Adil Templargin is a full-time private investor from Seattle and a high performing member of Micro-Cap Club (the US equivalent of the AUS Straw man). His website can be found here: https://www.templargin.com/index.html.
Below are Adil's investment notes on ENA:
Ensurance Ltd (ENA.AX)
Feb 22, 2022
Intro
Have you ever watched Kindergarten Cop? An undercover police officer acted by legendary Arnold starts a job as a substitute teacher with 6-year-olds. Soft kids in chaotic environment at the beginning of the movie transform into disciplined soldiers with inner peace by the end.
I think we are watching a very similar movie with Ensurance after Tony Leibowitz came on board and started bringing things to order. He got rid of things that did not work, focused on what worked, cleaned up the company structure, appointed a new leader and laid the foundation for the future success of this organization. Now we have a profitable small company with a big vision and I think we are about to see the “everyone is happy and marching together” part of the movie soon.
Insurance
Ensurance is an insurance company. I have very little knowledge about the industry aside from the logical conclusions one can make from being a customer. I pay for car, medical and home insurance. I pay small amounts every month or every year so that in case of a major disaster happening insurance company covers the cost. The insurance company collects all the money upfront, which is nice. The company needs to calculate the risks and probabilities of the disastrous events. An insurance claim is an event in which a customer asks the company for the money because something happened.
Warren Buffett used the virtue of having the money upfront to his advantage. He just happened to know how to allocate that free upfront money – the float all investors talk about.
This pretty much rounds up my knowledge about insurance.
After coming across Ensurance I did a bit more research on the industry. The main thing was to understand the meaning of the “insurance company”. There are a few terms we need to know: insurer or carrier, insurance agent, insurance broker, coverholder, underwriting.
Insurer or carrier. This is the main player in a customer-insurance relationship. This is the company that gets most of the money and takes most of the risk.
Underwriting is a process of evaluating the risks of a certain transaction. For example, you pay $50 a month in insurance. What should the total amount of money be paid to you in case of an accident? Well, it depends on your age, location, credit history or any other factor depending on the insurance type we are dealing with. Looking at all the factors together and coming up with a risk evaluation is called underwriting.
Insurance agents and insurance brokers are somewhat similar. Both are paid a commission which is a percentage of the total sum that customer spent (gross written premium or GWP). The difference is that the agent represents the insurer and the broker represents the customer.
In summary, insurance agents, who represent the insurer, work with insurance brokers, who represent the customer: insurer -> agent -> broker -> customer. Why do insurers need a middleman and not work directly with customers? There are many factors but in my understanding, the answer is – it is impossible to be everywhere and know everyone. It is technically possible but that requires too much time and money. It is much cheaper and easier to have someone who already knows the audience in a certain geography, motivate them with the commission and let them distribute your products. Apparently, in the US, the raise of agents and brokers took place when big insurance companies, which were mostly placed in the northeast, started their expansion to the west.
Managing general agent (MGA), or underwriting agency, or coverholder – is an entity that in addition to what a regular agent does can also underwrite and bind packages for customers. Obviously to deserve this MGA needs to go through a process of certification and earn the trust of the insurer. Why? MGA does not bear any risks should claims start rolling up, all the risk remains with the insurer most of the time. MGA only works on commission from the total amount spent by the customer.
Today, Ensurance is a fully incorporated MGA business model in UK and Australia and is ready to grow.
Company history
Ensurance was listed on ASX through a reverse takeover in 2015. At the time there were three divisions in the company: insurance broker (Savill Hicks Corp), underwriting agency (Ensurance Underwriting) and IT company (Ensurance IT). All three divisions were operating only in Australia. Every division had managers with high compensation, operating expenditures were through the roof and the company was losing money. The whole picture was far from good looking. They kept losing money, raising money, losing money, raising money and so on.
IT company (third division) was trying to push their software solutions to other companies riding the digitalization wave. Their platform was created with knowledge about what insurance company needs and hence appealed to a lot of players in the sector. White labelling the product helped too because the customers (agencies, brokers) could in turn offer these online platforms to their clients as their own.
Thanks to the online platform Ensurance developed the company was able to penetrate the UK market and generate interest from the local players. At the end of 2016 Ensurance UK was formed as an MGA with Tim James at the helm and it was, looking back today, a company making moment.
Ensurance UK with its MGA business model started to grow quickly. In 2017 yet another capital raise took place and that’s when uncle Tony entered the game. Tony Leibowitz filled 50% of the $3 million placement, became an executive chairman and shortly after extended a $2 million debt facility to the company.
