Steadfast and AUB Group shares remain undervalued after dipping earlier this year amid concerns about artificial intelligence impacts on broking, Morningstar says. 

The decline implies the market thinks brokers offer little more than policy comparison and quote generation, analyst Nathan Zaia notes in a report released this week. 

“We think the market is wrong. Insurance customers place significant value on brokers’ understanding of business-specific risks and policy options.” 

The sector is also regulated, creating an added layer of protection against bad advice, and brokers can negotiate better terms and prices and facilitate claims resolution, Mr Zaia says. 

“Online aggregators only have access to standardised cover for very small businesses. 

“We don’t think insurers have an incentive to support a price-sensitive channel with standardised policies.

“Complexity allows insurers to vary terms and conditions and prices to earn excess profit or take market share.” 

Related article: Investors’ AI panic sends a signal brokers can’t ignore

Morningstar has maintained fair value estimates of $39 a share for AUB Group and $6.20 for Steadfast, but has lifted its uncertainty rating to high from medium. 

“We don’t see a clear incentive for mass switching away from brokers, and ongoing barriers to entry should support pricing,” it says.  

“However, we acknowledge the threat has increased potential downside to our fair value estimate if we’re wrong, and upside if AI actually reduces admin costs.” 

AUB’s forward price to earnings ratio of under 13 times compares with a five-year average of 20 times, highlighting the extent of the multiple derating.

To justify AUB’s share price, brokers’ share of the Australian general insurance market would need to tank from 55% to 25%, with earnings before interest and tax margins falling to 29% from 36%, Morningstar says. 

AUB shares, which were trading above $30 in January, closed at $24.52 yesterday. The shares have traded between $22.08 and $40.28 over the past 12 months. 

Steadfast closed yesterday at $4.27, compared with more than $5 at the start of the year. Its 52-week range is $3.97 to about $6.66.