FIG’s business model is to design, distribute and administer a simple range of life insurance products through direct and general advice distribution channels. FIG does not take-on any underwriting risk. The company was founded in 2009 and has since grown organically to capture close to 10% of the direct life insurance market, estimated to be over $1.5 Billion. We were attracted by the undemanding valuation, high growth profile and an experienced management team with a high degree of ownership. FIG has grown at 50% CAGR from FY14 to FY17 and has already made a material upgrade to FY17 prospectus forecasts less than a fortnight following its IPO late last year. Growth rates are about to accelerate further as FIG launches its mortgage protection product next month. We estimate FIG will earn 5.5 cents EPS this year growing to 10.5 cents in FY19. This places FIG on a PE multiple of 10x FY17 and 5x FY19. For a business growing organically at 50% pa for the next 2-3 years - it is extremely cheap.
Freedom Insurance Group Ltd (FIG) designs, distributes and administers life insurance products in Australia. FIG does not act as an insurer, but rather provides its services to life insurers regulated by the Australian Prudential Regulation Authority (APRA). From February 2017, Swiss Re, one of the largest insurance companies in the world, will underwrite all new business by FIG, this new agreement will remove any previous caps on FIG’s growth rates. The company was established in 2009 and in October 2010 designed and launched its first sale of a life insurance product.
Since that time the company has enjoyed strong revenue growth by focusing on growing distribution channels with its flagship product in the final expenses market, better known as funeral insurance. To date FIG has focused on manufacturing straightforward life insurance products that are simple to understand, easy to sell, and capable of being sold under a General Advice process. Inforce annual premium income has grown from $17 million in FY2014 to a forecast $105 million in FY2017. New business annual premium income has grown from $12 million sales in FY2014 to a forecast of $55 million of sales this year. These organic growth rates are quite impressive and a testament to the successful execution of the management team.
FIG distributes these products via inbound and outbound call centres and via alliance partners (known as the direct channel) and through third party intermediaries such as financial advisers and mortgage brokers (known as the indirect channel). In December 2015 FIG acquired life insurer focussed dealer group, Spectrum Wealth Advisors, with over 270 advisors in the group. Spectrum will assist FIG to grow its distribution reach into the third party market. We anticipate potential further acquisitions in the advisor space to expand FIG’s distribution channels.
FIG generates its revenue via commission and administration fees paid by the APRA regulated policy issuer. Commission is structured as an upfront payment and a trailing payment. FIG reports both a reported and a cash earnings figure. Reported earnings include the movement in the carrying value of its trail commission book and are non-cash in nature. Whilst FIG is growing fast, there is a material gap between reported and cash earnings, but we expect these to converge over time as the business matures.
The company raised $15 million at IPO and listed on the ASX on 1 December 2016. Importantly none of the key insiders sold down stock at IPO. Keith Cohen, the founder and MD, owns 17% of the company and has deep experience in the insurance industry as the previous executive director of Westpac Life insurance and the co-founder and MD of Australian Life Insurance group (ALI). ALI was acquired by private equity in 2009 and is the leading mortgage protection insurance provider in Australia.
The management’s team past experience and expertise should assist FIG with its imminent exclusive partnership launch into the mortgage protection market with Finsure. Finsure has over 800 mortgage brokers nationally and is one of the fastest growing mortgage brokers in the country. The mortgage protection market is 2-3 times bigger than final expenses. This large opportunity bodes well for continued future growth rates.
We acquired a shareholding in the company following an upgrade to prospectus forecasts less than a fortnight after listing. We believe the business has considerable momentum at the moment. We were attracted by the undemanding valuation, high growth profile and degree of insider skin in the game.
In terms of valuation, broker forecasts released last month show the company should earn $12 million reported NPAT this year growing to $24 million in FY2019. This places FIG on a PE multiple of 10x FY17 and 5x FY19. For a business growing organically at 50% pa for the next couple of years - it is extremely cheap. It goes without saying that management will need to continue to execute successfully in order to meet these analyst forecasts. If FIG is successful in growing and diversifying its product portfolio, then we are of the view that it will eventually be acquired. Interested parties may either be a local player or more probably one of the Japanese life insurers that over the last few years have gobbled up several insurance companies in Australia.
As an example, Clearview Wealth (CVW) has recently been partially acquired for a reported earnings multiple of circa 30x by Sony Life. CVW has a more diversified insurance book than FIG and is also an underwriter for its own products, but is currently writing similar levels of new business to FIG. Even applying a 50% discount to the CVW takeover multiple, we still get a valuation for FIG that is potentially multiples of today’s prices. FIG will provide a further update at its upcoming half-year results, and we believe there is a high likelihood of another earnings upgrade.
The above is an extract from the TBF December quarterly report. The full report can be read here: (VIEW LINK)
Ron Shamgar is the Chief Investment Officer and Co-founder of TBF Investment Management and has been the Portfolio Manager of the TBF Small Cap Value Growth Fund since 2013. Ron has joint responsibility for research, company analysis, portfolio...
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Do you have any concerns that the net operating cash flow is negative?
Hi Trooki, As we explained in the above article, FIG reports both reported earnings and cash earnings. The difference is the adjustment to the fair value increase in the trail asset book of FIG. As FIG is growing fast, the gap between reported and cash earnings is large. Over time as the business matures and growth tapers somewhat, the difference will be minimal. Prior to this year, FIG was building its scale to the point where from now onwards, operating cash flows will follow cash earnings quite closely. As can be seen from the recent upgrade to prospectus forecasts, any increase in sales can have a material positive effect on the cash earnings of the business as the operating leverage kicks in. Therefore we expect net operating cash flows to be quite strong this year after accounting for the one off IPO costs. Hope that helps. Cheers
Thanks for the reply Ron, much appreciated.