.
Underwriting
Overview
The Underwriting business provides services in commercial and personal lines insurance across a wide variety
of products. The business consists principally of issuing insurance policies on behalf of insurance companies
to customers through the internal Advisory and Retail businesses and third-party brokers. The Underwriting
business operates as a virtual insurer, performing most of the functions of an insurance company other than the
provision of capital in respect of insurance claims. The Underwriting business does not incur liability in
respect of insurance claims.
The Underwriting business assesses risks, issues policies, administers policies, handles renewals and handles
claims. In writing an insurance policy, it will agree the underwriting criteria and the delegated authority under
which it will operate on behalf of the insurance company. In respect of most policies, it will take the lead in
rating and pricing risks, as it has the expertise in various commercial and personal lines products and
knowledge in the specialist market segments in which it operates. This expertise in rating and pricing risks
means that the Underwriting business aims to offer stable performance to insurance company partners and
attractive prices to customers.
13
The Underwriting division is made up of three units as follows:



Commercial Lines, which is further divided into:
o Fusion Insurance: which provides tailored commercial insurance and risk management solutions
for SME businesses operating in a wide range of trades.
o Arista: which was acquired in April 2014 and provides commercial combined, motor and package
insurance for SME clients via eight branch offices around the UK.
o Towergate Commercial Underwriting: which focuses on e-traded SME package commercial
products.
Personal Lines, which is further divided into:
o Towergate Underwriting Household: providing standard and non-standard household and let
property products distributed by brokers and providing specialist white labelled products on the
home panels of corporate partners.
o Private Clients: offering insurance solutions to high and mid-net worth individuals
o Travel: providing insurance solutions from individual trip travel and tour operators needs, to major
travel crises and failure of travel.
Agriculture: which operates two brands in the farm market, AIUA and BiBU, whose combined
market share makes Towergate the second largest participant in the UK agricultural insurance market.
The Underwriting business obtains its underwriting capacity from a panel of leading insurance companies,
which provide capital and incur all liability in respect of insurance claims. During 2015 approximately 76% of
the underwriting capacity was provided by five insurance companies, RSA, Allianz, Canopius, QBE and
Cardif Pinnacle.
Products
The Underwriting business currently offers underwriting services in respect of over 200 different insurance
products. These products are developed in conjunction with insurance company partners and range from farm
motor vehicles to events cancellation insurance.
Commercial lines insurance focuses primarily on SMEs. Personal lines insurance focuses primarily on
specialist lines, such as non-standard household insurance and private clients (including cherished cars and
high net worth).
Competition
Commercial Lines: As an MGA, the Underwriting business works with a number of insurer partners which
gives us a wide underwriting footprint. We are in a soft market with almost unprecedented levels of
competition and we have seen the larger insurers be particularly aggressive on pricing during the last year.
Whilst there is a drive to more digital solutions for the smaller SME customer, regional brokers still dominate
the SME market and continue to value access to known underwriters who have the ability and authority to
respond in a timely manner. This will remain the case for the foreseeable future.
Personal Lines: The top 10 insurers make up approximately 80% of the market and their action in the first half
of 2016 will determine market profitability, which has already been adversely impacted by recent weather
conditions. Towergate has sought to mitigate this by applying rate increases, following the market up and
improving loss ratios with insurers.
The distribution landscape for Household is dominated by Bancassurers, and Towergate has a good foothold in
this space with a number of large distributors. The primary opportunity for Towergate lies with aggregators.
We estimate circa 300,000 Home quotations are processed per day by the four largest comparison sites,
highlighting the scale of the opportunity.
In a market with these competitive dynamics, Towergate must be able to react more quickly than the
competition and a key priority for 2016 is to invest in new systems to drive pricing and product, allowing the
business to “think and act” like a direct insurer.
14
Paymentshield
Overview
Paymentshield administers and distributes its products primarily to the mortgage intermediary market, acting
as an intermediary between mortgage brokers and underwriters. It earns commission from its underwriters,
paying away a share to brokers, together with fee and instalment income from customers.
It distributes products through mortgage brokers, estate agents, independent financial advisors, loan brokers
and networks. In many cases, Paymentshield has exclusive agreements in place with networks of mortgage
intermediaries.
The majority of policies administered are household insurance policies. Paymentshield also administers a
mortgage protection payment insurance book underwritten by Aviva and a short-term income protection
product underwritten by Cardif Pinnacle, although new business levels for these products have declined over
the last few years, with 97% of new business sales in 2015 relating to household products. Paymentshield
administers all of the policies it places, except those within its British Insurance brand, and handles the claims
for the mortgage payment protection insurance business on behalf of Aviva. Other claims are handled by the
relevant insurer. Paymentshield issues legal expenses insurance policies on behalf of ULR and home
emergency policies on behalf of DAS. The liability in respect of insurance claims is retained by insurers.
Paymentshield has profit commission arrangements in place across the household and mortgage insurance
books.
Products
Products include mortgage payment protection insurance, short-term income protection insurance, household
insurance and certain other related insurance products including home emergency insurance and legal expenses
insurance relating to home ownership. The household insurance includes buildings-only cover, contents-only
cover and combined buildings and contents cover. Short-term income protection insurance includes
unemployment-only insurance coverage.
Paymentshield designs its own household-related insurance products in partnership with insurance companies
and distributes them to mortgage intermediaries via its Inertia point-of-sale software system, a front-end
software system linked to a web-based platform through which its products can be accessed.
Competition
The main sources of competition for the general insurance associated with mortgage activity are price
comparison websites, direct providers/insurers or via insurers’ affinity relationships with banks, building
societies or retailers.
Competition to secure the activity of mortgage brokers, especially the larger networks, comes direct from
insurers and other home and contents insurance panel operators who exist in the market, but who are not of a
comparable size to Paymentshield.
Broker Network
Overview
As a member of Broker Network, independent brokers benefit from different levels of insurer and business
support services, depending on their level of membership.
The Broker Network business offers brokers three levels of membership: Premier, Advantage and Connect
(previously branded as Countrywide).
Before Premier membership is granted, all prospective Premier members are subject to due diligence which
includes external credit checks, a review of financial statements, confirmation from insurance companies of
credit issues, review of client money reconciliations and a review of their general control environment
including their regulatory reporting submissions. Within three months of a broker joining the network, a
compliance audit is conducted to assess areas of weakness in satisfying FCA requirements and the network
business works with the member to remedy where necessary.
The Broker Network receives commission and fees from both members and insurance companies for services
in respect of all membership categories.
15
Products
Premier members benefit from access to the products and services of insurance companies and intermediaries
at commission rates that would not ordinarily be available to them. With the combined buying power of all
members, the Broker Network business is able to negotiate enhanced commission rates with partner insurance
companies and intermediaries for the members.
Competition
The Broker Network business competes with other networks; the five top competitors are Compass (part of
Arthur J. Gallagher), Cobra, Willis Networks, Purple (part of Marsh) and Bluefin.
Risk management
Towergate encounters a variety of risks, most of which are operational in nature. The effective management of
these risks is critical to the running of the business and provides a greater prospect of achieving both Group
and divisional objectives.
An effective Risk Management Framework (RMF) can inform the Group’s decision making by helping to
identify business opportunities and potential risks to profitability, capital and long-term sustainability. An
RMF gives a competitive advantage and is an integral part of maintaining financial stability for customers and
other stakeholders. The Group’s board agrees the appetite for taking individual risks and gains assurances that
they are being appropriately identified and managed within the boundaries set. The Group aims to take risks
that will give consistent long-term returns and manage those risks that could prevent it from achieving its
objectives.
The management of risk is underpinned by the application of a three lines of defence governance model, which
may be defined as follows:



The first line: this sits in the business and is responsible for the identification and management of all
material risks
The second line: is made up of Group Risk and Compliance and which provides challenge, guidance
and support to the business on the first line risk assessment
The third line: is delivered by Group Internal Audit, which independently assesses the effectiveness
of the internal controls, governance and risk management
Risk management process
The RMF defines the approach for identifying, managing and reporting risk within Towergate as part of the
Group’s overall governance and control arrangements. The RMF and associated governance is overseen
centrally, although individual businesses are responsible for implementation and ensuring that the RMF is
appropriate for their specific needs.
Towergate made some significant enhancements to its risk management framework in 2014 and in 2015 the
focus was on the implementation and embedding of the framework. The key areas that were implemented in
2015 were:





A more robust process for risk identification and monitoring, including more effective tools for the
reporting of risks.
More co-ordinated recording of risk events that occur, focusing on those that could have a significant
financial or reputational impact on the organisation.
Improved trend analysis on risks and risk events, ensuring that lessons learned from incidents or risks
are shared across the Group to facilitate better mitigating strategies.
Risk reports enhanced to focus on those areas where risks are above appetite, with an increased
emphasis on the actions being taken to bring the risk back within appetite.
A stronger link developed between the issues being raised by Internal Audit and Compliance
Monitoring reviews and recent control failures, and the identification and assessment of the risks,
including ensuring the analysis uses a similar basis for assessment.
All business and control functions within the Group are required to review their risk profiles on a quarterly
basis. These are formally reported to the Group’s Leadership Team and Group Risk Committee. The Group
Risk and Compliance function provides robust challenge to business management as to their risk assessments,
with particular focus on the consistency of the assessment, the effectiveness of the controls, the exposure of the
risk against appetite and the adequacy of any actions being taken to reduce or mitigate the risk.
16
Each of the Group risks is owned by a member of the Leadership Team, who reviews and agrees the
assessment, and challenges the business as to the effectiveness of their assessment. Possible future risks to the
Group are also considered and documented and preventative measures taken as appropriate. The diagram
shows the governance and component parts of the risk management process:
The enhanced divisional governance processes introduced in 2014 have been embedded in the last 12 months.
The Group’s risk profile is reviewed by the Group Risk Committee and similarly the business profiles are
reviewed at the Divisional Regulatory Committees (RegCos), all of which have non-executive members as
well as the key executives. The quality of reporting to these committees improved significantly in 2015, which
has enabled more informed discussions as to the risks and their adequate mitigation. The risks in each division
and central function are also discussed on a regular basis at the management meetings in those areas, with clear
ownership for each risk and any accompanying actions.
In addition to the Group and Divisional Committees each risk type has a Group owner who is responsible for
ensuring the risk is appropriately and consistently managed across all areas of the business. These risk owners
are also responsible for setting the risk appetite on an annual basis, and ensuring that the controls are
appropriate.
Risk appetite
Risk appetite is an expression of the amount and type of risk that the Group is willing to accept in order to
achieve its strategic objectives. The Group’s risk appetite influences the risk management strategy which in
turn influences the business culture and operating decisions. Risk appetite statements have been developed for
each risk category and a range of techniques is used to ensure that risk exposures are monitored against these
statements. All risks are formally considered against appetite on a quarterly basis. Any risk exposures outside
of appetite are escalated and reported to the Group Risk Committee, and action plans to reduce the risk are
monitored for effectiveness and timely completion. The risk appetite statements are reviewed and approved by
the Group Risk Committee and Group board on an annual basis.
