Circa $0.7 million in net operating profit for the past 12 months — thus ENA is now trading on a PE of approx 25x at the current market cap of $17.6M or a PE of approx 17x on a cash-adjusted basis (approx $5.5 million in net cash on the balance sheet). For a company growing the top line (GWP) at 40% YoY, that seems like reasonable value to me.

Just revisiting this given the share price action...

With ~90m shares on issue, we have a market cap of $18m at 20c. In my mind, I'm contemplating what it would take for the share price to double from here. To get to a $36m market cap (40c) on a PE of 15x, we'd need NPAT of $2.4m. That's EBIT of around $3.4m. With an EBIT margin of around 30%, that requires a top line of $11.3m.

If we do a similar calc, but on a PE of 30x, we'd need NPAT of $1.2m, or EBIT of $1.7m, which requires a top line of $5.7m, (assuming a 30% EBIT margin).

That compares to a current top line (run rate basis) of ~$3m. So if the top line was to grow at 25% pa, we'd reach $5.7m rev in 3 years time. I.e. 100% share price uplift in 3 years, if those assumptions hold. But if the stock was to trade on a PE of 15x, it would take 6 years for the same outcome (share price to double).

Either way, that's a better outcome than the long-term average of the ASX All Ords (doubling every 7-8 years) - but it relies on execution success (30% EBIT margin, strong compounding growth of 25% YoY). These calcs also don't take into account the strong cash balance of ~$6m (given the PE multiple approach works off NPAT, not EV).

I believe the current leadership team has shown itself to be a safe set of hands. An impressive track record is beginning to be built here ever since the involvement of Tony Leibowitz (and subsequently Tom Kent), and they are backing themselves to continue this success with collective ownership of > 30% of the company (with ongoing on-market share purchases).

FY23 and beyond should show a higher profit margin now that the UK business has been sold, and they are doubling down on Australia. At 22c, we have a market cap of ~A$20m and net cash and investments of ~A$8m (of which $1.5m is in KOBA and $2m is in ASX PSI), thus an EV of ~A$12m.

The business is set for around ~A$1m in profit in the next 12 months (based on normalised numbers from the last 4c), so by my calculations, ENA is trading on an NTM earnings yield of 1/12 = 8.3%, for a low-moderate level of risk (insurance being a defensive industry). There's no way I will beat that in bonds or a high-interest cash account.

It was terrific to meet two high-quality straw-people at the Ensurance AGM recently (ENA), namely, @wtsimis & @PinchOfSalt; the Strawman network is a good one!

It was very insightful to meet and speak 1:1 with Tony Leibowitz (ENA Chairman, and ex-PLS founder) for a considerable amount of time, in addition to Tom Kent (ENA CEO) after the AGM itself. Both are very down to Earth and humble. They are most certainly the under-promise and over-deliver type.

I also happened to meet Tony's son, Matt, who is a shareholder in ENA and the CEO and Founder of Stake. Suffice to say, the Leibowitz's are a high-performing (and very wealthy) family.

My investment thesis in ENA has strengthened based on a) ENA team morale and b) Tony & Tom's appreciation for smart capital allocation and growing profitability.

Remains my #1 pick and largest holding on Strawman and in real life.

T.E.P.

Another 250,000 units (~$50k AUD) were acquired by the Chairman, on-market.

ENA's CEO, Tom Kent, has also dipped his hand into his own pocket to buy another $115,658.40 dollars worth of ENA shares at current prices. Great to see.

Tony Leibowitz, has just bought another lazy $279,139.57 dollars worth of ENA shares on (and off) market (1,200,000 units) at an average price of 23.3c to take his total holding from 15.87% of all SOI to 17.13%.

Tony Leibowitz is a Fellow of The Institute of Chartered Accountants in Australia and has over 30 years of professional experience, including as a senior partner with PwC in corporate finance and investment banking. Thus, I suspect the ENA financials are tracking pretty well indeed...

The situation ENA is left with is now as follows:

• Amazing balance sheet: ~$8m cash in bank, ~$2m investment in PSI
• Top line growing, high-calibre team, management buying on market etc
• EV of ~$12m
• ENA Australia at ~$3m revenue growing at 50% CAGR
• A high-margin operation

Why this was a smart strategic move:

• They sold the lower quality half of their business (ENA UK) at the top of the insurance cycle

Was it a good price?

