Vertically Integrated Insurance Brokers Under Regulatory Scrutiny

Steadfast's, and to a lesser extent, AUB Group's, shares fell materially following an ABC report concerning strata insurance commissions. The crux of the allegations being that Steadfast brokers are conflicted in recommending strata insurance because Steadfast owns the largest strata agency in the country, CHU. And as a result, premiums are rising for customers because of Steadfast’s market dominance. Another claim, which Steadfast did not dispute, is the existence of joint ventures between brokers and strata managers that potentially skirt the strata managers' disclosure requirement as it is not “commission.” This is a bad look, adding an unnecessary financial incentive to use one broker over another. Considering all this, the chair of Australia’s competition regulator is calling for a ban on strata insurance commissions. Nevertheless, we think both narrow-moat firms are undervalued, with the potential regulatory intervention in the sector rattling confidence.