17
Information technology
The Towergate IT systems are managed collectively by an in-house team of IT professionals, relying heavily
on a series of outsource contracts with key suppliers.
The main ongoing focus of the IT department is on continuing to provide secure and performant services
whilst addressing the underlying complex, expensive and ageing infrastructure through comprehensive
renewal programmes.
IT initiatives
IT systems are critical in providing the tools for the business to manage its customers efficiently and costeffectively. System stability was a key challenge through 2015 and key measures being undertaken to
remediate this are:

Current system stability and security. A programme of tactical initiatives has resulted in a more stable
environment with a significant increase in performance and decrease in incidents impacting the ability to
transact business.

Redesigning infrastructure. The Infrastructure Transformation Programme (ITTP) has been developed
and has gained Group board approval to renew all of the WAN/LAN, data centres and end-user
environments across the estate. The first of these, mobile telephony and printing are well advanced
through delivery. The overall architecture, approach and business case has been developed and ratified
and the programme will move into delivery from the end of Q1 2016.
System access controls and information security
System access controls manage authentication procedures and allow controlled access to data and applications.
There are in place multiple firewalls and mail filtering, virus scanning and spam controls to protect the
network. The IT department also employs a certified security manager to review data protection and network
security. In addition, a specialist security organisation performs penetration testing and highlights any potential
system weaknesses. As part of the Control Framework programme, Towergate has developed a Group-wide
Information Governance framework to protect its information assets. In line with industry standards,
Towergate has appointed a Data Protection Officer to oversee data security and standards.
Business continuity and disaster recovery
The business sites are connected to one of two data centres in Birmingham and Reading. Each of the data
centres is built to support highly resilient power services, as well as banking security and communication
standards. Whilst business continuity and disaster recovery plans exist these are not considered optimal and
these will be materially upgraded as part of the ITTP delivery.
Intellectual property
Towergate relies on copyright and trademark laws, confidentiality procedures and contractual provisions to
protect its intellectual proprietary rights. Towergate actively takes steps to protect the Group’s intellectual
property rights when and where deemed appropriate.
Towergate markets the majority of its products and services under approximately 130 trademarks, all of which
are registered in the United Kingdom. The Towergate trademark, as well as major service and product brands,
enhance the competitive advantage and are essential to the business.
Towergate has registered an extensive number of internet domain names. These domain names are either used
by the businesses to deliver services and information to customers or held to protect trading names and brands
developed by the businesses.
Although the businesses have contributed to the development of certain of the software platforms that are
licensed, such as Landscape and Guidewire, the proprietary rights in the intellectual property of these software
platforms rests with their licensors. However, the businesses exclusively own the business process intellectual
property resulting from the integration of these software platforms with the existing systems and the
customisation of these platforms. Towergate has no patents or patent applications pending.
Environmental matters
Towergate believes that it does not have any material environmental compliance costs or environmental
liabilities.
18
Property portfolio
Towergate leases its registered office, which is located at Towergate House, Eclipse Park, Sittingbourne,
Maidstone, Kent, ME14 3EN, England. It also leases over 100 properties, circa 85 of which are advisory and
retail offices. The remainder are principally offices which conduct underwriting, mortgage broker solutions
and network operations in various locations throughout the United Kingdom.
The property portfolio is managed internally by a property team, supported by external specialists where
appropriate. This team is responsible for ensuring that each site is in compliance with the relevant statutory
requirements, including health and safety requirements.
Insurance
The operations are subject to various actual and potential claims, lawsuits and other proceedings relating
principally to alleged errors and omissions in connection with the placement of insurance in the ordinary
course of business. Errors and omissions claims, lawsuits and other proceedings arising in the ordinary course
of business are covered in part by professional indemnity or other appropriate insurance.
Regulation
Towergate businesses are regulated by the FCA. The FCA Rules include rules that impose, among other
things, high level standards on the establishment and maintenance of proper systems and controls and
minimum threshold conditions that must be satisfied for an insurance firm to remain authorised as well as rules
on the conduct of business and treating customers fairly. The FCA Rules also impose certain minimal capital
and liquidity requirements on firms. Firms have an ongoing obligation to provide the FCA with certain
information regularly. Monitoring is carried out by the FCA to assess compliance with regulatory requirements
and the FCA has almost unlimited investigative and disciplinary powers. A number of senior individuals in
Towergate are approved persons (under FCA rules) and are required to satisfy certain fitness and propriety
criteria.
Towergate has regular contact with the FCA who has a scheduled programme of update meetings with
members of the senior management. There are a few areas, such as governance and operational controls where
the FCA has required Towergate to take some action to improve its position. These areas are making good
progress and are expected to be completed in 2016.
Legal proceedings
At any given point in time the Group is subject to various actual and potential claims, lawsuits and proceedings
relating principally to alleged errors, omissions or unfair provisions in connection with the placement of
insurance or the provision of financial services advice in the ordinary course of business. As the Group often
assists its customers with matters, including the placement of insurance coverage and the handling of related
claims and the provision of financial services advice, involving substantial amounts of money, errors and
omissions claims against the Group may arise that allege its potential liability for all or part of the amounts in
question. Claimants can seek large damage awards and these claims can involve potentially significant defence
costs.
The Group maintains professional indemnity insurance for errors and omissions claims, the terms of which
vary by policy year. In recent years, the Group’s self-insured risks have increased. In respect of such risks, the
Group has established a provision for claims in respect of outstanding errors and omissions claims that the
Group believes to be adequate in light of current information and legal advice and the Group adjusts such
provision from time to time according to developments.
Currently the most significant errors and omissions notifications relate to the ETV and UCIS reviews which is
discussed further on page 26. In addition in the normal course of business the Group has a provision of £2.2m
to cover potential claims based on an estimate of the likely outcome of outstanding and potential claims.
19
Employees
The Group had an average of 4,618 (2014: 4,969) full time equivalent employees. Virtually all of the
employees are located in the United Kingdom. The table below shows the Group’s number of full time
equivalent employees by division.
Advisory
Retail
Underwriting
Paymentshield
Broker Network
Central Support
2015
2014
1,725
1,234
791
252
138
478
2,002
1,295
803
271
143
455
4,618
4,969
None of the employees is represented by a labour union. The Group considers the relations with employees to
be good.
20
Management’s discussion and analysis of financial condition and results of
operations
Significant factors affecting results of operations
Commissions and fees
Insurance brokers and underwriting agents derive the majority of their revenue from commissions and fees.
Commissions are generally based on insurance premiums and negotiated commission rates. Fees are paid for
individual services based on negotiated amounts. As rating is currently soft, commission income is depressed.
The net commission rates are mostly affected by up front trading deals signed between 2013 and 2014 and
operational complexity linked to the high number of Policy Administration Systems.
The Group also enters into profit sharing arrangements, fees for the provision of payment instalment plans and
other one-off deals with third parties which are recognised over the life of the relevant arrangement or when
they can be measured with reasonable certainty. Such trading deal income includes contributions to marketing
or product development, volume payments and profit commissions receivable. The amount and timing of
trading deal income is inherently uncertain and individual amounts may be material. Amounts accrued at the
year end and recognised as assets may be subject to judgement.
Acquisitions
The TIL Group has historically pursued a strategy of acquisitions to deliver scale advantage.
This acquisition strategy was focussed on both intermediary (or broking) business and on underwriting
agencies. In evaluating potential acquisitions, the TIL Group considered the market position, growth prospects
and underwriting performance of target businesses, as well as their geographic, distribution channel and
product mix fit with its existing operations. The price paid for acquisitions was based primarily on the
commission and fee income streams of the target business and the potential to increase such streams following
the acquisition.
Acquisitions affect the results of operations in several ways. First, the results for the period during which an
acquisition takes place includes the results of the acquired business in that and subsequent accounting periods.
Second, the results for subsequent periods may be affected by applying the Group’s enhanced commission
arrangements to the policies that the acquired business places, and by cross-selling products. Third, the results
for subsequent periods may be affected if synergies are realised from shared services and infrastructure.
Insurance cycle
The insurance industry is inherently cyclical, meaning that the pricing and terms and conditions of cover vary
over time. The insurance cycle is characterised by soft and hard market conditions. Soft conditions reflect
muted demand, low or negative premium rates, widening coverage and the free availability of capital. As a
result soft markets generally result in a lower level of underlying profitability for both insurance carriers and
intermediaries. Hard market conditions generally follow a period of heightened loss activity and capital
erosion. As a result the supply of insurance is limited, rating or pricing increases and coverage narrows. It
follows that underlying profitability for both insurance carriers and intermediaries generally rises in a hard
market, although there can be a lag between the market turn and the effect on reported profits.
Seasonality
The Group experiences some seasonality in the volumes of insurance policies transacted and, consequently, in
commission and fees. The Group historically transacted less business from November to February than in most
other months of the year. Accordingly, although volumes typically increase in March, commission and fees for
the first quarter tends to be lower than the second and third quarter, before declining again in the fourth quarter.
21
Group financial performance
The following discussion and analysis compares pro forma consolidated results of operations for the year
ended 31 December 2015 for Finco and Topco, along with the 2014 pro forma consolidated results for TIL.
The tables below set out the commission and fees and Adjusted EBITDA results for the divisions:
Year ended 31 December
Commission and fees
Advisory
Retail
Underwriting
Paymentshield
Broker Network
Other(1)
Adjusted EBITDA
Advisory
Retail
Underwriting
Paymentshield
Broker Network
Other(1)
Finco
2015
£000
Topco
2015
£000
TIL
2014
£000
131,518
84,334
74,342
48,830
13,011
(197)
131,518
84,334
74,342
48,830
13,011
(197)
130,683
90,942
81,195
58,873
13,652
576
351,838
351,838
375,921
18,275
23,112
21,390
33,174
3,940
(41,830)
18,275
23,112
21,390
33,174
3,940
(2)
(43,499)
13,139
37,434
27,437
44,365
5,023
(31,297)
58,061
56,392
96,101
(1) Other primarily comprises non allocated central support costs.
(2) Topco includes additional costs associated with the Group board, primarily directors’ fees.
22
Description and performance of key line items
Set out below is a brief description and performance of the composition of the key line items of the Group’s
consolidated statement of comprehensive income.
Commission and fees
Commissions and fees represents income received from third parties net of commissions paid to sub-agents and
brokers. When a sub-agent or broker refers a customer to the Group, it typically shares that commission with
the sub-agent or broker. For the purposes of the analysis of results below, commission and fees are analysed by
division. Income from trading deals with insurers is included in commission and fees.