• H1 FY22, ENA UK did EBITDA of A$128K and EBIT of A$106K
• The deal was for A$8.2m (75% cash, 25% shares)
• That's a transaction multiple of 32x EBITDA and 38x EBIT (and a PE of 40x) if one annualises the H1 FY22 figures
• It might look like an average price on a revenue multiple (~2x) or on a p/GWP multiple (~21%) but that obscures the fact that the ENA UK business has razor-thin margins, and very heavy regulatory, systems and HR costs

The ENA Australia business is in rude financial health:

• The Australian business is running at an EBITDA of $823K in H1 FY22
• That's 6.4x as much profit as ENA UK; the data suggests it is the faster growing, higher quality business for ENA to focus on

The future for the ENA growth opportunity looks immense

• ENA Aus is at the beginning of a significant growth runway in its specialist sectors in Australia
• They have expanded from 1 office (Adelaide) to 4 (Melbourne, Sydney, Perth)
• They now have significant funds to execute on strong profitable growth

Well done to the ENA team — producing a record quarter at the top-line and bottom-line. Also appears that the Australian expansion is heating up. During the quarter, Ensurance Australia appointed Andrew Hookings as National Manager – Casualty & Environmental Risks in Sydney. This role will commence in October of this year. I like their expansion/diversification strategy of the product set outside professional and financial risks insurance products.

In the space of 1.5 years, the ENA Australia business has grown from 1 office in Adelaide to multiple offices in Sydney, Melbourne, and Perth, all whilst remaining cash flow positive! I personally believe there is a solid chance that ENA will be a dividend-paying stock in 3-5 years' time based on the strong and improving margins of the ENA Australia business, the discipline towards profitability being shown and the fact that Tom Kent himself is the company's largest shareholder – thus dividends provide a way of returning some of the business profits back to his pocket (and that of shareholders).

JUNE 2022 Quarterly Report:

Ensurance set to announce maiden annual profit after posting fourth consecutive quarter of positive net operating cash-flow

Growing demand for specialist insurance products, in conjunction with an expanded Australian operation, results in another strong quarter

• FY22 revenue rises to ~$7.2M, a 61% increase over FY21.
• FY22 unaudited net profit of ~$224K compared to a $1.3M loss for FY21.
• Strong June 2022 quarter resulting in $2.2M revenue (March 2022 quarter: $1.46M).
• Gross Written Premium (GWP) of $57M for FY22 and $16M for the June Quarter.
• Debt-free following repayment of the $1M unsecured loan.
• Expanded Australian operations with the opening of a Melbourne office joining established offices in Sydney, Melbourne, Adelaide and Perth.
• Strong business outlook with Australian revenues underpinned by recent 3-year contract with Liberty Specialty Markets.
• Subsequent to quarter-end, Ensurance signs a non-binding term sheet to sell its UK operations to PSC Insurance (ASX: PSI) for A$8.2M; The sale will allow Ensurance to focus on the immense growth opportunities in Australia.

The ENA Aus business was bought for just ~$2.5m a little over 12 months ago. At that time, the ENA Aus business was doing ~$10m in GWP. It is also interesting to note that that transaction was done at 30c (3c followed by a 10/1 consolidation); so there is a big incentive for Tom Kent to get the share price back above that level. Fast forward a short space of time and the ENA Aus business is doing $15.2m GWP*. So in a little over a year GWP has grown 50%. Is that enough to justify a 4x uplift in market value? Probably not. But, in the last couple of months (yet to be reflected in financials) ENA Aus has also grown from 1 office to 3 and the team has expanded more than 5x. With ENA UK sold for $8.2m (40% of the market cap), my conclusion is that the overall ENA market valuation ($21m MC, $13m EV) reflects the profitable, fast-growing nature of ENA Aus.

* $13.40m in GWP was done in the quarter ending March 31st 2022 across the entire business. Annualising, I get to a run rate of $53.6m GWP. Deducting $38.4m GWP (as calculated in my previous post), I get to $15.2m GWP (annualised) for the ENA Aus business.

