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“I do think some brokers have, to a large extent, lost the art of selling.” (or a successor) retaining equity. Mr McKeough, who has run Austbrokers since its inception [see panel], refers to the arrangement as “keeping skin in the game” – a strategy that results in principals being focused on building the business, including buying competitors. “Our model isn’t about control – from either side,” he says. “I know your typical corporate play isn’t to go out and buy a 50% stake in a business, but at Austbrokers it’s truly a partnership.” When Insurance News interviewed Mr McKeough in Sydney in mid-January, the company was preparing to announce its half-year results. That put financial discussions and specific planning out of court, but enabled Mr McKeough to focus instead on the wider issues. He has kept the company focused on the core strategy worked out a quarter of a century ago. As far as he is concerned, the model still works very well. If it didn’t, he would have found another. “Sure we’re a cluster, but the ‘cluster’ part is a result of the common equity ownership,” he says. “We’re a business. It’s important that we do all the other things that clusters do, but we’re a business first and a cluster second.” Each of the major Australian cluster group business models is different. For example, the largest cluster, Steadfast, has some 280 members. It has no financial interest in their businesses, but provides centralised services and considerable negotiating and buying power. Austbrokers’ member services are essentially marketing, administrative support, IT and other back-office systems, compliance and risk management. The company’s willingness to share those resources proved a major enticement when Mr McKeough started talking to rival cluster group IBNA in 2006. With 78 independent members and $800 million in gross written premium, IBNA was a significant player in the broker space, but hadn’t built up the sort of centralised services that Austbrokers could provide. Mr McKeough’s team proposed a joint venture structure in which IBNA members would retain their independent ownership and identity, while pooling resources with Austbrokers. Nearly three years after inception, Mr McKeough says the A & I Member Services joint venture (better known as 32
While other cluster groups have been formed by brokers intent on scale and greater market power, Austbrokers was originally formed by an insurance company. In the mid-1980s Lach McKeough was a senior executive working for major general insurer Mercantile Mutual, which was 50% owned by Dutch financial services company Nationale-Nederlanden (later part of ING). To counter NZI’s decision to buy up brokerages to enhance distribution of its commercial products, Mercantile Mutual decided to acquire interests in brokers and assist them to develop their businesses thereby protecting its own distribution. Mr McKeough was managing Mercantile Mutual’s northern New South Wales operations, and was given the job of making the acquisitions. At that time most small towns had their own insurance branch offices, and the retention of independent brokers was essential to maintain and grow distribution. “I realised very quickly, however, that I had some serious conflicts of interest managing the insurance company operations and having a closer involvement with brokers where an interest had been acquired.
1986. It became a listed public company in November 2005. In the last financial year – a difficult one for an industry labouring under a cycle at rock bottom and intense market competition – Austbrokers recorded an 11.1% rise in aftertax profit to $15.9 million. Shareholders who bought Austbrokers shares when they first listed in 2005 achieved a 124% return on their investment up to the end of the 2009 financial year – a 34% annual return. Austbrokers enjoys some significant shareholders, including the investment management arms of Challenger Financial Services (5.7%), AMP (6.8%) and Westpac (6.1%). But the largest single shareholding is held by QBE, which spent $41 million in February 2007 buying a 14.9% stake – a purchase that QBE Chief Executive Frank O’Halloran described as “strategic, long-term and friendly”. A few months later Allianz Australia bought a 5.1% shareholding.
“And that was the foundation stone of Austbrokers.”
The insurers’ stakes are regarded as a security measure to protect a valuable distribution channel should any other insurer make a move on Austbrokers.
The first brokerages were acquired in 1985, with the Austbrokers name being adopted in
This way they have their own “skin in the game”.
AIMS) is progressing nicely. “It’s early days still, but it’s bedded down very, very well,” he says. “I think we’ve achieved quite a lot for the members of both networks, and also for our underwriting partners.” Many of the IBNA businesses are large and successful, with their owners approaching retirement. Some have already moved across to Austbrokers, and Mr McKeough believes others may well follow over time. “We expect IBNA to continue to be a source of acquisitions for Austbrokers as the need for succession solutions arise. Certainly we value our closer relationship with IBNA members, and we would like the opportunity to have a seat at the table if they want to sell.” A number of Steadfast members have insuranceNEWS
February/March 2010
also moved across to Austbrokers, and Mr McKeough makes it clear the affiliation of the company is not an issue in negotiations. “If the deal’s right, we’ll do it. It’s the business we’re interested in.” He agrees Austbrokers has bought into some of the broking sector’s “cream” companies over the past decade, but insists there are many more prospects out there. “We’re very pleased with the group that we have, but, there’s still good businesses out there and we’ll continue to look for acquisitions.” He believes the broking sector will continue to consolidate over the next four to five years. “Brokers at some point are going to sell or at least be looking to pass the baton to somebody in their office,” he says. “We’re not going to buy every brokerage that be-