Brokers buoyant as premium rates, acquisitions boost outlooks

Rising premiums and acquisitions have delivered strong first-half results for each of the three listed insurance broking companies, with the firms upgrading outlooks and delivering positive messages to the market.

Steadfast, AUB Group and PSC Insurance Group are all expanding through acquisitions while driving improved performance from existing operations as a strong insurance market provides a tailwind.

“The firm premium rates environment helps from a commissions perspective and probably also increases demand for their services,” MST Marquee Emerging Companies Analyst Scott Hudson says.

“It is a tough environment for companies to be dealing with. In some cases there are pretty aggressive rate increases, and capacity being withdrawn in some areas of the market, increasing demand for help in placing complex risks.”

Major deals during the half included AUB Group’s purchase of UK wholesale group Tysers, with the company now moving to spin off the retail operations that were part of transaction into a joint venture with PSC. Separately, PSC continues to expand with UK and local acquisitions and has taken a 40% stake in insurance building company Bay Building Group.

Steadfast, which operates the largest broking network in Australia and New Zealand, acquired Insurance Brands Australia during the half and is raising holdings in existing businesses through its “trapped capital” program.

“All three management teams are executing on their strategies, which are all helping to deliver top line and margin expansion, and that helps to drive earnings and share prices higher,” Mr Hudson said.

Steadfast CEO Robert Kelly told an earnings results briefing last week that the hard insurance market will continue as reinsurers require higher retentions and significant rate increases.

“The rate increases and the retentions are amazingly high. All of that adds up to – they have to keep driving price,” he said.

Rebuilding and motor repair costs have also soared since covid as insurers deal with material, parts and labour shortages and the impacts of increasing inflation, supporting higher rates.

Macquarie Equities Senior Equity Research Analyst Andrew Buncombe says the broking companies are performing well from a mergers and acquisition perspective, and are raising forecasts for earnings as premiums rates remain strong.

The sector can be seen as a hedge against inflation and interest rate impats, and it’s providing a product that remains in demand during tough economic times. Share prices are being supported by increased investor interest.

“You are seeing a number of big investors in Australia buying brokers at this point,” Mr Buncombe says. “If you think the economic environment is going to get more bearish over the next 6, 12, 24 months, then the purchase of insurance is very resilient.”

Macquarie has an “outperform” rating for all three companies and says operating conditions remain supportive.

Morningstar, in research notes for Steadfast and AUB, notes that brokers benefit from the relationship nature of their business, and client retention rates are high for both companies. The risks of disruption from online aggregators or a foreign player are seen as relatively low.

“Online aggregators have increased product awareness and competition in the more commoditised consumer insurance space, but more complex and specific requirements in the SME insurance market mean online aggregators are unlikely to gain traction,” it says.

Steadfast and AUB Group together account for close to half of the Australian intermediated general insurance market, while foreign players make up a small share of industry gross written premium, it says.

Foreign and local broking groups continue to look for acquisition opportunities following the recent deals, and performance by the listed companies in that area remains important to longer-term outlooks.

“We are confident that Steadfast’s disciplined approach to acquisitions will continue, with most being made from within the broker network or from long-term partners,” Analyst Nathan Zaia says. “Improving operational efficiency and integrating acquisitions are key areas of focus.”

AUB has highlighted that its landmark London-based Tysers acquisition is performing better than expected, changes have already been made to drive improvements and the acquisition will offer long-term value to the group as demand for expertise in complex risks increases.

PSC Insurance Group’s raised guidance excludes any contribution from the Tysers retail joint venture with AUB that is expected to start in April, while reflecting strong contributions from its core Australia broking business, growing UK operations and other recent acquisitions.

Conditions for brokers are expected to remain supportive for the businesses through to the end of this calendar year at least.

Insurers are battling headwinds from surging reinsurance, claims inflation and pressures from natural catastrophes, but the tough conditions highlight the value of brokers for clients and revenues and underlying earnings are rising.