Towergate Insurance Limited

Transcription

1 Towergate Insurance Limited Quarterly report For the quarter ended 31 March 2015 TIG Finco plc 425,000, % senior secured notes due 2020 TIG Finco plc 75,000,000 floating rate super senior secured notes due 2020 Issued: 26 June 2015

2 Table of contents Page General and recent developments 1 Presentation of financial and other information 3 Forward looking statements 4 Summary unaudited pro forma financial information and other data 5 Management s discussion and analysis of financial condition and results of operations 14 Appendix 1 Interim financial statements of Towergate Insurance limited 20

3 General This quarterly report should be read in conjunction with the unaudited interim consolidated financial statements of Towergate Insurance Limited (TIL or the Company) for the quarter ended 31 March This quarterly report has been prepared under International Financial Reporting Standards (IFRS). This quarterly report presents unaudited interim consolidated financial and other information on TIL and its subsidiary companies (together the Group or Towergate). Recent developments The following items have been noted as updates to ongoing issues or a summary of transactions to bring to the attention of the reader: FCA Updates on the ongoing issues with the Financial Conduct Authority (FCA) in relation to client money and advice provided by the Towergate Financial business A summary of the Group financial restructuring Senior management changes A summary financial review and outlook During Q the Group identified that 15.0m of client and insurer monies had been misallocated to an unrestricted account between November 2007 and January As soon as the misallocation was confirmed management transferred 15.0m to the relevant client and insurer accounts. The FCA was notified and investigations into this matter are continuing. The Group is continuing discussions with the FCA in connection with past advice provided by the Towergate Financial businesses on pension Enhanced Transfer Values (ETV) and Unregulated Collective Investment Schemes (UCIS). There remain material uncertainties over the level of redress costs as customer contact has commenced but is not significantly complete and the redress methodology has not been agreed. Purely for internal purposes a range of 65.0m- 85.0m is used in cash flow projections. Given the level of uncertainty this item remains a contingent liability in the Group s financial statements. Acquisitions and disposals The Group made seven acquisitions in the fifteen months to 31 March 2015 (consisting of two companies and five portfolios) for an aggregate consideration of approximately 21.9m. The Group disposed of five businesses during this period. The material transactions were: On 17 April 2014 the Group completed the acquisition of Arista Insurance Limited (Arista), a leading UK commercial managing general agent specialising in property, liability and motor insurance, for a consideration of 16.7m. Arista has a clearly defined regional distribution network and fits well with the Group s strategy of acquiring specialist businesses with strong growth potential On 29 August 2014 the Group disposed of Folgate Insurance Company Limited (FICL) to Anglo London for a consideration of 1.9m. Folgate Insurance was an insurance company in run off and as such operated outside the Group s core UK specialist lines and small and medium sized businesses (SME) markets On 23 December 2014 the Group disposed of The Hayward Holding Group Limited (Hayward Aviation) to Jardine Lloyd Thompson for a consideration of 27.0m. As an international aviation insurance broker, Hayward Aviation operated outside the Group s core UK specialist personal lines and SME markets On 16 March 2015 the Group disposed of its Towergate Financial business (TF) to Palatine Private Equity for a consideration of 8.6m. The Towergate Financial business was a provider of independent financial and mortgage advice and operated outside the Group s core UK specialist personal lines and SME markets 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. As part of these arrangements TIG Finco plc (a newly formed holding company) acquired the Group for consideration of 735.0m made up of the issue of 425.0m of Senior Secured Notes by TIG Finco plc and the issue of new shares in TIG Finco plc s indirect parent company, TIG Topco Limited, valued at 310.0m. 1

4 As a result of these arrangements, in April 2015 Highbridge Principal Strategies LLC 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 TIG Topco Limited of new shares for 50.0m and the issue by TIG Finco plc of 75.0m of Super Senior Secured Notes at a discount of 3.0m. The additional funds provide liquidity to the Group and have enabled it to fund the costs of the restructuring of 42.0m, the vesting of long term incentive plans which have crystallised or will in the future crystallise as a result of the restructuring of 30.0m, retention bonuses of 8.0m and minority interest buy outs of 2.0m. Senior management changes There have been a number of senior management changes in the period since 31 December 2014 including: Scott Egan has changed his role from Chief Financial Officer to Interim Chief Executive Officer Alastair Lyons has changed his role from Executive Chairman to Non-executive Chairman The appointment of Mark Mugge as Chief Operating Officer and Steve Wood as Chief Executive Officer of Paymentshield The appointment of John Tiner as Chairman with effect from 29 June 2015 Financial review and outlook Q was a challenging period. Confidence in Towergate was tested with performance in all divisions affected by both the Group financial restructuring and the change programme. However significant progress has been made in multiple areas. Towergate has attracted long term supportive shareholders in Highbridge, KKR and Sankaty. Over the last fifteen months much of the comprehensive change programme has been implemented. Towergate continues to attract talent. The Board remains focussed on operational delivery in 2015 and there are some early signs of recovery as the business stabilises. The Group is focussed on retention and new business and aims to deliver this through a concentration on customer service and operational excellence. The expectation is that expenses will fall through the completion of the change programme and continued integration of businesses. The Board will continue to invest in the business to deliver profitable growth in its chosen markets. 2

