Australia s insurance sector Brokering deals to the full

Australia s insurance sector Brokering deals to the full 2015

1 Introduction Now is the time for smaller operators in the insurance broking sector to crystalise the value of their operations. Today s insurance brokerage market is relatively fragmented, with changing consumer preferences and behaviours making it more difficult for small privately owned operations to preserve their competitive advantage. With large market participants continuing their push for greater market share, those insurance brokers who have been acquired have been able to secure strong valuation multiples despite the underlying operating environment being one of contracting margins, greater competition and increasing efficiency requirements. In the last 36 months alone there have been 79 acquisitions observed in the Australian market as these large acquirers build scale and drive efficiencies through cost structures. This appetite for consolidation is leading to valuations of between 8 and 10 times earnings which will prove unsustainable over the longer term. While this appetite continues, so too does the environment for smaller brokers to consider their options. Although we expect consolidation within the insurance brokerage industry to continue in the short term (next two to three years), the attractiveness of valuations will have an expiration date smaller broking businesses need to plan now in order to maximise value.

2 Move forward with confidence and certainty Pitcher Partners is well placed to help you ensure you have a solid foundation to capitalise on the current strong transaction market. Our specialists well understand how to scale new heights while pursuing growth strategies that can inherently present risks unless measured, evaluated and planned for appropriately. After completing our own basic due diligence, we approached Pitcher Partners to help us navigate the Australian business environment and M&A process. They delivered on timesensitive matters and leveraged the knowledge they gained through their investigations providing a much greater understanding of the target company s valuation. As a result, we were able to achieve an adjustment on the original valuation, providing a fair and equitable outcome for both parties. We now use this as a model for all our transactions. Jimmy Jia // Investment Manager // Invengo International Pte Ltd

3 Market overview A period of consolidation is currently taking place within the broking industry, with a number of larger participants actively acquiring smaller participants. The insurance brokerage industry is encountering a changing landscape. While macro fundamentals are expected to remain positive, there are a number of challenges with new entrants and distribution channels competing for market share. The past five years have seen industry revenues grow at a CAGR of 2.6%, and determinants such as an aging population, and an increase in insurable items (dwellings, vehicles, businesses) are all forecast to drive growth at similar levels over the coming years. Traditional brokers have the advantage of impartiality over alternative distribution channels. However they have also turned to consolidation to take advantage of diversified offerings, improved efficiency and increased scale in order to remain competitive. Underwriters and banks have entered the market and in an attempt to move down the value chain are providing insurance directly to the consumer. Online aggregators such as iselect and CompareTheMarket have also emerged to compete with traditional brokers for private clients. Given that the top four participants account for less than 17% (Source: Ibis) of total industry revenue, the market is largely made up of smaller brokerage firms. This consolidation has seen improved revenue and profitability through diversified offerings, cross selling opportunities, increased efficiencies, systemised back office functions, and protection against new entrants to the market. With significant numbers of small brokerage participants still in operation, and increasing competition within the industry, further consolidation within the brokerage industry is expected. Product and services segmentation (2014-2015) 14% 9% 33% Life Insurance Commercial general lines Private general lines Other products and services Health insurance 2% 42% Source: IBISWorld Market trends Macro themes Low interest rate environment impacting brokerage investment returns Industry level impacts Revenue growth of 2.6% CAGR in the 5 years to FY15, and expected to continue at a similar rate Aging population requiring increased insurance to protect higher income, greater assets, and lower future earning capacity There is an expected increase in insurable items (dwellings, vehicles, businesses). Factors driving this include record low interest rates, and historically low car prices Downward pressure on premiums following the Federal Government s decision to open industry to unregulated foreign insurance companies (Oct-14) M&A activity at small and large ends of the sector to improve operating efficiencies and maximise profit Emergence of underwriters and banks through online offerings has increased competition Emergence of online aggregators targeting private clients with easy to use and convenient platforms available to compare and sign up for policies Brokers focused on delivering expanded services and remaining impartial to protect market share

