At a time when much of the market is struggling to stay afloat and consolidation is rife, Towergate is experiencing unprecedented growth. In the past four years the partnership has bought no fewer than three of the biggest brands in the mortgage intermediary sector – John Charcol in February 2010, British Insurance in January 2008 and Paymentshield in 2006.
The man now heading Paymentshield as chief executive is Tim Johnson. To him the growth experienced by the group is not surprising.
“It’s not in our DNA to squash a company down,” he says. “We buy something, we grow it – that’s what we’re about.”
By “we” Johnson is referring to his Towergate colleagues including chairman Peter Cullum and group chief executive Andy Homer.
Johnson is also a board member at Towergate. He joined Paymentshield last July from Cullum Capital Ventures, which he launched and stayed with for three years as chief executive. CCV is a subsidiary of Towergate and specialises in acquiring insurance brokers.
“It was a start-up and basically a quasi-venture capital business,” says Johnson.
But it isn’t the first time he has worked for Towergate. He was chief executive of Towergate Underwriting prior to launching CCV.
“I joined it in September 2003,” he says. “Before that I was with a company called Aon for 10 years and before that I was a graduate trainee at Royal Insurance.”
Before embarking on his career in financial services Johnson studied geography at university, although he jokes that this did him little good.
“I always get lost,” he says. “I’m notoriously bad at directions.”
Despite a successful decade at Aon, Johnson took the plunge and moved to Towergate. When the position at Paymentshield became available following the departure of Stuart Pender, Cullum offered Johnson the opportunity to round off his CV.
“In the Towergate family there are three big components,” he says. “There’s the underwriting bit, then there’s retail broking, which I worked in for a short period. Paymentshield is the third block of the business and the only thing I’d not done. So when the job there became free the chairman asked if I’d fancy it.”
Of course there’s a slight difference in Johnson taking on this new venture as opposed to his other career moves – this move was slap bang in the middle of a recession.
“It’s a difficult market,” he says. “2007’s lending of £350bn was a false peak. We all know now it was overheated and banks were lending recklessly. So £350bn was a fake number and maybe a more realistic and sustainable amount seems to be £220bn. Last year it was £140bn.
Obviously that’s a difficult market to go into.”
And that difficult market got worse for Johnson as just two months after he joined Paymentshield he was forced to make redundancies. He blames market conditions for this move.
“What I found when I started at Paymentshield was we’d kept a 2007 cost base in a 2009 market,” he explains. “I suppose the good news about that – if there is ever good news about redundancies – is we had a lot of contractors who knew their contracts were finite.
“There were a lot of people doing claims handling work because of the uplift in mortgage payment protection insurance. And by the time we’d been through the list of people with contracts we got a number of voluntary redundancies because a lot of the people were young and decided to leave and go travelling, among other things. In the end we lost 52 people.”
The need for job cuts did not come as a surprise for Johnson. As a board member he was well aware of the figures involved.
“Obviously Paymentshield reported their results to the board,” he says. “So it was apparent that I’d probably have to make cuts as one of my first tasks. It’s not the sort of thing one enjoys but I had to do it.”
The cuts came around the same time that Paymentshield and other insurers agreed on an industry-wide package of measures for consumers with the Financial Services Authority, including refunds of around £60m. Insurers stated that they had the right to review the cost of premiums within their terms and conditions but failed to disclose this in Key Facts Illustrations. The FSA ruled in October 2009 that this was unfair. Firms were also ordered to undo their price changes and reverse any reductions in cover.
The industry acted in response to FSA concerns over recent increases in premiums and reductions in what customers were covered for under their policies, but Johnson says the redundancies were not related to this.
“We wanted to keep the end price for customers as low as we could,” he says. “For example, let’s say the premium was £1 and the insurers wanted it to be £1.20. What we didn’t do was stick our commission on top to make it £1.50.
“We took a nominal amount, so the good news for us was because we’d not taken much we didn’t have to give much back. We were trying to keep the end price down for customers so we chose to take hardly anything.”