5 Presentation of financial and other information This quarterly report is prepared by the Company in connection with the issuance by TIG Finco plc of 425.0m senior secured notes and 75.0m floating rate super senior secured notes (together the Notes) on 2 April The unaudited interim consolidated financial statements of the Group have been prepared in accordance with IFRS. The unaudited financial information of the Group presented in this quarterly 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 been made in respect of: Subtraction of the results of disposed businesses: Hayward Aviation for the period 1 January 2014 to 23 December 2014 FICL for the period 1 January 2014 to 29 August 2014 TF for the period 1 January 2014 to 16 March 2015 Inclusion of the Group debt which was in Towergate Finance plc at the date of this report, to reflect the impact on the Group s unaudited interim consolidated financial statements. 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. In these financial results, references to EBITDA for the parent guarantor are to profit/(loss) on ordinary activities before interest payable and similar charges, tax, depreciation, amortisation of intangibles and group reorganisation costs. Accordingly, EBITDA can be extracted from the consolidated financial statements of TIL by taking profit/(loss) on ordinary activities and adding back interest payable and similar charges, tax, depreciation, amortisation of intangibles and group reorganisation costs. References to Adjusted EBITDA for TIL represent EBITDA as adjusted for certain redundancy and restructuring costs, financing transaction costs, asset write downs in connection with business restructuring, long-term incentive plan charges and business investment costs. 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. 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. 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 annual 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. In these financial results, all capitalised terms not otherwise defined are defined in the indenture agreements dated 2 April 2015 related to the issuance of the Notes. 3

6 Forward looking statements This annual report contains statements under the captions risk factors, business, 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 results of 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. These factors include among others: The impact of current economic conditions on the Group s results of operations and financial condition The risk of a downturn in the property market Volatility or declines in the premiums on which the Group s commissions are based and declines in commission rates The Group s dependence on insurance companies providing us underwriting capacity and on third-party brokers, mortgage intermediaries and networks of mortgage intermediaries to distribute its products The impact of any adverse changes to relationships with brokers and mortgage intermediaries The impact of competition The Group s exposure to potential regulatory sanctions and fines The unpredictable nature of profit commissions Legislative, taxation and regulatory changes, inquiries or enforcement actions, affecting the Group s ability to operate or the profit generated from its activities Exposure to potential liabilities arising from errors and omissions claims against the Group The impact of acting outside the scope of the Group s delegated authority from insurance companies Interruption or loss of the Group s information processing systems or failure to maintain secure information systems and technological changes Risks relating to the Group s acquisition strategy Risks of increased competition from consolidators limiting potential growth opportunities The Group s ability to retain its senior management and underwriters, account executives, sales personnel and other client facing employees The Group s ability to gain technological expertise and apply technology effectively The risk that the Group may have to write down the value of its goodwill The interests of the Group s shareholders Risk relating to conflicts of interest and transactions with affiliated companies The Group s substantial debt Fluctuations in interest and foreign exchange rates The other factors discussed in more detail under Risk factors These risks and others described under Risk factors are not exhaustive. Other sections of this annual report describe additional factors that could adversely affect the Group s results of operations, financial condition, liquidity and the development of the industries in which it operates. New risks can emerge from time to time, and it is not possible for the Group to predict all such risks, nor can it assess the impact of all such risks on its business or the extent to which any risks, or combination of risks and other factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, readers of this document should not rely on forward-looking statements as a prediction of actual results. Any forward-looking statements are only made as of the date of this annual report, and the Group does not intend, and does not assume any obligation, to update forward-looking statements set forth in this annual 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 annual report. As a result, readers of this document should not place undue reliance on these forward looking statements. 4

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 consolidated financial information have been made based on available information and assumptions that the Board believes are reasonable. The unaudited pro forma consolidated 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 and the restructuring transaction, and the application of the proceeds therefrom occurred on the dates presented, nor should it be used as the basis of projections of the Group s results of operations or financial condition for any future period. The unaudited pro forma consolidated financial information should be read in conjunction with the financial statements included as an appendix to this quarterly report. The following tables should be read in conjunction with, and is qualified in its entirety by reference to, the consolidated financial statements and the notes thereto for TIL for the quarters ended 31 March 2015 and The tables should also be read together with management s discussion and analysis of financial condition and results of operations. The following tables provide a summary on basis of the pro forma consolidated statement of comprehensive income, pro forma consolidated statement of the financial position, consolidated cash flow, other financial data, a reconciliation of the loss on ordinary activities to Adjusted EBITDA and an analysis of contractual debt. Quarter ended 31 March Quarter ended 31 March Pro forma consolidated statement of comprehensive income data: Commission and fees 85,331 92,470 Investment income Salaries and associated expenses (50,487) (47,342) Other operating costs (40,949) (24,479) Depreciation and amortisation charges (5,303) (4,764) Group operating (loss) / profit (11,319) 15,987 Finance costs (22,245) (24,777) Finance income 93 3,503 Loss before taxation (33,471) (5,287) Income tax credit 4,232 4,846 Loss on ordinary activities after taxation (29,239) (441) 5

