Back with a swagger

In contrast to big insurers, the leading local brokerages have rewarded shareholders with sparkling results

By Bernice Han

Sentiment is a fickle beast. In late March Steadfast and AUB Group withdrew their initial upbeat 2019/20 guidances within days of each other. They didn’t know how big a blow the COVID-19 lockdown measures would inflict on their clients and their own operations.

Their understandably sombre mood lasted only a few months, however. By the time earnings were announced in August, the relief the two local broking powerhouses exhibited was unmistakable.

They had regained their confidence, buoyed by how they had weathered the business storm of the pandemic in the runup to the last financial year.

Leading the charge was Steadfast, the country’s largest brokerage network. The business performed at the higher end of its pre-virus forecast of $215-225 million. Underlying earnings before interest, tax and amortisation (EBITA) rose 15.5% to $223.5 million and for this financial year, it is projected to fall somewhere between $235-245 million.

Steadfast has also set a higher target for underlying net profit, anticipating it will improve to $115-122 million. If that is achieved – and no one is doubting it – it would exceed the $108.7 million earned in the 2019/20 year.

While the guidance is subject to uncertainties, especially over the speed of economic recovery from the pandemic crisis, Steadfast co-founder and Chief Executive Robert Kelly believes the business is capable of producing another strong year.

“I can tell you I have no idea what’s going to happen in the second half of [this current] financial year,” he told a post-earnings conference call. “What I can tell you is… we put out what we think we can actually achieve regardless of the impact of what is occurring out in the market.

“And I rely on our track record over the last seven years.”

Mr Kelly, who has again agreed to extend his tenure and will now stay on until after the annual general meeting in October 2023, says Steadfast is “on reasonably solid ground” based on trading figures for the June quarter.

He says member brokerages have generally fared well, also citing the results of AUB and PSC Insurance Group as examples of the sector’s resilience.

AUB Group achieved a 15.2% rise in underlying net profit to $53.4 million from the previous corresponding period, the largest gain since fiscal 2013. For this financial year, it is projecting a 9.5-14% increase. Fuelling the optimism are continuing signs of “strong momentum” towards the end of 2019/20.

“We are a fitter and more complete organisation than ever before and are confident that the group is well placed for continued accelerated growth in FY21 and future years,” Chief Executive Mike Emmett said.

The group’s largest division, Australian Broking, reported a 14.6% rise in pre-tax earnings to $62.1 million, assisted by an average 6.3% increase in commercial line premiums.

PSC Insurance Group, which has steadily expanded its presence at home and abroad through a series of shrewd investments, says underlying earnings exceeded $57 million as previously flagged.

The Melbourne-based business projects the numbers for this financial year will improve to $65-70 million.

Continued hardening market conditions, along with solid organic growth and contributions from key acquisitions in the UK and Australia, will support the business in the current financial year and beyond, PSC said.

Morningstar Equity Analyst Nathan Zaia, who tracks Steadfast, predicts further earnings upside potential for the broker network – and by extension for the other big local brokers too – as rates continue to harden.

“We are going to see premium rates go up and that should benefit the commission that the Steadfast broker network makes,” he told Insurance News.

So why are the broking groups performing so much better than the leading insurers in the local market? Mr Zaia points to the issues the insurers have had to deal with so far this year.

“For the insurers it’s not just COVID. They’ve been hit by the higher natural peril events and on top of that, you have reinsurance costs going up.

“Their investment income has taken a beating. That’s probably due to COVID but also due to lower cash rates.”

insuranceNEWS October/November 2020