There are several key reasons why this appears to be an excellent strategic move other than the fact that divestments are generally received much more favourably by the market than acquisitions:

1. The ENA AUS business has higher margins (more tech-enabled) compared to the ENA UK business. Thus, they are re-directing efforts into areas of the company that have more profit potential and that are arguably higher quality.
2. The valuation appears to be favourable. This is the right time of the insurance cycle to be selling, which has enabled them to achieve an incredible ~30x EBIT valuation on this transaction (~21% p/GWP)*
3. 75% of the sale proceeds will be received in cash, which gives them a $6.15m boost to their balance sheet. At the current market cap of $21m, plus the existing $1.7m held in hand, the Enterprise Value (EV) of ENA is now $21m - $6.15m - $1.7m = $13.15m
4. 25% of the sale proceeds will be received in PSI shares; this is a high-quality ASX-listed company ($1.46b market cap) to have exposure to (an older cousin of ENA of sorts)
5. ENA can now direct more focused attention to the Australian insurance underwriting market and be laser-focused on the east coast expansion

A potential disadvantage of the decision is that the mix/diversity of insurance sectors in which ENA products are offered will decrease. In addition, there will no longer be a natural seasonality hedge operating in both the northern and southern hemispheres.

All in all, I think this is a smart move.

Following on from recent news of the Chairman buying (last week), ENA's CEO Tom Kent (a former Strawman guest) has also picked up another 100,000 units at 25c ($25,000 AUD) with an off-market trade as of Wednesday this week (8th June 2022). Management continues to eat their own cooking and evidently, like what they are tasting...

At it again! ENA non-exec chair Tony Leibowitz has picked up another 100,000 units at 25c ($25,000 AUD) in an off-market trade to bring his total to 14,316,083 fully paid ordinary shares (worth $3,793,762 AUD at the current price). Love it.

"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 a 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." Source: https://www.templargin.com/ena.html

I love that this company has a stellar team behind it with skin in the game and an owner's mindset. That has major implications for capital management (lean profitable operations favoured over capital raises), strategy and growth. Together, the board and management hold more than 30% of all shares on issue (SOI) and the top 20 hold more than 70% of SOI (and rising).

Personally, I'm very content to continue to soak up shares here at a $24 million valuation (MC) given management's credentials, $60m+ in GWP, 30%+ YoY growth, $6m+ in TTM revenue and a recent shift towards consistent (3 consecutive quarters) cash flow positive operations. That values the company at circa 40% p/GWP. In addition, the recent early repayment of the loan suggests another quarter of CF+ operations is incoming.

For me, this is a long term game. This is not a disruptive business. It is an independent, steady performer with a strong business model (MGA), and strong connections (such as Liberty) in a macro-favourable and growing industry with tailwinds (rising premiums associated with rising interest rates). A couple of years from now and ENA has a good chance to be paying dividends. Aside from a takeover of ENA, dividends (coupled with share price growth) are the best strategy for the ENA MD (Tom Kent) to reward shareholders and himself (he took a $2.5m all-script deal at 30c/share to roll his business, TKSR, into ENA last year so he's not going away anytime soon).

Given the macro environment, I believe investors on the ASX will increasingly be seeking out cash-generative businesses in the coming months and quarters. I think insurance and ASX:ENA in particular is very well positioned to benefit from that...

A very positive signal to the market that the cash flow and profit outlook for ENA is looking strong. This also provides an immediate saving of $36k in interest payments per quarter.

Plenty of M&A activity in the insurance underwriting sector happening at the moment!

Tysers is being acquired by ASX:AUB on ~12x EV/EBITDA and ~25% p/GWP. AUB will likely get a solid deal there. That's earnings accretive for them, as AUB are trading on more like 40% p/GWP. In saying that, their (Tysers) revenue has been declining ($363m in CY19 to $322m in CY21) as has EBITDA ($81m in CY19 to $64m in CY21), which explains why the acquisition multiple is lower than other recent M&A comparables in the sector.

For all stocks in my portfolio, I've been contemplating how a rising interest rate environment and an inflationary environment will play out for the stock and the sector in which it resides. It will be negative for many/most industries, but I believe insurance is an exception to that.