Let’s take a minute to understand who this Tony guy is. He is one pillar of the famous trio who took a small sub $10 million shell and turned it into one of the largest billion-dollar lithium players in the world in less than 5 years. That company is Pilbara Minerals and the famous trio is Neil Biddle, John Young and Tony Leibowitz. The trio was the most active within the company up to 2017 when they started to venture out elsewhere. In 2017 all three joined Bardoc Gold which has grown more than five times in value since then. Needless to say, Tony Leibowitz knows how to make money.
2017 is the year when Tony Leibowitz spotted Ensurance and participated in its private placement. What did a guy like Tony see in this small money-losing microcap? We got an answer in May 2018. In May 2018 Ensurance made an announcement that outlined a new direction for the company. The announcement basically stated that everything except the UK MGA business was bad and that the company was going to start a big clean up. In the presentation, it was said that the company will divest the insurance brokerage business, adopt the UK model to existing Australian underwriting agency, cut costs and start launching new products. They said it would take 2-3 years for the full transformation.
Slowly but surely Ensurance methodically started to turn the big plan into reality. First, they sold off the money-losing insurance brokerage shortly after announcing the company’s new direction. Second, the money-losing Australian underwriting agency division was sold in 2020. A lot of top managers and some directors left because of these two events and, combined with proper instructions from Tony, the operational costs began to decrease dramatically.
Something interesting happened in May 2021. Ensurance acquired a boutique underwriting agency in Australia – TK Specialty Risks (TKSR). Why sell one and then buy one? I think it was way too difficult to implement the UK model into the existing money-losing business (just my guess). It was easier to get rid of it and find something more ready-to-go, which TKSR exactly was. TKSR was founded by Tom Kent in 2015 as a Professional and Financial insurance underwriting agency. By 2021 it was a profitable business and had insurance premium under management in excess of $10 million.
I think Tony saw in Tom what he wanted to see – a person who is young and hungry and who can take Ensurance to the next level. The TKSR acquisition was fully financed with Ensurance shares which demonstrated a vote of confidence from Tom and his alignment with the company’s vision. Recently Tom (owns 14%) became an executive director and CEO of Ensurance and Tony (owns 15%) stepped down to being a non-executive director.
It took a bit longer than 2-3 years (it always does, doesn’t it?) but what a setup do we have today! We have a profitable UK division led by industry veteran Tim James, a profitable Australian division led by Tom Kent and it is all happening under uncle Tony’s guidance. Both divisions are growing rapidly by adding new products, expanding geographies and increasing efficiencies with the help of IT efforts.
Products
Ensurance’s two major money-making products are construction and engineering insurance (UK) and professional and medical indemnity insurance (AU). The company followed through with the promise of adding new products. Ensurance added cyber offerings in 2018 and latent defects and terrorism and sabotage offerings in 2019. Ensurance offers its products through global partnerships with the largest insurers in the world – AXA, Lloyd’s, Beazley.
Competitors
Ensurance is the only truly independent MGA player listed on ASX. There are a few peers on ASX (not necessarily peers, since they are all billion-dollar companies) like AUB Group (AUB), PLC Insurance (PSI), Steadfast Group (SDF). These companies are largely insurance brokers, though, with smaller underwriting divisions. It seems that this industry is ripe for acquisitions as these companies are actively looking and buying profitable underwriting agencies and insurance brokers. Currently, AUB has 27 underwriting agencies, AUB - 24 and PSI - between 10 and 20.
Numbers
Let’s look at the numbers – Ensurance is valued at $22 million market cap, recorded $3.5 million revenue and $29 million of GWP in HY2022. The company reported two consecutive positive quarters in FY2022 for the first time since origination.
How are underwriting agencies valued? Quick research gives a “6-8 times EBITDA” answer. However, if an agency is to be acquired by an insurer it is valued as a multiple of GWP number. It seems that $100 million in GWP is a number when a company begins to matter and falls under acquirers’ radars. Companies can be valued at 50-100% of their GWP depending on a growth rate.
This year Ensurance will cross the $50 million mark and I believe they will achieve $100 million within another year or two. At that point, they will be generating cash, establish themselves as a strong growing player in a growing market and will finally outshine their murky past. Earnings growth combined with a likely rerate due to change of perception sets up a good risk-reward opportunity.
Conclusion
As they say, champions are not made in the ring, they are merely recognized there. The actual work happens in the gym. Ensurance has been patiently working out since 2018 and they are about to come to the ring. I believe the recognition is to follow in a not-so-distant future.
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