Company Reports

Steadfast's, and to a lesser extent, AUB Group's, shares fell materially following an ABC report concerning strata insurance commissions. The crux of the allegations being that Steadfast brokers are conflicted in recommending strata insurance because Steadfast owns the largest strata agency in the country, CHU. And as a result, premiums are rising for customers because of Steadfast’s market dominance. Another claim, which Steadfast did not dispute, is the existence of joint ventures between brokers and strata managers that potentially skirt the strata managers' disclosure requirement as it is not “commission.” This is a bad look, adding an unnecessary financial incentive to use one broker over another. Considering all this, the chair of Australia’s competition regulator is calling for a ban on strata insurance commissions. Nevertheless, we think both narrow-moat firms are undervalued, with the potential regulatory intervention in the sector rattling confidence.

Steadfast Group operates the largest general insurance broker network in Australia and New Zealand. Taking equity interests in insurance broker business, Steadfast has been consolidating the market since it was founded in 1996. It has deployed a similar strategy in underwriting agencies. It derives revenue by being paid a commission (from insurers) based on gross written premium written by agencies within its network, earning a share of profits from associates and joint ventures, and receiving professional services fees.

Higher insurance premiums are a tailwind for the insurance broking and underwriting industry but were not the sole driver of Steadfast’s strong fiscal 2024 result. Underlying earnings before interest tax and amortization rose 23% to AUD 529 million, aided by volume growth, new joiners to the network, acquisitions, margin improvement, and higher interest income earned on premium payments. Fiscal 2024 earnings came in at the top end of guidance and broadly aligned with our expectations. Acquisitions remain a core contributor to growth, and Steadfast has a good track record of buying and integrating businesses. Organic and acquired EBITA growth was split roughly 55/44 in the year. At group level, EBITA margins improved by 100 basis points to 31.5%.

Steadfast Group operates the largest general insurance broker network in Australia and New Zealand. Taking equity interests in insurance broker business, Steadfast has been consolidating the market since it was founded in 1996. It has deployed a similar strategy in underwriting agencies. It derives revenue by being paid a commission (from insurers) based on gross written premium written by agencies within its network, earning a share of profits from associates and joint ventures, and receiving professional services fees.

Narrow-moat Steadfast’s investor day provided an opportunity to hear from segment leaders on the current state of the market and outlook. We have three key takeaways. First, the Australian business is performing well, and the outlook is positive. Second, the US is a long-term growth opportunity. Third, the firm has extensive managerial experience across the group.

Steadfast Group operates the largest general insurance broker network in Australia and New Zealand. Taking equity interests in insurance broker business, Steadfast has been consolidating the market since it was founded in 1996. It has deployed a similar strategy in underwriting agencies. It derives revenue by being paid a commission (from insurers) based on gross written premium written by agencies within its network, earning a share of profits from associates and joint ventures, and receiving professional services fees.

Steadfast Group operates the largest general insurance broker network in Australia and New Zealand. Taking equity interests in insurance broker business, Steadfast has been consolidating the market since it was founded in 1996. It has deployed a similar strategy in underwriting agencies. It derives revenue by being paid a commission (from insurers) based on gross written premium written by agencies within its network, earning a share of profits from associates and joint ventures, and receiving professional services fees.

Higher insurance premiums are a tailwind for insurance broking and underwriting, given commissions are tied to premiums, but Steadfast’s first-half fiscal 2024 revenue growth of 19% with EBITA growth of 21% is more than a rate story. There's no denying that higher premiums are playing a large role, but volume growth from new client wins and new brokers joining should not be discounted—nor should higher interest income earned on premium payments. Steadfast deposits customer premiums in cash accounts and earns interest before passing on the premium to the insurer, and we estimate the benefit of higher cash rates is responsible for around one third of EBITA growth in the half. The profit impact is tempered by higher interest costs on the firm’s debt. Acquisitions remain a core contributor to growth, and Steadfast has a good track record of buying and integrating businesses. Organic and acquired EBITA growth was split roughly 60/40 in the half, with stronger contributions expected from recent acquisitions in the second half. At a group level, EBITA margins improved by 50 basis points to 29% in the first half.

