AUB Group Limited (AUB) Earnings Call Transcript & Summary

Good morning, and thank you for joining us this morning. I'm pleased to announce that AUB Group has agreed to acquire 95.9% of Prestige Insurance in the U.K. for GBP 219 million, AUD 432 million based on an EBITDA multiple of 12.9x before taking into account cost synergies. Prestige is a diversified insurance business comprising a portfolio of broking and underwriting agency businesses as well as an insurtech platform. The business is guided by a highly experienced and respected leadership team, which will continue to drive its success under the direction of CEO, Trevor Shaw. The acquisition is highly complementary to AUB's strategy and will enable us to accelerate the delivery of growth and margin benefits planned for the U.K. and the International division. In December 2025, we also completed step-ups of our equity stakes in 360 Underwriting and Pacific Indemnity in Australia. Originally, these step-ups were planned for the second half of '26. However, our equity partners requested we bring them slightly forward to December. Given the requirement to fund the Prestige acquisition, together with the step-up investments in 360 and Pacific Indemnity and to ensure we retain sufficient funding capacity for additional bolt-on and step-up investments likely to arise later in calendar year '26, we have chosen to secure a level of funding that exceeds the amount needed solely for the Prestige investment. To achieve this, we've increased our debt facility by $200 million and today are launching an underwritten $400 million institutional placement at an offer price of $29.40. A non-underwritten share purchase plan will also be made available to eligible shareholders. On a pro forma basis, post Prestige, these step-up investments, the capital raising and the increase in our debt facility, our leverage will be circa 2.47x, and we will have circa AUD 303 million of cash and undrawn debt available, providing us flexibility to deploy capital in a disciplined manner over time. And while the leverage has increased since our financial year '25 result, we are comfortable with this level in the context of the continued strong performance of the business and this highly strategic opportunity, noting that our business has a strong track record of earnings growth and cash generation, which will lead to a natural deleveraging over time as we have demonstrated strongly in the past. The investments in Prestige and the step-ups are expected to be EPS neutral pre-synergies and low to mid-single-digit EPS accretive post synergies for calendar year '25 on a pro forma basis. The surplus cash and debt headroom resulting from the equity raise is expected to lead to additional EPS accretion over time as and when the funds are deployed. And while we are still working through the preparation of our audited results for the first half, we expect our first half '26 underlying net profit after tax to be in the range of $90 million to $91 million. On Slide 11, we have provided an overview of performance in the first half of '26 based on unaudited preliminary results. As mentioned, we anticipate the underlying net profit after tax for the first half to be in the range of $90 million to $91 million, representing growth of 13.4% to 14.7% on the prior calendar period. During the first half of '26, we observed strong performance in most of the group. We are very pleased with the results the team delivered in the first half, which has been achieved in the face of some meaningful FX headwinds. There are 2 aspects. Firstly, during the first half of '26 on a constant currency basis, using first half '25 FX rates, the underlying net profit after tax would have been $2.2 million higher. Secondly, I'd also highlight that this continued devaluation means that as our hedge contracts mature, they are repricing at lower spot rates such that the benefit of the hedges is diminishing over time. For example, the benefit from FX hedges reduced during the first half of '26 versus the first half of '25 by approximately $1.8 million. Against this backdrop, the team has delivered strong organic growth, and I'll summarize each division's performance now. Our Australian Broking division continues to deliver solid performance, notwithstanding the reduction in interest income, which has arisen from lower interest rates as well as challenging and highly competitive conditions in the large and corporate segment of the market. The Underwriting Agencies division enjoyed another strong half, although strata agencies struggled in a challenging market with competitors continuing to significantly reduce rates. The International division performed well and margin improvement initiatives are starting to deliver tangible benefits. We're also beginning to see pleasing momentum from newly seeded businesses in this division. Discover continued its positive trajectory, delivering another half of robust organic top line growth and margin expansion, both locally and in their offshore markets. New Zealand results for the half were disappointing and significantly underperformed expectations. There's been a weakness in the corporate market across New Zealand, and this has impacted the business and our initiatives to grow market share have not delivered satisfactorily. We're working with these businesses to adjust short- and medium-term performance outcomes. In summary, during the first half, we saw solid to strong performance across much of the business, muted by the disappointing results in New Zealand and the negative impact of currency devaluation. Based on the strong business performance in 1 half '26, we are reaffirming our financial year '26 UNPAT guidance in the range of $215 million to $227 million despite the anticipated continuation of FX headwinds during the second half. This guidance note is before the impact of the Prestige acquisition and the step-up investments. It's important to note that the step-ups were already planned to occur in financial year '26. They have, however, simply been brought forward slightly into the first half. Additionally, the completion of the Prestige transaction is subject to FCA approval, and we expect this to most likely take place during the fourth quarter of financial year '26. An additional item I want to highlight is that we expect to recognize noncash impairments in the first half of '26 of circa AUD 39 million. AUD 26 million of this relates to a brokerage focused on the corporate segment in Australia and a further $13 million relates to historical Tysers wholesale team departures that took place in early calendar year 2025. These impairments relate to the carrying value of the broker registers as well as to the assessment of the carrying value of goodwill for these respective businesses. Moving to Slide 13, which provides an