M&A outlook Industry fundamentals suggest that the Australian Insurance Brokerage sector is set for continued consolidation during the next 3 to 5 years. 4 Market maturity Increasing distribution capacity has been a key driver of global M&A activity, particularly for insurers operating in single regions such as Australia Improved efficiency Consolidation creates cost efficiencies such as shared technology platforms, PI cover, distribution, and back office support. Greater scale allows leverage purchasing power, and assistance in obtaining capital Shifts in consumer preference Changing consumer behaviour such as increased use of the internet to both research and purchase insurance has reduced the effectiveness of some smaller brokers Expanding service offering The increasing importance of being able to offer value added services (e.g. risk consulting advisory and claim management) in order to compete in the market place has adversely impacted smaller traditional broking firms Key attributes of an attractive target Attractive financial profile; cash generative, long-standing customers Receptive to transitional arrangements that protect the business and relationships postdeal Likely to face business succession issues in near future

5 Recent reported transactions Currently, there are three active listed companies in the market, with a number of private groups also pursuing an acquisitive growth strategy. In addition to the following list of transactions, we are aware of a further 14 unreported transactions within the last two years. Date Target Acquirer Enterprise value $m EBITDA multiple Apr-15 ICF (Australia) Pty Ltd Steadfast Group Limited 32 7.0x Dec-14 Instrat Insurance Brokers Pty Ltd Arthur J Gallagher & Co 30 Na Aug-14 Ausure Pty Ltd Steadfast Group Limited 29 7.1x Jul-14 50% stake in Nexus (Aust) Pty Ltd and 75% stake in Asia Mideast Insurance and Reinsurance Pty Ltd Jun-14 Wesfarmers Insurance Investments Pty Ltd Oamps Insurance Brokers Ltd Austbrokers Holdings Ltd 8 Na Arthur J Gallagher & Co. 1,160 10.9x Feb-14 Procare Group Pty Ltd Austbrokers Holdings Ltd 18 Na Aug-13 * National Credit Insurance Brokers Pty Ltd Steadfast Group Limited 30 8.8x Aug-13 * GWS Network Insurance Brokers Pty Ltd Steadfast Group Limited 22 7.6x Aug-13 * Regional Insurance Brokers Pty Ltd Steadfast Group Limited 87 10.7x Aug-13 * Brecknock Insurance Brokers Pty Ltd Steadfast Group Limited 25 11.4x Aug-13 * Mega Capital Pty Ltd Steadfast Group Limited 21 7.8x Jun-13 InterRISK Australia Pty Ltd Austbrokers Holdings Ltd 20 9.1x Source: Cap IQ *Steadfast acquisitions in August 2013 relate to acquisitions made as a part of their IPO (58 acquisitions in total, the majority of which details were unreported). 8.9x Average EBITDA multiple last 24 months 8.8x 79 Median EBITDA multiple last 24 months Acquisitions past 36 months 3+ $31m Acquisitive acquires Average reported selling price (excluding AJG acquisition of OAMPS) $25m Median reported selling price (excluding AJG acquisition of OAMPS)

Case studies There are risks of not crystallising value in the current market; multiples may decline and we may see attrition of smaller brokerages that no longer remain competitive. 6 Arthur J Gallagher Acquisition of Oamps Insurance Brokers Initial Public Offering of Steadfast Limited Arthur J Gallagher Acquisition of Instrat US based Arthur J. Gallagher (AJG), the world s fourth largest insurance broking and risk management company grew its presence in Australia by acquiring the insurance broking and premium funding operations of Wesfarmers Insurance Investments Pty Ltd. The transaction included broking subsidiaries Oamps Insurance Brokers, OAMPS UK, Crombie Lockwood (New Zealand), Lumley Finance and Monument Premium Financing. The transaction was finalised in June 2014, for $1,160 million in cash, at a multiple of 10.9x EBITDA, and represents one of the higher multiples paid in this time of industry consolidation, for a large, diverse broking group. In August 2013, Steadfast Group Limited (Steadfast) completed a substantial series of acquisitions of equity interests (between 25% and 100%) in 58 insurance broking businesses, two underwriting agencies and two ancillary services businesses. The A$250.4m of acquisitions were executed as part of Steadfast s initial public offering, with the company expected to take advantage of significant growth opportunities through the potential for further consolidation and the ability to enhance cross-selling of products throughout the Steadfast broker network. Following its listing on the ASX Steadfast had an equity interest in 62 insurance broking businesses across Australia. In early 2015 Arthur J Gallagher (AJG) settled on the acquisition of Instrat, as part of its expansion strategy. Based in Melbourne, Instrat serviced a loyal and consistent client base which was attractive to AJG from a quality of earnings perspective and supported a higher valuation. The transaction enabled Instrat to manage its succession issues while crystallising the value built in the business by shareholders over past decades. The shareholders of Instrat were advised by Pitcher Partners Corporate Finance on this transaction. We engaged Michael Sonego and his team at Pitcher Partners late in the process and at a time that required significant expertise and experience to ensure value to shareholders was maintained or enhanced. What Pitcher Partners delivered was commercially astute advice combined with creative solutions. This achieved better outcomes than we had initially set. Michael and his team were also friendly and approachable which made the process that much easier and simpler and once on board we felt more confident and comfortable with the final outcome. We appreciate everything they did it really was uncharted waters for us. Peter Johnston and Jim Santamaria // Founders and Former Owners // Instrat Insurance Brokers