From what I understand, ENA's lines of insurance (speaking about Australia primarily) are 'long tail' and typically reflective of the state of an economy, so where the cost of living increase alongside interest rates & fraud increases, people become more litigious etc. so the loss ratios tend to increase which means insurers offering long tail products will increase their premiums.

On the flip side of this, the biggest negative of a rising interest rate and inflationary environment for ENA is hiring talent, it becomes very costly in this part of the economic cycle and the wholesale nature of ENA's business means they are reliant on people's brains and relationships to scale this business.

Net-net, I think ENA is a beneficiary of the current macro environment (rising interest rates & inflation). Insurance is one of only a few sectors that can lay claim to that. I continue to accumulate here where I can.

In my eyes, this is a very solid quarter. The business hasn't shot the lights out just yet (such as by demonstrating material growth cash), but they are trending firmly in the right direction with a 3rd consecutive quarter of CF+ operations. The odds are now in ENA's favour of seeing a full-year profit (albeit a small one) for FY22. Top-line growth also appears promising with quarterly revenue up 46% pcp and quarterly GWP up 62% pcp. My thesis is that the recent opening of the Sydney branch and the scheduled opening of the Melbourne office (May 2022) should drive an acceleration in revenue across the next couple of quarters. They are doing well so far to balance this expansion with CF+ operations. ENA's ambition is to drive to a ~30% EBITDA margin once at scale. So converting a 15x EV/EBITDA multiple to a revenue multiple (at 30% margins) leads me to believe that a ~4.5x revenue multiple is fair. At a market cap of $22m, (and YTD revenue of $5m, with another quarter still to come in the financial year), I'm happy to keep accumulating here.

ENA weekly-chart shaping up well here leading into the next quarterly announcement.

The shaded areas in green, below, are my best guess at what a fair p/GWP and PSR multiple is.

In terms of the p/GWP multiple, above $100m AUD in GWP, I'm assuming a 50-80% p/GWP multiple is fair based on what we have heard about acquisitions in the space for fast-growing MGA entities.

In terms of the PSR multiple, AUB/SDF/PSI (ENA's closest peer group on the ASX) actually trades at 5-7x TEV/LTM rev, which reflects the highly recurring nature of insurance underwriting revenue and high gross margins. But, I have been conservative and suggested 3-4x revenue is a fair valuation range at this stage due to the smaller scale of ENA.

In the last half, ENA did $29m AUD in GWP (up 70% YoY) [so running at c.$60m GWP annualised) and $3.6m in revenue (up 49% YoY) [so running at $7.2m AUD annualised].

I really like the story playing out here (and the management team), so personally, I'm planning to hold this one for the long term. Let's see where we get to over the coming weeks, now that the overhang is cleared. It could move quickly — that's the benefit of having an aligned and tight shareholder register.

The ENA overhang (800k units at 25c for ~$200k AUD) that was sitting in the market for weeks was just line wiped in one massive swoop (see screenshot below) today. This could get very interesting: a run back to the 30s or 40s is on the cards in my opinion.

Adil Templargin is a full-time private investor from Seattle and a top-ranked member of Micro-Cap Club (the US equivalent of Strawman). His website can be found here: https://www.templargin.com/index.html. Below is 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 new leader and laid the foundation for the future success of this organization. Now we have a profitable small company with 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 insurances. I pay small amounts every month or every year so that in case of a major disaster happening insurance company covers the cost. Insurance company collects all the money upfront, which is nice. The company needs to calculate the risks and probabilities of the disastrous events. Insurance claim is an event in which 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 which gets most of the money and takes most of risk.

Underwriting is a process of evaluating 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 agent and insurance broker are somewhat similar. Both are paid a commission which is a percentage of total sum that customer spent (gross written premium or GWP). The difference is that agent represents the insurer and 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 commission and let them distribute your products. Apparently, in 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 which 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 trust of the insurer. Why? MGA does not bare 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 customer.

Today, Ensurance fully incorporated MGA business model in UK and Australia and is ready to grow.

