Steadfast has made its move into the US with the purchase of a broker network that opens up new horizons

By Wendy Pugh

Steadfast is taking the business model that has delivered strong annual growth since its stock exchange listing a decade ago to the US, with a $US55 million acquisition opening up an expansion pathway in the world’s largest economy.

After studying large and small targets for five years and narrowing the field in the past 18 months, Steadfast has purchased privately owned ISU Group, an intermediary network business headquartered in Mt Pleasant, South Carolina.

Group Chief Executive Robert Kelly says the business has similarities to Steadfast earlier in its timeline. The acquisition allows the company to “not bet the farm” on the US move, while at the same time acquiring a highly scalable business that provides a runway of opportunities.

The network has more than 220 independently owned and operated agencies across 40 states, handles premium volume of almost $US6.5 billion and has contracts with some 75 insurance carriers and wholesalers.

“In terms of cost we’ve done four or five times bigger transactions,” Mr Kelly tells Insurance News. “In terms of potential, it’s the biggest because it gives us a footprint in the biggest insurance market.”

ISU offers its agency members the ability to tap into the resources and strength of a national organisation while retaining their independence – an approach similar to offerings in the Australian broking market.

For Steadfast, ISU presents opportunities to roll out company technology, including the Insight broker system and the Steadfast Client Trading Platform. It plans to introduce some of its stable of underwriting agencies to the market and will look to acquire equity in members who want to sell down stakes in an extension of its existing “trapped capital” project.

Mr Kelly, who is currently also Chairman of the US-based insurance data standards body the Association for Cooperative Operations Research and Development (ACORD), has assured investors that Steadfast is familiar with the market, and he has personally built-up US knowledge over the past 14 years.

He says Steadfast’s due diligence on ISU has confirmed the business is ethical and reliable and that the culture aligns. Sydney-based Steadfast is presenting itself to ISU members as a collaborative growth partner rather than making a “big flash” entry into the US.

“We’re not arriving and saying ‘we’re here from Australia, we’re now here to revolutionise and we’re going to tip 50 million in and show you how to do it’,” Mr Kelly says.

“We will build the North America business the way we build in Australia – slowly, methodically and not stepping outside our defined paradigms of how we go about doing things.”

Steadfast has been strengthening its local and overseas-focused leadership team while pursuing opportunities at home and abroad.

Former AIG local head Nigel Fitzgerald has become Chief Operating Officer, replacing Samantha Hollman, who has been appointed Steadfast International Chief Executive. That division’s new Chief Operating Officer, Nick McKee, has come on board after two decades based in New York.

JP Morgan analyst Siddharth Parameswaran says the ISU transaction is a low-risk move for a company the size of Steadfast, while offering the potential for future equity transactions within the network.

“On balance, we think that investors will like that Steadfast has entered the US market without committing too much capital,” he says. “While a lot is still uncertain, the acquisition provides Steadfast with meaningful opportunities for growth.”

The Independent Insurance Agents and Brokers of America estimates there are about 40,000 independent property and casualty brokers and agents in the US. Around half use wholesale brokers or managing general agents for commercial lines.

ISU operates across commercial, home, car, health and life. Its revenues comprise a small membership fee and commissions paid by insurers for business placed with them. Under its existing model it doesn’t seek to take equity in its member businesses.

Macquarie Group Insurance Analyst Andrew Buncombe says Steadfast should resist pressures to expand too quickly through acquiring network equity to increase earnings, while it assesses the US opportunities. He notes it will also take time for the Steadfast Client Trading Platform to gain traction in the market.

“Our conclusion is, as long as this is a 10-year strategy, it is a good move,” he tells Insurance News. “If they try and push this too fast, we have seen that strategy fail in other sectors multiple times.”

Jana Matthews, an international expert on entrepreneurial leadership and founding director of the Australian Centre for Business Growth at the University of SA, says a number of risks need to be considered when entering a US industry.

These include the combined impact of fluctuating exchange rates and higher than expected costs, and subtle but important differences in sector rules and regulations. US company management styles also tend to be more transactional, while Australian companies tend to be more relational.

Dr Matthews says the relatively small population base in Australia and New Zealand means fewer degrees of separation between business leaders, so introductions to new prospects or potential employees via “somebody who knows somebody” are easier to achieve.

But many more degrees of separation exist in a country the size of the US.

“It is difficult to get to the people you need to speak with unless you have identified a partner who is already working with the target market that you are going after – which is why acquiring a US company with customers makes sense,” she says.

If the US executives are recruited away or decide not to stay after the acquisition, the Australian company would need to recruit a new team, in a new country, and manage the relationships with US customers through the transition. And that could be risky, she says.

Australia’s three listed broking groups are each spreading their wings internationally, with different pathways and strategies, and investors and analysts will be watching progress as they each balance the demands of local and overseas operations.

AUB Group last year paid $880 million for Lloyd’s wholesale broker Tysers in an acquisition it has described as “transformational”. PSC Insurance Group has also made a number of overseas acquisitions, particularly in the UK, and its deals have included the purchase of Paragon International.

Steadfast, the largest broker network in Australia, started in 1996 and listed on the ASX in 2013. The network had 426 brokerages at the end of last fiscal year, including 337 in Australia, 63 in New Zealand and 26 in Singapore, Broking gross written premium was $11.6 billion.

The company has steadily added brokerages and increased its equity stakes in firms. Acquisition costs totalled $574.2 million last financial year, including $286.4 million for Insurance Brands Australia and $287.8 million for 57 equity stakes in network brokers through the “trapped capital” program.

Additionally, the company has specialist underwriting agencies and a 60% stake in global network Unison Steadfast. On the technology side, $1.2 billion was transacted last year through the Steadfast Client Trading Platform.

ISU started as a franchise more than 40 years ago and the next generation of the family has led the business as it has become one of the largest agency networks in the US, based on the revenue and premium generated by members. Steadfast says the experienced management team will remain post-acquisition.

An issue ISU has faced as a network is that some brokers looking to retire or sell-down have left, given a lack of options to remain, while private equity investments have not necessarily proved a good option for firms. Steadfast’s “trapped capital” program could provide mutual benefits in that context.

“Steadfast would be a logical buyer of these broking businesses to keep them in the network, whereas ISU did not have the appetite for taking equity stakes,” Morningstar analyst Nathan Zaia says.

Morningstar sees the fragmented US broker market presenting opportunities for Steadfast to make additional acquisitions, and says it’s in a good position to win market share by attracting members of other networks with a superior option.

Steadfast hasn’t elaborated on likely timeframes for its plans, but the company has already introduced itself to many ISU members through recent town hall meetings and says feedback has been positive.

“There’s a lot of networks over there, but they don’t have the range of products and services that we offer to help these smaller business grow and develop so we are a partner of growth in them,” Steadfast International’s Ms Hollman told the company’s recent annual general meeting.

“That’s the exciting opportunity.”