Vertically Integrated Insurance Brokers Under Regulatory Scrutiny 

 Nathan Zaia 

Senior Equity Analyst 

Analyst Note | by Nathan Zaia Updated Sep 10, 2024

Steadfast's, and to a lesser extent, AUB Group's, shares fell materially following an ABC report concerning strata insurance commissions. The crux of the allegations being that Steadfast brokers are conflicted in recommending strata insurance because Steadfast owns the largest strata agency in the country, CHU. And as a result, premiums are rising for customers because of Steadfast’s market dominance. Another claim, which Steadfast did not dispute, is the existence of joint ventures between brokers and strata managers that potentially skirt the strata managers' disclosure requirement as it is not “commission.” This is a bad look, adding an unnecessary financial incentive to use one broker over another. Considering all this, the chair of Australia’s competition regulator is calling for a ban on strata insurance commissions. Nevertheless, we think both narrow-moat firms are undervalued, with the potential regulatory intervention in the sector rattling confidence.

Steadfast equity-owned strata insurance brokers contributed around 5% of fiscal 2024 group profit. The agency business is much more heavily weighted to strata, though—we estimate the total contribution to profit from strata is between 15% and 20%. AUB has a smaller exposure to strata, making up 5% of gross written premium, or GWP, in fiscal 2024.

We lower our Steadfast fair value estimate by 8% to AUD 6 per share and AUB Group's by 3% to AUD 34 per share on downward revisions to agency earnings. For Steadfast we assume some market share loss and downward pressure on premium rates in strata. Increased oversight on brokers to ensure all policies are in the client’s best interests, even if it becomes overly cautious, could see more volume go to other insurers. CHU may be forced to compete more on price, even if a competing policy is not entirely comparable, to reduce the risk of customers feeling they are being given dud advice.