Market Wants Proof Tysers Acquisition a Winner; Creates Buying Opportunity in AUB Group Shares

Business Strategy & Outlook

AUB 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. AUB owns or has equity stakes in each broking business within the network. Post the exit of rehabilitation services in 2021, around 85% of group EBITA is delivered by the broker network, while the underwriting agencies generate about 15%. A key value proposition over smaller brokers is AUB’s ability to negotiate more favourable 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’s underwriting agencies distribute insurance products but take no underwriting risk. Underwriting agencies act on behalf of insurers to design, develop, and provide specialised insurance products and services.

The earnings outlook is positive. Further insurance price rises are expected over the medium term as insurers seek to cover claims inflation and weak investment income. This follows a weak pricing environment due to excess global reinsurance capacity, soft economic conditions, and elevated competition. Insurance brokers are expected to take share of the intermediated market. Technology should allow a greater number of policies per client–for example, adding personal motor/home on top of a business clients 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 is material for AUB Group, and while the current projection of low-single-digit revenue growth may prove conservative in the current rate environment, an optimistic outlook is adopted in relation to whether targeted cost and revenue synergy targets will be achieved.

Financial Strengths

AUB is in sound financial health. It has strong cash flow generation with a high conversion of earnings to operating cash flow and a relatively high dividend payout ratio. Gearing as reported by the company (corporate, subsidiary and look through share of associate debt/debt plus equity) ratio is reasonable, at 31% and below the firm’s maximum 40% ratio. The current debt load looks manageable, with EBITDA interest cover of over 18 times and the nature of its businesses being relatively low-risk. It is assumed AUB will use operating cash flows to fund increased positions in existing broker partners, with headroom to fund small acquisitions from cash on hand. To fund the acquisition of Tysers, expected to complete in first-half fiscal 2023, AUB Group completed a AUD 350 million equity raising, and will issue AUD 175 million worth of shares to the vendor, and increase debt. Debt/EBITDA is expected to rise to around 2.8 times from 2 times in fiscal 2021, but is also expected to fall on the part sale of the U.K. retail broking business, realisation of synergies, and strong cash flow generation.

Bulls Say

AUB’s scale and expertise in insurance products and services leave it well placed to benefit from higher insurance pricing.

BizCover and the Kelly+Partners partnership see AUB placed to take market share in the smaller end of the SME market.

The firm’s acquisition strategy, both new investments and increased equity stakes, likely boosts EPS growth.

Company Description

AUB Group is the second-largest general insurance broker network in Australia and New Zealand. It has an ownership in 55 brokerage businesses, which collectively write over AUD 3 billion in premiums. It also owns equity stakes in 27 underwriting agencies. AUB derives revenue from commissions (from insurers, ultimately paid for by AUB’s customers) based on gross written premium, or GWP, from agencies it owns, and a share of profits from associates and joint ventures. GWP is split between personal (6%), small to medium enterprises (68%), and corporates (26%).

(Source: Morningstar)

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