S-1 1 t1702844_s1.htm FORM S-1 t1702844_s1 - none - 17.3084625s
As filed with the Securities and Exchange Commission on November 16, 2017
No. 333-      ​
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ADVANTAGE INSURANCE INC.
(Exact name of registrant as specified in its charter)
Puerto Rico
6311
66-0840765
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification Number)
American International Plaza
250 Muñoz Rivera Avenue, Suite 710
San Juan, Puerto Rico 00918
(787) 705-2900
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Walter C. Keenan
Chief Executive Officer
American International Plaza
250 Muñoz Rivera Avenue, Suite 710
San Juan, Puerto Rico 00918
(787) 705-2900
(Name, address, including zip code, and telephone number, including area code, of agent for service)
With Copies to:
Brian S. Korn, Esq.
Manatt, Phelps & Phillips, LLP
7 Times Square
New York, New York 10036
(212) 790-4000
(212) 790-4545 Facsimile
Pedro I. Vidal-Cordero, Esq.
Vidal, Nieves & Bauzá, LLC
T-Mobile Center
B7 Tabonuco Street, Suite 1108
Guaynabo, Puerto Rico 00968
(787) 413-8880
(787) 625-0889 Facsimile
Robert J. Grammig, Esq.
Tom McAleavey, Esq.
Shawn Turner, Esq.
Holland & Knight LLP
100 North Tampa Street
Tampa, Florida 33602
(813) 227-8500
(813) 229-0134 Facsimile
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. ☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of  “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934. (Check one):
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☒
(Do not check if a smaller reporting company) Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act. ☐
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be Registered
Proposed Maximum
Aggregate Offering
Price
Amount of
Registration Fee
Shares of common stock, par value $0.01 per share
$ 150,000,000 (1) $ 18,675
(1)
Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities under this prospectus until the registration statement of which it is a part and filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED November  16, 2017
PRELIMINARY PROSPECTUS
[MISSING IMAGE: lg_advantageinsur.jpg]
Advantage Insurance Inc.
       Shares of Common Stock
This is the initial public offering of our common stock. Prior to this offering, there has been no public market for our common stock. We are selling        shares of our common stock. We currently expect the initial public offering price to be between $       and $       per share of our common stock.
We have two classes of authorized capital stock, common stock and preferred stock. The rights of the holders of common stock and preferred stock are identical, except with respect to voting, dividends and conversion. Each share of common stock is entitled to one vote per share and is entitled to such dividends as our board of directors may lawfully declare. Preferred stock automatically converts to common stock upon completion of this offering at a predetermined ratio of the number of common shares issued per preferred share. Outstanding shares of common stock will represent 100% of the voting power of our outstanding capital stock following this offering.
We have granted the underwriters a 30-day option to purchase up to        additional shares of our common stock to cover over-allotments.
We have applied to list our shares of common stock on the New York Stock Exchange under the symbol “AVI.”
We are an “emerging growth company” as defined under the federal securities laws and are eligible for reduced public company reporting requirements.
Investing in our common stock involves risks. See “Risk Factors” beginning on page 14 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Per Share
Total
Public offering price
$             $            
Underwriting discount(1)
$ $
Proceeds to us (before expenses)
$ $
(1)
Not applicable with respect to up to     shares of common stock to be sold pursuant to the Directed Share Program. We have agreed to reimburse the underwriters for certain expenses in connection with this offering. See “Underwriting.”
The underwriters expect to deliver shares of common stock to purchasers on       , 2017.
RAYMOND JAMES
JMP Securities
B. Riley | FBR
This prospectus is dated            , 2017

We have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.
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SUMMARY OF CERTAIN DEFINED TERMS
The following terms have the meanings indicated below:
ABIC
Advantage Business Insurance Company I.I.
ACAMS
Association of Certified Anti-Money Laundering Specialists
ADCP
Advantage DCP Ltd
AIBC
Advantage International Bank Corp.
AIMCL
Advantage International Management (Cayman) Ltd.
AIMUSA
Advantage Insurance Management (USA) LLC
AIS
Advantage Insurance Services LLC
ALAC
Advantage Life & Annuity Company SPC
ALAI
Advantage Life Assurance I.I.
ALIF
Advantage Life Investment Fund SPC
ALPR
Advantage Life Puerto Rico A.I.
ALSCF
Advantage Life Small Cap Fund SPC
A.M. Best
A.M. Best Company, Inc.
AML
Anti-Money Laundering
APCC
Advantage Property & Casualty Company SPC
ASU
Accounting Standards Update
AVI
Advantage Insurance Inc.
BEPS
Base Erosion and Profit Shifting
Blackstone
The Blackstone Group L.P.
BSA
Bank Secrecy Act of 1970, also known as the Currency and Foreign Transactions Reporting Act
BVPS
Book Value Per Common Share
CAMS
Certified Anti-Money Laundering Specialist
CDD
Customer Due Diligence
CFC
Controlled Foreign Corporation
CFT
Combating the Financing of Terrorism
CIMA
Cayman Islands Monetary Authority
CIP
Customer Identification Program
CLO
Collateralized Loan Obligation
The Code
Internal Revenue Code of 1986
CRS
Common Reporting Standard for the Automatic Exchange of Information
CSU
Common Share Unit
CTR
Currency Transaction Report
Exchange Act
Securities Exchange Act of 1934
EY
Ernst & Young Ltd.
FASB
Financial Accounting Standards Board
FATCA
Foreign Account Tax Compliance Act of the U.S. Internal Revenue Code of 2010
FATF
Financial Action Task Force
FCA
Financial Conduct Authority of the United Kingdom
FFI
Foreign Financial Institution
FinCEN
Financial Crimes Enforcement Network of the U.S. Department of the Treasury
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FIO
Federal Insurance Office of the U.S. Department of the Treasury
GAAP
Generally Accepted Accounting Principles in the United States of America
GSO
GSO Capital Partners International LLP
HNWI
High Net Worth Individual (an individual owning net investable financial wealth in excess of  $1 million)
HRPA
Harbor Risk Pool Association
IDF
Insurance-Dedicated Fund
IFE Act
Puerto Rico International Financial Center Regulatory Act of 2012
IRS
United States Internal Revenue Service
JOBS Act
Jumpstart Our Business Startups Act of 2012
KBRA
Kroll Bond Rating Agency, Inc.
KPMG
KPMG in the Cayman Islands
KYC
Know Your Customer
MCAA
Multilateral Competent Authority Agreement
NAIC
The National Association of Insurance Commissioners of the United States
NAV
Net Asset Value
NYSE
The New York Stock Exchange
OCIF
Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico (Oficina del Comisionado de Instituciones Financieras)
OCS
Office of the Commissioner of Insurance of the Commonwealth of Puerto Rico (Oficina del Comisionado de Seguros)
OECD
Organisation for Economic Co-Operation and Development
OFAC
Office of Foreign Asset Control of the U.S. Department of the Treasury
OTTI
Other Than Temporary Impairment
PAS
Policy Administration System
P&C
Property and Casualty
PFIC
Passive Foreign Investment Company
PPLI
Private Placement Life Insurance
PRA
Prudential Regulation Authority of the United Kingdom
PROMESA
Puerto Rico Oversight, Management, and Economic Stability Act of 2016
QEF
Qualified Electing Fund
REEFS
Regulatory Enhanced Electronic Forms Submission
RPG
Risk Purchasing Group
RPII
Related Person Insurance Income
RRG
Risk Retention Group
SAR
Suspicious Activity Report
SEC
U.S. Securities and Exchange Commission
Sarbanes-Oxley
Sarbanes-Oxley Act of 2002
Securities Act
Securities Act of 1933
USA PATRIOT Act
Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act
USCL
U.S. Commonwealth Life, A.I.
VIE
Variable Interest Entity
VOBA
Value of Business Acquired
VUL
Variable Universal Life
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. It does not contain all the information that you should consider before investing. You should read the entire prospectus carefully, including the sections entitled “Risk Factors” beginning on page 14 of this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 52 of this prospectus and the consolidated financial statements and the related notes contained elsewhere in this prospectus before making an investment decision. Some of the statements in this summary constitute forward-looking statements. See “Special Note Regarding Forward-Looking Statements.” For the definitions of certain terms used in this prospectus, see “Glossary of Selected Insurance and Tax Terms.” All dollar amounts referred to in this prospectus are in U.S. Dollars unless otherwise indicated. As used in this prospectus, unless the context otherwise indicates, any reference to “Advantage,” “our company,” “the company,” “the corporation,” “us,” “we” and “our” refers to Advantage Insurance Inc., together with its consolidated subsidiaries, and any reference to “AVI” refers to Advantage Insurance Inc. only. Unless the context otherwise indicates, any reference to “the offering” or “this offering” refers to the offering being made in this prospectus.
Our Company
We are an underwriter of specialty private placement life insurance, or PPLI, for high net worth individuals, or HNWIs, business owners and family groups worldwide through our Life Insurance division. In addition, through our Business Insurance division we provide property and casualty, or P&C, insurance underwriting services to small and medium-sized businesses. Our goal is to build and maintain a stable base of earnings from profitable insurance underwriting and policy servicing, complemented by consistent cash flows from our investment assets.
We measure our success by the total economic return to shareholders from an investment in our company as measured by growth in book value per share, plus any dividends paid. In the year ended December 31, 2016 our pro forma book value per diluted common share increased from $8.14 to $8.99, or 10%; in 2015, it increased from $7.79 to $8.14, or 4%. We did not pay any dividends in 2016 or 2015. See “Unaudited Pro Forma Financial Data — Reconciliation of Pro Forma Book Value per Share to GAAP Financial Statements.”
We are growing. In 2016, our Business Insurance division more than doubled its total revenues compared to 2015. This growth was attributable to increased underwriting activity and the successful addition of new captive insurance management clients. We tripled the size of our Life Insurance division in 2016 compared to 2015 as measured by separate account assets held by life insurance policies in force. This growth in Life Insurance came through sales of new policies and our acquisition of U.S. Commonwealth Life, A.I., or USCL. In 2015, we launched our new banking subsidiary Advantage International Bank Corp., or AIBC, to provide cost effective cash management, investment custody and funds transfer services exclusively to our operating subsidiaries and their insurance clients.
We believe that our differentiated approach, particularly our focus on the overall profitability of a client relationship including both risk underwriting and associated underwriting services income, will enable us to generate consistent returns on equity that are superior to those of traditional insurance and reinsurance companies. We also believe that the flexibility we have in our investment strategy due to our long-dated life insurance liabilities is a significant competitive advantage. We have designed our investment program to earn higher expected portfolio returns than traditional insurance companies by investing in higher-yielding, less liquid debt securities that we can hold to maturity. Other, traditional insurance companies are required to invest in higher-rated, more liquid securities in order to meet risk-based capital thresholds or other regulatory requirements that do not apply to us.
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Our Insurance Strategy
Our insurance strategy is to provide insurance underwriting services and enter into insurance contracts that allow us to earn an underwriting profit before investment income, where premiums we earn over the life of the insurance contract exceed the loss, loss adjustment and tax expenses we incur from the contract.
The three primary types of risk we assume from our insurance underwriting are:

Death.   We are exposed to mortality risk, or the timing of the event of death of one or more insured lives as it would impact our expected underwriting profit before investment income.

Disaster.   We are exposed to catastrophe risk, or insurance losses arising from the occurrence of one event or a series of large scale natural or human-caused events leading to widespread destruction of insured property as it would impact our expected underwriting profit before investment income.

