Over the past 12 months, AUB (ASX: AUB) has delivered total shareholder returns of 15%, modestly outperforming 13% for the S&P/ASX 200 and well ahead of peer Steadfast, which is all square. But this is much lower than returns of general insurers IAG, QBE, and Suncorp, which have posted above 30% returns.

Why it matters: Insurance brokers are not benefiting from lower-than-expected natural hazard costs and higher investment income on policyholder and shareholder funds. But these earnings tailwinds enjoyed by insurers can quickly become headwinds, and we view broker earnings as more resilient.

  • Insurance brokers earn commissions on premiums, but 30% of revenue is fees, meaning not all revenue is exposed to the recent tailwind of premium rate increases. The ability to adjust fees and very little exposure to claims volatility results in much more predictable earnings than insurers.
  • We expect general insurer profits to weaken over the medium term, as claims rise and investment income falls. Modest rate increases are necessary to prevent returns plummeting below cost of capital, supporting our view of modest annual earnings growth for brokers.

The bottom line: We retain our respective fair value estimates of AUD 6 and AUD 35 per share for narrow-moat Steadfast and AUB Group. Both trade close to their respective fair values. In contrast, no-moat general insurers’ shares are materially overvalued.

  • We expect AUB and Steadfast to achieve 17% and 15% profit growth in fiscal 2025, a mix of organic and acquired growth. Our forecasts are in line with guidance, which in AUB’s case was tightened to the top end of the range in May.
  • We think growth is likely to moderate on low-single-digit premium rate increases and less upside from acquisitions compared with the past. Over the five years to fiscal 2029 we forecast annual profit growth of 8%-9%, with potential for more upside from acquisitions and increased equity stakes.

AUB primed for future growth

AUB Group operates the second-largest general insurance broker network in Australia and New Zealand. AUB brokers derive revenue from commissions paid by insurers, based on gross written premiums, plus fees. AUB owns or has equity stakes in each broking business within the network. Around half of group profit is delivered by the Australian and New Zealand broker network, around 30% from Tysers in the United Kingdom, and the remainder from underwriting agencies.

A key value proposition over smaller brokers is AUB’s ability to negotiate more favorable policy wording and pricing. Scale also provides the capacity to spend more on technology, which helps facilitate greater analytical and processing capabilities, and marketing to help attract and retain customers. Other services such as claims support and premium funding support the value proposition.

AUB Group’s underwriting agencies distribute insurance products but take no underwriting risk. Underwriting agencies act on behalf of insurers to design, develop, and provide specialized insurance products and services.

The earnings outlook is positive. We expect further insurance price rises over the medium term, albeit not at double-digit levels recently experienced, as insurers seek to cover claims inflation and higher reinsurance costs.

We expect insurance brokers to make modest market share gains of the general insurance market. Technology should allow a greater number of policies per client—for example, adding personal motor/home on top of a business client’s insurance needs. AUB’s investment in BizCover, a self-service insurance platform targeting small SMEs, and partnership with accounting firm Kelly+Partners to act as a lead generator should see AUB take share of the small SME end of the market. This share will most likely come from the direct channel.

The acquisition of Tysers was material for AUB Group. We are optimistic that cost and revenue synergy benefits, as well as insurers lifting prices, will lead to solid earnings growth for the business.

AUB bull say

  • AUB’s scale and expertise in insurance products and services leave it well placed to benefit from the essential nature of insurance.
  • Ownership in BizCover leaves AUB placed to take share in the smaller end of the SME market.
  • The firm’s acquisition strategy, of both new investments and increased equity stakes, likely boosts EPS growth.

AUB bears say

  • Insurance volumes and prices are closely tied to the insurance cycle and general economic conditions. Downside risk could increase in a recession.
  • The insurance pricing cycle could weaken if excess capacity and competition in the global reinsurance market increases.
  • The acquisition of Tysers could fail to deliver earnings growth over the medium term and prove a distraction of company resources.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.