In this week’s Silver Linings, Panorama Fund portfolio manager Colin McPherson, CFA discusses Steadfast Group, a potential bear winner that may capitalize from the current slowdown.
“The insurance brokerage industry is attractive because insurance is not a discretionary purchase.“
At Wealhouse, we are constantly scouring the globe to meet entrepreneurial management teams running businesses with competitive advantages, insider ownership, recurring revenues, long term growth track records, and clean balance sheets to take advantage during market dislocations like we are experiencing currently. One example where we recently increased our holding after speaking to company management (despite the 15-hour time difference) is our holding in Steadfast Group, based in Sydney, Australia.
Steadfast is the largest general insurance broker network in Australia. CEO Robert Kelly founded the company in 1996 by combining 43 independent insurance brokers to gain scale and compete with larger international insurance brokers. Through organic growth and acquisitions, Steadfast has grown to a network of 473 brokers, writing over $6 billion in gross premiums annually. 20% of the company is owned by insiders within the firm. The management team has also built a best-of-breed insurance technology platform to be used as an underwriting platform and broker management system, which we believe is an undervalued asset.
The insurance brokerage industry is attractive because insurance is not a discretionary purchase. Companies are required to buy insurance coverage to operate regardless of the economic backdrop. Brokers also don’t take any underwriting risk and receive payments up-front, thereby minimizing risk. This results in a recurring revenue model with long term customer relationships that generates significant free cash flow that can be returned to shareholders or used for additional M&A. In Steadfast’s case, they have historically maintained a conservative balance sheet allowing them to make acquisitions opportunistically.
Given the global market slowdown, we see opportunities from a likely increase of M&A opportunities in the near future. Recent M&A transactions include two of Steadfast’s largest global competitors: Marsh & McLennan bought Jardine Lloyd Thompson for $5.6 billion on September 18, 2018 and Aon announced its acquisition of Willis Towers Watson for $31.4 billion on March 9, 2020. We expect there to be significant opportunities both organically and inorganically for Steadfast to grow market share going forwards.