overview of Prestige. Prestige was established in 1973 in Belfast and has built a strong portfolio of businesses across the U.K. and Ireland. The group places over GBP 300 million of premium with an EBITDA of GBP 17.5 million in calendar year '25. The business runs at a 30% margin and has a significant and experienced team led by Trevor Shaw, a respected senior industry leader. On Slide 14, you'll note that Prestige bears a strong resemblance to our Australian operations. They have a portfolio comprised of retail brokerages, underwriting agencies and a highly successful insurtech. In effect, this acquisition, complemented by our equity partnerships with Novo and Momentum, both leading U.K. appointed rep networks, positions us to replicate the model and structure we have in place in Australia and enables us to take advantage of growth and optimization opportunities across the U.K. market. Our success in achieving the scale and maturity in retail broking in the U.K. is described on Slide 16. Following this investment in Prestige, AUB's U.K. retail broking portfolio, excluding MGAs, will place close to GBP 550 million in premium with teams interacting with our clients across more than 200 locations. Similarly, the underwriting agency portfolio writing GBP 180 million of premium provides a strong platform to grow, not only delivering placement capacity for our brokers and clients, but also the ability to seed or bolt-on new agencies to further scale the portfolio, consistent with the model we have successfully executed in Australia. Slide 18 illustrates the breadth of the portfolio we've built in the U.K. over the past few years. one that is strongly aligned to the foundational structures that underpin our success in Australia. And this includes strong, well-established and respected authorized rep networks, specialist and/or scaled licensed retail brokerages and both general and specialist underwriting agencies. And in addition, we now have equity stakes in 2 distinctive insurtech players that we can deploy to utilize across our growing portfolio. All of the building blocks for growth are now in place. Prestige is already an excellent business on a stand-alone basis. There are, however, additional benefits and synergies we expect to unlock, and these are summarized on Slide 19. Please note that for the purposes of estimating synergies, we have only quantified cost-out opportunities, and these are expected to be greater than AUD 10 million by the end of FY '27 on a run rate basis. In addition, we are optimistic that additional upside will be delivered through revenue synergies over time. I've previously spoken about the lack of operational leverage in the existing Tysers retail business and the need to optimize the middle and back-office efficiencies to unlock this potential. And this represents our first synergy area. With this transaction, we will now be able to leverage Preston's scale and operational capacity whilst also being able to drive focus and efficiency in Tysers wholesale by focusing the middle and back office support on that area. Secondly, we will streamline and rationalize overlapping functions across Tysers Retail and Prestige. Thirdly, the leadership of the merged Prestige and Tysers retail operation will enable us to leverage Prestige team's experience and capability. Fourth, the additional scale and breadth we achieved through this merger will increase our ability to enhance commercial arrangements with industry partners. Fifthly, we see meaningful opportunity to enhance the flow of business between AUB retail broking businesses and our expanded MGA portfolio. And finally, leveraging Tysers wholesale wherever possible to place retail MGA binders and individual risks into Lloyd's. And this follows the model and approach we demonstrated when we acquired Tysers Wholesale and delivered these synergies by placing Australian and New Zealand volumes into Tysers. In summary, we believe there are significant benefits to be gained from these areas with many that are as yet unquantified. We've previously described our ambition to grow in the U.K. retail market. And on Slide 21, we've summarized the reasons why we have targeted retail in the U.K. and the considered approach we've adopted for our expansion in U.K. retail. So why U.K. retail? Well, frankly, we're good at retail. This is a core strength of AUB. We know how to manage retail broking businesses and MGAs. We have an outstanding platform to leverage in the U.K. through Tysers, and we know that our owner driver equity model is a key differentiator, not only in Australia and New Zealand, but also in the U.K., where our discussions have met with significant engagement and enthusiasm. The ambition is also supported by the fact that the U.K. broking market is at least twice the size of the market in Australia. We identified 5 areas of focus that we felt would be necessary to position ourselves for success in the U.K. retail. Firstly, to split out Tysers retail from wholesale. This was completed last year, except for the middle and back-office separation, which was deferred until we made an investment like Prestige. This will result in a far more fit-for-purpose middle and back office setup given the differences in market focus between our Tysers wholesale and U.K. retail businesses. Secondly, to invest in at least 1 and ideally 2 highly regarded authorized or appointed rep networks. We have 2 in Australia, and we now obviously have our equity stakes in Momentum and Movo. Thirdly, to build out a national license brokerage with a national footprint and brand. Post completion, we intend to rebrage our Tysers retail business under the Prestige brand, which will now be our go-to-market in the U.K. and operate as our national licensed brokerage. Fourthly, to grow a portfolio of MGAs that support the retail broking businesses in both general and specialist commercial products. And finally, to build out a selective portfolio of insurtech assets that can be deployed in AUB network businesses. We are pleased with the significant progress, apologies, achieved to date. And as you can see, the acquisition of Prestige significantly enhances our ability to deliver on the last 3 building blocks. We are very pleased to have secured an investment in a business of prestigious caliber. It represents an excellent strategic fit with AUB Group, and we are delighted to welcome Trevor and his team into the AUB family. This acquisition positions us incredibly well to accelerate our growth in the U.K. market and to build a set of businesses in the U.K. that, in time, will rival the quality and scale of our Australian portfolio. The rest of the slides in the pack cover the equity raise in more detail, and I will leave these for you to work through in detail. I'll now hand over to the moderator to take your questions.

