Company Interview / No premium rises? No worries...

Robert B. Kelly CEO of Steadfast (ASX:SDF) observes that adverse claims and severe weather events across Australia drive a hardening in insurance pricing. Despite increased costs in operations, the company manages to contain expenses and maintain profitability through strong teamwork.

Robert anticipates a flattening rather than a softening of price increases, predicting inflationary hikes between 2.5% to 5% yearly. Increased market competition could boost policy volumes, even if pricing stabilises. He attributes Steadfast's success to diligent control and cultural alignment in acquisitions.

Discussing Steadfast’s US expansion, Robert highlights the company's comprehensive market knowledge and careful acquisition strategy. With a strong team and ethical reputation, he sees minimal execution risks and substantial potential for enhancing distribution networks

Full unedited transcript:

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I think we've seen over the last few years a people say the hard market, but a hardening in pricing due basically because of the adverse claims and more particularly on the East Coast. So I should say probably all around Australia, the the actual weather events that have created the problem. So what you've had over the past, say, five years or six years is you've had the normal attritional claims that that have been being paid. You've had the adverse weather claims of catastrophe covers that, as you might refer to it, that has been increasing that and the insurers have been slow to put pricing up. And then all of a sudden, about three years ago, we had to we had to get really, really stiff on pricing. Compounding that, of course, has been the fact that y that the, uh, claims inflation is compounding each year it's going up and up and up more, more so that the consumers had to pay more for their insurances and I

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guess in some ways, because we're we're a, uh, uh, 70% of our revenue comes from, uh, commission on policies that we sell that we've been writing a bit of a, I guess, a what you might think, uh, is extremely more, more profit. The reality is, but that the expense line has well and truly been following it. So it's not like the expense line has flatlined over the last five years. You know, we've had eight, eight, 8% wage rises and we've we've had incredible costs in, in a whole range of things in our, in our operations structure that that has meant that the increase in the premiums and the increase in the REM hasn't really been what you would call that the the result of why we've been profitable. The reason we've been profitable is that we've been able to contain the contain costs to about the

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same level as what the extra, extra commission and fees have reduced in by way of revenue. So it's almost been a couple of parallel lines. So the, the, the the fact that we have been successful over the last decade, and it's because we have an incredible teamwork of people. We stick to our our knitting, we understand the industry that we operate in, and we're very clear in our direction about what we want to do with the business. And, you know, we'd not go out building rocket ships. You know, we we're advisors on general insurance. We're managers of, uh, mGUS that where we get capital given to us on behalf of the insurers to go through. So the the easing that we will see on pricing, um, that's coming, it's not going to be a waterfall in terms of profit, because everybody's been been tailoring their revenue to and their, their expenses to make sure that they're parallel. I'm

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not I'm not too concerned that if there is a flattening of pricing that, um, that we're going to we're going to sustain any hit to, to our bottom line profit. Well, you answered one of my, one of my questions for later in the piece was exactly that. What happens when premiums start coming off? Because arguably, that's perhaps why the share price has been relatively subdued to start the year. Because, you know, there is this, this looming prospect for the premiums to come off. But maybe you can help me then understand volumes. So, you know, you put volumes down as one of the reasons why you've seen, you know, such strong performance. Help me understand the dynamics. Will that continue? Pretty easy to understand that in hard times when insurers are less competitive and when markets recede and don't want to write things, the consumer, uh, usually is happy to stay where they are. In other words, you don't sell a lot of a lot more

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clients. So your volume stays maybe 2 or 3% a year, it goes up. So what? The job of the intermediary is at that stage is to make sure that the consumer is well insured and that the consumer is being looked after. When you get a softening of the market, okay. And I when I say softening, I don't believe there will be a softening. I believe I believe there'll be a flattening of price increases which will go back to normal, maybe inflationary increases yearly, you know, somewhere between two and a half and 5%. So what what what I mean by volume is that when there is more available market to compete for the clients, uh, policies, then the average insurance broker uses that as an opportunity to actually get more clients. So so what you may do, you might may find is that the volume of people that you act or the volume of policies that are, that are

