PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements (within the meaning of the federal securities law) that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this Annual Report on Form 10-K regarding our strategy, future operations, future financial position, future net sales, gross margin expectations, projected costs, projected expenses, prospects and plans and objectives of management are forward-looking statements. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that the expectations underlying any of our forward-looking statements are reasonable, these expectations may prove to be incorrect, and all of these statements are subject to risks and uncertainties. Should one or more of these risks and uncertainties materialize, or should underlying assumptions, projections, or expectations prove incorrect, our actual results, performance, or financial condition may vary materially and adversely from those anticipated, estimated, or expected. We have included important factors in the cautionary statements included in this Annual Report on Form 10-K, particularly in the section entitled “Risk Factors,” that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, investments or terminations of distribution arrangements that we may make. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.
Unless the context requires otherwise, references to “Reliance Global Group, Inc.,” “we,” “our,” and “us” in this Annual Report on Form 10-K refer to Reliance Global Group, Inc.
Item 1. BUSINESS
About Reliance Global Group, Inc.
Reliance Global Group, Inc. (formerly known as Ethos Media Network, Inc.) was incorporated in Florida on August 2, 2013. In September 2018, Reliance Global Holdings, LLC, a related party, purchased a controlling interest in the Company. Ethos Media Network, Inc. was renamed Reliance Global Group, Inc. on October 18, 2018.
We operate as a company managing in assets in the insurance markets, as well as other related sectors. Our focus is to grow the Company by pursuing an aggressive acquisition strategy, initially and primarily focused upon wholesale and retail insurance agencies. The Company is controlled by the same management team as Reliance Global Holdings, LLC (“Reliance Holdings”), a New York based firm that is the owner and operator of numerous companies with core interests in real estate and insurance. Our relationship with Reliance Holdings provides us with significant benefits: (1) experience, knowhow, and industry relations in both sectors; (2) a source of acquisition targets currently under Reliance Holdings’ control; and (3) financial and logistics assistance. We are led and advised by a management team that offers over 100 years of combined business expertise in real estate, insurance, and the financial service industry.
In the insurance sector, our management has extensive experience acquiring and managing insurance portfolios in several states, as well as developing specialized programs targeting niche markets. Our primary strategy is to identify specific risk to reward arbitrage opportunities and develop these on a national platform, thereby increasing revenues and returns, and then identify and acquire undervalued wholesale and retail insurance agencies with operations in growing or underserved segments, expand and optimize their operations, and achieve asset value appreciation while generating interim cash flows.
As part of our growth and acquisition strategy, we are currently in negotiations with several non-affiliated parties and expect to complete a number of material insurance asset transactions throughout the course of 2021. As of December 31, 2019, we have acquired six insurance agencies, including both affiliated and unaffiliated companies. In addition to the acquisition of UIS Agency, LLC in August 2020, an unaffiliated niche transportation insurance agency we are in the process of continuing our investments in NSURE Inc. As of December 31, 2020, our total investment in NSURE, Inc., a digital insurance agency, amounted to $1.350 million. Reliance Holdings has committed to fund the Company for at least the next 12 months in the event that the capital raise is not successful.
Long term, we seek to conduct all transactions and acquisitions through the direct operations of the Company. However, in some instances, Reliance Holdings could act as a placeholder to facilitate the acquisition process, whereby Reliance Holdings will acquire the prospective asset and ultimately transfer it to the Company at a later date. This would be necessary for example in the case of a material acquisition that would require an audit. Reliance Holdings would acquire the asset and hold it as the audit is in process and transfer it to the Company upon successful completion of the audit. However, the Reliance Holdings will ultimately, upon successful completion of the audit, transfer the asset to the Company and the Company will pay for the consideration of the asset.
Over the next 12 months, we plan to focus on the expansion and growth of our business through two different channels: continued asset acquisitions in insurance markets; and organic growth of our current insurance operations through geographic expansion and market share growth.
Insurance Market Overview
There are three main insurance sectors: (1) property/casualty (P/C), which consists mainly of auto, home, and commercial insurance; (2) life/health (L/H), which consists mainly of life insurance and annuity products; and (3) accident and health, which is normally written by insurers whose main business is health insurance. The $3 trillion global insurance industry plays a huge role in the U.S. economy, with insurance spending in 2019 making up about 11.5% of the U.S.’s GDP (Source: OECD Insurance Statistics), as shown in the table below.