[Operator Instructions] Your first question comes from Tim Lawson with Macquarie.

You've talked about the strategic rationale of the Prestige transaction. Can you just talk about how prepared you are in terms of -- from an inside looking out U.K. retail perspective and how ready they are for this change?

Yes. So well, in fact, I think if we hadn't have made an acquisition like Prestige in the first 6 months of calendar year '26, I think we would then start missing out the opportunities that we're prepared for. So in effect, the last 18 months, we've been separating our Tysers retail. We've been preparing the middle and back office and our technology functions for exactly this type of structure and opportunity. We just didn't have, if you like, the platform or foundation to move on to. So we've done everything we can with Tysers Retail. by having effectively a sort of a platform that we could move it on to. So short answer, Tim, I think the timing is spot on. And in fact, the last 18 months have been pointing to and preparing for this point.

Okay. And then just in terms of the -- if you look back to the original Tysers transaction, you talked a bit about the sort of wholesale opportunities from ANZ Australia, ANZ AUB into the U.K. market and then obviously, commercial terms as well. Can you just -- you haven't talked in as much detail around those sort of commercial term step-ups and wholesale opportunity in this case. Can you sort of contrast the differences as to why that situation?

Yes. I think we had -- so we have been preparing and determining the potential value. We set up a business specifically called O placements so that we could anticipate and understand the benefits we get from a wholesale investment. And I suppose in a way, we'd almost geared everything up to estimate those synergies a year before we even embarked on the Tysers investment. And it was also clearer because MGA binder placements, you can much more tangibly determine. And so I guess there's -- it's not do I believe the benefits are there or not. It's the confidence in being able to estimate them with certainty that we're confident enough to explicitly talk numbers with the market, I think. So it's more about our confidence in estimation than our confidence in the benefits being there.