8 Quarter ended 31 March Quarter ended 31 March Pro forma consolidated statement of financial position data: Intangible assets 818,271 1,365,880 Property, plant and equipment 11,130 10,785 Other non-current assets 11,347 7,528 Trade and other receivables 76, ,492 Cash at bank and in hand 185, ,785 Other current assets - - Current liabilities (405,791) (334,633) Non-current liabilities (929,804) (936,705) Net (liabilities) / assets (232,580) 527,132 Quarter ended 31 March Quarter ended 31 March Consolidated cash flow: Cash flows from operating activities Cash generated from / (used in) operations 11,157 (742) Exceptional items (18,302) (2,366) (Decrease) / increase in net insurance broking creditors (25,237) (14,769) Net interest (paid) / received and investment income Taxation (paid) / received - 16 Net cash used in operating activities (32,200) (17,704) Cash flows from investing activities Acquisitions and disposals 2,205 (2,792) Purchase of intangible assets computer software and commission buy outs (1,316) (2,912) Purchase of property, plant and equipment (372) (520) Net cash generated from / (used in) investing activities 517 (6,224) Cash flows from financing activities Financing 16,646 10,854 Net cash generated from financing activities 16,646 10,854 Decrease in net cash in the year (15,037) (13,074) 6 Quarter ended 31 March Quarter ended 31 March Other financial data: EBITDA 12,404 23,167 Adjusted EBITDA 13,077 23,787 Adjusted EBITDA margin 15.33% 25.72% Net borrowings (1) 1,010, ,157 (1) Net borrowings represent pro forma total borrowings excluding accrued interest and capitalised fees plus deferred consideration and less available cash and cash equivalents.

9 Quarter ended 31 March Quarter ended 31 March Reconciliation of loss on ordinary activities to Adjusted EBITDA Loss on ordinary activities after tax (29,239) (441) Add back: Finance costs and income (related to derivative financial instruments) (A) 22,245 21,324 Group reorganisation costs 4,853 2,366 Regulatory costs 1,051 - Group financial restructuring costs 12,423 - Income tax (4,232) (4,846) Depreciation and amortisation charges 5,303 4,764 EBITDA 12,404 23,167 Add back / (deduct from): (Profit) / loss on disposal of business (B) Asset write-downs in connection with business restructuring (C) Long-term incentive plan charges (D) Business investment costs (E) Acquisition costs (F) Adjusted EBITDA 13,077 23,787 (A) 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, hedging costs and certain other charges. Finance income represents the fair value gains on derivative (interest rate swap) financial instruments. (B) Represents in 2015 the loss on disposal of the sale of a portfolio from Towergate Underwriting Group Limited. (C) Represents costs incurred in relation to potential acquisitions and disposals of businesses. (D) 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 are 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 Towergate or a listing of Towergate. 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 (E) 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 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. (F) Represents (i) transaction costs in respect of acquisitions (ii) adjustments to acquisitions that are more than one year post-acquisition and (iii) adjustments to the valuation of deferred consideration and redemption liability non-controlling interest put options on acquisitions that are more than one year post-acquisition. 7

10 Unaudited pro forma financial information and other data for the quarter ended 31 March 2015 Pro forma consolidated statement of comprehensive income Quarter ended 31 March 2015 for Towergate Insurance (1) Removal of the results and pro forma adjustments for the disposal of TF (2) Pro forma adjustments for debt costs (3) Pro forma quarter ended 31 March Pro forma consolidated statement of comprehensive income Commission and fees 85, ,331 Investment income Salaries and associated expenses (50,487) - - (50,487) Other operating costs (40,949) - - (40,949) Depreciation and amortisation charges (5,303) - - (5,303) Group operating loss (11,319) - - (11,319) Analysed as: Group operating profit before exceptional items 7, ,348 (Loss) on disposal of businesses and investments (340) - - (340) Group reorganisation costs (4,853) - - (4,853) Regulatory costs (1,051) - - (1,051) Group financial restructuring costs (12,423) - - (12,423) Group operating loss (11,319) - - (11,319) Finance costs (4) (238) - (22,007) (a) (22,245) Finance income (5) Loss before taxation (11,464) - (22,007) (33,471) Income tax (expense) / credit (6) (224) - 4,456 (b) 4,232 Loss on continuing operations (11,688) - (17,551) (29,239) Loss for the period from discontinued operations, net of tax (366) 366 (a) - - Total comprehensive (loss)/profit for the period (12,054) 366 (17,551) (29,239) Other pro forma data Available cash (7) 40, ,280 EBITDA 12, ,404 Adjusted EBITDA 13, ,077 Adjusted EBITDA margin % Adjusted EBITDA 12 months to 31 March ,191 (799) - 85,392 Capital expenditure 1,664 (1) - 1,663 Adjusted net senior borrowings (8) ,700 Adjusted net total borrowings (8) ,010,418 Adjusted net interest expense (9) ,250 Ratio of adjusted net senior secured borrowings to adjusted EBITDA (8) x Ratio of adjusted net total borrowings to adjusted EBITDA (8) x Ratio of adjusted EBITDA to adjusted net interest expense (9) x Pro forma division data Turnover by division Underwriting 19, ,498 Insurance Brokers 36, ,666 Direct 14, ,980 Paymentshield 11, ,107 Network 3, ,067 Central support