Taxes.   We are exposed to tax risk, or changes in types and rates of taxation that would impact our expected after-tax underwriting profit before investment income.
We assume insurance underwriting risk only after we have determined the expected total profitability of the insurance transaction that offers the underwriting participation, including insurance services but excluding potential investment income. We believe this approach to be different than our competitors, most of whom we believe look to retention of underwriting risk as the primary profit generator.
Our Life Insurance division underwrites PPLI, health insurance and annuity policies. PPLI enables a broad range of investment alternatives, including securities issued in a private placement, to be held as policy assets. Traditional life insurance policies offer a limited range of investment alternatives, or participation in the general investment account of the issuing life insurer. HNWIs and family groups frequently choose PPLI over traditional life insurance products because of:

Flexibility.   PPLI enables customized investment strategies using external investment advisers, including separately managed accounts, hedge funds and other alternative investments;

Transparency.   Costs of a PPLI policy are broken out into individual components, including cost of insurance, policy administration fees, and investment-related fees; and

Security.   PPLI policy assets are usually held by a highly rated custodian bank and are legally segregated from those of the insurer and other policyholders.
We believe we differ from other life insurance companies in how we originate new business. We do not solicit new PPLI business directly, but instead rely upon introductions of prospective clients from knowledgeable wealth planning professionals including accountants, attorneys, external investment advisers and traditional insurance agents.
Our Business Insurance division underwrites P&C insurance risks of small and medium-sized businesses and professional services organizations located in the United States through the use of captive insurance and risk retention group structures. Our services enable smaller companies to access the financial benefits of self-insurance underwriting programs that historically have been available to large companies. In addition to providing captive insurance underwriting services, we underwrite third party P&C insurance at Lloyd’s of London, or Lloyd’s, for our own account and on behalf of our clients.
Our Investment Strategy
Our investment strategy is to earn over time the highest possible income from a portfolio of fixed maturity investments, after principal losses from credit defaults. We actively seek to invest in debt securities that are less liquid than investment-grade corporate or government bonds and
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expect to hold our less liquid investments to maturity. We obtain leverage in our investment portfolio indirectly, by purchasing intrinsically leveraged securities such as collateralized loan obligations, or CLOs, or utilizing medium-term credit facilities where our loss potential is limited to the amount of our investment only. We do not use margin loans, repurchase agreements or other short-term, recourse financing to add leverage to our portfolio. In addition, we seek to minimize the potential negative effect on our portfolio from rising interest rates by investing predominantly in floating-rate debt instruments such as bank loans and CLOs. The majority of CLO investments in our portfolio are managed by GSO Capital Partners International LLP, which together with certain of its affiliates forms the credit investment division of the Blackstone Group L.P., or Blackstone. We intend to contribute most of the proceeds of this offering to our insurance subsidiaries for further deployment into loan funds and CLOs managed by GSO. See “Use of Proceeds.”
The majority of our surplus capital today is invested in CLOs, specifically U.S. Dollar-denominated CLOs holding participations in broadly syndicated senior loans to corporations. As of September 30, 2017, CLO investments comprised 5% of our total assets and 77% of total shareholders’ equity. We have chosen CLOs as our focus asset class because we believe that, if held to maturity, the lifetime realized returns from a CLO are likely to approximate the expected returns at the time of initial investment. The long term nature of our insurance liabilities gives us the ability to hold a CLO investment to its stated maturity, which can be as long as 20 years. This lifetime holding period allows us to fully realize the ultimate returns delivered by a CLO investment, compared to other leveraged investment strategies that utilize short-term funding sources that pose risks of margin calls or other circumstances that would force premature liquidation on a distressed-sale basis.
CLOs are highly leveraged investment structures. We invest in the most leveraged securities issued by a CLO, which are deeply subordinated in right of repayment compared to the senior debt tranches. 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 or all of our CLO investments in the event of a prolonged economic recession leading to widespread credit defaults and borrower bankruptcies. Compared to direct investments in below-investment grade bank loans on an unleveraged basis, investments in subordinated tranches of CLOs are more likely to experience deeper realized losses than unleveraged, direct investments in the same underlying loans. Because CLO investments account for the majority of our total shareholders’ equity, if we were to incur significant realized losses within our CLO portfolio, our book value per share would decline precipitously. See “Risk Factors — Our Investment Strategy — Our investment strategy is risky.”
Our Business Organization
Our business strategy was developed by our management team over many years of advising and managing insurance companies and fixed income investment portfolios over many economic and insurance cycles. Our Chief Executive Officer, Walter Keenan, organized the initial recapitalization and re-purposing of Advantage in 2013 and the implementation of its CLO-focused investment strategy. Our Chief Investment Officer, Mark Moffat, has overseen our CLO portfolio from its inception, both in his prior capacity as an employee of GSO and his current role with Advantage. Our Chief Financial Officer, Tamara Kravec, has over 25 years of experience as an insurance industry analyst, investor and consultant. Our Chief Underwriting Officer, Stuart Jessop, joined Advantage in 2005 and is highly experienced in our Life Insurance business. Leslie Boughner, head of Business Insurance, is a long-tenured expert in corporate risk management and self-insurance programs. Together, we believe our management team has the requisite skills and experience to operate and grow our company.
Our company is headquartered in Puerto Rico, where it is licensed under the International Insurance Center established by the Puerto Rican government. Prior to relocating to Puerto Rico in 2016, our headquarters was in the Cayman Islands. We believe that our Puerto Rico location offers significant benefits for our business, including customer preferences for purchasing insurance from companies governed under U.S. law and the low corporate income tax rate applicable to us due to
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our participation in Puerto Rico’s economic incentive programs. We also believe that Puerto Rico offers competitive advantages for attracting HNWIs in Latin America because of language and historical cultural ties Puerto Rico has within the region.
In addition to our Puerto Rico headquarters, we have operations in the Cayman Islands, United Kingdom and United States. We utilize multiple licensed subsidiaries to underwrite insurance in order to provide our clients with a broad range of products, services and regulatory domicile choices. Our largest subsidiary as measured by capital invested is Advantage Life & Annuity Company SPC, or ALAC, domiciled in the Cayman Islands. We serve U.S. residents primarily from Advantage Life Puerto Rico A.I., or ALPR, which has made a tax election under Section 953(d) of the Internal Revenue Code, or the Code, to be fully taxed as a U.S. domestic corporation. Our UK and U.S. operations are focused on our Business Insurance division. We believe having licensed subsidiaries in multiple jurisdictions enables us to serve the broadest possible market of HNWIs.
Market Trends and Opportunities
Globally, the number of HNWIs continues to grow. In 2010, there were 10.9 million HNWIs holding $42.7 trillion of financial wealth. In 2016, there were 16.5 million HNWIs holding $63.5 trillion of financial wealth. The three largest markets — Asia-Pacific, North America and Europe — experienced growth in 2016 while the overall HNWI population in Latin America has remained stable during this period.
The following chart depicts the growth in global wealth and HNWIs from 2010 – 2016:
[MISSING IMAGE: t1702844_chrt-barline.jpg]
Source: Capgemini Global Wealth Report 2017
We believe that the global wealth management industry, consisting of accountants, attorneys, fund managers, private bankers and other professional wealth advisors, will continue to seek out individuals and families that achieve HNWI status to provide them with financial planning and investment services. Our opportunity is to participate in the overall growth of professionally advised HNWIs by underwriting PPLI policies sourced through professional advisors, and to provide risk management and captive insurance services to HNWI business owners.
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Our Competitive Strengths
We believe we distinguish ourselves based on the following features of our business and strategy:

Focus on Insurance Underwriting Services.   We focus on offering customized insurance solutions to clients through our captive insurance underwriting programs and separate account life insurance policies. Most of the insurance risk we underwrite is subsequently passed through to reinsurance companies or is ultimately retained by the captive insurance client, allowing us to avoid significant concentrations of underwriting losses from one client or a particular type of client.

Solutions-Based Approach.   Many insurance services companies, including brokers and agents, focus on the sale of products to clients because product sales generate commissions. Most of our revenues are attributable to customized insurance solutions such as PPLI policies or captive insurance companies, which typically are evergreen in nature and do not have annual renewals. We do not depend upon new sales to generate one-time commissions; instead, we rely on recurring revenues from long-term client relationships.

Efficient Administration Platform.    We believe we are able to offer high quality products and services at a lower all-in cost compared to similar products and services offered by our large competitors due to the efficiency of our operations. Our employee productivity and operating costs benefit from modern information technology and communications services, paperless document management processes, and other workflow efficiencies derived from our many years of experience in our core business lines.

Opportunistic Underwriting Participation.   Our clients and our regulators do not require us to retain on our balance sheet the insurance risks we underwrite. We believe that many of our clients and all of our regulators prefer us to utilize reinsurance from highly rated counterparties to further spread the risk associated with their policies or insurance programs. In general, there is ample reinsurance coverage available to us today, at acceptable prices. This use of reinsurance allows us to selectively evaluate the risks we manage and to elect to participate in varying amounts for the insurance coverage underwritten.

Total Return Investment Approach.   We employ a non-traditional investment approach utilizing CLOs that has the potential to generate higher rates of return than traditional insurance company portfolios. Because our operating subsidiaries and lines of business generally do not require high risk-based capital ratios for regulatory purposes, we are able to invest in less liquid, lower-rated debt securities that offer better total return potential than highly liquid, highly-rated securities.

Experienced Management Team.   We believe our management team has a broad range of relevant skills, experiences and relationships in the life insurance and captive insurance sectors, as well as in the investments supporting our insurance risks.

Experienced External Investment Adviser.   Our external investment adviser, GSO, together with certain of its affiliates, is part of the global credit platform of Blackstone. GSO represents one of the largest credit-oriented asset managers in the world and, as of September 30, 2017, manages approximately $99.5 billion of assets across multiple strategies within the leveraged finance marketplace, including bank loans, high yield bonds, distressed and mezzanine.

Alignment of Management and Shareholder Interests.   Our CEO and his family have invested directly in our common shares, and all of our senior managers have purchased shares or received share grants as compensation. Furthermore, our compensation
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approach is to align management and employee interests with those of our shareholders over the long term. Finally, the value of the warrants to purchase common shares held by many of our senior managers are long-dated and become valuable when the market value of our common shares increases.
Our Growth Strategy
We intend to grow our business in the future, both organically and by acquisitions of complementary insurance businesses. In particular, we plan to:

Increase Sales Volume of New PPLI Policies.   We plan to grow our book of in-force PPLI policies by increasing our share of new business sourced through existing introducer relationships and by developing new referral sources worldwide. In particular, we plan to expand into referral channels that require insurance service providers to have “A” category ratings as we plan to seek such a rating following completion of the offering. These channels include bank trust departments, fiduciary services providers, investment advisers and wealth planning firms. We intend to contribute substantially all of the net proceeds from this offering to our Life Insurance and Business Insurance operating subsidiaries. We believe that the resulting increased total capital will help us receive an “A” category insurance financial strength rating, since ratings agencies place great importance on capital assets in assessing insurance company strength. See “Use of Proceeds.”

Develop New Types of Life Insurance Policies.   At present, we issue variable universal life, or VUL, and deferred variable annuities to high net worth and ultra-high net worth individuals and family groups. These policies do not require us to make investment return guarantees or otherwise take risks other than the mortality of the lives assured. We have issued a small number of accident and health-related policies in the past, and expect to expand this business in the future. We also offer insurance-based retirement savings plans to companies with employees or owners who are resident in certain countries with histories of government instability, bankruptcy or other risks to individual savings and investments. We may expand the range of retirement plan options offered and further build out our administrative capabilities for savings-based insurance contracts in order to grow this line of business.

Add New Clients for Business Insurance Services.   We plan to add new Business Insurance clients by recruiting experienced industry personnel who have existing relationships with prospective clients and referral sources for new clients. We believe that the visibility of our company due to the listing of its shares on the New York Stock Exchange, or NYSE, will assist us in attracting both highly experienced professional staff and new clients for captive insurance and related underwriting services. Using our expanded balance sheet following this offering, we will seek to participate on an opportunistic basis in some of the more attractive risks we underwrite for our clients, and to expand our underwriting and market presence at Lloyd’s.

Acquire Complementary Insurance Businesses.   Since our recapitalization in 2013, we have acquired two life insurance companies and one book of captive insurance management contracts. We plan to allocate a portion of the proceeds from the offering to fund potential acquisitions of life insurance and captive insurance management businesses. Based on our own experience, we believe that these types of businesses face increasing challenges related to regulatory compliance, accounting and audit, technology and increasing competition. Our investment in technology and competitive cost structure enables us to compete against other potential acquirers of these types of businesses. There is no assurance that we will be successful in identifying, completing and/or integrating any acquisition(s). We currently do not have any plans, arrangements, understandings or agreements with respect to any potential acquisition.
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Assume Blocks of In-Force Business.   We have the ability to grow our business by assuming the rights and obligations of existing life insurance contracts, including PPLI policies, issued by other carriers who have discontinued underwriting new policies of the same type. This type of business is often referred to as a “run-off block.” We plan to continue to seek out run-off blocks of in-force life insurance business from other carriers where we can earn acceptable profit margins on the assumed business.

Gain Scale to Achieve Profit Margins from Captive Insurance Business.   We provide captive insurance underwriting and management services to our Business Insurance division clients where our primary costs are related to the people we employ and third party vendors we utilize on behalf of our clients. We believe that we earn attractive profit margins on our services before corporate overhead costs. We seek to increase both the number of Business Insurance clients and the revenue per client.
Risk Factors
An investment in our common shares involves numerous risks described in the section entitled “Risk Factors” and elsewhere in this prospectus. You should carefully consider these risks before making an investment in our common shares. The following represent a highlight of some, but not all, of the risks that could impact our business and competitive strengths:

We are Small.   We compete with very large companies and groups of companies. Clients may choose to work with larger companies due to a perception that large companies are more stable and less risky than small companies.

We May Not Grow.   We are investing in our own growth by hiring additional employees and developing new insurance products and services in order to gain new clients. If we fail to attract new clients and we lose existing clients, our business will shrink and our financial results will be poor.

We May Lose Our Key People.   Our future success depends to a significant extent on the efforts of our senior management and other key personnel to implement our business strategy. The loss of the services of one or more of the members of our senior management or other key personnel, or our inability to hire and retain other key personnel, could delay or prevent us from fully implementing our business strategy and, consequently, significantly and negatively affect our business.

We Invest Our Surplus in Risky Assets.   Our total return-oriented investment strategy is more volatile and presents greater risks than traditional fixed-income investment strategies due to the intrinsic leverage, complexity and illiquidity of our investments. In addition, our CLO investments are not traded on exchanges or in reliably liquid over-the-counter markets. In the past, CLO securities have experienced significant price volatility and periods of extended market illiquidity.

Our CLO Investments Are Exposed to Multiple Types of Risks.   Among other things: (i) CLOs typically will have no significant assets other than the loan assets underlying such CLO and we may be in a first loss position with respect to any realized losses on the loan assets; (ii) our CLO positions are exposed to interest rate risk; (iii) we may not be able to participate in CLO warehouse credit facilities as we have in the past; (iv) we may be subject to margin calls or other adverse effects from our participation in CLO warehouse investments; (v) our loan and CLO investments amortize over time and subject us to reinvestment risk; and (vi) we typically invest in subordinated or equity tranches of CLOs that are subject to first loss risk.