Company history

Ensurance 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 labeling 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 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 a 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 which outlined a new direction for the company. The announcement basically stated that everything except UK MGA business was bad and that the company was going to start a big clean up. In the presentation it was said that company will divest insurance brokerage business, adopt 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 money losing insurance brokerage shortly after announcing 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 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 profitable UK division led by industry veteran Tim James, 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). Company followed through with the promise of adding new products. Ensurance added cyber offering in 2018 and latent defects and terrorism and sabotage offerings in 2019. Ensurance offers their 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 $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 come to the ring. I believe the recognition is to follow in a not-so-distant future.  

Brilliant, once again.

Ensurance Ltd (‘Ensurance’ or ‘the Company’) (ASX: ENA) is pleased to announce a significant partnership between Ensurance Australia Pty Ltd (‘Ensurance Australia’) and global insurer LibertyMutual Insurance Company, Australia Branch, trading as Liberty Specialty Markets (‘Liberty’). Ensurance Australia has executed a 3-year agreement for delegated underwriting authority, effective16th March 2022 and running through to 16th March 2025. Under the terms of the agreement, Liberty will provide insurance capacity for Ensurance Australia’s current Professional Risks portfolio, as well as additional capacity to enable growth via new products. In Australia, Liberty operates as a branch of its US incorporated parent, resulting in the entire balance sheet of the parent standing behind the policies underwritten in Australia. Being regulated by APRA, Liberty must hold sufficient assets in Australia to meet the obligations of the Australian operations. This corporate structure therefore provides for the strength of a global company combined with the safety of Australian Prudential Regulation.

Mr. Kent commented “This is a transformational moment for our Australian division. The signing of this contract forges a path for long-term mutually beneficial growth with improved margins and increased capacity. Securing such a high calibre relationship in these uncertain times is a very positive result for the Company. We are excited to bring the global strength of Liberty to our local client base.”

ENA has a strong, tightly-held register of shareholders who understand the long term vision playing out here. Once the rest of the 26c overhang (circa $200k) from a particular Perth businessman is cleared (Bob Peters), this could easily run back into the 30s or 40s. There's barely any sell-side liquidity other than that on offer because I would imagine current holders are not planning to let this go anytime in the next couple of years while this company is still in the early stages of its accelerating growth journey.

Onwards and upwards.

This call was recorded and is available to the public on the Reach Markets website: https://reachmarkets.com.au/webcast/the-insider-meet-the-ceos-16-february/

Regarding takeovers and acquisition activity in the space (and the corresponding valuation multiples), underwriting businesses like ENA are valued either on a multiple of EBIT or on a percentage of gross written premiums (GWP).

Ultimately, it all comes down to size. The larger the business, the higher the multiple, to the point where medium to large firms with more than $100m AUD in GWP are valued on close to a dollar for dollar with GWP (1:1 ratio, i.e. 100% of GWP).

Currently, I think fair value is in the order of ~50% of GWP, but as ENA scale, I think that ratio will increase to ~75% of GWP and potentially higher. Tom Kent mentioned examples of historical transactions occurring at north of 40x EBIT.

In terms of growth, ENA appears to be highly efficient. Across the industry, each employed underwriter typically handles around ~$2.5m AUD of written premiums. But the ENA AUS business appears to do about ~$3.75m AUD per underwriter because of their system (tech) enhancements.

So, to borrow an analogy from a smart friend: "ENA is the BHP in iron ore (Fe) on the cost curve".

I like this business: It is profitable, with high gross margins, is growing well, has proven management and most certainly flies under the radar (because, and no offence to anyone, insurance is not always a riveting topic and is dismissed by most!).

This is a long term compounding machine.

This is an outstanding result, kudos to management. The market will appreciate that 60% of total debt has been repaid with a lump sum payment of $1.5m repaid on the Kalonda loan (associated with Chairman Tony Leibowitz).

From an operations perspective: we are witnessing record revenue (up 35% on PCP), gross written insurance premiums (GWP) of $29m for H1 FY22 (up 70%) YoY, CF+ (for the second quarter in a row) and profit margins increasing. The CEO, Mr Tom Kent, is the second-largest shareholder in ENA himself (having purchased a massive amount on market last year) — it has been a busy quarter and he is continuing to make his mark.