Advisory:
Commission and fees are broadly in line with last year. Retention rates have strengthened towards the end of
the year and are getting back to the levels achieved prior to the change programme. Adjusted EBITDA has
increased by 39.1% resulting from a reduction in expenses which include the Group restructuring fair value
adjustments.
Retail:
The SBU and Direct divisions were combined to form the Retail division in 2015. Commission and fees
declined by 7.3%, mainly due to continued challenges in the SBU division, this has been partly offset by a
strong and resilient performance in Direct which has seen new business increase year on year. Adjusted
EBITDA has declined by 38.3%, impacted by both the decrease in income as well as an increase in costs,
notably the annualised effect of the old SBU division which was originally launched during 2014.
Underwriting:
Commission and fees declined by 8.4% resulting from a challenging year in 2015 and the impact of the
financial restructuring, notably felt in retention and new business. Other negative impacts include lost revenues
as internal broking businesses declined and the exit from certain lines that didn’t meet required returns.
Adjusted EBITDA has decreased by 22.0% driven by the shortfall in income. Expenses are broadly flat, in line
with last year.
Paymentshield:
Commission and fees declined by 17.1%, impacted by a £6m non-cash income adjustment in 2014. The
underlying income decline is 10.1%, excluding this adjustment, which is driven by the continued reduction in
back books of MPPI and Household. Adjusted EBITDA has decreased by 25.2% largely due to the decrease in
income, with expenses broadly in line with last year.
Broker Network:
Commission and fees declined by 4.7% due to a fall in member numbers and refreshed pricing of the existing
book in response to an increasingly competitive market. Adjusted EBITDA has declined by 21.6%, resulting
from a decrease in income and an increase in expenses. The uplift in costs includes higher bonuses and one-off
premises costs in 2015.
Investment income
Investment income represents the interest received on restricted cash.
In the year ended 31 December 2015 investment income has decreased by £0.1m (26.9%) for Finco and Topco
compared to TIL for the same period in 2014.
Salaries and associated expenses
Salaries and associated expenses represent the costs of staff and staff related costs incurred in the operations of
the Group and will include staff related costs for exceptional spend not in the normal course of operations of
the Group.
Salaries and associated expenses have decreased in the year ended 31 December 2015 by £9.8m (5.1%) at
Finco and £8.5m (4.4%) at Topco reflecting a decrease in the cost of the workforce compared to TIL for the
same period in 2014.
23
Other operating expenses
Other operating expenses represent all other administrative costs and will include exceptional spend not in the
normal course of operations of the Group.
Other operating expenses decreased in the year ended 31 December 2015 by £129.2m (39.2%) at Finco and
£119.6m (36.3%) at Topco compared to TIL for the same period in 2014. This is primarily due to the related
party bad debt write off in 2014 offset by additional expenditure on acquisition and financing costs, group
reorganisation costs and regulatory costs in 2015 not incurred in 2014.
Depreciation and amortisation charges
Depreciation and amortisation charges represent the depreciation charge of tangible assets and the amortisation
of intangible assets.
Depreciation and amortisation charges have increased by £22.2m (98.7%) in the year ended 31 December
2015 compared to TIL for the same period in 2014. This is primarily due to increased amortisation on
intangibles, where fair values increased as a result of the Group restructuring.
Impairment of Goodwill
Impairment of goodwill in 2015 and 2014 represented the impairment of the goodwill based on the value in use
or fair value less costs to sell of the Group. This was conducted at cash generating unit level which reflects the
divisional structure of the Group.
Finance costs
Finance costs represent the interest and other financing costs of the Group.
Finance costs have been subject to pro forma adjustments in order to present the cost of the current debt as if it
was in place for both comparative periods.
Finance income
Finance income represents the interest on available cash and the changes in fair value of the financial
instruments in the statement of financial position.
Finance income has increased by £0.2m in the year to 31 December 2015 compared to 2014, primarily due to
increased office cash balances being held following the Group restructuring on 2 April 2015.
Income tax credit
An income tax credit arises on the unwinding of the deferred tax liability in respect of the amortisation charged
on the intangible assets and due to a change in corporation tax rate which has been applied to the deferred tax
asset and liability.
Exceptional costs
Group change programmes
During 2014 and 2015 the Group has undertaken a number of change programmes. These programmes were
designed to improve efficiency across the business, to build regulatory resilience, to position the Group to
exploit future scale advantages and to enhance the customer proposition. These programmes have been
separately disclosed within exceptional items on the face of the consolidated statement of comprehensive
income.
Acquisition and financing costs and bad debt provision for related parties
The Group has undergone a financial restructuring which completed on 2 April 2015. Costs of £41.2m were
incurred in the year to 31 December 2015 (2014: £10.3m). In addition in 2014, TIL recognised a provision of
£191.2m against amounts due from previous holding companies which are considered irrecoverable following
the restructuring, of which £0.7m relates to the Towergate Financial business and has been re-analysed as part
of the assets held for sale balances in the statement of financial position.
24
Group reorganisation costs
In February 2014 TIL began a major finance transformation with the creation of accounting centres in Leeds
and Maidstone. The majority of insurance broking accounting and client money processing was consolidated
into an in-house facility in Leeds, with some ongoing support from an outsourced third party provider. In
parallel, financial accounting and management accounting was centralised in a second in-house facility in
Maidstone. These two centres are developing standardised policies and procedures and will allow future
investment to be focused and prioritised. They will also allow IT hardware and software used by the Group to
be streamlined and re-focused with the objective, over time, of improving control while exploiting scale
advantage.
In April 2014, TIL announced the creation of a new business unit in Manchester. This unit is designed to
service small premium business through a dedicated contact centre with extended opening times. In addition,
a site consolidation to rationalise the office network across the Advisory, Retail and Underwriting businesses
was undertaken.
On 25 August 2015, a settlement was reached with regards to the litigation by Arthur J. Gallagher in relation to
certain members of its executive team joining Towergate following the financial restructuring. The Group
agreed to fund £8.0m of this settlement, payable in two £4.0m tranches in August 2015 and April 2016, plus
£1.2m of estimated legal fees.
The group reorganisation initiatives had an aggregate cost of £19.1m for Finco and £28.3m for Topco (2014:
£37.4m for TIL).
Regulatory costs
The Group has incurred exceptional regulatory costs of £29.2m in 2015 (2014: £8.9m). These items primarily
represent the creation of a provision for UCIS of £19.8m and other costs incurred in relation to the ongoing
regulatory investigations into advice provided by TF on ETV and UCIS, investigation into client and insurer
monies, and a strengthening of the Group’s control framework. ETV remains a contingent liability and is
disclosed on page 26.
Finance legacy review
The Group launched a review in 2013 to improve financial processing, reporting and controls across
Towergate. This included a re-assessment of the recoverability of certain legacy balances. The finance legacy
review continued in 2014, as a result of which a further £3.7m was identified as irrecoverable or impaired and
so was written off as an exceptional cost (2013: £10.0m).
Financial strength
On a pro forma basis Finco had net assets of £175.7m and net current assets of £19.4m as at 31 December
2015. Topco had net assets of £164.7m and net current assets of £10.9m. TIL had net assets of £327.4m and
net current liabilities of £16.1m as at 31 December 2014. The Group had regulatory capital requirements within
its regulated companies of £19.9m at 31 December 2015 and TIL had £18.8m at 31 December 2014.
Prior to the financial restructuring, presented consolidated financial statements in respect of TIL did not
include debt which was held in Towergate Finance Plc, the previous parent company of Towergate Insurance
Limited. Previously, TIL supported the debt held by Towergate Finance Plc through a guarantee. Following the
restructuring on 2 April 2015, the level of debt supported by the Group has significantly reduced and the
overall leverage position of the Group has reduced from 11.8x at 31 March 2015 to 7.9x at 31 December 2015.
Cash flow
The statutory net cash flow generated from operating activities for the period to 31 December 2015 was an
outflow of £43.3m (year ended 31 December 2014: inflow of £5.1m) and included spend in relation to
exceptional items of £81.7m for Finco and £85.7m for Topco (year ended 31 December 2014: £45.0m). The
net increase in cash balances of £205.9m for the period to 31 December 2015 includes £186.7m of cash
received as part of the financial restructuring.
The cash outflow from investing activities is negative in both periods, representing expenditure on
acquisitions, intangibles and property, plant and equipment in excess of proceeds from disposals.
The positive cash flows from financing activities in both periods reflects funds received from the issue of share
capital, receipt of funds from debt facilities and capital contributions from parent entities.
25
Contractual obligations
The following table summarises material contractual obligations as of 31 December 2015:
Total
1-5 years
£m
Less than 1
year
£m
£m
More than 5
years
£m
Senior secured notes
Floating rate super senior secured notes
Operating leases
Other obligations(1)
425.0
72.4
42.7
4.7
14.0
3.9
425.0
72.4
24.5
0.8
4.2
-
Total contractual obligations
544.8
17.9
522.7
4.2
Deferred consideration
Deferred consideration is payable in respect of certain acquisitions based on the performance of the acquired
business typically in the 24 month period following the acquisition and in connection with put and call options
granted to shareholders of businesses we have acquired in respect of the remaining minority interest of such
shareholders, typically for the 36 month period following the acquisition.
Operating leases
Contractual obligations for operating leases reflect the Group’s annual commitments under non-cancellable
operating leases.
Off balance sheet arrangements
The Group had no off balance sheet arrangements at 31 December 2015.
Contingent liabilities
The Group is in discussion with the FCA about past advice provided by the TF Group businesses on ETV. The
independent file reviews for the investigation are ongoing. Customer contact, which will be a key factor in
determining the extent of the Group’s redress obligation, commenced in 2015 and is expected to be phased
over the next two years. Payment of redress is expected to occur over similar periods of time once customers
have been contacted and the redress methodology has been approved by the FCA. We expect material
payments to start in 2016.
Given the number of material uncertainties that exist around ETV redress, it is not yet possible to make a
reliable estimate of the Group’s ultimate liability. However, purely for the purposes of developing business
plans and cash flow projections for the Group, it has adopted a range of £45.0m to £65.0m in potential redress
costs, excluding costs and expenses.
This internal range is derived from a set of assumptions based on currently available information. As explained
above, in view of the material uncertainties all such assumptions are subject to change and the Group can give
no assurances as to whether its ultimate liability will be within this range or not. The ultimate liability for ETV
may, therefore, be materially different.
The foregoing does not include any recoveries that may be available either from third parties or under the
Group’s insurance arrangements, both of which the Group continues to pursue. The maximum recoverable
amount under insurance arrangements is £12m in addition to costs, although the ultimate extent and timing of
any recovery remains uncertain.
(1) Represents deferred consideration and redemption liability on non-controlling interest put options of £4.5m and obligations under finance
leases and hire purchase contracts in an amount of £0.2m.