Okay. And then maybe just a sort of question on the BAU M&A and the step-up M&A, we think about those separately. Just you obviously -- it's obviously been an active period. You called out that the step-ups has sort of maybe fallen in this half rather than the next half. Just anything in particular as to what's behind that timing, why you think there might be a slightly slower period between you sort of called out the end of the calendar year as being maybe the next point of time where there might be some more activity. Just to understand that cycle of timing, please.

Well, I think I said that we agreed with the vendors on Pac Demon 360. I think to be more explicit, we are working through a restructuring of our underwriting agencies portfolio in terms of management and coordination. And we've built a really nice portfolio of agencies we are now looking to how do we consolidate and optimize those. And so in a way, part of the step-up in equity was to facilitate some consolidation activity that we anticipate we can make over the next 6 months. That's the first point. So that really precipitated part of why we wanted to take these step-ups and then also why we felt it was easier to do it earlier than later. So that piece specifically. I think probably worth emphasizing that when we talk about consolidating businesses, I've spoken for several years about the importance of consolidations in terms of our optimizing of our portfolio and the margin improvement. But very often, the consolidations and the step-ups are linked because in some cases, to facilitate a consolidation, we also take a step-up in equity to enable that consolidation and vice versa. And so there's a piece which is around if we couldn't take step-ups, we would struggle to action the consolidations. But if we just took step-ups, there'd be less value in the benefit. And so long answer to a short question, we anticipate that there are lots of opportunities for us to continue to consolidate the portfolio to continue to step up our equity stakes. And that's part of what -- why we effectively are looking to raise more equity than is purely needed for the Prestige acquisition. The second piece is that the reason for the timing is actually more about just a broader plan in terms of the way in which we can drive some efficiencies across the business.

Your next question comes from Olivier Coulon with E&P Financial Group.

Congrats on what seems like a pretty sensible deal. Just have a question on the guidance. So you mentioned that it's pre the acceleration of the step-ups, which presumably will increase guidance. But then you don't mention whether it's adjusted for the $400 million capital raising. So is that inclusive of that? Because I suppose depending on what you do with the cash, that will obviously kind of generate some[indiscernible]

Well, so there will be -- I mean, it's slightly swings and roundabouts, Olivier. I think probably 4 comments I'd make. The first one is, obviously, the difference to -- in terms of the step-ups is really the net benefit you get between the debt cost versus the profit contribution over a few months being the acceleration. One of those was going to be in June and the other one is going to be in April. And so it's not a full half of benefit. And obviously, it's the net benefit in terms of -- because we're funding -- you've got to look at the the debt cost piece. That's the first point. Second point is purely on a -- if you're talking about the difference in the timing between the raise today and the deployment of the capital for Prestige and pick a date, say, end of March, end of April, then yes, there is some benefit in terms of an interest piece. But we also obviously have slightly offsetting that is facility costs and deployment of the debt component. But then as I've referenced, there's a hard to quantify FX headwind that we anticipate in the same period. So if you take all of those things in the rounds, our view is based on the -- so the positive is business is performing arguably ahead of expectation. headwinds, particularly from FX and New Zealand underperformance. In parallel, you've got some swings and roundabouts in terms of funding costs, a bit of uncertainty around the timing of Prestige, et cetera. And so we're confident that guidance range, we're still in play. Business is performing well. No reason to have frankly, no reason to say strong confidence in increasing guidance, no reason to feel nervous about the other situation. But just too early to say given uncertainty around interest rates, FX rates, timing of the Prestige completion. There's a whole bunch of variables in there that we think just sensibly, we stick middle of the road, hit the ball straight, and we just get on with things.

I appreciate that. I mean, particularly given the importance of the fourth quarter. Just maybe have another crack at that revenue synergy because I know that you obviously played a reasonably straight bet. So I mean, it sounds like you're very confident that there will be some. You don't, at this stage, want to kind of go on the record as putting a number out there. I mean, is there a yardstick that we can potentially use as a reference case to the Tysers deal?

No, because it's so different, right? It really is so different. So the reason that I've skirted away from it is precisely because -- so I think it is big enough to be excited about. but too uncertain to try and estimate. And so we are absolutely going to do everything we can to optimize that. But the fact is we're buying a really good quality asset. We're putting in place a strategic sort of set of building blocks in the business that can drive flywheel type benefits. We know that it's interesting enough and exciting enough to focus on, but not tangible or certain enough for us to be able to estimate or commit to.