Serial acquirer Steadfast is splashing out up to AUD 280 million to acquire Sure Insurance, or Sure, a fast-growing underwriting agency. Sure specializes in home and contents insurance and strata in regional Queensland, and will take the total number of underwriting agencies within the Steadfast network to 30. Sure is a young business started in 2016 by the previous CEO of RACQ Insurance, a large member-owned home and motor insurer in Queensland. With gross written premiums of AUD 120 million and fiscal 2023 EBITA of AUD 23 million, the insurer is successfully and profitably taking share with policies seemingly better suited to higher-risk markets. Sure carries no claims risk, other than its three insurance providers no longer wanting to work with the underwriting agency.

Steadfast Group operates the largest general insurance broker network in Australia and New Zealand. Taking equity interests in insurance broker business, Steadfast has been consolidating the market since it was founded in 1996. It has deployed a similar strategy in underwriting agencies. It derives revenue by being paid a commission (from insurers) based on gross written premium written by agencies within its network, earning a share of profits from associates and joint ventures, and receiving professional services fees.

Australia’s three largest independent insurance broker networks, Steadfast, AUB Group, and PSI Insurance have all guided to continued profit growth in fiscal 2024. Steadfast reaffirmed its outlook at the annual general meeting today. Taking the midpoint for profit growth guidance, AUB Group is the strongest at 23%, followed by Steadfast at 14%, and PSI Insurance at 7%. AUB Group is benefiting from earnings accretion from Tysers and other small acquisitions, and Steadfast is similarly acquiring growth with increased ownership of brokers already operating within its network. Our forecasts are at the top end of guidance.

Narrow-moat insurance broker Steadfast marks its expansion into the United States with the acquisition of ISU Group for USD 55 million. ISU operates an independent insurance broker network in the U.S., providing 220 broker members with access to insurers and other services like coaching and best practices. Revenue is split roughly evenly between member payments and commission fees from insurers based on volumes and the claims ratio within the network.

Steadfast Group operates the largest general insurance broker network in Australia and New Zealand. Taking equity interests in insurance broker business, Steadfast has been consolidating the market since it was founded in 1996. It has deployed a similar strategy in underwriting agencies. It derives revenue by being paid a commission (from insurers) based on gross written premium written by agencies within its network, earning a share of profits from associates and joint ventures, and receiving professional services fees.

We increase our fiscal 2023 underlying NPATA forecast by 4% to AUD 262 million, which is now 4% ahead of upgraded guidance. Our more positive view owes to insurers in Australia and New Zealand putting through double-digit price increases in response to high claims inflation, rising reinsurance costs, and higher natural hazard costs. While Steadfast brokers may look to help customers by lowering commission rates, we still expect a net positive tailwind to earnings. Steadfast upgraded the midpoint of fiscal 2023 underlying NPATA guidance by 3%, with the top end in line with our previous AUD 252 million forecast.

Fiscal 2021 was a strong result for Steadfast, with NPAT and EBITA growth of 20% and 18%, respectively. The result largely as we expected. Insurers putting up rates to improve their own margins provides a nice tailwind for the resilient insurance broking industry.

We upgrade our capital allocation rating on Steadfast Group to Exemplary from Standard. We believe the balance sheet is sound, dividend payout ratio appropriate, and the investment strategy and execution have been and will continue to be positive contributors to shareholder returns. Our AUD 3.70 fair value estimate, medium uncertainty rating, and narrow economic moat rating are unchanged. While we like the business, we believe Steadfast is modestly overvalued at current prices. The market has priced in our view that commission income will continue to be aided by insurance premium increases, earnings upside from acquisitions of existing network brokers, organic market share gains on the back of technology and marketing spend, and positive operating leverage.

Steadfast Group operates the largest general insurance broker network in Australia and New Zealand. Taking equity interests in insurance broker business, Steadfast has been consolidating the market since its founding in 1996. It has deployed a similar strategy in underwriting agencies. It derives revenue by being paid a commission (from insurers) based on GWP written by agencies within its network, earning a share of profits from associates and joint ventures, and receiving professional services fees. Around half of group EBITA is delivered by the broker network, while the underwriting agencies generate about 45%.