26
Risk factors
The risks below are not the only risks the Group face. Additional risks and uncertainties not currently known
to us or that we consider immaterial may also significantly and adversely affect our business or operations in
the future. Any of the following risks could result in a material adverse effect on our business, results of
operations and financial condition.
Risks relating to our business
Our business may be adversely affected by a decline in economic conditions.
Our business, like others, is affected by economic conditions in the United Kingdom and the resultant decline
in business and customer confidence. Economic conditions may have a significant negative impact on the
buying behaviour of some of our commercial and individual customers. In addition, economic conditions may
negatively impact the buying behaviour of customers of mortgage intermediaries placing business with
Paymentshield and customers purchasing insurance from brokers in our broking division and network for
brokers. Insolvencies associated with continuing economic uncertainty could also adversely affect our
underwriting and broking businesses through the loss of customers or by hindering our ability to place
insurance. If unemployment increases, claims against mortgage protection insurance will also increase and
place downward pressure on commissions earned by Paymentshield. Due to their size, our small to mediumsized business (SME) customers may be more vulnerable to any economic downturn and may be more prone
to insolvency than larger commercial customers. While it is difficult to predict the consequences for our
business of a deterioration in economic conditions, any significant reduction or delay by customers in
purchasing insurance or making payment of premiums could have a negative impact on our business.
In addition, we have a significant amount of trade accounts receivable from some of the insurance companies
with which we place insurance. If those insurance companies experience liquidity problems or other financial
difficulties, we could encounter delays or defaults in payments owed to us. Furthermore, if a significant insurer
fails or withdraws from writing certain insurance coverage that we offer our clients, overall capacity in the
industry could be negatively affected, which could reduce our placement of certain lines and types of
insurance. The failure of an insurer with whom we place business could also result in errors and omissions
claims by our clients.
Our mortgage broking solutions business, Paymentshield, may be adversely affected by a downturn in the
property market.
Our mortgage broker solutions business, Paymentshield, is materially affected by changes in the property
market and mortgage lending in the United Kingdom. Any decline in property prices in the United Kingdom or
in applications for new mortgages and any tightening of lending criteria employed by mortgage providers
when assessing mortgage applicants may lead to a decrease in mortgage lending activity. This may lead to a
reduction in customers purchasing or renewing mortgage protection insurance and household protection
insurance.
Volatility or declines in premiums, as well as declines in commission rates, may seriously undermine our
business and results of operations.
We derive most of our revenue from commissions and fees for underwriting and broking services. Our
commissions are generally based on insurance premiums, which are cyclical in nature and may vary widely
based on market conditions. Competition, economic difficulties or other factors may prevent increases in
premiums or may even cause premium rates to decline. As insurance companies continue to outsource the
issuance of insurance policies to non-affiliated agents and brokers such as ourselves, they may seek to further
bring down their expenses by reducing commission rates payable to such organisations. A significant reduction
in commissions, along with general volatility or declines in premiums, could have a significant adverse effect
on our business.
We depend on insurance companies providing us with underwriting capacity and products.
We are an insurance intermediary and depend on insurance companies providing us with insurance
underwriting capacity and products. The underwriting capacity of insurance companies depends on, among
other things, their ability to procure reinsurance, over which we have no control. To the extent that reinsurance
becomes less widely available, as a result, for example, of adverse economic conditions, we may not be able to
provide the amounts or types of coverage desired by our customers. To retain underwriting capacity, we also
need to maintain satisfactory loss ratios for our insurance company partners. A withdrawal by insurance
companies of underwriting capacity and products in circumstances where no replacement underwriting
capacity or products can be procured, or an excessive increase in the rates charged by an insurance company
would be a big risk to our business performance.
27
We depend on relationships with third-party brokers, mortgage intermediaries and networks of mortgage
intermediaries, and any adverse changes in these relationships could materially adversely affect our
business, results of operations and financial condition.
Our success depends, in significant part, on the quality of services provided by, and our relationships with,
third-party brokers, mortgage intermediaries and networks of mortgage intermediaries through which we
distribute a substantial portion of our insurance products. A significant amount of written premiums placed by
Paymentshield are sourced from mortgage intermediaries and networks of mortgage intermediaries. Although
we have some exclusive and long-term relationships with networks of mortgage intermediaries, most of our
relationships with third-party brokers and mortgage intermediaries are not exclusive or long-term. In addition,
we do not have control over whether the third-party brokers and mortgage intermediaries through which we
distribute our products comply with FCA regulations. If the third-party brokers, mortgage intermediaries and
networks of mortgage intermediaries through which we distribute our products do not provide customers with
competitive levels of service or a significant number of third-party brokers and mortgage intermediaries
choose not to distribute our products, the level of written premiums we place with customers may decline. If
the third-party brokers and mortgage intermediaries through which we distribute our products fail to comply
with FCA regulations or have other difficulties, we may lose the confidence and trust of our insurance
company partners and also the business provided by such third-party brokers and mortgage intermediaries.
Competition in our industry is intense, and if we are unable to compete effectively, our business may be
materially adversely affected.
We face intense competition in all of the businesses in which we operate, based on product breadth,
innovation, quality of service and price. In our insurance Underwriting and Broking businesses, numerous
firms, as well as insurance companies that directly solicit customers without the assistance of an agent or
broker, compete for a share of the various insurance markets and customers. Paymentshield faces competition
both from other insurance providers and large lenders, such as major retail banks and building societies and
standalone providers. Broker Network faces competition from other companies offering services to
independent insurance brokers.
If we fail to comply with regulatory requirements, we may not be able to conduct our business or may be
subject to sanctions or substantial fines that may have a material adverse effect on our results of operations
and financial condition.
Our business is primarily regulated by the Financial Conduct Authority (FCA). The FCA prescribes rules,
principles and guidance (Rules). The Rules impose high level standards on the establishment and maintenance
of proper systems and controls and minimum ‘‘threshold conditions’’ that must be satisfied for a firm to
remain authorised as well as rules on the conduct of business and fair treatment of customers. The Rules also
impose certain minimum capital and liquidity requirements on us. Our ‘‘treating customers fairly’’ obligation
requires us to demonstrate that we are consistently delivering fair outcomes to consumers and that senior
management are taking responsibility for ensuring that we, and our staff at all levels, deliver the consumer
outcomes relevant to our business by establishing an appropriate culture. Situations can arise where the
interests of Towergate differ from those of customers, or the interests of one customer differ from those of
another customer. The FCA rules oblige us to manage conflicts of interest fairly and we risk regulatory action
if we do not do so.
Firms have an ongoing obligation to periodically provide the FCA with information, including their financial
performance and customer outcomes. The FCA supervises firms’ activities to assess compliance with
regulatory requirements, including client money rules. The FCA will seek additional information from firms
via surveys, thematic reviews and formal risk assessments. The FCA has broad investigative and disciplinary
powers, including the power to impose fines and vary or cancel regulatory permissions. While we maintain an
ongoing dialogue with the FCA in the ordinary course of business and consider our compliance with the Rules
to be robust, failure to comply with the Rules could lead to disciplinary action, including requiring customers
to be compensated for loss, the imposition of penalties and the revocation or variation of our authorisations to
conduct business, in whole or in part.
28
Profit commissions are less predictable than traditional commissions, and we are less able to forecast the
amount of profit commissions that we will receive.
We derive a small portion of our revenue from profit commissions from insurance companies. Profit
commissions are typically based on the profitability of the business placed with the insurance company, as a
function of premiums earned net of commissions less claims, expenses and target minimum returns for the
insurance company. We are less able to forecast profit commissions than traditional commissions. In addition,
catastrophic events, whether natural or otherwise, may affect the amount of claims being made and therefore
the profitability of the business placed by us. A large proportion of the business we place insures risk in the
United Kingdom, and therefore the profitability of our business is significantly affected by catastrophic events
in the United Kingdom. Moreover, insurance companies may seek to negotiate profit sharing agreements with
less favourable terms to us as a result of a decrease in the profitability of the business we place with them.
Our business, results of operations and financial condition may be materially adversely affected by
legislative or taxation changes or HMRC enforcement actions.
We are subject to the laws of England and Wales and the taxation rules administered by HM Revenue &
Customs (HMRC). Changes in legislation or regulations and actions by regulators, including changes in
administration and enforcement policies, could from time to time require operational improvements or
modifications, the conduct of reviews and audits or the cessation of certain business practices, product lines or
income streams that could result in higher costs or restrict our ability to operate our business and, as a result,
have a material adverse effect on our business, results of operations and financial condition. In 2015, for
example, the UK government raised the rate of insurance premium tax from 6% to 9.5%. Currently,
commissions payable on insurance premiums are exempt from Value Added Tax. Any change to these taxation
rates or the treatment of taxation on our other sources of income could have an adverse effect on our business
performance.
HMRC may also take enforcement actions against us which may result in fines, penalties and/or interest
charges being imposed on us which may have a material adverse effect on our business, results of operations
and financial condition. We are required to certify to HMRC that we have appropriate tax accounting
arrangements in place. In reviewing the processes and procedures which support tax compliance obligations
certain matters came to light in 2012 concerning liability for value added tax on services received from abroad,
the requirement to account for withholding tax on certain annual interest paid to non-residents, the efficacy of
certain employment arrangements and the taxation of some benefits in kind provided to staff. The only
outstanding point relates to some benefits in kind provided to staff for which we await HMRC feedback. There
are some outstanding points from HMRC regarding corporation tax on the group. It is not anticipated that any
of these points will lead to a significant tax liability or penalties or interest.
Our business, results of operations and financial condition may be materially adversely affected by errors
and omissions and the outcome of certain actual and potential claims, lawsuits and other proceedings.
We are subject to various actual and potential claims, lawsuits and other proceedings relating principally to
alleged errors, omissions or unfair provisions in connection with the placement of insurance or the provision of
financial services advice in the ordinary course of business. As we often assist our customers with matters,
including the placement of insurance coverage and the handling of related claims and the provision of financial
services advice, involving substantial amounts of money, errors and omissions claims against us may arise that
allege our potential liability for all or part of the amounts in question. As a result, claimants can seek large
damage awards from us and these claims can involve potentially significant defence costs. Such claims,
lawsuits and other proceedings could, for example:
 allegations of damages as a result of our employees, agents or sub-agents improperly failing to place
coverage or to notify claims on behalf of customers;
 failing to inform clients of relevant warranties and exclusions applying to their policies;
 failing to adequately advise customers of their duties of disclosure and the risk of underinsurance;
 failing to provide insurance companies with complete and accurate information relating to the risks being
insured or to appropriately apply funds that we hold for our customers on a fiduciary basis.
