Advantage Insurance (AVI-OLD) has filed proposed terms to sell 10 million shares of common stock at a midpoint price of $10.00 per share for gross proceeds of $100 million.
The company provides specialty insurance products and related services to high net worth individuals [HNWIs] and business owners throughout the United States and elsewhere.
Advantage is a small insurer that is growing revenues at a decreasing rate and is pursuing a higher risk premium surplus investment strategy that may work well in a good economic environment but has potentially excessively negative consequences in the event of a downturn.
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San Juan, Puerto Rico-based Advantage was founded in 1993 as a Cayman Islands-based captive insurance manager and has since launched several product and service lines in the life and property & casualty markets.
Management is headed by CEO Walter Keenan, who has been with the firm since 2013 and was previously Executive Chairman of Medicus Insurance Holdings.
Mr. Keenan organized the recapitalization and re-purposing of Advantage in 2013 as well as its CLO-focused investment strategy.
The company had 43 employees as of Sept 30, 2017, and 329 life insurance policies in force.
Institutional investors in the firm include Copper Beech Capital (16% pre-IPO), BlackRock (9.6%), MVC Capital (9.6%), BKB Growth Investments (6.3%) and Amzak Capital Management (6.1%).
Advantage sells insurance products across primarily two lines:
Life – Private Placement Life Insurance for HNWIs Business – Captive insurance products for businesses wishing to self-insure
Below is a brief video by CEO Walther Keenan:
For its life insurance business, Advantage underwrites PPLI or private placement life insurance policies that enable high net worth individual to tailor their insurance plan by choosing the underlying investments from a range of asset classes. Additionally, the firm provides cash management, investment custody and funds transfer services through its Advantage International Bank Corp subsidiary. The life insurance business has tripled in size in separate account assets in 2016 vs. 2015.
For its business segment, Advantage provides captive (self-insurance) insurance and property & casualty products to small and medium-sized business in the U.S. The firm says its business segment doubled its total revenues in 2016 vs. 2015.
According to a 2017 World Wealth Report by CapGemini [PDF], the HNWI population and wealth is expanding on all fronts with growth markets around the world.
The report states its growth forecast as follows:
In the 2016 World Wealth Report, Capgemini estimated that global High Net Worth Individual [HNWI] wealth would surpass a stunning US$100 trillion (from US$16.6 trillion in 1996) by 2025. At the time, it seemed a bold prediction. In the 2017 WWR, we confirm that global HNWI wealth expansion is on track as projected, with faster growth in North America and Europe helping to offset a deceleration in Asia-Pacific. This is just one of many positive factors giving lift to the wealth management industry today. [Italics mine]
Advantages primary geographic market focus is the U.S. and sells its various insurance products, both life insurances and business insurances to high net worth individuals [HNWIs] located there.
The chart below illustrates CapGeminis forecast for HNWI financial wealth growth over the next eight years:
(Source: CapGemini 2017 World Wealth Report)
That is quite a rosy picture for the wealthiest strata of global society and represents a CAGR of 5.9% in wealth from 2016 to 2025.
So, AVIs focus on the HNWI strata would seem to be a well-timed bet, assuming management can effectively execute.
The firm invests its premium revenue surplus primarily in CLOs, or collateralized loan obligations. Management note that its CLO holdings are in a first-loss position and that Because the non-rated, junior CLO interests that we hold are in a first-loss position with respect to defaults and realized losses from the bank loans held by the CLO, it is possible that we would experience a complete loss for some of all of our CLO investments in the event of a prolonged economic recession
The majority of its CLO investments are managed by GSO / Blackstone Debt Funds Management. The firm intends to contribute most of the proceeds of this offering to our insurance subsidiaries for further deployment into loan funds and CLOs managed by GSO.
The firms captive insurance operations are subject to potentially negative IRS actions based on its potentially abusive tax shelter capabilities by virtue of its possible passive foreign investment company status. It has already seen new compliance requirements as a result of the initial action in 2015 and 2016 and forecasts the need for further technology investment to remain current with compliance burdens.
Major competitive vendors that provide PPLI insurance products include:
Crown Global Lombard International
Captive business insurance competitors include:
Ryan Strategic Risk Services USA Risk
The firm also competes against major insurance firms and intermediaries as indirect competitors.
AVIs recent financial results can be summarized as follows:
Growing topline revenue, although at a decreasing rate Stable net loss, adjustments & G&A expenses Uneven but positive cash flow from operations
Below are the companys operational results for the past three and 戮 years (Audited GAAP for full years):
(Source: Advantage Insurance S-1/A)
Revenue (Policy charges & fee income, net premiums and net investment income) ($)
Through Sept 30, 2017: $17.3 million, 17.7% increase vs. prior 2016: $21.5 million, 28% increase vs. prior 2015: $16.8 million
Net loss and adjustments, underwriting and G&A (%)
Through Sept 30, 2017: 77% 2016: 77% 2015: 66%
Cash Flow from Operations ($)
Through Sept 30, 2017: $1.56 million cash flow from operations 2016: $4.6 million cash flow from operations 2015: $1.8 million cash flow from operations
As of Sept 30, 2017, the company had $8.5 million in cash and $22.5 million in other liabilities.
Advantage intends to raise $100 million in gross proceeds from an IPO of its common stock.
Assuming a successful IPO and the underwriters exercising the over-allotment options in full, the firm will have a post-IPO market capitalization of approximately $240 million.
The estimated market cap includes the firms preferred shares which total 7.56 million issued and outstanding shares.
AVI says it will use the net proceeds from the IPO as follows:
We intend to contribute substantially all of the net proceeds from this offering to our Life Insurance and Business Insurance operating subsidiaries. We intend to use any remaining net proceeds for general corporate purposes, which may include the payment of dividends on shares of our common stock.
Management also says it plans to continue seeking acquisitions, as follows:
We plan to continue to seek out acquisitions of complementary life insurance businesses to profitably grow our business. We believe that our demonstrated ability to identify, negotiate and complete complex acquisition transactions provides us with distinct advantages relative to other potential acquirers of PPLI and specialty life insurance businesses.
Listed bookrunners of the IPO are Raymond James (RJF), JMP Securities (JMP) and B. Riley | FBR (RILY).
An expanded version of this analysis including my commentary is available on my in-depth IPO research service, IPO Edge.
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Expected IPO Date: Tuesday, December 19, 2017.
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