Surviving and thriving in challenging times

Mark Searles, CEO and managing director of Austbrokers, talks income diversification and shares his frustrations at inaccurate media reporting

If there's one thing that irritates Mark Searles, it’s journalists who don’t check their facts.

In July, an investment analyst authored a piece published in a major metropolitan newspaper. In that piece, the analyst opined that Austbrokers could be threatened by a Berkshire Hathaway decision to sell commercial insurance online, specifically targeting SME businesses.

“That [article] was full of factual inaccuracies and assumptions that were based on erroneous information,” Searles tells Insurance Business. “I’ve been in contact with the author and I’ve provided him with a balanced view, because it’s an area that always frustrates me.

“When you’re running a listed company, the right of reply is sometimes limited, and it doesn’t help when people don’t get a balanced view or come to you for your side of it. In that particular instance, had the author contacted Berkshire Hathaway, had they spoken to [Berkshire Hathaway Specialty Insurance’s Australasian president] Chris Colahan like I’ve done, they would’ve found very quickly that they have no plans whatsoever to launch any direct commercial operation.”

Searles draws attention to the fact that the article in question was based on a piece originally published in an American publication, discussing Berkshire Hathaway’s activities in respect of the US market. “It had nothing to do with Australia at all,” he says. “I get particularly annoyed because, at the end of the day, articles like that get picked up by the national press … When you don’t have a right of reply or a balanced view, it’s one person’s view that gets published … And you think, ‘Hang on a minute. If someone had bothered to ring us up and ask for our view of that, we could’ve completely … put it right.”

How does Searles feel about the notion that broking is, or soon will be, dead in the SME space?
“Absolutely ridiculous” is his unequivocal response. “This is a relationship industry … At the micro end of SMEs, can you commoditise the risk? Absolutely, the client has a choice. We recognise that and, equally, we have answers to that. But, more importantly, it costs nothing to use a broker … The client can be getting professional advice from a broker; he is licensed by ASIC to advocate for the client. So why wouldn’t you use one? This whole concept of everything’s going to hell in a handbasket and going direct [is] absolutely ridiculous.”

Asked for a broker’s best defence against digital disruptors, Searles says, “One word – relationships.” But he adds, “Clearly, you can’t rest on your laurels. If you can commoditise something, as I said before, there’s always the opportunity of putting things online, but we won’t stand back and just allow that to happen. Every day you … hear [about] big insurers with their … offerings online. That’s fine. Let the client choose. We have to be pretty confident that the quality of relationships is strong enough to protect against just saving a few dollars.”

In August, Austbrokers announced an equity partnership with Allied Health Australia, an occupational health and safety rehabilitation service provider. Consistent with Austbrokers’ Owner-Driver partnership business model, the deal involves the group acquiring 60% of the equity of Allied Health Australia. This is a further example of Austbrokers executing its risk management diversification strategy, which it initiated two years ago.
“Our whole strategic intent is to become the provider of choice for clients and business partners across Australia and New Zealand in the total risk management space,” Searles says. “The acquisition … basically gives us a really good position in the return to work services marketplace.”

Searles says there are two parts to the group’s strategy. “One is to diversify our income generation. So, if you go back five years, the vast majority [of income] would’ve been derived out of broking. Effectively, I’ve been keen in my time here to diversify some of that income to become less exposed to the insurance cycle. But secondly, the more important point is if we think about the concept of our clients, and predominantly they’re commercial clients, then how do we ensure that we provide risk services, including the provision of risk assessments: people risk, physical risk and financial risk in all those areas … how do we ensure that we provide relevant solutions? So this is part of that strategy.”

Execution of that diversification strategy means that 23% of Austbrokers’ net operating profits now come from non-broking business. That’s virtually doubled since FY12, when the figure was 12%.

The end of August saw the group announce its full-year results for FY15, reporting its 10th consecutive year of underlying profit growth since listing. It reported a 2.5% increase in net profit after tax of $36.3m, which was in the middle of the guidance range it indicated back in January. Risk services were reported as already outperforming plan, delivering over $2m in profit before tax. Searles described the results as “solid performance in a challenging market” that reflected the group’s “continuing focus on its sustainable growth strategy”.

Additionally, the group announced it had committed over $70m to acquisitions over the previous year, making it Austbrokers’ biggest year to date for acquisitions.

So is Austbrokers focused on very specific business types to partner with in pursuit of its risk management diversification strategy?

“If we can see areas of potential growth and opportunity to the strategy, we’ll focus on it,” Searles says. “We’ve got … a number of partners operating in the return to work services market who are at the top of their game. Our ambition is to partner with businesses that are best in class, and [the Allied Health Australia transaction] is another example where we’ve done that. It doesn’t mean to say we go out there and acquire things willy-nilly, because we won’t do that. We just want to partner with companies and people who are delivering the requisite metrics for the clients …”

And does risk management specialisation serve as an important differentiator between Austbrokers and competitor broking network Steadfast?

Searles says it’s a differentiator from Austbrokers’ point of view, but that the two business models are fundamentally different. “Everyone talks about Austbrokers versus Steadfast but, at the end of the day, the similarity is we’re listed companies. We have different strategies, different approaches and business models.

“If we look at what Steadfast have been doing recently, they’ve been really looking at acquiring 100% shares of underwriting agencies. Our core business model is an Owner-Driver model. It’s an equity partnership model. Effectively, we see the end client as critical to basically ensuring we drive the strategy.”

On the subject of underwriting agencies, Searles cites the growth of the group’s agencies as a highlight of the year, alongside its diversification strategy. Those underwriting agencies have enjoyed “strong progression”, according to Searles, with 29% growth in revenue and profit contribution before tax of 35% in FY15. He says the group’s strategy here is to build specialist agencies that are top-three players, if not the market leaders, in chosen segments. And investment in these start-up agencies certainly seems to be paying off. “Longitude [Insurance] is now the third-largest strata insurer in Australia,” Searles tells Insurance Business. “That grew from a start-up three years ago. And New Surety is … a top-three player in the surety bonds market.

“I think it’s great to see when strategy is executed well, and you stick to your principles and your disciplines, and you start to see some of these things delivering for you.”

On the horizon
Contemplating times ahead, Searles says the greatest challenge for Austbrokers in the short to medium term is managing its business opportunities. “It’s to ensure we choose the right priorities and, being a listed company, [that] we’re deploying shareholders’ funds in the correct way. A lot of opportunities we get presented with, sometimes, we have to prioritise out of the way because we have to ensure we’re doing the right thing at the right speed to grow our business, because our view is this is all about creating a growth trajectory for the medium and long term … It’s not just about tomorrow.

“So it’s all about making sure we put the right bets in place which, from my point of view, if we look at a lot of the work that we’re doing in the underwriting agency space, it’s all been around how do we seek start-ups rather than going and spending shareholders’ money on buying things. We find it far more effective to actually create a very strong value proposition than just going and buying something in the marketplace.”

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