Johnson says every firm handled commission differently. Some took the full commission while others took none, some paid brokers full commission and some did not pay any commission to brokers.
“It was a mixed bag and a rather complicated set of manoeuvres,” he says.
Paymentshield refunded cus-tomers and clawed back the commission paid to brokers. The mortgage payment protection insurance policies affected were underwritten by Aviva, which increased premiums by 20% last year.
Brokers were still paid full commission on the original premium and were also paid commission on any reinstated policies.
Since the redundancies, Johnson says the shape of the business is generally the same as it was.
“We took a lot of people out of non-customer-facing roles,” he says. “For example, we merged Paymentshield formally into Towergate last year. That means you can access central compliance and finance functions. So we managed to take people out of there. The shape is hardly any different.”
Johnson says he put more people into sales and rejigged the sales team by beefing up its resources.
“We have two pools of people,” he says. “The first are on short-term contracts or don’t speak to customers that often. In the second pool you have people who speak to brokers every day. I wanted more of the latter and less of the first group. So we moved them over, trained them and grew this section. The business has more of a sales service focus to it now and fewer back office staff.”
Johnson says the decision to incorporate Paymentshield fully into Towergate was a technicality.
“We bought Paymentshield in October 2006 and for a host of reasons we kept it as a separate limited entity under the group umbrella,” he says. “Then last year we formally rolled it into the group structure, so it was just a legal issue.”
With a parent company as big and successful as Towergate one wonders how much control Paymentshield had to relinquish. But Johnson says each company under the Towergate umbrella has a fair degree of autonomy to run the day-to-day business independent of the parent.
“Towergate has as much control over Paymentshield as it has over any of its businesses,” he says. “Cullum pays me to run Paymentshield so if there’s something I need to bounce off him or get a view on I will do, if not I’ll run with it. We try to run it as autonomously as we can.”
Since buying British Insurance early in 2008 Towergate has replaced managing director Simon Burgess with Nel Mooy.
Was it always the plan to replace the management team at Paymentshield after the acquisition?
“When we bought Paymentshield from Pender he said that once he’d settled it in, he’d probably go off and do something else,” says Johnson. “We saw it coming so it wasn’t a last-minute situation. We’ve been able to plan for it properly.”
Earlier this year Towergate acquired struggling brokerage John Charcol but Johnson says there are no plans to replace its management team. He calls the purchase opportunistic.
“The guy who runs Towergate Financial Services is Ian Darby,” says Johnson. “He was at John Charcol for about 15 years so he knew the business intimately. He was contacted to say it was available. Obviously he knew a lot about the business – we don’t buy businesses we don’t understand. He said he thought it would be a good buy, sat down with Cullum on the Thursday and bought it on the Monday. It was that quick.”
Johnson says Towergate found out the brokerage was struggling around the same time as the media.
“We just got wind that there may have been trouble and we wanted to save it,” he says. “The bit we think is virtuous is that had we not made that sale it would probably have gone under and people would have lost their jobs.
“It’s a nice business and a fantastic brand but what gets missed in the telling is that it was a good rescue job. Customers will still get looked after and we’ve employed all their staff. The brand is staying the same.”
With both John Charcol and British Insurance under the same umbrella as Paymentshield, it begs the question whether the firms were bought as a means of distribution for Paymentshield. But Johnson says this is not the case.
“We speak to British Insurance and it sells our products,” he says. “But it’s not totally in our space because it is a direct-to-consumer business – it just happens to be an MPPI specialist as well.
“The thing to know about Towergate is that we’re opportunistic and entrepreneurial. If we see a business in a certain niche that we think is a good player we’ll buy it. Paymentshield and British Insurance were already trading before Towergate bought them so the link existed. As you get bigger, inevitably you’ll get such cross-references.”
On the subject of distribution, last year Paymentshield joined up with a number of networks. It also had a single-tie deal with now-defunct The Mortgage Times Group, but Johnson says the collapse of the network did not affect it too much.
“It wasn’t a huge slice of our revenue,” he explains. “That’s one of the fortunate things about Paymentshield, we’ve got quite a bit of scale. We’re the dominant player in our market.