7 Profile of major acquirers Healthy trading multiples across key players in both the domestic and international markets continue to underpin high multiples paid for bolt on acquisitions. Ticker Company EV / EBITDA FY15 E Insurance Brokers ASX:AUB Austbrokers Holdings Limited 13.9 ASX:SDF Steadfast Group Limited 16.0 Insurance Companies ASX:SUN Suncorp Group Limited 19.0 ASX:CVO Cover/More Group Limited 18.4 ASX:IAG Insurance Australia Group Ltd 11.9 ASX:MPL Medibank Private Limited 12.6 ASX:NHF NIB Holdings Limited 15.9 ASX:QBE QBE Insurance Group Limited 8.4 Average 14.5 Median 14.9 Insurance Companies NYSE:AON Aon 16.3 NYSE:MMC March Mercer 13.8 NYSE:WSH Willis Holdings 16.4 NYSE:AJG AJ Gallagher 21.1 LON:JLT Jardine Lloyd Thompson 13.3 Average 16.2 Median 16.3 Source: Cap IQ Steadfast s business strategy is to grow shareholder value thought This strategy encompasses: Generating growth from acquisitions. We are the natural acquirer of Steadfast Network Brokers, non-aligned brokers and underwriting agencies. Steadfast Limited Investor Centre 2015 AUB Strategies FY14/15: Distribution Growth focus on organic distribution including bolt-on acquisitions; stand alone acquisitions. 2HY15 will benefit from continuing broking consolidation continuing acquisition opportunities. Austbrokers Limited, results presentation 25 February 2015 Are you sale ready? How to maximise transaction value factors influencing earnings multiple Opportunity to influence pre-transaction Depth in management Stable Highly predictable Very large Less competitive Self-sustaining Management depth Past earnings Future earnings Business size Industry competition Financing requirements Managed by main operator Less stable Extremely unpredictable Small one person business Highly competitive Capital constrained

Bringing the right team together 8 Michael Sonego Marcus Bartlett Partner As a Partner in the Corporate Finance team of Pitcher Partners Melbourne, Michael assists many clients, from a range of industries, with their transaction pursuits with specialist services including: mergers and acquisitions advice, financial analysis and due diligence investigations. Clients benefit significantly from Michael s astute business acumen and persuasive negotiating skills. Clients seeking growth through divestment and acquisition strategies draw on Michael s existing financial and banking networks to maximise business and financial results. He works with many public and private businesses on their buy and sell side mandates. Prior to joining Pitcher Partners in 2007, Michael worked with Baker Tilly in London where he provided clients with due diligence services and assisted clients to list on the Alternative Investment Market (AIM) of the London Stock Exchange. Areas of expertise Mergers and acquisitions advice Capital raising Due diligence Valuations Director Marcus is a Director in the Corporate Finance team of Pitcher Partners Melbourne, specialising in providing M&A advice to clients across a range of industries. With over 15 years of professional experience, Marcus is passionate about helping clients to grow their businesses via acquisition and working with business owners to realise value from divestments. Prior to joining Pitcher Partners in 2015, Marcus worked for large international advisory firms in both Australia and the UK, advising clients that included large multinational enterprises, family-owned companies and private equity on both buy and sell side transactions. Between 2006 and 2011 Marcus held internal M&A roles with two of Australia s largest corporates, Wesfarmers Limited and Foster s Group Limited. These roles have provided Marcus with significant commercial experience in managing end-to-end M&A initiatives; from working with senior management teams in defining strategic objectives, to identification and origination of targets, deal execution, due diligence and integration activities. Areas of expertise Mergers and acquisitions advice Capital raising Due diligence Valuations

