Clock could be ticking for Towergate boss Hodges after third loss in a row

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Analysts suggest private equity backer Advent may be seeking an exit

Mark Hodges’ future as Towergate chief executive has been cast into doubt by market insiders following a third consecutive year of losses, amid suggestions the consolidator’s private equity backer could be contemplating an exit.

A lack of improvement in Towergate’s financial performance since the 2011 appointment of the former Aviva UK CEO – which was compounded by pre-tax losses of £41m for 2013 (see box) – has led to claims he is facing increased scrutiny from the firm’s investors.

One former Towergate executive told Post: “He has to deliver now. The business has gone backwards under his reign and he has spent a lot of money trying to reinvent it. He will try to fight it out to the end, but my gut instinct is that he would probably feel more comfortable in the insurer market than staying with a broker.”

The Towergate boss has been mooted as a potential candidate to replace Arthur J Gallagher-bound Adrian Brown as UK and Western Europe CEO at RSA, a role in which Direct Line Group personal lines managing director Tom Woolgrove has already admitted his interest.

Towergate results under Mark HodgesSpeaking as Towergate unveiled its most recent results, Hodges said he had no intention of departing. He told Post: “Why would I want to leave? Ultimately people will judge what we’re doing, but I’m confident Towergate is on the right path and I’m convinced the business will flourish over the coming years.”

A spate of recent departures from the broker has included claims director Simon Gifford, underwriting division specialist motor director Neil Harris, Scotland and Northern Ireland managing director Kenny Hogg and direct division finance director Rob Styring, all of whom have left since the start of the year.

PE backer concerns
Imas managing partner Olly Laughton-Scott conceded that poor financial returns could spark action from Towergate’s PE backer Advent International; however, he suggested the need for managerial stability at a time of widespread changes in personnel could play into Hodges’ hands.

He explained: “[Towergate is] struggling and these results reflect that. They are not terminal, but they are also not the results it would want to put out to the market. [Advent] will be looking at any way to improve the business, and if that means management then that means management. But so many people have left that I suspect it will try to keep some stability.”

A source close to Towergate said Advent is likely to be considering its investment in the business almost four years after taking a £200m stake. “It really is all about what Advent wants, and it doesn’t mind making it a five or six-year play. We are now four years into its journey, so it must have a two to three-year horizon now,” they said.

“If this is a business that is more mature than it thought and it can’t squeeze any more pips, then it needs to just stop haemorrhaging money. It could sell its shareholding – breaking the company up is always an option.”

Reports earlier this year indicated Advent had already approached potential investors in the second half of 2013.

Meanwhile, Hodges has been keen to stress his faith in the long-term performance of Broker Network, despite seeing the division’s earnings fall 42% to £6.1m in 2013 (2012: £10.6m), while income fell 22% to £14.5m (2012: £18.6m).

The business is currently celebrating its 20th anniversary, and has been offering six months’ free membership to brokers signing up to a contract of at least two years.

According to a bondholder report published last week – which showed Towergate’s highest-paid director received £2.26m last year (2012: £1.97m) – Broker Network had 600 members at the turn of the year, and broking sector insiders have suggested the move to bring new members into the fold free of charge will rankle existing members.

A director at a rival network told Post: “You have to ask how the existing members are going to feel about it. Broker Network had a vital need to reinvent itself and come up with something because the business model was probably tired. But the members will have to make up their own minds as to whether it’s the right way to go.”

A Broker Network spokeswoman declined to comment when contacted by Post, but sources suggest the business’s revenues have become increasingly weighted away from intermediaries. One well-placed source said: “It’s going to continue to struggle because a lot of its revenue is coming from insurer payments rather than broker membership fees. But there are lots of networks out there that are finding their business model a bit of a struggle.

“They need to go back and ask what do small to medium-size brokers need and what do the insurers need out of this model.”

Advent could not be reached for comment.

This article was published in the 8 May edition of Post magazine.

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