Yes. Okay. I appreciate that. Maybe just the last one for me. I mean, I don't want to point at a soft spot, but just the write-down of the goodwill relating to that commercial broker. Is that just a function of buying it at the wrong time? Or has something gone wrong from a kind of or personnel perspective?

So I mean -- and look, Nick, who's on the line listening as our sort of acting CFO will twitch as I say this. So let me be brutal about -- and I'm an accountant, so I'm allowed to be brutal about accounting standard. So here's how it works, right? When you buy a brokerage, so corporate -- this is our corporate broker, very imaginatively called Austbrokers Corporate. Our corporate broker, it bought a business in 2022. What happens when you buy a broking business, and it had a smallish portfolio, very large clients. When you buy a business, you attribute -- and apologies, I'm teaching your socks, you attribute a portion of the purchase price to the value of the client portfolio that's been bought, okay? Then the accounting approach is we then write off that -- we amortize that broking register over 10 or 12 years depending on the parts of the business and the types of clients. If during that period of 10 to 12 years, any of those clients leave the business, then you write off whatever the carrying value is attributed to that client based on the original acquisition. Now the reason I'm going into that detail is, so the floor in it is if -- let's say, you bought 10 clients, of them leaves and 9 of them double in value and revenue over that period. you only have a write-off. You never recognize that actually what you bought was really valuable, right? And so that's the challenge with the broker register amortization. The lion's share of the impairments relate to sort of writing off the carrying value of these clients. And then there's a consequential goodwill adjustment based on sort of, if you like, a present value of the discounted cash flow view of the income that would have come from that. So I don't want to make it sound -- I don't want to trivialize it, but I do just want to emphasize that these don't talk to any systemic issue with the business. It is a mature seasoned practice. I also want to emphasize that the combination of broking register and goodwill intangibles is at about $2.5 billion on the balance sheet, and this is $39 million of that. So again, I'm trying not to trivialize it, but equally, I want to put it in context. So I want to be very explicit about it so that there were no surprises out of that. And then what I want to do is just make sure that also you understand the context of it.

Yes. No, I appreciate that. So I mean, I guess what you're saying is if there's a step-up in gross churn, you're going to get more write-offs even if net churn hasn't really changed.

Bluntly, in this corporate business, it's one client that we lost. And in Tysers, it's actually with Tysers, obviously lags. So you might recall, and I bored you guys with -- in February and in August, we spoke about property and casualty team to teams that had left or were leaving. And it's the lag effect of on the balance sheet recognizing that adjustment to the carrying value of the clients related to the teams leaving.

Your next question comes from Julian Braganza with Goldman Sachs.

Just the first one. Can you maybe just talk about premium rate increases that you're seeing across the different portfolios at the moment? I think at the first quarter update at the AGM, you had flagged about 5% to 7% rate in the Australian broking portfolio. So I just want to clarify just what you're seeing at the moment in Australian Broking and also just across some of the other portfolios as well.

Sure, Julian. So we're not quite at the point of having -- so I have to talk anecdotally. We're not at the point of being able to do our average income per client explicit pieces. I will talk about that in February, as I always do. So I suppose there's a piece where I don't want to talk explicitly about the numbers and the ranges until we've done -- we do a fairly detailed piece of work about that, which we just haven't done because it's very early. It's quite premature for us in terms of talking about results. What I would say is that directionally, what we are seeing is premium rates in New Zealand, particularly in the larger end of the market, so sort of mid- to large corporate, et cetera, we're seeing those rates continuing to soften even though rationally, we don't think they should. And in Australia, we're seeing a whole mixed bag according to risk classes. But on balance as a portfolio, the rate -- the premium rates are still in that -- they're certainly not 1% or 2%. They're in the 5%, 6%, 7% range. But I will talk explicitly about that when we do the results presentation in February.

Okay. Got it. That's clear. And then maybe just in terms of some of the organic trends that you're seeing across the U.K. Tysers business, just the wholesale business. Just interested in some of the discussion there just in terms of what are you seeing organically in the Tysers business? And also just for the Prestige business over the last few years, if you can talk to some of the organic growth trends there as well, that would be useful.