11 Quarter ended 31 March 2015 for Towergate Insurance (1) Removal of the results and pro forma adjustments for the disposal of TF (2) Pro forma adjustments for debt costs (3) Pro forma quarter ended 31 March Pro forma division data (continued) Adjusted EBITDA by division Underwriting 4, ,928 Insurance Brokers 5, ,427 Direct 3, ,752 Paymentshield 7, ,532 Network Central support (9,548) - - (9,548) (1) The information in this column has been derived from the Group s unaudited interim consolidated financial statements as of and for the quarter ended 31 March 2015 included elsewhere in this quarterly report. (2) The pro forma and removal of trading period adjustments for the disposal of TF on 16 March 2015, give effect to the following adjustment;(a) represents the removal of the aggregated results of the trading period 1 January 2015 to 16 March 2015 for TF which is classed as discontinued operations in the TIL consolidated financial statements and is compiled from information in the respective management accounts of TF. (3) The pro forma adjustments for debt costs incurred by Towergate Finance Plc on behalf of the Group give effect to the following adjustments: (a) represents (i) the interest costs for the quarter ended 31 March 2015 in respect of the 8.5% senior secured notes ( 5.1m), the 10.5% senior notes ( 8.0m), the floating rate senior secured notes ( 6.1m), the 14.6m 10.5% senior notes ( 0.4m), the 85.0m revolving credit facility( 1.1m) and the 4.0m senior secured notes ( 0.1m)(ii) the amortisation of capitalised debt costs in relation to the transaction of 10 May 2013 and 11 February 2011 ( 1.4m), offset by the removal of the interest cost for the 20.0m bridging loan which is contained in the TIL consolidated financial statements ( 0.2m) (b) represents the tax effect of pro forma adjustments (a). (4) Finance costs are comprised of interest payable on bank loans, directors loans, the debt as discussed in (3), finance charges payable in respect of finance leases and hire purchase contracts, hedging costs and certain other charges. (5) Finance income represents the interest receivable on own funds and fair value gains on derivative (interest rate swap) financial instruments. (6) The Group does not expects to incur a corporation tax charge for 2015, any profits will be group relieved with losses from companies outside of the restricted group. (7) Available cash of 40.3m excludes restricted cash in an amount of 145.1m. Restricted cash consists of (i) client money in respect of insurance premiums due to insurance companies and insurance company money in respect of claims payments due to policyholders, (ii) cash deposits kept for the purposes of solvency and capital adequacy requirements imposed by the FCA and (iii) rent deposits. (8) The pro forma borrowings incurred by Towergate Finance Plc have been used in calculating adjusted borrowings. For the purposes of calculating adjusted net senior secured borrowings, total pro forma Towergate Finance Plc debt excludes unsecured loan notes and has been adjusted for the pro forma available cash of 40.3m. 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 12 months ended 31 March 2015 of 85.4m. (9) Adjusted net interest expense represents net interest expense on pro forma adjusted total borrowings, excluding commitment fees relating to the undrawn portion of the revolving credit facility and hedging costs. The ratios of adjusted EBITDA to adjusted net interest expense is calculated by reference to the pro forma adjusted EBITDA for the 12 months ended 31 March 2015 of 85.4m. 9