29
We maintain professional indemnity insurance for errors and omissions claims. The terms of this insurance
vary by policy year and our ability to obtain professional indemnity insurance in the amounts and with the
deductibles we desire in the future may be adversely impacted by general developments in the market for such
insurance or our own claims experience. In recent years, our self-insured risks have increased. In the case of
self-insured risks, we have established a provision for claims in respect of outstanding errors and omission
claims that we believe to be adequate in the light of current information and legal advice and we adjust such
provision from time to time according to developments. If our insurance coverage proves inadequate or
unavailable or there is an increase in liabilities for which we self-insure.
We issue insurance policies on behalf of insurance companies pursuant to delegated authority agreements,
and, if we issue policies or handle claims beyond the scope of our delegated authority, we may incur liability
in respect of insurance claims.
Our underwriting agencies assess risk and issue policies to customers on behalf of insurance companies. In
writing an insurance policy, we agree to a set of underwriting criteria with an insurance company and write the
policy under delegated authority from the insurance company. If we underwrite a greater risk than agreed by
the insurance company, handle a claim in excess of any cap without referring such claim to the insurance
company, issue policies that are outside of the applicable eligible business criteria, use staff who are not
authorised under the relevant delegated authority agreement to handle claims or otherwise act beyond the
scope of our delegated authority, the insurance company may refuse to provide the funds in respect of the
insurance claim in question. As a result, we would incur the liability for such claims.
Interruption or loss of our information processing systems or failure to maintain secure information
systems could have a material adverse effect on our business.
Our business depends on the ability of our employees to process transactions using secure information
systems. Our capacity to service our customers depends on storing, retrieving, processing and managing
information. Interruption or loss of our information processing capabilities through loss of stored data, the
failure of computer equipment or software systems, a telecommunications failure or other disruption could
have a material adverse effect on our business, results of operations and financial condition. A disruption in the
infrastructure that supports our business and the communities where we are located, for example, would
adversely affect our ability to operate our business.
Our computer systems also store information about our customers, some of which is sensitive personal data.
Database privacy, identity theft and related computer and internet issues are matters of growing public concern
and are subject to changes in rules and regulations. Our failure to adhere to or successfully implement
processes in response to changing regulatory requirements in this area could result in legal liability or harm to
our reputation. Although we have taken reasonable and appropriate security measures to prevent unauthorised
access to information stored in our database and to ensure that our processing of personal data complies with
the relevant data protection regulations, our technology may fail to adequately secure the private information
we maintain in our databases and protect it from theft or inadvertent loss.
The loss of a number of our senior management or a significant number of our underwriters, account
executives, sales personnel or other client-facing employees could have a material adverse effect on our
business. The inability to attract and retain qualified personnel could also have a material adverse effect on
our business.
Our success depends to a substantial extent on the ability and experience of members of our senior
management and on the individual underwriters, account executives, sales personnel and teams that service our
customers and maintain customer relationships. The loss of a number of our senior management or a
significant number of our underwriters, account executives, sales personnel or other client-facing employees
could have a material adverse effect on our business. We believe that our future success will depend in part on
our ability to attract and retain additional highly skilled and qualified personnel and to expand, train and
manage our employee base. In the past, the insurance broking industry has experienced intense competition for
the services of leading individual account executives and broking teams and we have lost account executives
and teams to competitors.
30
If we are unable to apply technology effectively in driving value for our clients through technology-based
solutions or gain internal efficiencies and effective internal controls through the application of technology
and related tools, our client relationships, growth strategy, compliance programs and operating results
could be adversely affected.
Our future success depends, in part, on our ability to develop and implement technology solutions that
anticipate and keep pace with rapid and continuing changes in technology, industry standards, client
preferences and internal control standards. We may not be successful in anticipating or responding to these
developments on a timely and cost-effective basis and our ideas may not be accepted in the marketplace.
Additionally, the effort to gain technological expertise and develop new technologies in our business requires
us to incur significant expenses. If we cannot offer new technologies as quickly as our competitors, or if our
competitors develop more cost-effective technologies, we could experience a material adverse effect on our
client relationships, growth strategy, compliance programs and operating results.
Interest rate changes may have a material adverse effect on our business, result of operations and financial
condition.
As of 2 April 2015, on a pro forma basis after giving effect to the Refinancing, we would have had an
aggregate principal amount of £500 million of debt. The interest is LIBOR plus 7.5% with a floor on LIBOR
of 1%. Three month Libor has been stable and tracking at or slightly below 0.6% for over 12 months. Because
there has been little risk of LIBOR 1% floor then there are no interest rate hedges currently in place. We have
considered events that could give rise to interest rate movement, notably the possible exit of the UK from the
European Union following the referendum in June 2016. Whilst an exit could give rise to interest rate
increases, we do not anticipate this to be of such significance that it would breach the 1% LIBOR floor. In
such an unlikely event we would hedge by interest rate swaps or explore further refinancing with our
shareholder.
Our substantial debt could limit our flexibility, adversely affect our financial health.
In addition to the aggregate principal amount of £500 million of debt, as of 2 April 2015 we also have £85.0
million available for borrowing under the Credit Facility Basket.
Our substantial debt could impact business, results of operations and financial condition, for example:
 Requires us to dedicate a substantial portion of our cash flow from operations to making payments on our
debt, thereby limiting the availability of funds for working capital, acquisitions, business opportunities
and other general corporate purposes;
 Potentially increases our vulnerability to adverse general economic or industry conditions;
 Limits our flexibility in reacting adequately to changes in our business or the industry in which we
operate; and
 Places us at a competitive disadvantage compared to those of our competitors that have less debt than we
do; and limits our ability to borrow additional funds and increase the costs of any such additional
borrowings.
But as well as supporting operations, proceeds from debt financing are used to fund the acceleration of
strategic investments. This will support future generation of cash for reinvestment and to continue paying
down debt. In addition, our shareholder remains supportive to investing in the business turnaround and growth.
31
Management
Board of Directors of Finco andTopco
The Directors of Finco and Topco at 31 December 2015 were:
John Tiner
Philip Moore
Teresa Robson-Capps
Oliver Feix
Scot French
Dev Gopalan
Mark Mugge
Non-executive Chairman
Non-executive director
Non-executive director
Non-executive director
Non-executive director
Non-executive director
Group Chief Financial Officer
John Tiner CBE (Non-executive Chairman): John is an independent non-executive member of the Board of
Credit Suisse Group, where he is also Chairman of the Audit Committee and a member of both the Risk
Committee and the Chairman’s Governance Committee. For 25 years up to June 2001, he worked for
accountants Arthur Andersen, in 1997 becoming head of their global financial services practice. There he led
the team which produced the official report investigating the 1995 collapse of Barings Bank for the Bank of
England’s Board of Banking Supervision. In June 2001, he joined the FSA to become managing director of the
consumer, investment and insurance directorate. In September 2003, he was appointed Chief Executive of the
FSA. In this role, he led the Tiner Review which reformed the regulation of both the life and general insurance
industries and initiated and led a programme to improve consumers' understanding of personal finance.
Philip Moore (Non-executive director): Philip has over 30 years insurance industry experience. He is Group
Finance Director of LV=, having joined from Pensions Insurance Corporation where he was both Group
Finance Partner and Chief Risk Officer. Prior to this he was Group Finance Director and latterly Group Chief
Executive at Friends Provident, where he was a non-executive director of F&C Asset Management. He has
previously held roles at AMP, NPI and PricewaterhouseCoopers in both London and Hong Kong.
Teresa Robson-Capps (Non-executive director): Teresa has spent over 20 years in a variety of senior
executive operational board positions in the retail, mobile telecoms, insurance and banking industries. Teresa
was Deputy Head of HSBC UK Direct Bank from June 2009 to September 2011. During this time she
developed and implemented a substantial change programme, integrating sales and service with increased
conversion rates whilst improving both customer and employee satisfaction. Prior to this Teresa was Head of
Contact Centres for HSBC, a role covering 11 million UK customers. Teresa was an Associate Partner at
Accenture from 2003 to 2006 and prior to that was managing director of The Customer Division at Reality, a
division of GUS.
Oliver Feix (Non-executive director): Oliver is a Managing Director at Highbridge. Prior to joining
Highbridge in 2008, he was a Vice President at Morgan Stanley and a member of the Leveraged and
Acquisition Finance team where he focused on originating, executing and distributing leveraged loans and
special situation financings across industries. He also worked at Deutsche Bank in London sourcing and
executing multi-asset portfolio trades as a member of the Transition Management team within the Global
Markets division. Oliver holds an MSc in Economics from the University of Konstanz.
Scot French (Non-executive director): Scot is a Partner and founding member of Highbridge and is the
Portfolio Manager for the Highbridge Mezzanine fund. Prior to joining Highbridge in 2007, he spent three
years at Citigroup as a Managing Director and Head of Private Investments for Citigroup Global Special
Situations, a credit focused, on-balance sheet proprietary investment fund managing over $8 billion globally.
Within Citigroup Global Special Situations, Scot managed a $1.5 billion portfolio of private mezzanine and
private equity investments in North America, Europe and Latin America. Prior to joining Citigroup, he worked
for Goldman Sachs and focused on mergers and acquisitions as well as high-yield capital markets. Previously
Scot worked in high-yield capital markets and mergers and acquisitions at Saloman Brothers Inc and for Price
Waterhouse. Scot graduated from the University of Illinois.
32
Dev Gopalan (Non-executive director): Dev is a Director in KKR Credit and serves as head of U.S.Private
Credit. Prior to joining KKR in 2010, he worked at the Canada Pension Plan Investment board as a principal in
private investments and private debt. Prior the that he worked for Barclays Capital, Goldman Sachs and
JPMorgan Chase in high yield capital markets as well as high yield/leverage loan research covering a variety
of sectors. Dev also sits on the boards of LCI Helicopters Limited, Battery Point Trust LLC, DCAL Aviation
Finance Limited and serves on the limited partner advisory committee of Star Mountain Multi-Manager Credit
Platform, LP. He is also on the board of Rebound Hounds, a non-profit organisation. Dev has a M.A. in
International Finance from Brandeis University and a B.S. from Georgetown University. Dev left the Group on
8 March 2016 and will be replaced by Daniel Pietrzak.
Mark Mugge (Group Chief Financial Officer): Mark held various senior finance and audit positions at
AmerUs Group Co, Grinnell Mutual Reinsurance Company and GuideOne insurance before joining Arthur J
Gallagher in 2006 where he was Group Controller until 2010. He then served as the CFO of the international
division at Arthur J Gallagher’s from 2011-2015. Mark earned his CPA at KPMG LLP and served in the
United States Marine Corps.
Directors of the ultimate parent company
The Directors of Sentry Holdings Limited, the ultimate parent company of the Group, at 31 December 2015
were:
Oliver Feix
Scot French
Dev Gopalan
Brad Palmer
Non-executive director
Non-executive director
Non-executive director
Non-executive director
The following is biographical information for each of the members of the board of Sentry Holdings Limited
who do not serve on the board of Directors of Finco orTopco.