Sure. So again, I mean, I think some of this -- I don't want to sort of jump the gun. Some -- probably some of these are better to talk about at our February results, Julian. But I think broadly, what we're seeing in [ Tysers ] is good organic growth. Well, let me rather say international and then wholesale because we're now -- we're sort of using a few brands in wholesale. Now we're sort of partitioning out how we go to market, et cetera. So broadly, we're seeing, as I've previously sort of outlined, our strategy is all about reducing certain classes of business and certain types of risk and accelerating others. And so at a headline level, we're seeing organic growth in the sort of single digit but not low single-digit sort of range. But underneath that, we're seeing very strong organic growth in some of our key focus business areas, obviously muted or offset by some other areas where, in some cases, we're consciously shrinking them. But again, probably more appropriate to talk to -- with some degree of color and detail at the February results.

Okay. Got it. No, that's clear. And then maybe just to provide a little bit of color in terms of the margin differential between U.K. retail and also just the Tysers business. I know it's a consolidated margin target of 32% across the portfolio, and these acquisitions will help in terms of getting there. But just to provide a bit of color on how we're thinking about the Tysers wholesale business from here.

So the 32% margin target, I think I spoke about this in February last year, but maybe in August only. So again, emphasizing the targets obviously fairly broad brush determinations of what is structurally feasible in a 3- to 5-year time horizon. So the 32% target was predicated on 3 assumptions. One, that wholesale -- we should be able to run our portfolio of wholesale businesses at 25% plus margin. Secondly, that U.K. retail businesses optimized U.K. retail businesses should run at 35%. And thirdly, that retail needs to be at least 25% of our portfolio so that the higher margin in retail is significant enough to, on a weighted basis, achieve the 32%. So obviously, as retail grows, it sort of drags the margin up. So structurally, wholesale businesses tend to run at a lower margin than retail businesses. Structurally, MGAs tend to run at higher margins than pure broking businesses. And so part of achieving that 32% margin target in the International division is about getting scale in retail broking and in MGAs and optimizing margin in all 3 of them. And so that's broadly what our 3- to 5-year horizon was when we spoke about the 32% margin.

Okay. Got it. No, that's clear. And then just a final question for me in terms of just the guidance. I can say that, that's been retained for FY '26. But just in terms of the contribution of the growth, I think previously, you flagged 3% from acquisitions and about 8% from organic. Materially, is that still how you're thinking about the growth from FY '25? Or has that changed more towards an acquisitive SKU?

No. So -- and again, I'll talk in more detail about this more explicitly at the February results. But broadly, if you look at the first half, we've seen -- if you look back at our August sort of broad summary of results, we had organic contribution, contribution from acquisitions and the impact of FX and debt costs. So broadly, on those 3 segments, all 3 of them are higher than I would have sort of anticipated and based on what we thought. So organic growth has been better than we predicted. Growth from acquisitions has been better than predicted. Unfortunately, the headwinds from FX and debt costs have also been greater. And therefore, on a net basis, we've landed pretty much squarely where we anticipated.

Your next question comes from Andrew Adams with Barrenjoey.

Just the M&A spend of $200 million in first half '26, is that mostly debt funded?

Well, so I suppose there's a hot off the press bit of that, which is the M&A spend, which relates to -- so we completed -- what we did the [indiscernible] And 360 acquisitions right at the tail end of of December. So yes, although it was debt funded anticipating sort of, let's call it, a restructuring. So yes.

Yes. And multiples around, what, 13x on average for that $200 million? Correct. -- and then just on Prestige, who gets the money? Who's the seller? Is it all management? Or is there third-party owners in there or...

So it's a mixed bag. So it's a 50-year-old business. The management team, like the CEO has been in place for 10 years, been in role for 10 years. Management team range from 7 to 15 years of tenure. Originally, it was -- so it's a combination of families that originally founded the business -- and then largely -- it's sort of almost professionalized over time. The family members have retired, moved to different things, et cetera, in some cases, no longer around. And so there was a chunk where unlike our types of transactions, they didn't have a practice of retiring shareholders exiting the shareholders. So you had a slug of the equity owned by these retired, let's call them, original founders.

How much of the equity goes to people still in the business? Or is most of it going to people no longer in the business?