12 Unaudited pro forma financial information and other data for the quarter ended 31 March 2015 Pro forma consolidated statement of financial position As at 31 March 2015 for Towergate Insurance (1) Pro forma adjustments for debt (2) Pro forma as at 31 March Pro forma consolidated statement of financial position Net assets Non-current assets Intangible assets 818, ,271 Property, plant and equipment 11,130-11,130 Available for sale financial assets Deferred tax assets 11,207-11, , ,748 Current assets Trade and other receivables 76,871-76,871 Cash and cash equivalents 185, , , ,267 Current liabilities Borrowings (20,074) (85,000) (a) (105,074) Trade and other payables (255,418) (40,406) (b) (295,824) Current tax liabilities (2,504) - (2,504) Provision for liabilities and charges (2,389) - (2,389) (280,385) 85) (125,406) (405,791) Net current liabilities (18,118) (125,406) (143,524) Non-current liabilities Borrowings (150) (920,400) (c) (920,550) Trade and other payables (5,136) - (5,136) Provision for liabilities and charges (4,118) - (4,118) (9,404) (920,400) (929,804) Net assets / (liabilities) 813,226 (1,045,806) (232,580) (1) The information in this column has been derived from the Group s unaudited interim consolidated financial statements as of and for the Quarter ended 31 March 2015 included elsewhere in this quarterly report. (2) The pro forma for debt reflect the borrowings, capitalised debt costs and interest payable incurred by Towergate Finance Plc as at 31 March These amounts were incurred on behalf of the Group but following the group capital restructure are not included in the unaudited interim consolidated financial statements of TIL as at 31 March 2015 give effect to the following adjustments (a) represents the 85.0m revolving credit facility(b) represents (i) interest payable at 31 March 2015 in respect of the 8.5% senior secured notes ( 10.7m), the 10.5% senior notes ( 19.4m), the floating rate senior secured notes ( 8.0m), the 14.6m 10.5% senior notes ( 1.0m), the 85.0m revolving credit facility ( 1.1m) and the 4.0m senior secured notes ( 0.2m) (c) represents borrowings on the 8.5% senior secured notes ( 230.0m), the 10.5% senior notes ( 290.0m), the floating rate senior secured notes ( 396.0m), the 14.6m 10.5% senior notes ( 14.1m) and the 4.0m senior secured notes ( 3.8) (ii) offset by fees capitalised in respect of the transactions of 10 May 2013 ( 7.6m) and in respect of the transactions of 11 February 2011 ( 5.9m). 10

13 Unaudited pro forma financial information and other data for the quarter ended 31 March 2014 Pro forma consolidated statement of comprehensive income Quarter ended 31 March 2014 for Towergate Insurance (1) Removal of the results and pro forma adjustments for the disposal of FICL, Hayward Aviation and TF (2) Revised recognition of trading deals (3) Pro forma adjustments for debt costs (4) Pro forma quarter ended 31 March Pro forma consolidated statement of comprehensive income Commission and fees 92,835 - (365) - 92,470 Investment income Salaries and associated expenses (47,342) (47,342) Other operating costs (24,698) 27 (a) (24,479) Depreciation and amortisation charges (4,764) (4,764) Group operating profit/(loss) 16, (173) - 15,987 Analysed as: Group operating profit before exceptional items 18, (173) - 18,353 Group reorganisation costs (2,366) (2,366) Group operating profit/(loss) 16, (173) 15,987 Finance costs (5) (1) - - (24,776) (a) (24,777) Finance income (6) ,453 (b) 3,503 Profit/(loss) before taxation 16, (173) (21,323) (5,287) Income tax credit / (expense) (7) 233 (6) (b) 37 4,582 (c) 4,846 Profit / (loss) on continuing operations 16, (136) (16,741) (441) Profit for the period from discontinued operations, net of income tax (8) 497 (497) (c) Total comprehensive profit / (loss) for the period 16,912 (476) (136) (16,741) (441) Other pro forma data Available cash (9) 46,865 (6,130) ,735 EBITDA 23, (173) - 23,167 Adjusted EBITDA 23, (173) - 23,787 Adjusted EBITDA margin % Adjusted EBITDA 12 months to 31 March ,347 (4,231) (173) - 134,943 Capital expenditure 2,976 (67) - - 2,909 Adjusted net senior borrowings (10) ,245 Adjusted net total borrowings (10) ,157 Adjusted net interest expense (11) ,922 Ratio of adjusted net senior secured borrowings to adjusted EBITDA (10) x Ratio of adjusted net total borrowings to adjusted EBITDA (10) x Ratio of adjusted EBITDA to adjusted net interest expense (11) x Pro forma division data Turnover by division Underwriting 19, ,234 Insurance Brokers 39, ,914 Direct 15, ,784 Paymentshield 12,893 - (45) - 12,848 Networks 3,863 - (320) - 3,543 Central support 1, ,147 11