We may not obtain an “A” category rating.   Companies, insurers and reinsurance brokers use ratings from independent ratings agencies as an important means of assessing the financial strength and quality of insurers and reinsurers. We believe that with the proceeds of this offering, our financial profile supports the issuance of an “A” category or
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better rating by A.M. Best or KBRA. If we do not obtain an “A” category rating from A.M. Best or KBRA after completion of the offering, we will not be able to add the quantity and quality of new clients that we would otherwise expect to win with the benefit of having an “A” category rating.

We Have a Limited Operating History as Underwriters.   We have a limited operating history of participating meaningfully in our clients’ risks and we expect to incur underwriting losses.

Our Results of Operations Will Fluctuate.   The performance of our insurance operations will be inconsistent from year to year and may not be indicative of long-term prospects. Fluctuations in revenues and profitability will result from a variety of factors, including, but not limited to, our sales of private placement life insurance policies and captive insurance services, performance of our insurance and reinsurance counterparties, and our ability to control our operating expenses.

We May Have Difficulties Raising Capital.   We may need to raise additional capital in the future through public or private equity or debt offerings or otherwise and such additional capital may not be available on terms favorable to us, or at all.

Cyclicality of the Insurance Markets May Affect Our Profitability.   The P&C insurance and reinsurance industry is cyclical and subject to unpredictable adverse events and developments such as natural disasters, man-made disasters, tort liability awards, and other, smaller insured losses that collectively are significant to the industry. Courts may grant increasingly larger rewards for such unpredictable adverse events and developments, which may affect the industry, including our profitability and liquidity.

Tax Law Changes Could Hurt Our Business.   If current tax laws and regulations are changed, it could reduce the economic benefit of our products and services compared to other risk financing and risk transfer alternatives. In addition, if we are deemed to be a Passive Foreign Investment Company, our shareholders may be subjected to additional taxes.

Regulatory Action Could Result in Significant Financial and/or Reputational Losses.   We are subject to myriad regulatory compliance requirements. Each of our regulators may revoke, suspend or otherwise limit our ability to operate in its jurisdiction if it believes or finds cause to believe that any of our insurance businesses operating within its jurisdiction is not in compliance with applicable laws and/or regulations, and regulations in the countries could likewise limit our ability to operate and/or impose fines. Suspension or revocation of our insurance licenses would materially impact our business and could cause us to realize material losses.

Our Puerto Rico Location May Adversely Impact Our Financial Condition or Results of Operations.   It is uncertain what impact the Puerto Rican government’s recent filing for bankruptcy, natural disasters (including Hurricane Maria and other hurricanes), and other events, will have on our financial condition and results of operations.

Our Investment Performance Depends on Our External Investment Adviser, GSO.   Our performance depends on, among other things: (i) the ability of GSO to generate positive returns; and (ii) GSO’s ability to advise on, and identify, investments in accordance with the investment objective of the company and to allocate the assets of the company among all investments in an optimal way.

You may be limited in your ability to transfer your shares of common stock.   Our certificate of incorporation provides that, in certain circumstances in order to avoid adverse tax, regulatory or legal consequences, our board may prevent a shareholder from transferring its shares of our common stock.
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You may be required to sell your shares of common stock to the Company at a price different than the current market price.   Our certificate of incorporation provides that, in certain circumstances in order to avoid adverse tax, regulatory or legal consequences, our board of directors may require a shareholder to sell its shares of our common stock back to us at a price equal to fair value as determined by the board of directors, which may be a price that is different than the current market price of shares of our common stock.

Other Risks Factors Listed Under “Risk Factors” and Elsewhere in This Prospectus.
Emerging Growth Company
We qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act, including as modified by the JOBS Act. As a result, we are eligible to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies. These exemptions include reduced disclosure about our executive compensation, reduced requirements for disclosure of historic financial information, and exemption from certain requirements imposed by the Sarbanes-Oxley Act of 2002.
We intend to take advantage of some, but not all, of the exemptions available to emerging growth companies until such time that we are no longer an emerging growth company. Accordingly, the information contained herein may be different from the information you receive from other public companies in which you invest.
We are electing to take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards and, as a result, we will not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. This may make it more difficult to compare our company with other companies in our industry who may be required to adopt such standards.
Following this offering, we will continue to be an emerging growth company for up to five years. We will cease to be an emerging growth company until the earliest to occur of: (1) the last day of the fiscal year during which we had total annual gross revenues of at least $1.07 billion (as indexed for inflation), (2) the last day of the fiscal year following the fifth anniversary of the date of our initial public offering under this prospectus, (3) the date on which we have, during the previous three-year period, issued more than $1 billion in nonconvertible debt or (4) the date on which we are deemed to be a “large accelerated filer,” as defined under the Exchange Act.
Recent Developments
On September 16, 2017 we implemented our business continuity plans for a major hurricane to impact our San Juan, Puerto Rico headquarters location. Key personnel relocated to our Grand Cayman, Cayman Islands office and other remote locations away from Puerto Rico prior to the landfall of Hurricane Maria in Puerto Rico on September 20. Our headquarters office tower location at 250 Muñoz Rivera Avenue in San Juan was not damaged by the hurricane. However, because of the declared state of emergency and ongoing impacts from Hurricane Maria in Puerto Rico, we have elected to continue to operate under our business continuity protocols with respect to our Puerto Rico operating subsidiaries until December 31, 2017. Although our business was adversely impacted in the quarter ended September 30, 2017 by Hurricane Maria, we do not expect the additional operating expenses we have incurred and are incurring since September 30, 2017 because of Hurricane Maria will be be material to our financial condition or results of operations.
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Corporate Information
The company was incorporated in 2015 and is registered with the Department of State in Puerto Rico. The company’s predecessor, Advantage Insurance Holdings Ltd., was located in the Cayman Islands until its merger with and into the company in 2016. Our principal executive offices are located at American International Plaza, 250 Muñoz Rivera Avenue, Suite 710, San Juan, Puerto Rico 00918 and our telephone number is (787) 705-2900. Our website address is www.advantagelife.com. Information contained on or accessible through our website is not a part of this prospectus and should not be relied upon in determining whether to make an investment decision.
The following chart depicts our company and its principal operating subsidiaries after giving effect to the offering:
[MISSING IMAGE: t1702277-orgchrt.jpg]
Summary Financial And Operating Data
The following tables set forth our consolidated summary financial data for the fiscal years ended December 31, 2016, 2015 and 2014, and our unaudited summary financial data for the nine months ending September 30, 2016 and 2017. The summary financial data for 2016 and 2015 is excerpted from our audited financial statements, which are included elsewhere in this prospectus. The summary financial data from 2014 is excerpted from historical consolidated financial statements which are not included in this prospectus. The unaudited summary financial data for the nine months ending September 30, 2016 and 2017 is excerpted from our unaudited financial statements, which are included elsewhere in this prospectus. These historical results are not necessarily indicative of future results and the results for any interim period are not necessarily indicative of the results that may be expected for a full fiscal year.
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You should read the following summary financial data together with our unaudited pro forma consolidated financial statements and related notes included elsewhere in this prospectus, and in conjunction with “Unaudited Pro Forma Financial Data,” “Selected Historical Consolidated Financial and Operating Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All dollars are in thousands, except per share data.
Summary Income Statement
Nine months ending September 30,
Year ending December 31,
2017
2016
2016
2015
2014
Revenue
Policy charges, premiums and fee income
$ 12,672 $ 9,149 $ 14,478 $ 9,356 $ 7,650
Reinsurance, net
(1,683) (722) (1,054) (759) (691)
Investment & other income
5,686 7,383 11,115 9,140 3,168
Total revenue
16,675 15,810 24,539 17,737 10,127
Expenses
Underwriting, general & administrative expense
10,333 10,589 14,491 10,354 8,966
Loss and loss adjustment expenses
2,976 1,256 1,986 689
Amortization and finance charges
1,753 150 1,434 235 365
Total expenses
15,062 11,995 17,911 11,278 9,331
Operating income (before tax)
1,613 3,815 6,628 6,459 796
Net income
$ 1,192 $ 3,924 $ 6,482 $ 6,866 $ 951
Diluted earnings per share
$ 0.11 $ 0.40 $ 0.66 $ 0.73 $ 0.11
Summary Balance Sheet
September 30,
December 31,
2017
2016
2016
2015
2014
(unaudited)
Assets
Separate account assets
$ 1,345,892 $ 446,516 $ 1,114,849 $ 337,803 $ 330,681
Investments and cash
77,683 78,305 83,723 78,234 79,776
Restricted cash and regulatory deposits
8,869 4,858 15,007 2,050 1,750
Receivables and other
21,982 17,524 16,567 12,878 8,577
Deferred acquisition costs and VOBA
21,761 2,636 21,022 1,374 986
Deferred income taxes
126 789 526 716 295
Intangible assets
1,965 2,122 2,043 2,220 362
Total assets
$ 1,478,278 $ 552,750 $ 1,253,737 $ 435,275 $ 422,297
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September 30,
December 31,
2017
2016
2016
2015
2014
(unaudited)
Liabilities
Separate account liabilities
1,345,892 446,516 1,114,849 337,803 330,681
Reserves for insurance liabilities
6,640 3,001 3,536 1,221 560
Note payable and surplus debenture
12,133 940 16,188 940 4,000
Other liabilities
20,352 13,229 25,651 9,271 5,270
Total liabilities
1,385,017 463,686 1,160,224 349,235 340,511
Shareholders’ equity
$ 93,261 $ 89,064 $ 93,513 $ 86,040 $ 81,922
Total liabilities and shareholders’ equity
$

1,478,278
$

552,750
$ 1,253,737 $ 435,275 $ 422,297
At or For the Nine Months
Ended September 30,
At or For the Years
Ended December 31,
2017
2016
2016
2015
2014
Summary Pro Forma Capitalization Statistics (unaudited)
Pro Forma Capitalization (1)
Pro forma shareholders’ equity (2)
$ 93,261 $ 89,064 $ 93,513 $ 86,040 $ 81,922
Pro forma diluted common shares outstanding
10,340,294 10,211,560 10,406,539 10,569,286 10,518,443
Pro forma book value per diluted share
$ 9.02 $ 8.72 $ 8.99 $ 8.14 $ 7.79
Summary Operating Statistics (unaudited)
Operating Statistics (at period
end):
Number of office locations
4 4 4 4 3
Number of full-time equivalent employees
43 38 41 34 32
Number of life insurance policies in force
329 194 319 187 156
(1)
For a reconciliation of our pro forma capitalization statistics, see “Unaudited Pro Forma Financial Data — Reconciliation of Pro Forma Book Value per Share to GAAP Financial Statements.”
(2)
Excludes proceeds from exercise of all outstanding warrants.
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THE OFFERING
Common shares offered by the company
       shares (plus up to an additional        shares upon exercise of the underwriters’ option to purchase additional shares)
Common shares outstanding before this offering (1) (2)
10,340,294
Common shares outstanding upon completion of this offering (1) (3)
       shares
Voting rights
One vote per common share, subject to a 9.9% limitation on the voting power of any single holder as set forth in our certificate of incorporation and bylaws. See “Description of Share Capital — Common Stock — Voting Rights.”
Use of proceeds
We estimate that our net proceeds from this offering will be approximately $       million, or approximately $       million if the underwriters’ option is exercised in full, and after deducting estimated underwriting discounts and commissions and estimated offering expenses.
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. See “Use of Proceeds.”
Dividend policy
We do not currently pay dividends on our common shares. Following completion of the offering, we expect our board of directors to institute a regular quarterly dividend of approximately $       per share. Any future determination to pay dividends will be made at the discretion of our board of directors and will depend upon many factors, including our financial condition, earnings, legal and regulatory requirements, restrictions in our debt agreements and other factors our board of directors deems relevant. See “Dividend Policy.”
Risk factors
See the section entitled “Risk Factors” beginning on page 14 and other information included in this prospectus for a discussion of factors you should consider before making an investment decision.
Proposed NYSE symbol
We intend to list our shares of common stock on the NYSE under the symbol “AVI.”
Registrar and Transfer Agent
Computershare Trust Company, N.A.
(1)
Includes 10,016,908 shares of our common stock, which we will issue upon automatic conversion of our issued and outstanding 7,560,444 shares of our preferred stock in accordance with the terms of our preferred stock.
(2)
Based on 323,386 shares of our common stock outstanding as of September 30, 2017, plus (i) an additional 10,016,908 shares to be issued further to the conversion described in footnote (1).
(3)
Such information excludes (i) common shares issuable upon the exercise of the underwriters’ option to purchase additional shares, (ii) 2,159,895 common shares issuable upon the exercise of outstanding warrants, and (iii) common shares of our common stock issuable upon vesting of restricted share awards outstanding to our employees.
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RISK FACTORS
The purchase of our common shares involves significant risks, including the potential loss of all or part of your investment, and other significant factors. These risks could materially affect our business, financial condition and results of operations and cause a decline in the book value and/or market value of our common stock. We have organized the discussion of risks using topic headings for convenience only. Many of the risks discussed under one topic heading are integrally related to risks discussed under another topic heading. This prospectus also contains forward-looking statements and estimates that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of specific factors, including the risks and uncertainties described below. See “Special Note Regarding Forward-Looking Statements.” You should carefully consider all of the risks described in this prospectus, in addition to all of the other information contained in this prospectus, especially our Business section and the Management Discussion and Analysis section and conduct such due diligence as you consider appropriate, before you make an investment in our common shares.
Risks Relating to Our Insurance Underwriting
Our results of operations will fluctuate from period to period and may not be indicative of our long-term prospects.
The performance of our insurance operations will be inconsistent from year to year. Fluctuations in revenues and profitability will result from a variety of factors, including:

our sales of new PPLI policies and captive insurance services;

our retention of existing PPLI and captive insurance clients;

loss experience from our insurance underwriting liabilities;

restrictions and limitations imposed on our business from new regulations or judicial interpretations;

our misselling of PPLI policies in foreign countries and states in the United States where such sales are not permitted;

performance of our insurance and reinsurance counterparties;

performance of our investment portfolio; and

our ability to control our operating expenses.
In particular, we seek to underwrite insurance contracts and make investments that will give us a return on equity over the long term that is better than the insurance industry overall. In our Life Insurance segment, we focus primarily on arranging and managing highly customized life insurance policies for business owners and high net worth individuals, or HNWIs, and family groups. Similarly, our Business Insurance segment focuses on risk management and financing services, including operation of captive insurance companies for small and medium-sized businesses. We seek to transfer the majority of the risks we assume from our clients to third party insurers and reinsurers. Most of our economic returns from the Business Insurance segment are related to our services that arrange for self-insurance or risk transfer to third parties, as distinct from earning premiums for risks transferred to us from our clients. We believe that this approach will result in higher profit margins than the traditional industry practice of retaining risks on-balance sheet. If our belief is incorrect, we will underperform the industry and our results will not compare favorably with other insurance companies.
Because we sell fewer life insurance policies with higher premiums and face amounts than other companies, our new business acquisition costs can be very high compared to the volume of business written. Our cost of acquiring a Business Insurance client can be high compared to the expected profits from the client over time. If we do not retain the new client for multiple years, we
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may not recover our client acquisition costs. Finally, we depend on our insurance and reinsurance counterparties to honor claims made by us on behalf of our clients who have experienced a loss covered by their policy issued by one of our subsidiaries or affiliates. If money due to us under our insurance policies or reinsurance treaties is uncollectable, we remain responsible for payment in full of all legitimate and valid claims of the clients we face directly. This could result in a material adverse impact to our results of operations.
Our Life Insurance products may not provide the benefits expected by our clients.
Our Life Insurance products are designed to offer clients and their beneficiaries financial benefits, notably favorable tax treatment of inter-generational transfers of family wealth. The effectiveness of our products in facilitating tax-efficient inter-generational wealth transfer depends upon:

compliance of our products with all applicable tax laws and other relevant regulations;

where applicable, validity of our life insurance contracts under U.S. tax laws including IRS Section 7702 guidelines; and

integrity of any trust arrangements or similar structures holding or benefiting from our life insurance products.
If our products do not perform as expected, our clients may seek to recover damages from us and our reputation in the marketplace will suffer.
Our Life Insurance products are complicated and require clients to take actions beyond those required to purchase traditional life insurance policies.
Persons seeking to purchase PPLI from our Puerto Rico and Cayman Islands subsidiaries must complete additional steps in the transaction that add complexity compared to purchasing ordinary life insurance products sold by a company in their home jurisdiction. In order to purchase a PPLI product from us, a client will typically:

learn about the benefits of PPLI from a third party advisor, as opposed to a company agent;

engage an attorney or other expert to provide advice and structure the transaction(s);

travel outside of their home country to discuss the product and related transaction(s) with their advisors and/or our personnel;

undergo a medical exam outside of their home country;

complete all required paperwork and financial transactions outside of their home country;

file additional tax information related to the purchase of international life insurance; and

in many jurisdictions, pay excise tax on the total amount of premium paid.
This complexity makes it difficult for our products to compete with traditional life insurance policies offered by locally regulated companies, which are often highly-rated carriers with worldwide operations and brand name recognition.
Recognizing, in connection with the sale of the PPLI policies, that activities may take place in foreign countries which could be subject to local laws, failure to ensure that the marketing and sales activities related thereto comply with the laws of such jurisdictions could result in compliance issues including imposition of sanctions and fines. Additionally, many jurisdictions may prohibit or restrict the sale of PPLI policies by insurers not authorized to transact insurance in such jurisdiction, even if sale of the policy is not intended to be made to residents of such jurisdictions. Therefore, if discussions of the PPLI product and related transactions by the insured or person seeking to purchase the PPLI policy and the advisors take place in a jurisdiction other than Puerto Rico or the Cayman Islands, those activities could lead to potential violations of foreign laws by the insurance company, advisor or policy holder. In connection with such
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activities, we rely on our employees to comply with the law of the jurisdiction where the transaction takes place and in which the insured resides. In addition to being regulated as insurance, our PPLI policies are regulated as investment securities in the United States and in many jurisdictions wherein prospective insureds reside. In addition, our failure to comply with the laws regulating sale of investment securities could subject us to lawsuits by insureds and policy owners and to administrative proceedings. In addition, sales of PPLI policies to U.S. person purchasers requires that purchasers are both accredited investors and qualified purchasers under U.S. securities laws. As a consequence, only those U.S. purchasers who are both accredited investors and qualified purchasers are eligible to purchase PPLI policies, and only in transactions that take place in either Puerto Rico or the Cayman Islands, given that we are not authorized to transact insurance business in any U.S. state.
In certain instances where we have issued policies to residents of certain jurisdictions, there is a risk that premium income arising from these policies could be deemed income earned by us in the country of the insured/policy owner, and potentially subject us to income tax in that country.
Established competitors with greater resources may make it difficult for us to effectively market our products or offer our products at a profit.
The insurance industry is highly competitive. We compete with major insurers and reinsurers, many of which have substantially greater financial, marketing and management resources than we do. Competition in the types of business that we underwrite is based on many factors, including:

premium charges;

the general reputation and perceived financial strength of the insurer;

relationships with financial advisors and insurance brokers;

terms and conditions of products offered;

ratings assigned by independent rating agencies;

speed of client service, claims payment and reputation; and

the experience and reputation of competitors’ management teams.
Competitors in our Life Insurance business include very large life insurance companies such as Old Mutual, Prudential, Zurich and others. We also compete against specialist PPLI companies such as Crown Global and Lombard International. Business Insurance competitors include large insurance intermediaries, including Aon, Marsh, Willis and other brokers; independent captive managers, including Ryan, Strategic Risk Services and USA Risk; and large property casualty insurance companies including AIG; Chubb; Travelers; Liberty Mutual, Markel; W.R. Berkeley; CNA; Hartford; and others. Reinsurers include Chubb, General Re Corporation (a subsidiary of Berkshire Hathaway, Inc.), Hannover Re Group, Munich Reinsurance Company, PartnerRe Ltd., Swiss Reinsurance Company, and XL Capital Ltd. Although we often purchase reinsurance from large global insurance companies or otherwise serve as a conduit to the global insurance market for our clients, these large companies can and will do business directly with our customers. We also compete with smaller insurance brokers and agencies, and other niche insurers from time to time.
We cannot assure you that we will be able to compete successfully in the insurance markets. Our failure to compete effectively would significantly and negatively affect our financial condition and results of operations and may increase the likelihood that we may be deemed to be a PFIC or an investment company. See “Risk Factors — Risks Relating to Regulation and Compliance — We are subject to the risk of possibly becoming an investment company under U.S. federal securities law” and “Tax Considerations — U.S. Federal Income Taxation — Passive Foreign Investment Companies.”
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Our clients may be dissatisfied with the performance of their insurance policies and seek to recover economic damages from us in a court of law.
Although we are not currently named as a defendant in any pending or expected court action, we have been sued in the past and may be sued in the future. We believe that our responsibilities to our clients are well-defined in our policy forms and corporate services agreements, which help us defend again potential claims arising out of the performance of insurance policies. However, there is no assurance that we will not be sued in the future or that we will not be subject of administrative proceedings brought by a foreign regulator, and there is no further assurance that we will be able to successfully defend against any future actions. In addition to any economic damages that we may be required to pay from a lawsuit, the distraction to management team members caused by defending a legal action could harm our business or limit our future growth.
Our ability to sell our Life Insurance products will be affected by adverse economic factors.
PPLI is often more expensive than traditional life insurance policies and our Life Insurance products have large face amounts and a broad range of investment alternatives that may be held as policy assets. As a result, our Life Insurance products are suited to a small number of potential customers and the underlying policy assets are exposed to a broad range of market risk. Adverse economic factors such as recession, inflation, periods of high unemployment or lower economic activity could result in the sale of fewer PPLI policies than expected, an increase in frequency or severity of claims or diminution in underlying value, each of which, in turn, could affect the value of our Life Insurance products, our growth and profitability.
Our investment results will fluctuate from period to period, may not deliver expected results and may result in realized losses of our capital.
Our reported financial results will be impacted by:

the market prices of corporate loans, and CLO securities; and

the overall performance of our investment portfolio.
Our core investment strategy is to earn incremental income from floating-rate, fixed maturity loans to corporate borrowers by adding leverage through CLO structures. Because of the intrinsic leverage, complexity and illiquidity of our investments, reported market prices are volatile and decline rapidly during periods of financial market dislocation. Also, realized credit losses from defaulted loans may impact our portfolio to a greater degree than traditional corporate credit investments because we invest in the intrinsically leveraged, subordinated tranches of CLO securities. For example, in a high default rate environment such as that experienced in 2009, our investments may realize losses greater than those experienced by the market overall.
Our business is growing rapidly and there is limited historical information available for investors to evaluate our investment performance or a potential investment in our common shares.
Compared to most insurance companies, we are new and have a much shorter operating history. Our Business Insurance division commenced operations in 1993 and our Life Insurance business issued its first policy in 1998. Many of our competitors were established over 100 years ago. We grew rapidly in 2016 through an acquisition of a life insurance company founded in 2009. Because we are new, and our underwriting and investment strategies differ from those of other insurance and reinsurance companies, you may not be able to compare our business or prospects to other P&C insurers or life insurers.
In particular, our ability to implement our Life Insurance investment portfolio strategy depends on, among other things:

the availability of corporate loans and CLO securities offered to us through our external investment adviser at attractive prices;
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our external investment adviser’s ability to originate for our portfolio new CLO structures using medium-term credit facilities known as warehouse financing; and

our ability and our external investment adviser’s ability to properly analyze the risks and expected returns of corporate loans and CLO securities; and

other market conditions that would hurt our ability to deploy the proceeds of the offering into a diversified corporate loan and CLO portfolio.
In addition, we are at risk of being deemed a PFIC or an investment company if we are unable to implement our business plan and are deemed to not be in the active conduct of an insurance business or to not be predominantly engaged in an insurance business. See “Risk Factors — Risks Relating to Regulation and Compliance — We are subject to the risk of possibly becoming an investment company under U.S. federal securities law” and “Tax Considerations — U.S. Federal Income Taxation — Passive Foreign Investment Companies.”
Our reinsurers and other counterparties may not pay claims owed to us.
Our business model relies heavily on transferring property, casualty, liability, morbidity and mortality risks to other insurance and reinsurance companies. Although we historically have only placed reinsurance with reinsurers rated “A” category or better by a major rating agency, we could be materially, adversely affected if a reinsurance counterparty fails to pay us for a valid claim, and we are still responsible for the claims payment to the policyholder. A reinsurance counterparty could fail to pay us for a claim due to:

the lapse of time from the occurrence of an event to the reporting of the claim and the ultimate resolution or settlement of the claim;

their belief that the claim is fraudulent;

the sale of the policy was illegal or otherwise invalid;

a disagreement over the validity of the claim or indemnity amount available to pay the claim;