Now that the business is in the right shape I want to push it forward, that’s what gets me out of bed in the morning
“There are some things that are not good about being the biggest and top of the league. Everyone is there to shoot at you and steal your lunch, but on the other hand when you’re going through tough times like the last couple of years we can ride out the storm. We’re profitable and we’ve got a big customer base.
“It’s a shame when a business like Mortgage Times struggles and disappears but in that network space it’s pretty crowded,” he adds. “There are all sorts of organisations of varying degrees of scale fighting for a pool of advisers and brokers. You could probably say there’ll be less of them by the end of 2010 than there are right now.”
Aside from networks, Paymentshield conducts a lot of its business through directly authorised brokers. Johnson estimates the split is about 50/50.
“In the days when mortgages were flying out the door and proc fees were easy to come by it was hard to get guys to sell general insurance,” he says.
“What’s been interesting for us to see is brokers now recognise the value of GI, not just because they have to sell as many additional products as they can to survive, but also because lots of their business is in one-off non-recurring revenue transactions.
“In other words they sell one mortgage and it’ll never come back again,” he adds. “Clients could keep their mortgage all the way through the 25-year term. It’s unlikely, but it could happen. And even if they do remortgage it will probably only happen two or three times.
“GI business renews every year and brokers get a renewal commission. We’re trying to help brokers build up repeat revenue. This is important because at the beginning of every January you are not starting from scratch, you know you’ve got GI revenue.
“Also, if and when brokers exit the market, it’s difficult to get a decent value multiple on one-off revenue. With GI income you could. You can help them build that up and that’s what we’re trying to do. If you want to build a business that’s going to be worth flogging one day you need to get sustainable business.”
Getting brokers more involved in selling insurance products takes training, as does coming to terms with the new marketplace.
“Educating brokers about GI is a large part of our job,” says Johnson. “I’ve been selling insurance for 20 years so I think it’s easy, but mortgage brokers probably think selling mortgages is easy. If you asked me to sell a mortgage tomorrow I wouldn’t be confident.”
Johnson says it’s about giving brokers the right training and tools.
“We have a price match tool for brokers,” he says. “A lot of brokers are nervous about competition that isn’t from other brokers. The competition is not just from their peers – it’s those firms operating in the direct market as well. The price match tool we have created with our insurers guarantees to beat other prices. We’re trying to help brokers fight off competition.
Paymentshield has also put a price freeze on renewal premiums.
The RDR will shake out less professional advisers and the good ones will prosper. It will be a natural selection process
“All predictions are that household insurance will go up by 5% to 8% this year and we’ve frozen ours,” adds Johnson.
One change set to shake up the market over the next two years is the implementation of proposals suggested in the Retail Distribution Review. Johnson says this will sort the wheat from the chaff.
“We have a mortgage broker bias to our book and obviously it will affect the IFA population more heavily,” he says.
“It will end up shaking out the less professional advisers but the good ones will survive and prosper. The ones who don’t want to do it or can’t be bothered with qualifications will not – it will be a natural selection process. If you can’t justify what you charge your cus-tomers its not sustainable.”
As for Paymentshield, the next few years are set to bring more growth and there are plans to employ more people.
“I’ve never been in a business and not grown it,” he says. “You do get people who specialise in squashing businesses. I’ve always been involved in businesses that have grown. Towergate has had phenomenal growth. Now we have the business in the right shape, I want to grow it and push it forward, because that’s what gets me out of bed in the morning.”
Johnson says this year will be about ensuring its book returns to growth again and that moderate growth is a realistic estimate.
“The predictions are that the mortgage market will grow by around 10% this year,” he adds. “We’ll ride on the back of that but we want to do it quicker. We always try to change markets and get ahead of them.”
And for Johnson himself, Paymentshield is his home for the foreseeable future.
“There is a long way to go before I think of the next move,” he says.
Given his success under the Towergate umbrella one would assume group chairman Cullum is pleased to hear that. n