Brad Palmer (Non-executive director): Brad joined Sankaty Advisors in 2013. He is a Managing Director
based in Sankaty’s London office in the Portfolio Group responsible for driving operating improvement
initiatives across Sankaty’s investments. Previously, he held a number of roles as a Senior Executive in private
equity backed businesses. Specific experience includes FMCG manufacturing management, as well as Finance
Director roles. Brad received a B.Sc. in Chemical Engineering from the University of Natal.
Senior management
Towergate’s senior management as at 31 December 2015 were:
John Tiner
David Ross
Mark Mugge
Adrian Brown
Janice Deakin
Steve Wood
Andy Fairchild
James Tugendhat
Jennifer Owens
Catherine Lynch
Sarah Dalgarno
Gordon Walters
Non-Executive Chairman
Chief Executive Officer
Group Chief Financial Officer
Chief Operating Officer and Chief Executive Officer - Underwriting
Chief Executive Officer – Insurance Broking
Chief Executive Officer - Paymentshield
Chief Executive Officer – Broker Network
Chief Commercial Officer
General Counsel and Company Secretary
Group HR Director
Group Chief Risk Officer
Group Chief Information Officer
The following is biographical information for each of the members of the senior management team as at 31
December 2015 who do not serve on the Board of Topco or Finco.
David Ross (Chief Executive Officer): David had a 25 year career at Arthur J Gallagher having started there
as a trainee. He was appointed Managing Director of the North American Division in 1997 then CEO of
Global Wholesale & Retail in 2003. In 2005 David was appointed CEO of the International Division where the
company underwent a defining period of growth and expansion. An Insead Alumnus, David has spent his
entire career on the front line of Broking and Intermediary work in the Insurance industry.
Adrian Brown (Chief Operating Officer and Chief Executive Officer – Underwriting): Adrian is a
qualified management accountant with extensive industry expertise having spent 25 years at RSA. He was a
main board director and CEO of the UK and Western Europe for six years. Previously he was UK COO and
established, and led, the successful direct business MORE TH>N. More recently he was executive chairman of
underwriting and distribution at Arthur J Gallagher.
33
Janice Deakin (Chief Executive Officer – Insurance Broking): Janice had a 13 year career at AVIVA,
leading the broker business as intermediary and partnerships director from December 2009 until 2013 and
prior to that, corporate sales director. Janice then served as the CEO of UK Retail for Arthur J Gallagher,
leading a combined business of over 2,000 people, placing in excess of £1billion of gross written premiums on
behalf of more than 200,000 commercial insurance customers.
Steve Wood (Chief Executive Officer – Paymentshield): Steve has worked in the insurance industry for over
30 years, including a range of senior executive roles. Before joining Towergate he was UK Managing Director
at Ecclesiastical Insurance Group, where he spent eight years, strengthening its core market positions and
broker relationships. Prior to Ecclesiastical, Steve led the MBO of Royal SunAlliance’s healthcare division. He
started his career at Royal Insurance.
Andy Fairchild (Chief Executive Officer - Broker Network): Andy joined the Group in December 2013. He
has a wide range of market experience including time on the UK Board of AXA, latterly as Chief Operating
Officer. He held various business development roles with both Royal Insurance and Commercial Union before
establishing the Insurance & Customer Service proposition at First Direct.
James Tugendhat (Chief Commercial Officer): James joined the Group in February 2014 from BUPA
where he spent six years in a variety of roles including Commercial Director of its market leading International
Health Insurance business and most recently as Chief Executive Officer of Health Dialog, BUPA’s US health
service business. Prior to BUPA James ran a successful consumer products start up and spent several years at
Diageo in a number of senior strategy, sales and marketing and general management roles. James held the
position Chief Executive Officer – Retail from February 2014 to October 2015. James will be leaving the
Group on 1 April 2016 and will be replaced by John Kitson on an interim basis.
Jennifer Owens (General Counsel and Company Secretary): Jennifer joined the Group in November 2013.
She joined from William Hill plc where she was Deputy General Counsel. Prior to William Hill plc, Jennifer
held several executive positions including General Counsel at Espirito Santo/Execution Noble and Legal and
Compliance Director at GE Money, after her time in private practice with Herbert Smith. Jennifer left the
Group on 29 February 2016 and was replaced by Geoff Gouriet on 31 March 2016.
Catherine Lynch (Group HR Director): Catherine joined Towergate from BGL Group, where she was HR
& Communications Director since January 2013. Prior to this, she was Head of HR at Barclaycard from June
2011 to December 2012 having held the role of HR Director at Santander UK for six years from June 2004.
Earlier in her career, Catherine held commercial positions at Sainsbury’s, House of Fraser and Tesco.
Sarah Dalgarno (Strategic Risk Officer): Sarah has more than 25 years’ industry experience and joined the
Group from Arthur J Gallagher International, where she spent nine years, latterly as CRO, responsible for all
regulatory, compliance risk management and governance matters of the UK regulated entities and international
operations. Prior to Arthur J Gallagher, Sarah worked at the FSA for six years.
Gordon Walters (Group Chief Information Officer): Gordon joined the Group in August 2015 as interim
Chief Information Officer and was confirmed as permanent CIO from the end of January 2016. Prior to this,
Gordon was a partner at Deloitte UK for over three years. Earlier in his career Gordon was COO, Corporate
banking at Lloyds banking group for over six years and a Partner at Accenture for 15 years. Gordon has a PhD
in Chemistry which he was awarded at the University of Edinburgh.
Compensation of directors and senior management
The aggregate salary and fees, performance-related remuneration and bonuses, pension contributions and other
benefits paid to the directors and senior management listed above in 2015 was £8.1m.
Committees of TIG Topco Limited
The committees in operation for the Group as part of Topco board of directors are set out below.
Audit Committee
The role of the audit committee is to monitor and review the group’s internal financial controls, and audit
function, approve the annual audited accounts and any other announcement incorporating material financial
information, monitor and review external auditor independence and objectivity and the effectiveness of the
external auditor review process. The audit committee will also develop and implement policy on the
engagement of, and make recommendations to the Group board in relation to the appointment or removal of,
external auditors.
34
Remuneration Committee
The responsibilities of the remuneration committee include determining the remuneration and performance
targets for senior executives, the remuneration of the members of the Group board, the award of rights under
long term incentive plans (including, potentially, through shares in Topco or other Group companies) and the
approval of new bonus and incentivisation schemes.
Nomination Committee
The responsibilities of the nomination committee include the recommendation to the Group b oard of the
appointment of senior executives and directors.
Group Risk Committee
The risk committee is responsible for all matters relating to regulatory compliance and risk management,
including reviewing, monitoring and implementing Group compliance and risk policies, the Risk
Management Framework, making recommendations regarding the risk appetite and monitoring the
effectiveness of the risk and compliance function.
Investment Committee
The investment committee is responsible for all matters relating to the acquisition program, including the
formulation, monitoring, review and implementation of the strategy regarding acquisitions, approval of
material acquisition proposals, review of the resources available to undertake acquisitions and review of
the effectiveness of the integration of acquired businesses.
35
Principal shareholders
Finco is a 100% owned subsidiary of TIG Midco Limited, which in turn is a 100% owned subsidiary of Topco.
Topco is directly and/or indirectly majority-owned through certain investment vehicles by Highbridge, KKR,
and Sankaty.
Highbridge was established in 2007 by Highbridge Capital Management, LLC as a credit and private
investment platform. Highbridge’s platform offers a full spectrum of strategies including loans, high yield,
mezzanine debt, distressed credit and private equity. Highbridge relies on fundamental research carried out by a
team of more than 85 experienced investment and senior professionals to invest approximately $24 billion of
equity capital and $27 billion of total capital including leverage across core credit strategies.
KKR is a leading global investment firm with a long history of investing in Europe. Founded in 1976 and led
by Henry Kravis and George Roberts, KKR has $119.5 billion in assets under management as of 31 December
2015. KKR holds its interest in the Group through funds and accounts managed or advised by KKR Credit
Advisors (U.S.) LLC. KKR Credit Advisors (U.S.) LLC is an SEC-registered investment adviser, which,
together with KKR Credit Advisors (Ireland) and KKR Credit Advisors (UK) LLP, conducts KKR’s credit
business (“KKR Credit”). With over 85 investment professionals globally, KKR Credit invests across the
corporate credit spectrum, including in leveraged credit strategies, such as leveraged loans and high yield
bonds, and alternative credit strategies, such as direct senior lending, subordinated private credit, special
situations and long/short credit.
Sankaty Advisors, an independently managed affiliate of Bain Capital, is a leading global credit specialist with
approximately $27.8 billion in assets under management as of 1 October 2015. They invest across the full
spectrum of credit strategies, including leveraged loans, high-yield bonds, distressed debt, private lending,
structured products, non-performing loans (NPLs) and equities.
Related party transactions
Related party transactions as of 31 December 2015 are disclosed in note 28 to the consolidated financial
statements of Topco and note 28 of Finco for the year ended 31 December 2015 which can be found in
Appendix 3.
Description of share capital
The share capital of Topco is £3,600,100 comprising 360,000,100 ordinary shares of £0.01 each. As at 31
December 2015 359,999,907 ordinary shares were in issue.
The shares are issued only in fully paid form in one series and have uniform rights, rank pari passu with each
other, have equal and proportionate rights in all distributions and participation in exit events, carry one vote per
share and are not divisible into fractional parts.
The share capital of Finco is £299,999,999 comprising 299,999,999 ordinary shares of £1.00 each. As at 31
December 2015 all 299,999,999 shares were in issue.
36
Appendices
Table of contents
Page
1.
Detailed unaudited pro forma financial information and other pro forma data
1.1 Pro forma consolidated statement of comprehensive income and other pro forma data for the year
ended 31 December 2015
39
1.2 Pro forma consolidated statement of comprehensive income and other pro forma data for the year
ended 31 December 2014
41
1.3 Pro forma consolidated statement of financial position as at 31 December 2015
43
1.4 Pro forma consolidated statement of financial position as at 31 December 2014
44
2.
Summary consolidated statutory information
45
3.