insolvency of the reinsurer; and

any other reason that may cause the reinsurer to decline to honor the claim.
We also utilize non-traditional reinsurance or risk transfer for certain types of life and health insurance policies we issue to businesses and business owners, where an affiliate of the purchaser assumes some or all of the actual insurance risk. These self-insurance elements incorporated into some of our policy structures add additional collectability risk to our reinsurance coverages. We believe that our traditional reinsurance counterparties are of the highest quality and pay our valid claims in a timely manner. We also believe that our non-traditional reinsurance and risk transfer is well documented and will perform as expected in the event of a covered claim or event that would trigger a payment due to us. However, there is no assurance that we will be able to collect 100% of what is owed to us by a reinsurer or other risk transfer counterparty, and we may incur substantial losses in the event of an insolvency of one of our reinsurers or risk transfer counterparties.
The P&C insurance market may be affected by cyclical trends and catastrophic events.
Our Business Insurance segment operates primarily in the P&C insurance markets. The P&C industry is cyclical. At certain times, the captive insurance risk management programs we sponsor on behalf of our clients may not be competitive in the marketplace. Recently, the availability of property/catastrophe insurance at historically low premium rates has reduced the demand for captive insurance programs for businesses located in hurricane-prone locations. This competition from traditional insurance markets impacts our ability to gain new clients and to retain existing clients.
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Unpredictable developments, including courts granting increasingly larger awards for certain damages, natural disasters (such as catastrophic hurricanes, windstorms, tornados, earthquakes and floods), fluctuations in interest rates, changes in the investment environment that affect market prices of investments and inflationary pressures, affect the industry’s profitability. Although we do not issue insurance contracts that directly expose us to catastrophic events, the effects of cyclicality heightened by catastrophic events could significantly and negatively affect our results of operations.
Our Business Insurance segment may be exposed to these events though its facilitation of risk pooling for our captive insurance management clients and through its ordinary activities and limited underwriting participation. Through its UK subsidiary, ADCP, Advantage has provided $4.0 million as a collateral deposit with Lloyd’s. To participate in Lloyd’s syndicates, Advantage was required by Lloyd’s to have a duly incorporated UK company for this purpose. The losses incurred by each syndicate exposes Advantage to losses, limited to its percentage participation in each syndicate. The maximum amount at risk by the company is limited to its collateral deposit.
Failure to obtain a rating of  “A” category or better from A.M. Best or KBRA may negatively affect our ability to implement our business strategy successfully.
We are not currently rated by independent ratings agencies A.M. Best or KBRA. Companies, insurers and reinsurance brokers use ratings from independent ratings agencies as an important means of assessing the financial strength and quality of insurers and reinsurers. One of the main reasons we believe this offering will benefit our current shareholders is the dilution that will occur is offset by the benefits we will receive from increased business enabled by our improved capital strength. An “A” category rating from A.M. Best or KBRA is a tangible demonstration of our capital strength to our clients. We believe that with the proceeds of this offering, our financial profile supports the issuance of an “A” category or better rating by A.M. Best or KBRA. Receiving a lower rating, or over time not having a rating from A.M. Best, KBRA or another recognized ratings service, will materially detract from our ability to add new clients, retain existing clients and otherwise grow our business.
If we lose or are unable to retain our senior management and other key personnel and are unable to attract and retain qualified personnel, our ability to implement our business strategy could be delayed or hindered, which, in turn, could significantly and negatively affect our business.
Our future success depends to a significant extent on the efforts of our senior management and other key personnel to implement our business strategy. We believe there are only a limited number of available, qualified executives with substantial experience in our niche segment of the insurance industry. In addition, we will need to add personnel, including salespersons and underwriters, to implement our business strategy. The loss of the services of one or more of the members of our senior management or other key personnel, or our inability to hire and retain other key personnel, could delay or prevent us from fully implementing our business strategy and, consequently, significantly and negatively affect our business.
We do not currently maintain key person life insurance with respect to any of our senior management, including our CEO. If any member of senior management dies or becomes incapacitated, or leaves the company to pursue employment opportunities elsewhere, we would be solely responsible for locating an adequate replacement for such senior management and for bearing any related cost. To the extent that we are unable to locate an adequate replacement or are unable to do so within a reasonable period of time, our business may be significantly and negatively affected.
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Commercial banks may be unwilling to accept assets in our investment portfolios as collateral, or may do so on unfavorable terms. Our failure to obtain letters of credit on commercially acceptable terms as we grow could significantly and negatively affect our ability to implement our business strategy.
We are not licensed or admitted as an insurer or reinsurer in any jurisdiction other than Puerto Rico and the Cayman Islands. Certain jurisdictions, including the United States, do not permit insurance companies to take credit for reinsurance obtained from unlicensed or non-admitted insurers on their statutory financial statements unless appropriate security measures are implemented. Consequently, certain clients will require us to obtain a letter of credit or provide other collateral through funds withheld or trust arrangements. We are also required to post letters of credit in favor of the U.S. Treasury for our Puerto Rico subsidiary that has made an irrevocable election to be taxed as a U.S. company under Section 953(d) of the Code. When we obtain a letter of credit facility, we are customarily required to provide collateral to the letter of credit provider in order to secure our obligations under the facility. Our ability to provide collateral, and the costs at which we provide collateral, are primarily dependent on the composition of our investment portfolio.
Typically, letters of credit are collateralized with investment-grade fixed income securities. Banks may be willing to accept assets held in our investment portfolio as collateral, but on terms that may be less favorable to us than insurance companies that invest solely or predominantly in investment-grade fixed income securities. The inability to renew, maintain or obtain letters of credit collateralized by our investment portfolio assets may significantly limit the amount of insurance we can write or require us to modify our investment strategy.
We may need additional letter of credit capacity as we grow, and if we are unable to obtain letter of credit capacity or are unable to do so on commercially acceptable terms we may need to liquidate all or a portion of our investment portfolio and invest in an investment-grade fixed income portfolio or other forms of investment acceptable to our clients and banks as collateral, which could significantly and negatively affect our ability to implement our business strategy.
The inability to obtain business provided from intermediaries could adversely affect our business strategy and results of operations.
We are prohibited by law from marketing our life insurance policies in the United States and other jurisdictions where our clients and potential clients reside. Most of our new life insurance business is sourced through referrals from independent financial advisors, trust and estates experts and other third party intermediaries. Our payment of advisory fees to third party intermediary advisors may not be linked to the marketing of the PPLI policies in a specific jurisdiction where such payment is not permitted. In addition, an advisor licensed as an insurance agent in the country where the solicitation arises runs the risk of losing its license if its activities incident to the sale of a PPLI policy are deemed to violate that country’s law. Our captive management services are similarly dependent on referrals by independent insurance brokers and financial advisors. If our key Puerto Rico and/or Cayman Islands domiciles become objectionable to intermediaries, or for whatever reason become less favorable than other, more easily accessible venues, we may lose referrals. Furthermore, client perception of financial services products and services obtained from low-tax or zero tax domiciles such as the Cayman Islands is sometimes negative, further reducing client demand. We believe that our ability to write new Puerto Rico business has been harmed by the Commonwealth of Puerto Rico’s default on its bond obligations and its ongoing financial insolvency process, which causes clients and prospective clients concern over the stability of the jurisdiction and the unknown risks of purchasing insurance from companies regulated by a bankrupt government. In addition, if we are unable to pay our intermediaries a competitive fee for their services, they may not refer new clients to us, which could materially affect future sales of new PPLI policies.
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Our relationships with these intermediaries might be interpreted by a regulator as an agency relationship, which might make us liable for the actions of the intermediaries, actions over which by and large we have no control. Moreover, if an intermediary is deemed to be soliciting insurance on our behalf from a location in which we are not licensed, we may be subject to regulatory sanction, which could have a material adverse effect on our business.
We may need additional capital in the future in order to operate our business, and such capital may not be available to us or may not be available to us on favorable terms. Furthermore, our raising additional capital could dilute your ownership interest in our company.
We may need to raise additional capital in the future through public or private equity or debt offerings or otherwise in order to:

fund liquidity needs caused by underwriting or investment losses;

satisfy letters of credit or guarantee bond requirements that may be imposed by our clients or by regulators;

meet applicable statutory jurisdiction requirements;