Businesses like Ensurance are valued on a percentage of total GWP, that's how discussions were structured for ENA's acquisition of TK Speciality Risks. For ENA, they are now clearly hitting a higher level of scale deserving of a valuation in the order of 50% of annual GWP. Underwriting businesses with >$100m in GWP can trade for up to 75% of GWP.

ENA achieved $29m for the first half of FY2022 (up 70% YoY). If we annualise this figure to $58m and apply a 50% GWP multiple, we are looking at a business that is very conservatively currently worth $29m (32c) (versus a market cap of $18m at 20c), without considering the growth rate of the business. At the current growth rate, ENA will soon surpass $100m in annual GWP, by which point the company should conservatively be valued at $50m AUD at a 0.5x GWP multiple. With 90m SOI, that equates to a short term share price target of 55c.

Given that the company is CF+ and growing well, in a strong insurance market, with aligned and proven management (Tony Leibowitz owns 18% and Tom Kent owns 15%), this is a low-risk asymmetric play for me. It also helps that I know the management team is honest, hard-working, and driven to make this a massive success. For that reason, I've increased my position here.

The market will wake up to this growth story soon...

Based on a bit of digging around, I've worked out that there is one final legacy shareholder who is selling out for personal reasons and is almost done, who has an AEP of around 15c. This shareholder has around 1.6M units remaining and has them on offer at 24c and 25c on-market. Would be a great opportunity for anyone with deep pockets to take a meaningful position.

Although this has put pressure on the share price in the short term, I expect the company to release further positive news in the upcoming quarters, highlighting profitable growth, which should help drive a gradual climb in the share price up to 50c levels (circa $40m MC).

Great to have Mr. Nick Beswick commence in the role of Professional Risks Manager for the Australian division of the Company (from 1st January 2022). Lastly, Chairman, Anthony Leibowitz, is continuing to buy on market with his most recent purchase on the 10th of January 2022. In the interim, I'm content to continue to sweep up small parcels around the 21c/22c mark (circa $20m MC), while the market awaits the overhang to be cleared.

The role of financial markets is to take money away from mediocre and underperforming companies and put it in stable, growing, high return on capital companies.

You can fight this trend, but it will always be an uphill battle. As an investor, you want to find opportunities to support the latter not the former, ideally before the market does the same. What I’ve learned so far from a decade in the financial markets is that the small, micro and nano-cap arena is the best place to go hunting for these types of companies. Sometimes, you are catching these opportunities before institutional funds are allowed to invest, sometimes these stocks are temporarily misunderstood and sometimes they are simply missed among the forest of opportunities in the small-cap ASX universe.

I believe Ensurance Limited to be one of these such companies; having held shares in ASX:ENA since circa May 2021 (refer here). Ensurance Limited is a speciality underwriter providing insurance underwriting on behalf of larger insurers in niche sectors primarily within the U.K and Australia. The company offers a comprehensive suite of products through its extensive insurance broker network and is backed by several significant agreements with major global insurers (AXA XL and Beazley).

Ensurance has a low-risk, high-margin business model (Ensurance does not retain or incur any underwriting profit or loss), is restructured and backed by proven business leaders (particularly Executive Chairman Tony Leibowitz) and is expanding into niche fast-growing sectors. Board and management are aligned and have significant skin in the game. Moreover, the company is competitively positioned having secured ongoing agreements with leading insurers such as AXA XL, AXA UK and Lloyd’s; which are difficult to secure, and grant Ensurance significant capacity to provide specialised underwriting.

I was recently provided with the opportunity to produce an equity research report on the company. In this note, I’ve done my best to provide a balanced view of the company; its history, industry overview, valuation analysis, the investment case and consideration of key risk factors. Although all due care has been taken with the preparation of the report, this document has been produced for informational purposes only and should not be considered as a recommendation to buy or sell.

Read the Report: Ensurance Ltd (ASX:ENA) ‘Maiden U.K. profit achieved & global growth strategy refined: accelerating accretive acquisitions within the underwriting sector’

I look forward to watching the Ensurance Ltd story unfold over the coming quarters. Let's see how the business and share price progresses.

Disclosure: Held in portfolio with ~6% weighting.

T.E.P.