Consolidated financial statements
48
2.1 TIG Finco Plc
2.2 TIG Topco Limited
37
1. Detailed unaudited pro forma financial information and other data
38
1.1 Pro forma consolidated statement of comprehensive income and other pro forma data for the
year ended 31 December 2015
Finco(1)
£000
Preacquisition
period for
TIL(2)
£000
Pro forma
adjustments
for
disposals(3)
£000
Pro forma
Finco
£000
Additional
costs in
Topco(4)
£000
Pro forma
Topco
£000
Commission and fees
Investment income
Salaries and associated expenses
Other operating costs
Depreciation and amortisation charges
Impairment of goodwill
267,236
262
(132,912)
(172,042)
(33,444)
(86,400)
85,331
89
(50,487)
(40,949)
(5,303)
-
(729)(a)
(b)
12,408
(5,979)(c)
-
351,838
351
(183,399)
(200,583)
(44,726)
(86,400)
(1,353)
(9,573)
-
351,838
351
(184,752)
(210,156)
(44,726)
(86,400)
Group operating (loss) / profit
(157,300)
(11,319)
5,700
(162,919)
(10,926)
(173,845)
11,250
1,456
(41,212)
(14,995)
(27,399)
(86,400)
7,348
(340)
(12,423)
(4,853)
(1,051)
-
(6,723)
12,423
790
(790)
-
11,875
1,456
(340)
(41,212)
(19,058)
(29,240)
(86,400)
(1,669)
(9,257)
-
10,206
1,456
(340)
(41,212)
(28,315)
(29,240)
(86,400)
(157,300)
(11,319)
5,700
(162,919)
(10,926)
(173,845)
(34,527)
405
(238)
93
(d)
-
(45,801)
498
-
(45,801)
498
Loss before taxation
Income tax credit / (expense) (7)
(191,422)
6,958
(11,464)
(224)
(5,336)
-(e)
(208,222)
6,734
(10,926)
-
(219,148)
6,734
Loss on continuing operations
(184,464)
(11,688)
(5,336)
(201,488)
(10,926)
(212,414)
-
(366)
366(f)
-
-
-
(184,464)
(12,054)
(4,970)
(201,488)
(10,926)
(212,414)
Year ended 31 December 2015
Analysed as:
Group operating profit before exceptional items
Increase in value of contingent consideration
Loss on disposal of businesses and investments
Acquisition and financing costs
Group reorganisation costs
Regulatory costs
Impairment of goodwill
Group operating (loss) / profit
(5)
Finance costs
Finance income(6)
(Loss) / profit for the period from discontinued
operations, net of tax
Total comprehensive loss for the period
(11,036)
(1) The information in this column has been derived from the audited consolidated financial statements for Finco as of and for the year ended 31 December 2015
included elsewhere in this annual report. Finco commenced trading on 2 April 2015.
(2) The pre-acquisition period for TIL represents the trading period 1 January 2015 to 1 April 2015 derived from the unaudited interim condensed consolidated
financial statements for TIL as of and for the quarter ended 31 March 2015. These figures have been previously reported in the Towergate Insurance Limited annual
report issued on 26 June 2015 for the quarter ended 31 March 2015.
(3) The pro forma adjustments for TIL, disposal of TF and debt costs represents (a) (i) 2014 audit adjustments made after the group accounts had been signed and (ii)
a timing adjustment in the recognition of a profit share (b) the reversal of group restructuring costs previously included in TIL but subsequently accounted for in
Finco (c) amortisation of intangibles for the three months to 31 March 2015 based on Finco intangible balances (£10.2m) offset by the reversal of the three months
amortisation of intangibles to 31 March 2015 already in TIL (£4.2m) (d) three months interest cost on the £425.0m 8.75% senior secured notes (£9.3m) (ii) three
months interest on the £75.0m floating rate super senior secured notes (£1.7m) (iii) three months amortisation on capitalised debt costs of £3.7m over a period of 5
years (£0.2m) offset by (iv) the reversal of interest charged in TIL on the £20.0m bridging loan (£0.2m) (e) tax effect of pro forma adjustments (a), (b), (c) and (d) and
(f) represents the removal of the aggregated results of the trading period 1 January 2015 to 16 March 2015 for TF which was classed as discontinued operations in
the TIL consolidated financial statements and is compiled from information in the respective management accounts of TF.
(4) Topco includes additional costs associated with the Group board, primarily directors’ fees and the settlement paid with regards to the litigation by Arthur J.
Gallagher.
(5) Finance costs are comprised of interest payable on bank loans, directors’ loans, the Notes, finance charges payable in respect of finance leases and hire purchase
contracts and certain other charges.
(6) Finance income represents the interest receivable on own funds.
(7) The Group will not incur a corporation tax charge for 2015.The income tax credit relates to the movement in deferred tax.
39
1.1 Pro forma consolidated statement of comprehensive income and other pro forma data for the
year ended 31 December 2015
Finco
£000
Preacquisition
period for
TIL
£000
Pro forma
adjustments
for TIL, Pro forma
disposals
Finco
£000
£000
Additional
costs in
Topco
£000
Pro forma
Topco
£000
Year ended 31 December 2015
Available cash(1)
EBITDA
Adjusted EBITDA
Adjusted EBITDA margin
Capital expenditure
Adjusted net senior secured borrowings(2)
Adjusted net total borrowings(2)
Adjusted net interest expense(3)
Ratio of Adjusted net senior secured borrowings to Adjusted
EBITDA(2)
Ratio of Adjusted net total borrowings to Adjusted EBITDA(2)
Ratio of Adjusted EBITDA to Adjusted net interest expense(3)
Turnover by division
Advisory
Retail
Underwriting
Paymentshield
Broker Network
Other(4)
Adjusted EBITDA by division
Advisory
Retail
Underwriting
Paymentshield
Broker Network
Other(4)
57,148
(37,051)
45,728
5,827
-
(5,923)
13,077
1,664
-
11,679
(744)
(1)
-
57,148
(31,295)
58,061
16.50%
7,490
442,852
447,304
44,580
7.63x
-
-
7.70x
1.30x
-
7.93x
1.26x
98,962
64,542
55,520
38,478
9,944
(210)
32,530
19,792
18,822
11,107
3,067
13
26
(755)
-
131,518
84,334
74,342
48,830
13,011
(197)
-
131,518
84,334
74,342
48,830
13,011
(197)
13,739
18,229
16,691
26,397
2,954
(32,282)
4,525
4,883
4,699
7,532
986
(9,548)
11
(755)
-
18,275
23,112
21,390
33,174
3,940
(41,830)
-
(10,926)
(1,669)
-
(1,669)
57,148
(42,221)
56,392
16.03%
7,490
442,852
447,304
44,580
7.85x
18,275
23,112
21,390
33,174
3,940
(43,499)
(1) Available cash of £57.1m excludes restricted cash of £148.7m. Restricted cash consists of client money in respect of insurance premiums due to insurance companies
and insurance company money in respect of claims payments due to policyholder; cash deposits kept for the purposes of solvency, capital adequacy and any other
requirements imposed by the FCA; cash deposits held for settlement of claims in relation to the disposal of the TF business as imposed by the FCA; and rent deposits.
(2) For the purposes of calculating Adjusted net senior secured borrowings deferred consideration and redemption liability on non-controlling interest put options have
been excluded. Adjusted net senior secured borrowings and Adjusted net total borrowings have been adjusted for the pro forma available cash of £57.1m. The ratios of
Adjusted net senior secured borrowings to Adjusted EBITDA and Adjusted net total borrowings to Adjusted EBITDA are calculated by reference to the pro forma
Adjusted EBITDA.
(3) Adjusted net interest expense represents net interest expense on pro forma Adjusted total borrowings. The ratios of Adjusted EBITDA to Adjusted net interest expense
is calculated by reference to the pro forma Adjusted EBITDA for the year ended 31 December 2015 of £58.1m for Finco and £56.4m for Topco.
(4) Other primarily comprises non allocated central support costs.
40
1.2 Pro forma consolidated statement of comprehensive income and other pro forma data for the year
ended 31 December 2014
TIL(1)
£000
Pro forma
adjustments
for
disposals(2)
£000
Pro forma
adjustments
for debt
costs(3)
£000
Pro forma
TIL
£000
Commission and fees
Investment income
Salaries and associated expenses
Other operating costs
Depreciation and amortisation charges
Impairment of goodwill
375,923
480
(193,220)
(331,423)
(22,504)
(552,861)
(2)(a)
1,649
-
-
375,921
480
(193,220)
(329,774)
(22,504)
(552,861)
Group operating (loss) / profit
(723,605)
1,647
-
(721,958)
Analysed as:
Group operating profit before exceptional items
Related party bad debt provision
Increase in value of contingent consideration
(Loss) / gain on disposal of businesses
Acquisition and financing costs
Group reorganisation costs
Finance legacy review
Regulatory costs
Impairment of goodwill
72,489
(190,534)
9,127
(1,547)
(10,289)
(37,390)
(3,702)
(8,898)
(552,861)
25(b)
(c)
1,622
-
-
72,514
(190,534)
9,127
75
(10,289)
(37,390)
(3,702)
(8,898)
(552,861)
Group operating (loss ) / profit
(723,605)
1,647
-
(721,958)
(11)
336
-
(44,902)(a)
-
(44,913)
336
(Loss) / profit before taxation
Income tax credit (6)
(723,280)
883
1,647
(5)(d)
(44,902)
-(b)
(766,535)
878
(Loss) / profit on continuing operations
(722,397)
1,642
(44,902)
(765,657)
(23,283)
23,283(e)
-
-
(745,680)
24,925
(44,902)
(765,657)
Year ended 31 December 2014
Finance costs(4)
Finance income(5)
Profit / (loss) for the period from discontinued
operations, net of income tax(7)
Total comprehensive (loss) / profit for the period
(1) The information in this column has been derived from the TIL audited consolidated financial statements for the year ended 31 December 2014.
(2) The pro forma and removal of trading period adjustments for the disposal of Hayward Aviation on 23 December 2014, FICL on 29 August 2014 and TF on
16 March 2015, give effect to the following adjustments:(a) and (b) represents the trading period 1 January 2014 to 29 August 2014 for FICL and is compiled
from information in their respective management accounts (c) represents the reversal of the consolidated loss on the disposal of FICL (d) represents the tax
effect of pro forma adjustments (a), (b) and (c); (e) represents the removal of the aggregated results of the trading period 1 January 2014 to 23 December
2014 for Hayward Aviation and 1 January 2014 to 31 December 2014 for TF which are classed as discontinued operations in the TIL consolidated financial
statements.
(3) The pro forma adjustments for debt costs incurred during the year ended 31 December 2014 represent (a) (i) 12 months interest cost on the £425.0m
8.75% senior secured notes (£37.2m) (ii) 12 months interest on the £75.0m floating rate super senior secured notes (£7.0m) (iii) 12 months amortisation of
capitalised debt costs of £3.7m over a period of five years (£0.7m) and (b) represents the tax effect of pro forma adjustment (a).
(4) Finance costs are comprised of interest payable on bank loans, directors’ loans, the Notes finance charges payable in respect of finance leases and hire
purchase contracts and certain other charges.
(5) Finance income represents the interest receivable on own funds.
(6) The Group did not incur a corporation tax charge for 2014; any profits were group relieved with losses from companies outside of the restricted group.