meet rating agency capital requirements to maintain a certain rating; or

respond to competitive pressures.
Additional capital may not be available on terms favorable to us, or at all. Further, any additional capital raised through the sale of equity could dilute your ownership interest in our company. Additional capital raised through the issuance of debt may result in creditors having rights, preferences and privileges senior or otherwise superior to those of our common shares.
We may be unable to purchase reinsurance for the liabilities we insure, and if we successfully purchase such reinsurance, we may be unable to collect, which could adversely affect our business, financial condition and results of operations.
Our Life Insurance business relies on the availability of long-term life reinsurance in order for us to underwrite new insurance policies. We also rely upon the continuing performance of our life reinsurance providers with respect to their obligations to make timely payments to us in the event of a claim made by us under the terms of a reinsurance agreement. The insolvency or inability or refusal of a reinsurer to make payments under the terms of its agreement with us could have an adverse effect on us because we remain liable to our client. Reinsurers may not be willing to reinsure the risk of PPLI policies insuring lives of persons residing outside of the United States, due to both local regulatory compliance concerns and mortality concerns. Although we believe that the reinsurance we need to purchase in order to continue new sales of life insurance policies will continue to be available at reasonable prices, it is possible that we will not be able to find life reinsurance capacity for our new business on favorable terms to us. Accordingly, we may not be able to grow our life insurance business and our captive management business. Our failure to establish adequate reinsurance arrangements or the failure of our reinsurance arrangements to protect us from overly concentrated risk exposure could significantly and negatively affect our business, financial condition and results of operations. Furthermore, the non-traditional reinsurance we utilize may be subject to challenge by third parties, including tax authorities in the jurisdictions of the primary insured party.
We may become exposed to property catastrophe risks through our facilitation of risk pooling for our captive insurance management clients.
Catastrophes such as hurricanes, earthquakes, hailstorms, tsunamis and other disasters that are expected to occur infrequently but render high losses present risks that could materially adversely affect our results of operations. Although we do not directly participate in any low frequency/high severity catastrophe risk, our Business Insurance segment may be exposed to these events though
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its facilitation of risk pooling for our captive insurance management clients and through its ordinary activities and limited underwriting participation. In particular, our underwriting of risks in the Lloyd’s insurance market gives us exposure to these types of risks.
Our recent relocation to Puerto Rico may create short-term challenges in our business operations and customer acquisition.
We moved our headquarters to Puerto Rico in 2016. Prior to this relocation, our headquarters was in the Cayman Islands. While we believe our Puerto Rico location offers significant benefits for our business and competitive advantages, changes in our branding and other customer-facing attributes of our business could diminish familiarity with our business, resulting in higher than expected customer attrition and policy acquisition costs. Recent events in Puerto Rico related to the landfall of Hurricane Maria have created ongoing impacts that affect our business operations, including implementation of our business continuity plan.
Puerto Rico’s recent filing for bankruptcy may adversely impact our financial condition or results of operations.
We have located our headquarters and a substantial portion of our business operation in the Commonwealth of Puerto Rico. On May 3, 2017, the Puerto Rico government and the PROMESA oversight board filed for a form of bankruptcy in the U.S. District Court in Puerto Rico under Title III of PROMESA. The Title III provision allows for a court debt restructuring process similar to U.S. bankruptcy protection. Since this is the first time that any state or territory of the United States has ever filed for relief that is expected to be comparable to bankruptcy relief because of the absence, until PROMESA, of any legal authority for such a relief, it is uncertain what impact this filing will have on our financial condition or results of operations. Continuing economic decline or other adverse political developments, natural disasters (including hurricanes), and other events could affect, among other things, our customer base, our cost of operations, our ability to provide services and our physical locations, property and equipment and could have a material adverse effect on our business, financial condition and results of operations.
Failure to protect the confidentiality of customer information or proprietary business information could adversely affect our reputation and have a material adverse effect on our business, results of operations or financial condition.
Our businesses and relationships with policyholders are dependent upon our ability to maintain the confidentiality of our and our policyholders’ and beneficiaries’ proprietary business and confidential information. We retain confidential information in our information systems and in cloud-based systems. We rely on commercial technologies and third parties to maintain the security of those systems. Anyone who is able to circumvent our security measures and penetrate our information systems, or the cloud-based systems we use, could access, view, misappropriate, alter or delete any information in the systems, including personally identifiable policyholder and beneficiary information and proprietary business information. It is possible that an employee, contractor or representative could, intentionally or unintentionally, disclose or misappropriate personal information or other confidential information. Our employees, intermediaries and other vendors may use portable computers or mobile devices which may contain similar information to that in our information systems, and these devices have been and can be lost, stolen or damaged. In addition, an increasing number of jurisdictions require that customers be notified if a security breach results in the inappropriate disclosure of personally identifiable customer information. Any compromise of the security of our information systems, or the cloud-based systems we use, through cyber-attacks or for any other reason that results in inappropriate disclosure of personally identifiable customer information could damage our reputation in the marketplace, deter people from purchasing our products, subject us to significant civil and criminal liability and require us to incur significant technical, legal and other expenses any of which could have a material adverse effect on our reputation, business, results of operations or financial condition.
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Our information systems may fail or their security may be compromised, which could materially and adversely impact our business, results of operations or financial condition.
Our business is highly dependent upon the effective operation of our information systems. We also have arrangements in place with outside vendors and other service providers through which we share and receive information. We rely on these systems throughout our business for a variety of functions, including processing claims and applications, providing information to customers and third-party distribution firms, performing actuarial analyses and modeling, performing operational tasks and maintaining financial records. Our information systems and those of our outside vendors and service providers may be vulnerable to physical or cyber-attacks, computer viruses or other computer related attacks, programming errors and similar disruptive problems. In some cases, such physical and electronic break-ins, cyber-attacks or other security breaches may not be immediately detected. A cyber-attack or other security breach could materially and adversely affect our business given the confidential information we gather about our policyholders and beneficiaries. In addition, we could experience a failure of one or these systems, our employees or agents could fail to monitor and implement enhancements or other modifications to a system in a timely and effective manner, or our employees or agents could fail to complete all necessary data reconciliation or other conversion controls when implementing a new software system or implementing modifications to an existing system. The failure of these systems for any reason could cause significant interruptions to our operations, which could result in a material adverse effect on our business, results of operations or financial condition.
Risks Relating to Our Investment Strategy
Our investment strategy is risky.
We invest in lower-rated corporate loans, and in CLO securities backed by low-rated loans and bonds. In the past, CLO securities have experienced significant price volatility and periods of extended market illiquidity. If the issuers of loans and bonds that we hold default on their payment obligations, and the recovery rates on our defaulted investments are low as a percentage of our principal investment, we will experience meaningful investment losses.
Because we seek to earn extra interest income as compensation for purchasing less liquid investments, if we are required to liquidate our portfolio within a short time period we will likely experience material losses upon the sale of the portfolio investments. Also, there is no assurance that we will be able to find a buyer for some or all of our portfolio investments in a short period of time, during periods of market dislocation or economic recession resulting in elevated default rates of corporate loans held by CLOs.
At certain times, new issue volumes of loans and loan-backed securities are low. We may be forced to purchase investments in the secondary market at prices that we consider to be high if there is not sufficient new issue volume to meet market demand.
We invest in the intrinsically leveraged subordinated tranches of CLO securities.
We typically invest in the most subordinated class of CLO securities. These securities are often referred to as ‘‘CLO Equity’’ as they do not have secured claims on the collateral held by the issuer, but are entitled to any residual value of the collateral after all senior claims are paid. It is possible that there will be no residual value to the CLO Equity following payment of senior claims following a liquidation of the CLO. These subordinated tranches represent 100% of our CLO investment portfolio, which constitutes substantially all of our investments. If the issuers of loans and bonds that we hold default on their payment obligations the value of our CLO investment portfolio will be diminished, potentially by a significant amount. Our potential losses are limited to our cost basis in the CLO securities.
We may invest in assets with no or limited performance or operating history.
We have invested in the past and may invest in the future in newly formed CLOs or other assets with no or limited investment history or performance record upon which GSO or the
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company will be able to evaluate their likely performance. The company’s investments in entities with no or limited operating history are subject to all of the risks and uncertainties associated with a new business, including the risk that such entities will not achieve target returns. Consequently, the company’s profitability and the value of its common shares could be adversely affected.
CLOs typically will have no significant assets other than loan assets, or Collateral, underlying the CLO; payments on the CLO securities are and will be payable solely from the cash flows from the Collateral.
CLOs typically will have no significant assets other than the Collateral (typically participants in first-lien floating rate senior secured bank credit facilities rated by one or more rating agencies). Accordingly, payments on CLO securities are and will be payable solely from the cash flows from the Collateral, net of all management fees and other expenses. Payments to the company as a holder of CLO Equity and/or CLO mezzanine securities are and will be met only after payments due on the senior notes of a CLO (and, where appropriate, the mezzanine notes) from time to time have been made in full. Moreover, we may be in a first loss or subordinated position with respect to realized losses on the Collateral, as 100% of our CLO portfolio is currently in a first loss position.
We are exposed to currency risk.
The company’s current investment guidelines require all general account investments of its Life Insurance subsidiaries to be denominated in U.S. Dollars. However, the company may invest in securities, the underlying assets of which are denominated in currencies other than the U.S. Dollar (e.g., the Euro). Accordingly, the value of such assets may be affected, favorably or unfavorably, by fluctuations in currency rates. To reduce the impact on a CLO of currency fluctuations and the volatility of returns which may result from currency exposure, the manager of such CLO may hedge the currency exposure against any Euro/U.S. Dollar exchange rate fluctuations (subject only to the availability of appropriate foreign exchange and credit lines) for the purposes of efficient portfolio management. Hedging may be by means of forward foreign exchange contracts or swaps or by using such other derivative instruments as may be available and having the same or similar effect. All such hedging transactions will result in deliveries of the relevant underlying currency pairs. Hedging strategies involve risk and may not be successful in reducing the exposure of any particular CLO to changing interest rates, currency fluctuations or other perceived risks and therefore may have an adverse impact on the value of the common shares of the company.
The CLO securities may experience price volatility impacting our reported earnings.
CLO Equity and mezzanine securities represent a leveraged investment with respect to the underlying Collateral. Therefore, changes in the market value of such CLO securities could be greater than the change in the market value of the underlying Collateral, which themselves are subject to credit, liquidity and interest rate risk. Any changes in market values of our investments that we designate as available-for-sale investments are reflected in our statements of comprehensive income as other comprehensive income. Thus, a decline in the market price of a CLO investment would result in lower reported earnings for the period in which the price decline occurs. Similarly, our reported earnings may appear more favorable based on unrealized gains flowing through the other comprehensive income line. If our earnings are unpredictable due to high levels of price volatility in our investment portfolio, it is likely to have a negative effect on the market value of our common shares.
We may not be able to accurately determine the fair value of our CLO investments.
As defined under GAAP, fair value is the price that would be received to sell an asset or paid to transfer a liability between market participants in the principal market or in the most advantageous market when no principal market exists. Adjustments to transaction prices or quoted market prices may be required in illiquid or disorderly markets in order to estimate fair value.
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Different valuation techniques may be appropriate under the circumstances to determine the value that would be received to sell an asset or paid to transfer a liability in an orderly transaction. Market participants are assumed to be independent, knowledgeable, able and willing to transact an exchange and not under duress. Nonperformance or credit risk is considered in determining fair value. Considerable judgment may be required in interpreting market data used to develop the estimates of fair value. Accordingly, estimates of fair value are not necessarily indicative of the amounts that could be realized in a current or future market exchange.
The recorded value of our CLO investments may differ from the reported market value.
We elect to treat most of our CLO investments as held-to-maturity, which records the amortized cost of the security on our balance sheet. The amortized cost may be significantly higher than the market price of a CLO security during periods of market dislocation or economic recession resulting in elevated default rates of corporate loans held by CLOs. Therefore, the financial condition of our company as reported in its financial statements may be different than the actual condition of the business if the market prices of the CLO investments fail to recover or the eventual performance of the CLO investments does not recover the amortized cost.
Our held-to-maturity accounting election dicourages us from selling CLO investments.
We currently hold all of our CLO Equity investments as held-to-maturity, which allows us to amortize the cost of each individual investment over its term and to disregard quarterly market price fluctuations in our financial statements. Were we to sell any of our held-to-maturity CLO investments prior to maturity, we would be required to change our accounting treatment to “available-for-sale,” requiring us to record changes in their market value. These accounting changes could adversely affect our financial condition as reported in our financial statements. Once our accounting treatment is changed from held-to-maturity to available-for-sale, we would be unable to change back. As a result, we may be unwilling to sell any of our held-to-maturity CLO investments prior to maturity, even if such sale were in the interest of our shareholders.
Our loan and CLO investments amortize over time and subject us to reinvestment risk.
Our investments and the loan assets that collateralize them amortize over time, and may return principal to us at times when we are unable to obtain replacement investments at or above the rate of return we received on the amortizing investment. Amortization rates of loans and CLOs are influenced by changes in interest rates and a variety of economic, geographic and other factors beyond the company’s control and consequently cannot be predicted with certainty. If we are unable to reinvest our cash flows from our loan and CLO investments in new investments with expected rates of return at least equal to that of the amortized investments, this may reduce our net income and, consequently, could have an adverse impact on our ability to pay dividends or provide capital to our operating subsidiaries to support growth.
Early prepayments may also give rise to increased re-investment risk with respect to certain investments, as we may realize excess cash earlier than expected. If we are unable to reinvest such cash in a new investment with an expected rate of return at least equal to that of the investment repaid, this may reduce our net income and, consequently, could have an adverse impact on our ability to pay dividends or provide capital to our operating subsidiaries to support growth.
Our CLO portfolio is exposed to interest rate risk.
We hold investments in CLOs holding Collateral comprised primarily of senior floating-rate loans. Most of the senior floating-rate loans held in our CLOs calculate the interest owed to us on a monthly or quarterly basis, using an underlying index such as LIBOR to determine the applicable interest rate for the next monthly or quarterly interest calculation period. Borrowers may also have the right to select an alternative index, such as the Prime Rate reported by the Federal Reserve Bank of New York. Because the liabilities of our CLO investments are indexed to 3-month LIBOR, we are exposed to interest rate risk and mismatches between the CLO funding costs and the interest received from the Collateral. Some loan agreements also include minimum rates known as
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LIBOR floors, which may also create mismatches between CLO funding costs and interest income. We are also exposed to credit risk that may arise from rapid increases in interest rates that would lead to borrowers defaulting on loan obligations because of failures to meet interest expense coverage ratio covenants or other events of default under credit agreements caused directly or indirectly by high interest rates.
Individual CLO investments may experience weighted average spread compression.
Recently, individual CLOs have experienced a significant decrease in the overall interest rate margin of the Collateral held compared to the underlying interest rate index, such as 3-month LIBOR. This narrowing of the interest rate spread earned from Collateral reduces the earnings of the CLO and amounts available to distribute to holders of the CLO’s equity tranche. CLO managers seek to mitigate this narrowing effect, often referred to as weighted average spread compression, by refinancing the CLO’s debt to reduce its interest rate margin. If our CLO managers are unable to mitigate weighted average spread compression by matching the reduction in interest rate margin on Collateral with corresponding decreases in their CLO’s funding costs, then our distributions will be reduced and we may not realize the total returns expected from the specific CLO at the time of initial investment.
The Collateral may be sold and replaced, resulting in a loss to the company.
CLO managers may, within certain limitations, sell Collateral held by the CLO and purchase replacement Collateral. If these transactions result in a net loss, the magnitude of the loss from the perspective of the holders of CLO Equity would be increased by the leveraged nature of the investment.
We may not be able to source attractive CLO warehouse invesment opportunities.
In the past, we have participated in a credit facility provided by a major bank to accumulate and hold bank loans to be contributed to newly-formed CLOs. Loan facilities of this type are often referred to as warehouse facilities. We believe that our warehouse participation is a key competitive advantage in our ability to obtain attractive investment terms for the purchase of CLO securities created using the loans accumulated in the warehouse facility. Our CLO warehouse facility expired in September 2017, and we may not be able to enter into a new CLO warehouse facility on favorable terms, or at all. If we are unable to continue our participation in CLO warehouse investments, our ability to purchase new CLO investments at attractive prices is likely to be limited.
We may be subject to accelerated repayment demands or other adverse effects from our participation in CLO warehouse investments.
Participation in CLO warehouse investments requires us to enter into credit agreements that contain covenants and other requirements of us. Complying with these covenants could adversely affect our ability to respond to changes in our business and manage our operations. Our ability to comply with any required covenants and other provisions in our existing and any future funding facility may be affected by changes in our operating and financial performance, changes in general business and economic conditions, adverse regulatory developments, or other events beyond our control. A failure by us to comply with the financial ratios and restrictive covenants contained in a warehouse facility could result in an event of default. Upon the occurrence of an event of default, the lenders could declare all amounts outstanding to be due and payable and exercise other remedies as set forth in the warehouse facility. In addition, if we are in default, we may be unable to borrow additional amounts under any such warehouse facility to the extent that they would otherwise be available and our ability to obtain future financing may also be impacted negatively. If the indebtedness under any warehouse funding facility were to be accelerated, our future financial condition could be materially adversely affected.
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Bank loans and participations pose particular investment risks and challenges.
Our external investment adviser may invest a portion of our assets in bank loans and loan participations. These obligations are subject to unique risks, including: (i) the possible invalidation of an investment transaction as a fraudulent conveyance under relevant creditors’ rights laws; (ii) so-called lender liability claims by the issuer of the obligations; (iii) environmental liabilities that may arise with respect to collateral securing the obligations; (iv) adverse consequences resulting from participating in such instruments with other institutions with lower credit quality; and (v) limitations on our ability to directly enforce our rights with respect to participations. Our assets may be invested in term loans and revolving loans, may pay interest at a fixed or floating rate and may be senior or subordinated.
Successful claims by third parties arising from these and other risks, absent bad faith, may be incurred related to the company’s investment portfolio. Bank loans are frequently traded on the basis of standardized documentation which is used in order to facilitate trading and market liquidity. There can be no assurance, however, that future levels of supply and demand in bank loan trading will provide an adequate degree of liquidity or that the current level of liquidity will continue or that the same documentation will be used in the future. The settlement of trading in bank loans often requires the involvement of third parties, such as administrative or syndication agents, and there presently is no central clearinghouse or authority which monitors or facilitates the trading or settlement of all bank loan trades. Often, settlement may be delayed based on the actions of any third party or counterparty, and adverse price movements may occur in the time between trade and settlement, which could result in adverse consequences for our investment portfolio.
We may not be able to acquire Collateral on advantageous terms.
We purchase senior secured loans on a primary or secondary basis directly and indirectly through CLO and CLO warehouse investment structures. Our success in acquiring loans will depend, in part, on our external investment adviser’s ability to obtain such loans on advantageous terms. In purchasing such loans, the company competes with a broad spectrum of buyers and lenders, some of which may be willing to lend or invest money on better terms (from a borrower’s standpoint) than us. Increased competition for, or a diminution in the available supply of, qualifying senior secured loans may result in lower yields on such loans, which could reduce returns to our company.
Risks Relating to Regulation and Compliance
Any suspension or revocation of our insurance licenses would materially impact our ability to do business and implement our business strategy.
Our operating subsidiaries are licensed in Puerto Rico and the Cayman Islands. We hold ancillary licenses in certain other jurisdictions. The suspension or revocation of our license by a jurisdiction to carry on business as an insurance company for any reason would mean that we would not be able to issue any new insurance policies until the suspension ended or we became licensed in another jurisdiction. Similarly, the suspension or revocation of our insurance manager’s license in the Cayman Islands would prevent us from continuing to act as a captive insurance manager in that jurisdiction. Any such suspension or revocation of our licenses would negatively impact our reputation in the insurance marketplace and could have a material adverse effect on our results of operations.
The Commissioner of Insurance, which is our regulating authority in Puerto Rico, may take a number of actions, including suspending or revoking an insurance license whenever the Commissioner of Insurance believes, among other things, that a licensee is or may become unable to cover any capital deficiency or is knowingly carrying on its business by exceeding the powers granted to a licensee under its charter or license. Further, the Commissioner of Insurance may suspend, revoke or fail to renew an insurance license if it believes:
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the licensee fails to comply or has contravened the terms of the Puerto Rico Insurance Law; or

