Insurance tech player Reliance Global (RELI, Financial) had a highly eventful 2020. The company successfully integrated a series of insurance agency acquisitions into the business and also made strategic investments in various technology platforms. The company was in the news for the beta launch of its platform called 5minuteinsure.com as well as its investment in Nsure.com in early 2020.
I believe that the company has built a highly scalable operational base and is on the brink of its operating break-even, which is why I think it is a highly compelling stock pick for microcap investors.
Solid top-line growth
Reliance Global's annual revenue for 2020 was highly impressive and should draw the eyes of many institutions as well as retail investors. The company reported a top-line of $7.3 million for the year ended Dec. 31, 2020, which was a staggering 63.55% growth as compared to the $4.5 million reported in 2019.
The management was able to drive the additional $2.8 million in revenues through the acquisition of multiple insurance agencies in the past two years. There was a definite accounting benefit associated with the management being able to report full-year revenues of the 2019 acquisitions in the current year.
Some of the recent acquisitions of the company include names like Altruis Benefit Consulting (individual and group health insurance), Commercial Coverage Solutions (property insurance, commercial trucking and transportation insurance), Southwestern Montana Insurance (group health insurance), Fortman Insurance Agency (property insurance, life and health insurance) and UIS Agency (commercial transportation insurance).
While acquisitions were a key driver of the top line in 2020, I expect technology to be a strong driving force in 2021. The beta launch of the company's 5minuteinsure.com platform is expected to slowly grow into a full-fledged revenue stream and generate strong leads for the insurance agencies under its umbrella.
It is worth highlighting that the company's Reliance Insurtech division has licenses to sell home and auto insurance in 43 states across the U.S. and the management is planning on expanding into additional types of insurance. Reliance Global's marketing initiatives involve targeting large enterprises and employee organizations so that they can ensure the bulk sales of policies.
Variable-cost-oriented structure
Despite the acquisition of many firms, the company's fixed costs have not risen significantly. Its total general and administrative expenses were $4.2 million in 2020, up from $3.64 million in 2019, which is a very small increase if we compare it to the revenue jump.
Commission expenses are a different story altogether. These are pure variable costs for the company and jumped from $705,714 in 2019 to $1.57 million on account of the significantly larger number of policies sold.
This variable-cost-oriented structure is highly suitable for a small company like Reliance Global as it helps the management in rapidly expanding the scale without worrying about breaking even, as most of the expansion costs are variable in nature.
In 2020, the biggest cost for the company came in the form of reporting expenses associated with listing on the NASDAQ, professional fees and employee stock option expenses, which were to the tune of $3.64 million. If we exclude these from the company's financial working, then Reliance Global has nearly broken even. However, after taking these into account, the company reported a net loss of $3.7 million.
Another big highlight of the result was how the management was able to narrow down the loss per share from $1.21 in 2019 to 88 cents in 2020. The company's numbers look very encouraging from my point of view.
Peer valuation and final thoughts
The above chart compares the enterprise-value-to-revenue multiple of Reliance Global with its two closest peers - Goosehead Insurance (GSHD, Financial) and Lemonade Inc (LMND, Financial). While all three companies are in the exact same domain, we see Lemonade and Goosehead trading at multiples of 51.56 and 38.08, respectively, whereas Reliance Global is trading at a modest number of 5.06. It is worth highlighting that while these peers operate on a larger scale, Reliance Global's use of technology and its platform are major assets that it seems are not being taken into account in this valuation.
As per the GF Value chart, the company appears to be heavily undervalued to the extent that it is a possible value trap (i.e. there could be a good reason why investors are ditching the stock en masse despite its seemingly great prospects). However, in my view, the recent results clearly show that this is no value trap. The company has shown growth in revenues and has significantly narrowed the net loss. Its investments in technology and the gradual expansion of its platform are bound to drive excellent growth in 2021. Overall, I believe that the company is an excellent investment proposition at current levels.
Disclosure: No positions.
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