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transmitted through an intermediary will go up and, and, and your turnover will go up proportionally for that, even though the the the level of pricing will have flattened out to maybe normal three to, you know, two and a half to 5% increases each year. Yeah. Got it. All right. And another feature of this result was the acquisition strategy that you've deployed that has proved positive from what I can see. Will it continue. Look it'll continue for us because we're we we never get deal fever. Okay. We've been doing we've been we've been on an acquisition strategy now for 11 years. So, um, I think if we were, if, if our, um, way we operate and evaluate businesses and then operate them in our care cuts and control was wrong, it would have failed quite some time ago. So we we will continue to acquire we'll continue to be diligent in the way we are, appraise a piece of business and whether we whether

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it is culturally aligned to us. I mean, last year we looked at probably about three quarters of $1 million worth of acquisitions that we didn't buy. Um, not not that there was anything wrong with them, but they don't fit the way we look at businesses that we want to acquire and co-own and run. So we'll keep going with that strategy, which has been, you know, retrospectively looking back, successful for us. And we'll never we'll never get to a situation where we will say we have to do a deal, because if we don't, we don't do a deal. People will think we're not developing. So I think our our strident approach to that has been it's paid dividends over a decade. And what about the US um, expansion strategy. It's you know, obviously the total addressable market, the Tam is huge, but there are risks associated with it. So are there sort of any execution risks that remain with that international expansion? Well, you have to look at firstly, our

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knowledge of the US market goes back 15 years and we've been we've been working on this acquisition before we floated. Okay. Expanding into the US. And so I'm fortunate that I'm on I'm on a US board that that works in it, works in it and understands the nuances of how distribution works across the US and and in fact, well known in the US market insurance market. So it's that we're not arriving and planting a flag and saying, hey, we're here to to revolutionize the US distribution market. And so the the asset we've bought over there is a great asset. It's well run. It was owned by a family who wanted to realize the the asset value and distribute the funds through the family. The father started the business uh, 40 odd years ago. And in his will, he left it to the family trust. So it was time for them to, uh, I guess, spread the money

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around. But firstly, it wasn't broken. It was. It was over 43 states. The people. The reputation it has in the industry is one very similar to ours honorable, ethical and do what they say. And and I guess thirdly, the executive team was fine. We didn't have to go in there and shoot anybody. We didn't have to go in there and and change too much. So what we built and what we had built here in steadfast was a strong team of a, a CEO, a CFO and a CEO that that were were moved about a year ago, just all probably a lot about 18 months ago actually. Time flies. We've owned next month nearly we've owned that free for a year. So it's probably about 18 months ago. We set our team up not to go over and take over the business, but to work alongside the people in that business and and enhance what we know about distribution alongside what they've achieved with this distribution. So

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the execution risk for us is nil because we're not going to execute anything. What what exists is, is as well done. What exists makes money and what we will do will be incredibly add to their skill levels and incredibly add to what we what they, I assume steadfast, will do for their their their agency network. Got it. Um, okay. So just in the interest of time, you've provided guidance going forward. What are the highlights for you? What are the risks like, what are you going to be really busy with as we get further into this new financial year? Because to your point, you know, we're almost September. I know it's frightening, isn't it? I mean, I don't know, I don't I don't know what happened to the year, but the risks are to us. Uh, probably to work with regulation all the time. Uh, we are one of the most highly regulated countries in the world. And the consumerism protection that's put down by governments. Sometimes

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you have to work in advance to make sure you're, you're you're over the top of it. So for, for us, the businesses are well run for us. Uh, our interaction with with the, uh, industries, uh, well established as being, uh, we know where we're going and they know what we're doing. So from from the point of view of running a business, an ASX 100 company, we have to make sure that we that everything we do complies with the regulation in regard to how consumers expect to be treated and, and the delivery of our service and our product lines like stacks up to the, the, the legislation that's being put over us periodically by the government. So that's the thing that we focus on. We've got a team that does that to make sure that when you deal with a steadfast intermediary or a steadfast managing agency, you're actually getting the best you possibly can in terms of service, product line, a competitive pricing and

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also a an organisation that is cognisant to the government regulations they have to operate under