Australian Insurance Brokers: Organic Growth Supported by Higher Premiums and Interest Rates

Australia’s three largest independent insurance broker networks, Steadfast, AUB Group AUB, 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.

The firms all trade below our fair value estimates, with Steadfast at a modest discount to our AUD 6.00 fair value estimate, and AUB Group and PSI Insurance trading at larger 17% and 12% discounts to our respective AUD 33 and 5.20 fair value estimates.

Insurance brokers and agencies continue to gain from higher commissions as insurers increase premium rates due to high claims inflation and the large number of catastrophes in recent years, more than offsetting wage inflation and information and technology spending. We estimate around one-third of the total profit growth for the brokers is being driven by the higher interest rate environment.

Insurance brokers and agencies receive premiums from clients and hold that cash on trust before it is paid to the insurer. In sitting on the cash, the firms earn interest, like a bank term deposit. With this cash balance far exceeding debt, even though interest rates on debt are higher, the firms are net beneficiaries.

Based on fiscal 2023 numbers, AUB Group generated a 3.6% return on cash held in trust. Assuming this rises to 5% in fiscal 2024, and cash held in trust increases on the back of premium growth, we estimate interest income jumps over 80% to around AUD 50 million. Finance costs will also rise, but we expect the net profit benefit to be around AUD 12 million, around 32% of our profit growth forecast.