(7) On 23 December 2014 the Group disposed of Hayward Aviation and on 16 March 2015 disposed of its TF business. The results of both businesses have
been classed as discontinued operations in the statutory accounts for the year ended 31 December 2014. The consolidated statement of comprehensive income
for the year ended 31 December 2014 has been restated to show TF and Hayward Aviation as discontinued operations.
41
1.2 Pro forma consolidated statement of comprehensive income and other pro forma data for the
year ended 31 December 2014
TIL
£000
Pro forma
adjustments
for disposals
£000
Pro forma
adjustments
for debt costs
£000
Pro forma
TIL
£000
-
34,959
(146,257)
96,101
25.56%
20,170
452,912
484,536
44,902
4.71x
-
-
5.04x
2.14x
Year ended 31 December 2014
Available cash(1)
EBITDA
Adjusted EBITDA
Adjusted EBITDA margin
Capital expenditure
Adjusted net senior secured borrowings(2)
Adjusted net total borrowings(2)
Adjusted net interest expense(3)
Ratio of Adjusted net senior secured borrowings to Adjusted
EBITDA(2)
Ratio of Adjusted net total borrowings to Adjusted EBITDA(2)
Ratio of Adjusted EBITDA to Adjusted net interest expense(3)
36,374
(147,904)
96,076
19,961
-
(1,415)
1,647
25
209
-
Turnover by division
Advisory
Retail
Underwriting
Paymentshield
Broker Network
Other(4)
130,683
90,942
81,195
58,873
13,652
578
(2)
-
130,683
90,942
81,195
58,873
13,652
576
Adjusted EBITDA by division
Advisory
Retail
Underwriting
Paymentshield
Broker Network
Other(4)
13,139
37,434
27,437
44,365
5,023
(31,322)
25
-
13,139
37,434
27,437
44,365
5,023
(31,297)
(1) Available cash of £35.0m excludes restricted cash of £164.1m. Restricted cash consists of client money in respect of insurance premiums due to insurance
companies and insurance company money in respect of claims payments due to policyholder; cash deposits kept for the purposes of solvency, capital adequacy and
any other requirements imposed by the FCA; cash deposits held for settlement of claims in relation to the disposal of the TF business as imposed by the FCA; and
rent deposits.
(2) The pro forma borrowings incurred by Finco have been used in calculating Adjusted borrowings. For the purposes of calculating Adjusted net senior secured
borrowings, total pro forma Finco debt excludes deferred consideration and redemption liability on non-controlling interest put options and has been adjusted for
the pro forma available cash of £35.0m. The ratios of Adjusted net senior secured borrowings to Adjusted EBITDA and Adjusted net total borrowings to Adjusted
EBITDA are calculated by reference to the pro forma Adjusted EBITDA for the year ended 31 December 2014 of £96.1m.
(3) Adjusted net interest expense represents net interest expense on pro forma Adjusted total borrowings. The ratios of Adjusted EBITDA to Adjusted net interest
expense is calculated by reference to the pro forma Adjusted EBITDA for the year ended 31 December 2014 of £96.1m.
(4) Other primarily comprises non allocated central support costs.
42
1.3 Pro forma consolidated statement of financial position as at 31 December 2015
As at 31 December 2015
Non-current assets
Intangible assets
Property, plant and equipment
Available for sale financial assets
Deferred tax assets
Current assets
Trade and other receivables
Cash and cash equivalents
Current liabilities
Borrowings
Trade and other payables
Current tax liabilities (1)
Provision for liabilities and charges
Net current assets
Non-current liabilities
Borrowings
Trade and other payables
Provision for liabilities and charges
Deferred tax liability
Net assets
Finco(2)
£000
Additional costs
in Topco(3)
£000
Topco(4)
£000
700,293
9,310
152
12,985
-
700,293
9,310
152
12,985
722,740
-
722,740
55,718
205,888
(5,486)
-
50,232
205,888
261,606
(5,486)
256,120
(86)
(190,077)
(219)
(51,845)
(5,440)
-
(86)
(195,517)
(219)
(51,845)
(242,227)
(5,440)
(247,667)
19,379
(10,926)
8,453
(494,399)
(11,254)
(8,837)
(51,975)
-
(494,399)
(11,254)
(8,837)
(51,975)
(566,465)
-
(566,465)
175,654
(10,926)
164,728
(1) Current tax liabilities have arisen where companies within a group are not able to utilise losses held by other group companies.
(2) The information in this column has been derived from the audited consolidated financial statements for Finco as of and for the year ended 31 December
2015 included elsewhere in this annual report.
(3) The intercompany balance in relation to Topco includes additional costs of £5.5m which is eliminated in the Topco statement of financial position.
(4) Topco includes an additional provision of £4m and £1.2m accrued settlement and legal fees in the statement of financial position.
43
1.4 Pro forma consolidated statement of financial position as at 31 December 2014
(2)
TIL
£000
Pro forma
adjustments for
debt (3)
£000
Pro forma
adjustments for
disposals(4)
£000
Pro forma
TIL
£000
823,561
11,993
140
11,056
-
-
823,561
11,993
140
11,056
846,750
-
-
846,750
70,808
199,018
7,333
-
(7,333)
70,808
199,018
-
277,159
-
(7,333)
269,826
(80)
(280,712)
(2,476)
(2,494)
(2,607)
-
2,476
-
(80)
(280,712)
(2,494)
(2,607)
(288,369)
-
2,476
(285,893)
(11,210)
-
(4,857)
(16,067)
(165)
(5,170)
(4,666)
(493,303)
-
-
(493,468)
(5,170)
(4,666)
(10,001)
(493,303)
-
(503,304)
825,539
(493,303)
(4,857)
327,379
As at 31 December 2014
Non-current assets
Intangible assets
Property, plant and equipment
Available for sale financial assets
Deferred tax assets
Current assets
Trade and other receivables
Cash and cash equivalents
Assets held for sale
Current liabilities
Borrowings
Trade and other payables
Liabilities held for sale
Current tax liabilities (1)
Provision for liabilities and charges
Net current liabilities
Non-current liabilities
Borrowings
Trade and other payables
Provision for liabilities and charges
Net assets
(1) Current tax liabilities have arisen where companies within a group are not able to utilise losses held by other group companies.
(2) The information in this column has been derived from the TIL audited consolidated financial statements as of and for the quarter ended 31 December 2014.
(3) The pro forma adjustments for debt represent the £425m 8.75% senior secured notes and the £75m floating rate super senior secured notes at their discounted
value at the time of issue of £72m offset by a debit balance of £3.7m in respect of costs capitalised in relation to the debt.
(4) The pro forma adjustments for the disposal of TF on 16 March 2015 represent the assets and liabilities at 31 December 2014 contained within the TIL
consolidated statement of financial position at this date.
44
2.
Summary consolidated statutory information
45
Consolidated statement of comprehensive income
Finco
Period ended
31 December
2015
£000
Topco(1)
Period ended
31 December
2015
£000
TIL
Year ended 31
December
2014
£000
TIL
Year ended 31
December
2013
£000
Commission and fees
Investment income
Salaries and associated expenses
Other operating costs
Depreciation and amortisation charges
Impairment of goodwill
267,236
262
(132,912)
(172,042)
(33,444)
(86,400)
267,236
262
(134,265)
(181,615)
(33,444)
(86,400)
375,923
480
(193,220)
(331,423)
(22,504)
(552,861)
411,930
858
(173,269)
(147,115)
(19,123)
(35,874)
Group operating (loss) / profit
(157,300)
(168,226)
(723,605)
37,407
(34,527)
405
-
(34,527)
405
-
(11)
336
-
(5,062)
135
(902)
(Loss) / profit before taxation
(191,422)
(202,348)
(723,280)
31,578
Income tax credit / (expense)
6,958
6,958
883
(18,916)
(184,464)
(195,390)
(722,397)
12,662
Finco
2015
£000
Topco
2015
£000
TIL
2014
£000
TIL
2013
£000
700,293
9,310
13,137
(2)
55,718
205,888
(242,227)
(566,465)
700,293
9,310
13,137
50,232
205,888
(3)
(247,667)
(566,465)
823,561
11,993
11,196
70,808
206,351
(288,369)
(10,001)
1,411,008
11,878
7,817
215,326
208,557
(265,390)
(29,453)
175,654
164,728
825,539
1,559,743
Finance costs
Finance income
Impairment of associates
Loss / (profit) on ordinary activities after
taxation
Consolidated statement of financial position
As at 31 December
Intangible assets
Property, plant and equipment
Other non-current assets
Trade and other receivables
Cash and cash equivalents
Current liabilities
Non-current liabilities
Net assets
(1) Topco includes additional costs associated with the Group board, primarily directors’ fees and the settlement with regards to the litigation by Arthur J. Gallagher.
(2) The Finco balance includes additional costs in relation to Topco of £5.5m which is eliminated in the Topco statement of financial position.
(3) Topco includes an additional provision of £4m and £1.2m accrued settlement and legal fees in the statement of financial position.
46
Consolidated cash flow
Finco
Period ended
31 December
2015
£000
Topco
Period ended
31 December
2015
£000
TIL
Year ended 31
December
2014
£000
TIL
Year ended 31
December
2013
£000
47,960
(81,651)
(10,181)
51,989
(85,680)
(10,181)
52,348
(45,001)
(3,135)
105,058
(24,996)
4,001
654
654
841
(305)
(47)
(47)
(1)
(675)
(43,265)
(43,265)
5,052
83,083
Cash flows from investing activities
Acquisitions and disposals
Purchase of software and commission buy outs
Purchase of property, plant and equipment
(63,634)
(4,441)
(1,386)
(63,634)
(4,441)
(1,386)
2,223
(14,873)
(5,701)
(16,156)
(14,064)
(3,063)
Net cash outflow from investing activities
(69,461)
(69,461)
(18,351)
(33,283)
Cash flows from financing activities
Issue of share capital
Debt financing
300,000
18,614
300,000
18,614
5,175
(46,572)
Net cash inflow from financing activities
318,614
318,614
5,175
(46,572)
Increase / (decrease) in net cash
205,888
205,888
(8,124)
3,228
Period ending 31 December(1)
Cash flows from operating activities
Net cash inflow from operations
Exceptional items(2)
(Decrease) / increase in net insurance broking
creditors
Net interest (paid) / received and investment
income
Taxation(3)
Net cash (outflow) / inflow from operating
activities
(1) The cash flows for Finco and Topco are for the statutory period from 5 February for Finco and 4 February for Topco to 31 December 2015. The
comparative TIL cash flow is for the statutory period from 1 January 2014 to 31 December 2014.
(2) Exceptional items include acquisition and financing costs, group reorganisation costs and regulatory costs as described on page 25.
(3) The taxation paid relates to corporation tax on profits arising in companies before being acquired by Towergate.
47
3.
Consolidated financial statements
Full audited financial statements for Towergate Insurance Limited for the year ended 31 December 2014 can be found on
our website www.towergateinsurance.co.uk
48