9 About Pitcher Partners Pitcher Partners is a full service accounting and business advisory firm with a strong reputation for providing quality advice to privately-owned, corporate and public organisations. In Australia, Pitcher Partners has firms in Adelaide, Brisbane, Melbourne, Perth, Sydney and Newcastle. We collaboratively leverage from each other s networks and draw on the skills and expertise of 1,000+ staff, in order to service our clients. Pitcher Partners Melbourne is the leader in the middle-tier market and is the largest accounting services firm in Melbourne after the Big 4 multinational firms. Pitcher Partners is also an independent member of Baker Tilly International, the eighth largest network in the world by fee income. Our strong relationship with other Baker Tilly International member firms, particularly in Asia Pacific, has allowed us to open many doors across borders for our clients. Pitcher Partners is a national association of independent firms. Liability limited by a scheme approved under Professional Standards Legislation. Est. 1991 Our commercial services to dynamic businesses Financial essentials Accounting and Business Advisory Services Audit, Risk Management and Assurance Internal Audit Recovery, Turnarounds and Insolvency Tax advice and Compliance Planning and growth Business Consulting and Commercial Advice Business Performance Improvement Business Structuring Corporate Finance Corporate Governance International Business Advisory Investment Advisory Services Succession Planning Superannuation Services Tax Consulting Technology and IT Consulting Valuations Our private wealth services Estate Planning Family Office Management Investment Advisory Services Philanthropy Services Succession Planning Superannuation Strategies Tax Advice and Compliance Industry specialisations Retail Professional services Health and aged care Manufacturing Not for profit Property and construction Government and the public sector Agriculture Food and beverage Hospitality Pitcher Partners refers to the Victorian partnership and its associated entities including Pitcher Partners Advisors Limited, Pitcher Partners Consulting Pty Ltd, Pitcher Partners Corporate Pty Ltd, Pitcher Partners Corporate Finance (Vic) Pty Ltd and Pitcher Partners Investment Services Pty Ltd. Melbourne 640+ Total Melbourne staff $3.6bn Worldwide revenue 2014 (USD) 133 Countries 27,000+ Partners and staff globally 93 Partners nationwide 1,000+ People nationally 45 Melbourne partners

10 Firm locations Pitcher Partners has the resources and depth of expertise of a major firm, but with a smaller firm feel. We give our clients the highest level of personal service and attention. That s the difference. Accounting Firm of the Year Winner of the 2014 Thomson Reuters Accounting Firm of the Year Indirect Tax Team of the Year Winner of the 2014 Thomson Reuters Indirect Tax Team of the Year Tax Team of the Year 2014 FINALIST BRW Client Choice Awards 2014 BRW Top 50 Companies to work for in Australia Winner of the 2014 Thomson Reuters Tax Team of the Year Disclaimer // In this proposal, Pitcher Partners refers to the Victorian partnership and its associated entities including Pitcher Partners Advisors Proprietary Limited, Pitcher Partners Consulting Pty Ltd, Pitcher Partners Corporate Pty Ltd, Pitcher Partners Transaction Services Pty Ltd and Pitcher Partners Investment Services Pty Ltd.

Get in touch Michael Sonego Corporate Finance Partner +61 3 8610 5485 michael.sonego@pitcher.com.au Marcus Bartlett Corporate Finance Director +61 3 8610 5249 marcus.bartlett@pitcher.com.au MELBOURNE SYDNEY PERTH PITCHER.COM.AU +61 3 8610 5000 partners@pitcher.com.au +61 2 9221 2099 partners@pitcher-nsw.com.au +61 8 9322 2022 partners@pitcher-wa.com.au ADELAIDE +61 8 8179 2800 partners@pitcher-sa.com.au BRISBANE +61 7 3222 8444 partners@pitcherpartners.com.au NEWCASTLE +61 2 4911 2000 newcastle@pitcher.com.au Pitcher Partners is an association of independent firms. Liability limited by a scheme approved under Professional Standards Legislation. insight_broker_150831