Improved disclosure to strata customers may be necessary and market share impacts for Steadfast are possible following this week’s Four Corners program and increased scrutiny on vertically integrated brokers, Morningstar says.

The ABC program alleges Steadfast’s strata reach through underwriting agencies, broking and other service providers reduces competitive tension, is not transparent and is inflating costs for unit owners. The company has rejected any suggestion it improperly channels business to related entities.

“The industry will likely need to improve disclosure to customers, which may not alter the competitive landscape materially,” Morningstar says.

“However, we think it is reasonable to make some allowance for the negative earnings impact of heightened regulatory and potentially political scrutiny.”

Morningstar has lowered its Steadfast fair value estimate by 8% to $6 per share and AUB Group’s by 3% to $34 on downward revisions to agency earnings.

Steadfast, which owns strata agency CHU, says its equity-owned strata brokers contributed about 5% of group earnings before interest, tax and amortisation last fiscal year.

“The agency business is much more heavily weighted to strata, though – we estimate the total contribution to profit from strata is between 15% and 20%,” Morningstar says. AUB’s exposure is smaller, making up 5% of gross written premium last year, the analyst’s research report says. 

Morningstar assumes some market share loss for Steadfast and downward pressure on premium rates in strata.

“Increased oversight on brokers to ensure all policies are in the client’s best interests, even if it becomes overly cautious, could see more volume go to other insurers,” it says. “CHU may be forced to compete more on price, even if a competing policy is not entirely comparable, to reduce the risk of customers feeling they are being given dud advice.”

A material step-down in pricing is not expected, with recent gains reflective of insurers looking to reprice after years of poor returns.

Morningstar says while there may be some validity to suggestions of reduced competitive tension, it would be to Steadfast’s long-term detriment to push up prices and competitors would begin taking market share in broking and insurance.

“Even within Steadfast, most brokers are not wholly owned or not owned at all and likely compete,” it says. “CHU is a key player in strata insurance with about 50% market share, but an insurance line overearning will generally attract more competition.”

In the ABC show, the Australian Competition and Consumer Commission repeated its call for an end to commissions and flagged the need for stronger acquisition notification rules, with Steadfast’s growth mostly occurring “below the radar”.

Morningstar says it is likely regulators will look to remove some of the alignment between strata managers and brokers, with the program raising concerns over businesses in which both Steadfast and strata managers hold shares.

“There is a risk of reputational damage, especially if examples of brokers and strata managers providing poor advice are brought to light, which could lead to material market share loss for Steadfast. 

“The impact on the agency business could be material if the business has been getting insurance volumes at uncompetitive pricing, but the need for price increases following large perils events has been an industry-wide phenomenon.”

A Macquarie Equity Research report on Steadfast and the ABC strata exposé says growing media and regulatory attention poses “an unquantifiable challenge to valuation”, which will remain a “watch point” over coming months.

“Proposed disclosure changes are unlikely to impact [Steadfast’s] earnings but the reputational damage could be a watch point, with potential implications for the trapped capital pipeline,” it says.

Macquarie estimates strata contributes about 30% of Steadfast earnings. On the underwriting agencies side, CHU contributed about 16.6% of group net profit in fiscal 2023 and it also owns strata specialists Axis and QUS.