The U.S. remained the world’s largest insurance market, with a 28% market share of global direct premiums written in 2017. There were approximately 743 L/H insurers, 2,620 P/C insurers, and 1,130 health insurers licensed in the U.S. in 2017, with premiums of $638 billion, $640 billion, and $189 billion, respectively (Source: Agency Checklist’s U.S. Insurance Market Still the Largest—Federal Report Covers the State of the Industry, November 2018). Sustained economic growth, rising interest rates, and higher investment income are among the positive factors that have bolstered insurers’ results in 2018, setting the stage for enhanced top- and bottom-line growth in the years ahead for us as we benefit from growth in insurers’ business growth (Source: Deloitte’s 2019 Insurance Industry Outlook).
Insurance Agency Industry Overview
An insurance agency or broker, solicits, writes, and binds policies through many different insurance companies, as they are not directly employed by any insurance carrier. Thus, insurance agencies can decide which insurance carriers they would like to represent and which products they would like to sell. They are like a retail shop that sells insurance services and products created by the insurance carrier. The main difference between a broker and an agent has to do with who they represent. An agent represents one or more insurance companies, acting as an extension of the insurer. A broker represents the insurance buyer.
An insurance carrier, on the other hand, is a manufacturer of insurance services and products that the insurance agencies sell. They control the underwriting process, claims process, pricing, and the overall management of the insurance products. Insurance carriers do not sell their products through direct agents, but only through independent agencies. Insurance policies are created and administered by the insurance carrier.
A key operating difference between agencies and carriers is the risk profile. The potential financial risks to the insurance industry caused by unforeseen event such as natural disasters are the responsibility of the carriers (and their re-insurers). Agencies and brokers bear no insurance risk. Furthermore, an increase in damage caused by natural disasters generally boosts demand for insurance and results in possible premium increases. Since insurance brokers and agents are a central part of the distribution of these products, they normally benefit from this increase in demand and premiums despite damaged profit margins among these upstream underwriters and carriers. Natural disasters are inherently difficult to forecast but any increase in the frequency of these events holds the potential to boost insurance policy volumes, particularly for property and casualty products (Source: IBISWorld’s Insurance Brokers & Agencies Industry in the US, December 2018).
This risk difference is key, especially considering the changing climate which is contributing to more volatile weather patterns that is resulting in an increased rate of natural disasters. The economic costs of 2018’s 394 natural disaster events were estimated at $225 billion, with insurance covering $90 billion of the overall total and creating the fourth costliest year on record for insured losses, noting that 2017 and 2018 brought the costliest back-to-back years on record for both economic losses ($653 billion) due to weather-related events and for insured losses ($237 billion) (Source: Aon’s Weather, Climate & Catastrophe Insight – 2018 Insight Report, January 2019).
Since insurance brokers and agents are a central part to the distribution of these products, they normally benefit from this increase in demand and premiums, despite damaged profit margins among these upstream underwriters and carriers (Source: IBISWorld’s Insurance Brokers & Agencies Industry in the US, December 2018).
The U.S. insurance broker and agency industry has grown steadily over the five years through 2020 due to macroeconomic growth, beneficial legislation which has passed, and positive trends within the insurance sector, reaching revenues of $161 billion in 2020. Over the next few years through to 2025, the industry is expected to grow moderately as the macroeconomic landscape continues to improve (Source: IBISWorld’s Insurance Brokers & Agencies Industry in the US, November 2020). The solid growth within the insurance agency market has resulted in strong mergers and acquisition (M&A) activity within this sector. Mergers and acquisitions from insurance agents and brokers broke records in 2020. The insurance distribution industry continues to prove its resiliency as Q4 2020 deal activity reached unimaginable highs. This is especially true given that a significant portion of the year was sluggish due to the pandemic. Total transactions in the Q4 were 290, nearly double that of the same period in 2019, and total deals for 2020 were 774, nearly 20% higher than what was recorded in 2019. (Source: Optis Partners Agent & Broker 2020 Year-end Merger & Acquisition Report). The confluence of unrelenting market pressure to achieve sustainable growth, a lingering abundance of capital and capacity, improving global economies, and an upturn in interest rates may indicate that insurers should be prepared for a continued growth of M&A activity in 2021 and beyond.