TOL - 1st Jun, 2024
Takeover targets: Why PE loves this sector, and where we're looking to invest next
Blackwattle Mid Cap discuss the ASX insurance brokers amidst a flurry of corporate activity across the sector
This month, one of our portfolio companies, PSC Insurance (ASX: PSI) announced that it had entered into a Scheme Implementation Deed to be acquired by private equity (PE)-backed The Ardonagh Group for A$2.3 billion.
In this wire, we explain why insurance brokers are so attractive to Private Equity, to quality investors like us, and where the opportunities lie as we contemplate the recycling of this capital.
Insurance brokers earn commissions and fees for advising their business customers on their myriad insurance requirements including liability, property and auto, workers compensation, business interruption, directors and officers, and cyber.
"Insurance broking is a solid business model, they own the customer relationships, while the insurers provide the capital, yet take all the risk."
Private equity has long been attracted to insurance broking businesses. Steady earnings and strong cash generation can sustain high levels of debt, thereby boosting available returns on equity.
Insurance broking is up there with the best ‘roll-up’ candidates, due to network effects, whereby the competitive advantage and available returns increase with scale. Underlying broker members enjoy stronger bargaining power, access to more product, shared investment in technology, and access to insights and data-analytics, sharing in the scale benefits.
Lastly, the industry continues to trundle along its structural growth path. On top of high general inflation, insurance premiums continue to increase due to the emergence new risks such as climate-change and cyber, plus social inflation which refers to the increasing prevalence of lawsuits coupled with larger jury awards.
Australian investors are blessed to have 3 high-quality insurance brokers listed on the ASX in PSC, AUB, and Steadfast (ASX: SDF). So what led us to initially select PSC?
Firstly, alignment, which is a core value of both Blackwattle Investment Partners and is commonly an important trait of the firms that we invest in.
"PSC remains founder-led, with founder Paul Dwyer serving as the Non-executive Chairman. Paul, together with other members of the board and executive team owned approximately 40%, ensuring that their interests remained aligned with other shareholders."
Secondly, we look to invest in companies with low levels of concentration, be that to customers, suppliers, regulators, or geographies. This is both a risk mitigant and an enabler of enduring growth. PSC already derives 50% of its revenue from outside Australia, mostly the UK.
Thirdly, as concentrated investors we seek to invest in the highest quality companies, one measure of which is profit margin. PSC exhibited the highest margins of any listed firm globally; a testament to the quality of their management.
After the PSC bid, we look to recycle this capital, maintaining a positive view of the industry we haven't had to look far for a ready replacement.
AUB Group (ASX: AUB) is well managed, led by CEO Mike Emmett. Since his appointment in March 2019, AUB has doubled its Earnings Per Share (EPS), equating to growth of 14% per annum.
"AUB EBIT margins have increased from 25% to 31%, an indicator of improving quality, with the company targeting material increases still to come."
Further, recent acquisitions of BizCover and Tysers have expanded AUB outside of its core Australian broker network, reducing concentration and providing blue-sky opportunity.
BizCover is a disruptive, high-growth online broking platform that targets the micro-SME segment. It currently has 225,000 clients, with a target to grow to 500,000 clients by 2026.
Tysers is a London-based insurance broker. The acquisition both de-risked AUBs existing Australian business by providing access to the Lloyds insurance marketplace, and provided a strong base from which to establish a successful UK retail broking business in coming years.
And finally, on a Price-to-Earnings (P/E) multiple, it is the cheapest listed insurance broker in the world. This discount may close as others begin to appreciate the attributes that we have described here.
This wire was co-authored by Michael Teran, Peter Wilson & Tim Riordan
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Tim Riordan has 25 years funds management and accounting experience.
Most recently, Tim was the Head of Direct Equities at Aware Super. Tim was responsible for managing the 11 strong equities team as well as 4 portfolios, with combined FUM of $3.5bn.
Tim's primary portfolio responsibility was the $2bn ASX mid cap industrials fund which he ran with Michael Teran.
Tim holds a Bachelor of Commerce (Accounting), earned the Financial Risk Manager (FRM) designation and is a Chartered Financial Analyst (CA) charterholder. Tim is the Portfolio Manager of the Blackwattle Mid Cap Quality Fund.
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The information in this article has been prepared by Blackwattle Investment Partners Pty Limited (ABN 24 663 839 094) (BIP). BIP is a corporate authorised representative of Blackwattle Licensing Pty Limited (ACN 665 711 839 AFSL 547 617) (corporate authorised representative no. 001304362).
This article contains general information only and is not intended to promote or recommend any particular product or services offered by BIP. It has been prepared without taking into account the objectives, financial situation or needs of any investor. Before making an investment decision, investors should read the relevant offer document and seek professional advice to determine whether the investment is suitable for them.
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Tim Riordan has 25 years funds management and accounting experience. Most recently, Tim was the Head of Direct Equities at Aware Super. Tim was responsible for managing the 11 strong equities team as well as 4 portfolios, with combined FUM of...
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Tim Riordan has 25 years funds management and accounting experience. Most recently, Tim was the Head of Direct Equities at Aware Super. Tim was responsible for managing the 11 strong equities team as well as 4 portfolios, with combined FUM of...
Expertise
No areas of expertise
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