14 Quarter ended 31 March 2014 for Towergate Insurance (1) Removal of the results and pro forma adjustments for the disposal of FICL, Hayward Aviation and TF (2) Revised recognition of trading deals (3) Pro forma adjustments for debt costs (4) Pro forma quarter ended 31 March Pro forma division data (continued) Adjusted EBITDA by division Underwriting 6, ,769 Insurance Brokers 7,388 (181) (98) - 7,109 Direct 5, ,198 Paymentshield 9, ,070 Network 1,800 - (320) - 1,480 Central support (6,233) (5,839) (1) The information in this column has been derived from the Group s unaudited interim consolidated financial statements as of and for the Quarter ended 31 March 2014 included elsewhere in this quarterly report. (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) represents the trading period 1 January 2014 to 31 March 2014 for FICL and is compiled from information in their respective management accounts (b) represents the tax effect of pro forma adjustment (a); (c) represents the removal of the aggregated results of the trading period 1 January 2014 to 31 March 2014 for Hayward Aviation and TF which are classed as discontinued operations in the TIL consolidated financial statements. (3)The Group as part of year end revised the basis of estimation of revenue recognition related to long term deal income; this adjustment makes this year end adjustment in the period to which it relates. Year end adjustments to expense charges have been recognised in the period to which they relate. (4) The pro forma adjustments for debt costs incurred by Towergate Finance Plc on behalf of the Group give effect to the following adjustments: (a) represents (i) the interest costs for the quarter to 31 March 2014 in respect of the 8.5% senior secured notes ( 4.9m), the 10.5% senior notes ( 7.6m), the floating rate senior secured notes ( 5.9m), the 14.6m 10.5% senior notes ( 0.4m), the interest rate swap agreement ( 3.7m), the 85m revolving credit facility ( 0.8m) and the 4.0m senior secured notes ( 0.1m)(ii) the amortisation of capitalised debt costs in relation to the transaction of 10 May 2013 and 11 February 2011 ( 1.4m) (b)represents the fair value gain on the interest rate swap derivative (c) represents the tax effect of pro forma adjustments (a) and (b). (5) Finance costs are comprised of interest payable on bank loans, directors loans, the debt as discussed in (4), finance charges payable in respect of finance leases and hire purchase contracts, hedging costs and certain other charges. (6) Finance income represents the interest receivable on own funds and fair value gains on derivative (interest rate swap) financial instruments. (7) The Group does not expects to incur a corporation tax charge for 2014, any profits will be group relieved with losses from companies outside of the restricted group (8) On 23 December2014 the Group disposed of Hayward Aviation. The Group also committed to a plan to dispose 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 and the consolidated statement of comprehensive income for the quarter ended 31 March 2014 has been restated to show TF and Hayward Aviation as discontinued operations. (9) Pro forma available cash of 40.7m excludes restricted cash in an amount of 148.6m. Restricted cash consists of (i) client money in respect of insurance premiums due to insurance companies and insurance company money in respect of claims payments due to policyholders, (ii) cash deposits kept for the purposes of solvency and capital adequacy requirements imposed by the FCA and (iii) rent deposits. (10) The pro forma borrowings incurred by Towergate Finance Plc have been used in calculating adjusted borrowings. For the purposes of calculating adjusted net senior secured borrowings, total pro forma Towergate Finance Plc debt excludes unsecured loan notes and has been adjusted for the pro forma available cash of 40.7m. 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 12 months ended 31 March 2014 of 134.9m. (11) Adjusted net interest expense represents net interest expense on pro forma adjusted total borrowings, excluding commitment fees relating to the undrawn portion of the revolving credit facility and hedging costs. The ratios of adjusted EBITDA to adjusted net interest expense is calculated by reference to the pro forma adjusted EBITDA for the 12 months ended 31 March 2014 of 134.9m. 12

15 Unaudited pro forma financial information and other data for the quarter ended 31 March 2014 Pro forma consolidated statement of financial position As at 31 March 2014 for Towergate Insurance (1) Pro forma adjustments for the disposal of Hayward, FICL and TF (3) Pro forma adjustments for debt (2) Pro forma as at 31 March Pro forma consolidated statement of financial position Net assets Non-current assets Intangible assets 1,414,385 - (48,505) 1,365,880 Property, plant and equipment 11,104 - (319) 10,785 Available for sale financial assets (16) 187 Deferred tax assets 7,437 - (96) 7,341 1,433,129 - (48,936) 1,384,193 Current assets Trade and other receivables 239,498 - (8,006) 231,492 Cash and cash equivalents 195,483 - (12,698) 182, ,981 - (20,704) 414,277 Current liabilities Borrowings (92) (59,000) (a) - (59,092) Trade and other payables (229,826) (14,315) (b) 8,570 (235,571) Derivative financial instruments - (14,857) (c) - (14,857) Current tax liabilities (22,657) (21,888) Provision for liabilities and charges (3,473) (3,225) (256,048) (88,172) 9,587 (334,633) Net current assets / (liabilities) 178,933 (88,172) (11,117) 79,644 Non-current liabilities Borrowings (160) (913,535) (d) - (913,695) Trade and other payables (19,863) - - (19,863) Provision for liabilities and charges (3,147) - - (3,147) (23,170) (913,535) - (936,705) Net assets / (liabilities) 1,588,892 (1,001,707) (60,053) 527,132 (1) The information in this column has been derived from the Group s unaudited interim consolidated financial statements as of and for the Quarter ended 31 March 2014 included elsewhere in this quarterly report. (2) The pro forma adjustments for debt reflect the borrowings, capitalised debt costs and interest payable incurred by Towergate Finance Plc as at 31 March These amounts were incurred on behalf of the Group but following the group capital restructure are not included in the unaudited interim consolidated financial statements of TIL give effect to the following adjustments (a) represents the amount drawn on the 85m revolving credit facility(b) represents (i) interest payable at 31 March 2014 in respect of the 8.5% senior secured notes ( 2.4m), the 10.5% senior notes ( 3.8m), the floating rate senior secured notes ( 3.8m), the interest rate swap agreement ( 3.7m), the 14.6m 10.5% senior notes ( 0.2m), the 85.0m revolving credit facility( 0.3m) and the 4.0m senior secured notes ( 0.1m) (c) represents the fair value of Towergate Finance plc s interest rate swap derivative which expires on December 31, 2014 (d) represents borrowings on the senior secured notes ( 230m), the 10.5% senior notes ( 290m), the floating rate senior secured notes ( 396.0m), the 14.6m 10.5% senior notes ( 14.0m) and the 4.0m senior secured notes ( 3.8) (ii) offset by fees capitalised in respect of the transactions of 10 May 2013 ( 10.7m) and in respect of the transactions of 11 February 2011 ( 9.6m). (3) The pro forma adjustments for the disposal of Hayward Aviation on 23 December 2014, FICL on 29 August 2014 and TF on 16 March 2015 represents the assets and liabilities at 31 March 2014 contained within the TIL consolidated statement of financial position at this date. 13

16 Management s discussion and analysis of financial condition and results of operations Significant factors affecting results of operations Insurance industry dynamics 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 lower level of underlying profitability for both insurance carriers and intermediaries. Hard market conditions generally follow a periodic 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. Insurance rating The outlook for rating is likely to remain soft for some time reflecting the ready availability of capital, the absence of major loss events and the absence of withdrawal of underwriting capacity or of insurance carriers from the markets in which the Group operates. 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 relatively depressed. 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 judgemental. A change in estimation of trading deal income could have a material effect on the Group s financial performance. Acquisitions and disposals The Group has pursued a strategy of acquisitions to deliver scale advantage. This acquisition strategy has been focussed on both intermediary (or broking) business and on underwriting agencies. In evaluating potential acquisitions, the Group considers 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 is 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 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. The Group made seven acquisitions in the fifteen months to 31 March 2015 (consisting of two companies and five portfolios) for an aggregate consideration of approximately 21.9m. The Group disposed of five businesses during this period. The material transactions were: On 17 April 2014 the Group completed the acquisition of Arista Insurance (Arista), a leading UK commercial managing general agent specialising in property, liability and motor insurance, for a consideration of 16.7m. Arista has a well-defined regional distribution network and fits well with the Group s strategy of acquiring specialist businesses with strong growth potential On 29 August 2014 the Group disposed of Folgate Insurance (FICL) to Anglo London for a consideration of 1.9m. Folgate Insurance was an insurance company in run off and as such operated outside the Group s core UK specialist lines and small and medium sized businesses (SME) markets 14

17 Seasonality On 23 December 2014 the Group disposed of Hayward Aviation Limited (Hayward Aviation) to Jardine Lloyd Thompson for a consideration of 27.0m. As an international aviation insurance broker, Hayward Aviation operated outside the Group s core UK specialist personal lines and SME markets On 16 March 2015 the Group disposed of its Towergate Financial (TF) business to Palatine Private Equity for a consideration of 8.6m. The Towergate Financial business was a provider of independent financial and mortgage advice and operated outside the Group s core UK specialist personal lines and SME markets The Group experiences some seasonality in the volumes of insurance policies transacted and, consequently, in commission and fees. The Group has 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. Description of key line items Set out below is a brief description of the composition of the key line items of the Group s income statement. 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 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. Investment income Investment income represents the interest received on restricted cash. 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. Other operating expenses Other operating expenses represent all other administrative costs which are not staff or staff related and will include exceptional spend not in the normal course of operations of the Group. Depreciation and amortisation charges Depreciation and amortisation charges represent the depreciation charge and the amortisation of intangible assets. Impairment of goodwill Impairment of goodwill represents the impairment of the goodwill balance based on the value in use or fair value less costs to sell of the Group. This is conducted at a 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 income Finance income represents the interest on available cash and the change in fair value of any financial instrument in the statement of financial condition. Impairment of associate Impairment of associate represents the write down in the fair value of associates in the statement of financial condition. Income tax Income tax represents the addition of the current income tax charge based on the profit or loss before taxation and the deferred tax charge based on the temporary timing differences between the carrying value of assets in the statement of financial condition and the amount carried for tax purposes. Group financial performance The following discussion and analysis compares pro forma consolidated results of operations for the quarter ended 15

18 31 March 2015 and pro forma consolidated results of operations for the quarter ended 31 March Turnover and EBITDA by division The tables below set out the commission and fees and adjusted earnings results for the divisions of the Group: Commission and fees Pro forma basis 2015 m 2014 m Insurance Brokers Direct Underwriting Paymentshield Network Other Adjusted earnings Pro forma basis 2015 m 2014 m Insurance Brokers Direct Underwriting Paymentshield Network Other (9.5) (5.8) Insurance Brokers: commission and fees declined by 8.1% compared to last year. Adjusted earnings declined by 23.7% compared to last year. Commission and fees for Q1 continue to be impacted by the change programme and uncertainty caused by the Group financial restructuring. The impact of the reduced income was mitigated by reduced expenses as the benefits of the change programme start to emerge. Gross margins remain strong at 20%, consistent with last year. Direct: commission and fees declined by 5.1% compared to last year. Adjusted earnings declined by 27.8% compared to last year. This is due to a more competitive environment leading to reduced retention rates and new business. There are some early signs of improvement with new business growing and retention rates ahead of last year s average. Underwriting: commission and fees increased by 1.4% compared to last year. Adjusted earnings declined by 27.2% compared to last year. Commission and fees have increased due to the acquisition of Arista, which has also led to an increase in expenses. Organic commission and fees have declined due to the impact of the financial restructuring and the challenging rate environment. Underlying retention levels remain steady and a long term strategic deal has been extended with Allianz which will provide up to 770m of maximum capacity. Paymentshield: commission and fees declined by 13.6% compared to last year. Adjusted earnings declined by 17.0% compared to last year. Commission and fees continue to be affected by the reduction in the mortgage premium protection insurance product. Household panel quote conversion has stabilised, with household new business volumes and margin improving over the quarter. Network: commission and fees declined by 13.4% compared to last year. Adjusted earnings declined by 33.4% compared to last year. Commission and fees has reduced due to one off income items included in 2014, discontinued insurer deals and corrective rating actions. Investment income Investment income has fallen by 0.01m (12.7%); this is due to a fall in the average return during

19 Salaries and associated expenses Salaries and associated expenses have risen by 3.1m (6.6%); staff numbers have remained stable in the quarter with the increase in cost reflecting as increase in pay of 2.5% last year and provision for bonuses. Other operating costs Other operating costs have risen by 16.5m (67.3%); this is mainly due to the exceptional items of 12.4m relating to the Group financial restructuring, 1.1m in respect of regulatory costs and an increase of 2.5m in relation to Group reorganisation costs. Depreciation and amortisation charge The depreciation and amortisation charge has risen by 0.5m (11.3%); this is due to an increase in the level of software development costs resulting from the change programmes and of intangible assets following acquisitions made in 2013 and Finance costs Finance costs have fallen by 2.5m (10.2%); this is due to the settlement of derivative contracts which were used to hedge floating rate debt. Finance income Finance income has risen by 3.4m (97.3%); this represents the change in value of the derivative instrument used to hedge floating rate debt. Group change programmes During 2014 the Group undertook a number of major change programmes. These programmes were designed to improve efficiency across Towergate, to build regulatory resilience, to position the Group to exploit future scale advantages and to enhance the customer proposition. Group reorganisation costs In April 2014 the Group 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 the Group has undertaken a site consolidation to rationalise its office network across its Insurance Brokers, Direct and Underwriting businesses. In February 2014 the Group began a major finance transformation with the creation of accounting centres in Leeds and Maidstone. All insurance broking accounting and client money processing was consolidated into an in-house facility in Leeds. 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. These initiatives had an aggregate cost of 4.9m during Q (Q1 2014: 2.4m), which has been treated as an exceptional item. Regulatory costs The Group has incurred exceptional regulatory costs of 1.1m in Q (Q1 2014: Nil). These items primarily represent costs incurred in relation to regulatory investigations into advice provided by Towergate Financial on pension Enhanced Transfer Values (ETV) and Unregulated Collective Investment Schemes (UCIS), investigation into client money issues and a strengthening of the Group s control framework. Group financial restructuring costs Towergate has undergone a financial restructuring which completed in April Costs of 12.4m (Q1 2014: Nil) related to this restructuring have been recognised in the Q results. Financial strength On a statutory basis the Group had net assets of 815.7m at 31 March 2015 ( 1,588.9m at 31 March 2014) and net current liabilities of 15.0m at 31 March 2015 (net current assets of 178.9m at 31 March 2014). The Group had regulatory capital requirements within its regulated companies of 19.8m at 31 March 2015 and 19.9m at 31 March Following the restructuring on 2 April 2015 the level of debt supported by the Group has significantly reduced and 17

20 the overall leverage position of the Group has reduced from 10.4x at 31 March 2015 to 4.6x after adjusting to pro forma for the Group financial restructuring on 2 April Cash flow For Q the net cash flow generated from operating activities was an outflow of 32.2m (Q1 2014: 17.7m) and net decrease in cash balances of 15.0m (Q1 2014: 13.1m). The cash generated from operating activities has declined due to the level of expenditure on exceptional items, being 18.3m Q and 2.4m Q Cash from investing activities is positive due to the sale of TF in the period. The cash generated from financing activity is positive reflecting the 20.0m bridging loan in the period; for Q the positive inflow was due to the 12.1m cash injection by Advent to fund the acquisition of Arista. Outlook Q was a challenging period. Confidence in Towergate was tested with performance in all divisions affected by both the Group financial restructuring and the change programme. However significant progress has been made in multiple areas. Towergate has attracted long term supportive shareholders in Highbridge, KKR and Sankaty. Over the last fifteen months much of the comprehensive change programme has been implemented. Towergate continues to attract talent. The Board remains focussed on operational delivery in 2015 and there are some early signs of recovery as the business stabilises. The Group is focussed on retention and new business and aims to deliver this through a concentration on customer service and operational excellence. The expectation is that expenses will fall through the completion of the change programme and continued integration of businesses. The Board will continue to invest in the business to deliver profitable growth in its chosen markets. 18