the licensee fails to comply with a regulation or order adopted or issued by the Commissioner of Insurance.
CIMA regulates our insurance businesses in the Cayman Islands, including services we perform for captive and other insurance companies domiciled in the Cayman Islands. CIMA may revoke, suspend or otherwise limit our licenses to operate in the Cayman Islands if it believes or finds cause to believe that any of our licensed Cayman Islands insurance companies is not in compliance with the Insurance Law, 2010 of the Cayman Islands. The Insurance Law, 2010 calls for regulated insurers to adhere to numerous financial, operational and other requirements typically imposed by insurance regulation. If we fail to comply with the regulations imposed by CIMA, we may be subjected to restrictions up to and including suspension or revocation of our insurance licenses, which would materially impact our business and could cause us to realize material losses.
CIMA is a member of the International Association of Insurance Supervisors (IAIS) which has signed Memorandums of Understanding (MOUs) for the exchange of information with other regulators that are part of IAIS, to facilitate the exchange of information between regulators. Similarly, the Office of the Commissioner of Insurance of Puerto Rico (OCS) is a member of the Association of Latin America Insurance Supervisors (ASSAL) which has an Agreement for the Cooperation and Exchange of Information with the insurance regulators in Latin America. It is possible that perceived violation of the laws of member countries may be shared with our domicile regulators by virtue of these MOUs which could potentially lead to investigations.
We are subject to the risk of possibly becoming an investment company under U.S. federal securities law.
The Investment Company Act regulates certain companies that invest in or trade securities. We believe that the company is not subject to the Investment Company Act because it is primarily engaged in activities other than investing in or trading securities. The law in this area is subjective and there is a lack of guidance as to the meaning of  “primarily” under the relevant exception to the Investment Company Act. For example, there is no standard for the amount of premiums that need be written relative to the level of a company’s capital in order to qualify for the exception. If this exception were deemed inapplicable, we would have to register under the Investment Company Act as an investment company. Registered investment companies are subject to extensive, restrictive and potentially adverse regulation relating to, among other things, operating methods, management, capital structure, leverage, dividends and transactions with affiliates. Registered investment companies are not permitted to operate their business in the manner in which we operate our business.
If at any time it were established that we had been operating as an investment company in violation of the registration requirements of the Investment Company Act, there would be a risk, among other material adverse consequences, that we could become subject to monetary penalties or injunctive relief, or both, that we would be unable to enforce contracts with third parties or that third parties could seek to obtain rescission of transactions with us undertaken during the period in which it was established that we were an unregistered investment company.
Additionally, it is possible that our classification as an investment company would result in the suspension or revocation of our insurance licenses.
Insurance regulators in the United States or elsewhere may review our activities and claim that we are subject to that jurisdiction’s licensing requirements.
In general, Puerto Rico insurance statutes, regulations and the policies of the Commissioner of Insurance are comparable to U.S. state insurance statutes and regulations. We cannot assure you that insurance regulators in the United States or in countries where policy owners of our PPLI policies and persons insured by our PPLI policies reside or where an advisor compensated by us
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does business or is resident will not review our activities and claim that we are subject to such jurisdiction’s licensing requirements. In addition, we are subject to indirect regulatory requirements imposed by jurisdictions that may limit our ability to provide reinsurance. For example, our ability to issue life insurance policies may be subject, in certain cases, to arrangements satisfactory to applicable regulatory bodies and proposed legislation and regulations may have the effect of imposing additional requirements upon, or restricting the market for, non-U.S. insurers such as our ALAC subsidiary. We do not know of any such proposed legislation pending at this time.
If, as a consequence of its activities incident to selling the PPLI policies, we would become subject to the laws or regulations of any state in the United States or to the federal laws of the United States or the laws of any other country, we could be subject to fines and sanction, and in addition will need to consider various alternatives to our operations. If we choose to attempt to become licensed in another jurisdiction, for instance, we may not be able to do so and the modification of the conduct of our business or the non-compliance with insurance statutes and regulations could significantly and negatively affect our business.
Puerto Rico insurance law exempts us from many of the filings required of companies regulated by The National Association of Insurance Commissioners, or NAIC.
We are not regulated by NAIC and our operating subsidiaries are not required to file statutory statements with NAIC. Neither our underwriting nor investment activities are regulated by NAIC. We are not required to calculate or publish risk-based capital ratios for our operating subsidiaries and any comparisons to other insurance companies in the United States will be more difficult as a result. We have six licensed insurance subsidiaries and one banking subsidiary that are subject to minimum capital requirements fixed by statute or regulation in Puerto Rico and the Cayman Islands. In addition, in order to maintain any rating we receive from a ratings agency and to avoid a potential ratings downgrade, we are required to maintain capital in amounts and in proportion to the amounts held at the time the rating was issued. Because our operating subsidiaries generally do not require high risk-based capital ratios for regulatory purposes, we are not limited with respect to our investment alternatives. We are able to invest in less liquid, lower-rated debt securities than other insurance companies in the United States. Our insurance contracts are not regulated by NAIC and therefore the pricing and terms of contracts are not subject to approval by NAIC commissioners. In addition, our life insurance policies issued in Puerto Rico and the Cayman Islands offer statutory protections for segregation of policyholder funds that are not allowed under NAIC regulations and related state laws. As a result, comparisons to U.S.-based insurance companies may be difficult.
Current legal and regulatory activities relating to certain insurance products and captive insurance arrangements could affect our business, results of operations and financial condition.
The sale and purchase of products that may be structured in such a way so as to not contain sufficient risk transfer to meet the requirement of SFAS 113 to be accounted for as insurance, or loss mitigation insurance products, have become the focus of investigations by the SEC and numerous state Attorneys General. In addition, the Internal Revenue Service issued Notice 2016-66 which subjects sponsors of captive insurers electing to be taxed under Section 831(b) of the Code to additional disclosure requirements about the nature, origin and operations of the insurance structures. In a recent case involving a captive insurance company making such an election, Avrahami v. Commissioner (149 T.C. No. 7 (2017)), the Tax Court held that policies issued by the captive insurance company did not qualify as insurance for federal income tax purposes, and therefore no deduction was allowed for payments of premiums to the captive insurance company. It is possible that we or our clients may become subject to the ongoing inquiries into captive insurance structures by the IRS, SEC or certain Attorneys General. In addition, we cannot predict at this time what effect the current regulatory activity will have on the insurance industry or our business or what, if any, changes may be made to laws and regulations regarding the industry and taxation of our clients. It is possible future regulatory developments and tax law changes will
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negatively impact our ability to use certain risk financing features in our products and, accordingly, our ability to operate our business pursuant to our existing strategy. Moreover, any reclassification of our life insurance policies as deposit liabilities rather than insurance contracts could call into question whether we are exempt from the Investment Company Act.
Compliance with the Foreign Account Tax Compliance Act and related regulations affects our business.
Our group companies could be considered FFIs in accordance with FATCA. On November 29, 2013, the governments of the Cayman Islands and the United States signed a Model 1B intergovernmental agreement and a new tax information exchange agreement to facilitate the automatic exchange of information under FATCA. This means that FFIs in the Cayman Islands including ALAC are required to report tax information about U.S. account holders directly to the Cayman Islands Tax Information Authority, which in turn provides the information to the IRS. We have incurred increased costs and regulatory compliance requirements from FATCA and will continue to bear these costs, which we are for the most part unable to pass through to our customers. In addition, current and prospective clients may be less inclined to purchase our life insurance products or use our insurance management services because the FATCA rules and regulations create burdensome tax reporting obligations that increase the time, effort and costs associated with their individual tax compliance activities.
Compliance with the Common Reporting Standard and related regulations affects our business.
Following the implementation of FATCA, which is specific to the United States, the Organization for Economic Co-Operation and Development, or OECD, sponsored the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information to provide a standard global treaty for tax reporting and collection enforcement. The mechanism defined by the OECD for the automatic exchange of financial information under the multilateral treaty is the Common Reporting Standard, or CRS. The Cayman Islands joined the treaty on October 29, 2014 and implemented collection of financial account information under the CRS beginning in 2016. This means that in addition to the FATCA compliance requirements, our Cayman Islands subsidiaries are required to report tax information about non-U.S. account holders to the Cayman Islands Tax Information Authority, which in turn provides the information to other CRS participants through the OECD. We have incurred increased costs and regulatory compliance requirements from CRS and will continue to bear these costs, which we are for the most part unable to pass through to our customers. In addition, current and prospective clients may be less inclined, for various reasons, to purchase our life insurance products or use our insurance management services given compliance by signatory countries with the CRS, including because of client perception that information collected by the OECD through the CRS is not secure and will be obtained by individuals or organized crime groups that will seek to kidnap and hold for ransom our clients and their family members. In addition, some of our clients and prospective clients have expressed concern that the financial account information reported under CRS will be abused by governments seeking illegitimate additional tax collections based on subjective or extra-legal criteria contrived to justify wealth confiscation.
Compliance with requirements for monitoring and reporting of illegal activity could affect our business.
In all jurisdictions where we operate and are regulated, we actively monitor various global compliance reporting systems for any reports of illegal activity or suspicion of illegal activity involving our clients. Depending on the type and substance of information that we obtain from our monitoring and ongoing client screening, we may be required to freeze the accounts of our clients or report to our regulators the existence of accounts held directly or indirectly by persons or organizations that appear on the reports we receive. Our failure to take timely action or make reports to our regulators of our business with individuals or organizations that are known to be in violation of laws or otherwise subject to official sanction could result in significant financial or criminal penalties to be imposed on us.
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Risks Relating to Taxation
In addition to the risk factors discussed below, we advise that you consult your own tax advisor regarding any tax consequences to your investment in the common shares. See “Tax Considerations.”
We may become subject to taxation in Puerto Rico which would negatively affect our results.
Under grants issued to us by the government of Puerto Rico pursuant to its Act No. 399-2004, known as the Puerto Rico International Insurers and Reinsurers Act, we are exempted from paying income and certain other taxes in Puerto Rico, while our Puerto Rico insurance subsidiaries are subject to a preferential tax rate of four percent (4%) on total net income in excess of One Million Two Hundred Thousand Dollars ($1,200,000.00). The Secretary of the Department of Economic Development and Commerce together with the Commissioner of Insurance of Puerto Rico have issued to each of our Puerto Rico international insurance company subsidiaries a “Grant of Tax Exemption,” in which we are covered while acting as a qualified international insurance holding company, for an initial term of fifteen (15) years which subject to certain conditions may be extended for two additional fifteen (15) year terms. The fifteen (15) year term of the “Grant of Tax Exemption” began from January 1, 2012, in the case of ALPR and USCL, October 8, 2015, in the case of AVI and ALAI, and September 1, 2016, in the case of ABIC. We cannot be assured that such “Grant of Exemption” will each remain valid for fifteen (15) years, or that extensions beyond fifteen (15) years will be granted. If we become subject to taxation in Puerto Rico, our financial condition and results of operations could be significantly and negatively affected. See “Tax Considerations — Puerto Rico Taxation of the Company.”
We may become subject to taxation in the Cayman Islands which would negatively affect our results.
Our Cayman Islands subsidiaries hold tax exemptions issued by the government of the Cayman Islands. These exemptions expire in the future, but may be renewed or extended under existing Cayman Islands law. In addition, the Cayman Islands does not currently impose a corporate income tax that would subject us to income tax in the Cayman Islands if for some reason our tax exemptions were invalidated, not extended, or otherwise extinguished. We believe the likelihood of becoming subject to taxation in the Cayman Islands is remote. See “Tax Considerations — Cayman Islands Taxation of the Company.”
We may be subject to U.S. federal income taxation.
We are incorporated under the laws of Puerto Rico and intend to operate in a manner that will not cause us to be treated as engaging in a U.S. trade or business and will not cause us to be subject to current U.S. federal income taxation on our net income. Certain of our subsidiaries are located in the United States and are subject to federal income taxation and one of our Puerto Rico subsidiaries has made an irrevocable election to be taxed as a U.S. domestic corporation under Section 953(d) of the Code. However, because the standards for being engaged in a U.S. trade or business are not clear, we cannot assure you that the IRS will not successfully assert that we are engaged in a trade or business in the United States and thus are subject to current U.S. federal income taxation for all of our income. Federal elected officials in the U.S. have publicly stated their intention to enact broad changes to U.S. tax laws. Federal elected officials have made similar statements in the past that were not followed by changes in tax laws. Tax reform could impact whether and to what extent we are subject to U.S. taxation, which could adversely affect our results of operations and financial condition.
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U.S. persons who own common shares or other equity interests may be subject to U.S. federal income taxation on our undistributed earnings and may recognize taxable income upon disposition of common shares or other equity interests.
Passive Foreign Investment Company (PFIC).   Significant potential adverse U.S. federal income tax consequences generally apply to any U.S. person (as defined below in “Certain U.S. Tax Considerations”) who owns shares in a PFIC. We cannot assure you that our company will not be a PFIC for 2017 or any future taxable year.
In general, we would be deemed a PFIC for a taxable year if 75% or more of our gross income constitutes “passive income” or 50% or more of our assets produce, or are held for the production of, “passive income.” Passive income generally includes interest, dividends and other investment income but does not include income derived in the active conduct of an insurance business by a corporation predominantly engaged in an insurance business, such exclusion being referred to as the “Insurance Company Exception.” The Insurance Company Exception is intended to ensure that a bona fide insurance company’s income is not treated as passive income, except to the extent such income is attributable to financial reserves in excess of the reasonable needs of the insurance business. We believe that we are currently operating and intend to continue operating our business with financial reserves at a level that should not cause us to be deemed a PFIC, although we cannot assure you the IRS will not successfully challenge this conclusion. Moreover, our expectation with respect to 2017 is based on the amount of risk that we expect to underwrite during the remainder of the year. We cannot assure you that we will be able to underwrite a sufficient amount of risk for later years to prevent Advantage and/or any of its subsidiaries from being a PFIC in subsequent years.
In addition, sufficient risk must be transferred under an insurance company’s contracts with its insureds in order to qualify for the Insurance Company Exception. Whether our insurance contracts possess adequate risk transfer for purposes of determining whether income under our contracts is insurance income, and whether we are predominantly engaged in the insurance business, are subjective in nature and there is very little authority on these issues. However, because we are and may continue to be engaged in certain structured risk and other non-traditional insurance markets, we cannot assure you that the IRS will not successfully challenge the level of risk transfer under our reinsurance contracts for purposes of the Insurance Company Exception. The IRS has notified taxpayers in IRS Notice 2003-34 that it intends to scrutinize the activities of certain insurance companies located outside of the United States, including reinsurance companies that invest a significant portion of their assets in alternative investment strategies, to determine whether such companies qualify for the active Insurance Company Exception in the PFIC rules. We cannot assure you that the IRS will not successfully challenge our interpretation of the scope of the active Insurance Company Exception and our qualification for the exception. Further, the IRS may issue regulatory or other guidance that causes us to fail to qualify for the active Insurance Company Exception on a prospective or retroactive basis. Therefore, we cannot assure you that we will satisfy the Insurance Company Exception and will not be treated as a PFIC currently or in the future.
The consequences of our company being treated as a PFIC and certain elections designed to mitigate such consequences are discussed in more detail under the heading “Certain U.S. Tax Considerations.” If you are a U.S. person, we advise you to consult your own tax advisor concerning the potential tax consequences to you under the PFIC rules.
Controlled Foreign Corporation.   A U.S. Person who owns 10% or more of the voting power of all classes of our voting stock, or a “U.S. 10% Shareholder,” may be subject to the CFC rules. Under the CFC rules, each U.S. 10% Shareholder must annually include his pro rata share of the CFC’s “subpart F income,” even if no distributions are made. In general, a foreign insurance company will be treated as a CFC only if U.S. 10% Shareholders collectively own more than 25% of the total combined voting power or total value of the company’s shares for an uninterrupted period of 30 days or more during any year. We believe that the anticipated dispersion of our common shares among holders and the restrictions placed on transfer, issuance or repurchase of our common shares (including the ownership limitations described below), will generally prevent
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shareholders who acquire common shares from being U.S. 10% Shareholders. In addition, because our certificate of incorporation prevents any person from holding 9.9% or more of the total combined voting power of our shares (whether held directly, indirectly, or constructively), unless such provision is waived by the unanimous consent of our board of directors, we believe no persons holding common shares should be viewed as U.S. 10% Shareholders of a CFC for purposes of the CFC rules. We cannot assure you, however, that these rules will not apply to you. If you are a U.S. person we strongly urge you to consult your own tax advisor concerning the CFC rules.
Related Person Insurance Income.   If:

our gross income attributable to insurance or reinsurance policies where the direct or indirect insureds are our direct or indirect U.S. shareholders or persons related to such U.S. shareholders equals or exceeds 20% of our gross insurance income in any taxable year; and

direct or indirect insureds and persons related to such insureds own directly or indirectly 20% or more of the voting power or value of our stock,
a U.S. person who owns common shares directly or indirectly on the last day of the taxable year would most likely be required to include their pro rata share of our RPII for the taxable year in their income. This amount would be determined as if such RPII were distributed proportionally to U.S. person at that date. We do not expect that we will knowingly enter into reinsurance agreements in which, in the aggregate, the direct or indirect insureds are, or are related to, owners of 20% or more of the common shares or our fully-diluted shares. We do not believe that the 20% gross insurance income threshold will be met. However, we cannot assure you that this is or will continue to be the case. Consequently, we cannot assure you that a person who is a direct or indirect U.S. shareholder will not be required to include amounts in its income in respect of RPII in any taxable year.
If a U.S. shareholder is treated as disposing of shares in a foreign insurance corporation that has RPII and in which U.S. persons own 25% or more of the voting power or value of the company’s capital stock, any gain from the disposition will generally be treated as a dividend to the extent of the U.S. shareholder’s portion of the corporation’s undistributed earnings and profits that were accumulated during the period that the U.S. shareholder owned the shares. In addition, the shareholder will be required to comply with certain reporting requirements, regardless of the amount of shares owned by the direct or indirect U.S. shareholder.
U.S. tax-exempt organizations who own common shares may recognize unrelated business taxable income.
If you are a U.S. tax-exempt organization you may recognize unrelated business taxable income if a portion of our subpart F insurance income is allocated to you. In general, subpart F insurance income will be allocated to you if we are a CFC as discussed above and you are a U.S. 10% Shareholder or there is RPII and certain exceptions do not apply. Although we do not believe that any U.S. persons will be allocated subpart F insurance income, we cannot assure you that this will be the case. If you are a U.S. tax-exempt organization, we advise you to consult your own tax advisor regarding the risk of recognizing unrelated business taxable income.
Change in U.S. tax laws may be retroactive and could subject us, and/or U.S. persons who own common shares to U.S. income taxation on our undistributed earnings.
The tax laws and interpretations regarding whether a company is engaged in a U.S. trade or business, is a CFC, has related party insurance income or is a PFIC are subject to change, possibly on a retroactive basis. New regulations or pronouncements interpreting or clarifying such rules may be forthcoming from the IRS. We are not able to predict if, when or in what form such guidance will be provided and whether such guidance will have a retroactive effect.
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The impact of the OECD’s directives to eliminate harmful tax practices and recommendations on base erosion and profit shifting is uncertain and could impose adverse tax consequences and increased operating costs on us.
Through the OECD, G-20 countries have initiated an effort among member and non-member countries to enact laws that will have the effect of eliminating differences in corporate tax rates among participating countries. These laws are intended to eliminate corporate tax planning strategies that the OECD believes exploit legal features of tax rules that allow corporations to shift profits to low or no-tax locations where there is little or no actual economic activity, such as manufacturing or sales. By shifting profits to low-tax jurisdictions, corporations can reduce their overall tax burden which typically results in higher profitability. The OECD describes these tax planning strategies as base erosion profit shifting, or BEPS. Because we operate in locations with low corporate tax rates compared to most OECD member nations, if the OECD is successful in achieving global implementation of its BEPS restrictions, our business may be harmed. For example, under one BEPS proposal, companies purchasing financial services including insurance from other companies such as ours located in low-tax jurisdictions would be subject to additional taxes and penalties for conducting business with us. We are not able to predict what changes will arise from the BEPS initiative or whether such changes will subject us to additional taxes. We anticipate that in the future, the burden and costs of compliance with BEPS or similar agreements among nations to collect taxes from business conducted outside of their borders will impact our industry and potentially our business.
Risks Relating to Our External Investment Adviser
The performance of the company depends on the ability and services of GSO, our external investment adviser.
Our performance depends on: (i) the ability of our external investment adviser to generate positive returns; and (ii) our external investment adviser’s ability to advise on, and identify, investments in accordance with the investment objective of the company and to allocate the assets of the company among all investments in an optimal way. Achievement of the investment objective will also depend, in part, on the ability of our external investment adviser to provide competent, attentive and efficient services to the company under the terms of the investment management agreement. There can be no assurance that, over time, GSO will be able to provide such services or that the company will be able to invest its assets on attractive terms or generate any investment returns for shareholders or indeed avoid investment losses.
The company will depend on the managerial expertise available to the external investment adviser GSO and its key personnel.
The performance of our investments depends heavily on the skills of our external investment adviser in analyzing, selecting and managing the investments. As a result, investors will be highly dependent on the financial and managerial experience of certain investment professionals associated with our external investment adviser, none of whom is under any contractual obligation to the company to continue to be associated with our external investment adviser. The loss of one or more of these individuals could have a material adverse effect on the performance of the company. Moreover, the investment management agreement may be terminated under certain circumstances.
Our external investment adviser GSO will attend to matters unrelated to the investment activities of the company.
We depend upon our external investment adviser to invest our assets and reinvest the cash flows returned by our invested assets. Additionally, there are no restrictions on our external investment adviser’s ability to establish funds, publicly traded entities or managed accounts that compete with the company. Our external investment adviser currently serves in a similar capacity for clients other than the company. We believe that the fees our company pays to our external investment adviser are not material to the financial performance or profitability of the external investment adviser.
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Our external investment adviser currently manages portfolios for other of its clients that have similar target assets to ours. In addition, individuals not currently associated with our external investment adviser may become associated with our external investment adviser and the performance of the investments may also depend on the financial and managerial experience of such individuals.
The success of the company will depend upon the experience and performance of our external investment adviser and its continued involvement in the company’s businesses. If the external investment adviser were to cease to provide its services to the company, then the company may experience difficulty replacing the external investment adviser with a comparable third party advisor, or may not be able to develop an internal investment management function that would deliver a cost-effective investment management function for our company.
GSO’s ability to invest the funds may be constrained.
GSO’s ability to identify investments for deployment of the funds available to the company, raised in the offering or otherwise, in appropriate investments may be constrained by a lack of investment opportunities or other market-related constraints.
The company has not yet identified the specific investments that it will make using the net proceeds of this offering. There can be no assurance that suitable investment opportunities will materialize, prove attractive or be sufficient in quantity or size to permit the company to invest any cash raised in the offering in a timely matter, or at all.
Until such time as GSO is able to identify, invest our assets in and monitor a suitable number of investments and implement the various aspects of the company’s investment strategy, its funds may not be fully invested and as a result, returns to shareholders may be adversely affected.
The company may face increased competition in sourcing and making investments.
The company may become subject to increased competition in sourcing and making investments. In particular, competition in respect of cash flow CLO transactions may increase. Some of the company’s competitors may have greater financial, technical and marketing resources and the company may not be able to compete successfully for investments. In addition, potential competitors of the company may have higher risk tolerances or different risk assessments or access to different sources of funding, which could allow them to consider a wider variety of investments and establish more relationships than the company. Furthermore, competition for investments may lead to the price of such investments increasing which may further limit the company’s ability to generate its desired returns. The company may lose investment opportunities in the future if it does not match investment prices, structures and terms offered by competitors. Alternatively, the company may experience decreased rates of return and increased risks of loss if it matches investment prices, structures and terms offered by competitors. The company can offer no assurance that competitive pressures will not have a material adverse effect on its profitability and/or the value of its common shares.
The due diligence process that GSO undertakes in connection with the company’s investments may not reveal all facts that may be relevant in connection with an investment.
Before the company makes any investment, our external investment adviser conducts due diligence that it deems reasonable and appropriate based on the facts and circumstances applicable to each investment.
The objective of the due diligence process is to identify attractive investment opportunities based on the facts and circumstances surrounding an investment. When conducting due diligence and making an assessment regarding an investment, our external investment adviser will be required to rely on resources available to it, including information provided by the originator of the investment.
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Accordingly, there can be no assurance that the due diligence investigation that our external investment adviser carries out with respect to any investment opportunity will reveal or highlight all relevant facts that may be necessary or helpful in evaluating any such investment opportunity. Moreover, there can be no assurance that such an investigation will result in an investment being successful.
Our external investment adviser has no influence on management of the portfolio’s underlying investments managed by non-affiliated third parties.
GSO is not responsible for and has no influence over the asset management of the loan portfolios underlying the CLO securities held by the company where GSO does not serve as the direct Collateral manager. To the same extent, GSO is not responsible for and has no influence over the day-to-day management, administration or any other aspect of the issuers of the CLOs, other than those where GSO serves as Collateral manager.
The performance fee may create an incentive for riskier investments; upon termination of the investment management agreement, the performance fee may be paid on unrealized gains which may subsequently never be realized.
The performance fee payable to GSO as our external investment adviser may result in substantially higher payments than alternative arrangements in other types of investment vehicles. The existence of the performance fee may create an incentive for GSO to make riskier or more speculative investments than it would otherwise make in the absence of such fee.
In addition, if the investment management agreement is terminated, GSO may be entitled to a termination fee which includes a performance fee calculated on a basis that includes unrealized appreciation of certain investments. Such fee may be greater than if such fee were based solely on the actual realized returns of such investments.
Certain policies and procedures implemented by Blackstone to mitigate potential conflicts of interest and address certain regulatory requirements, and contractual restrictions to which Blackstone may be subject, may affect the company.
Specified policies and procedures implemented by Blackstone to mitigate potential conflicts of interest and address certain regulatory requirements may reduce the synergies across Blackstone’s various businesses that the board of directors and our external investment adviser expect to draw on for purposes of pursuing attractive investment opportunities. Because Blackstone has many different lines of asset management businesses and a capital markets services business, it may be subject to a number of actual and potential conflicts of interest and greater regulatory oversight than that to which it would otherwise be subject if it had only one line of business. In addressing these conflicts and regulatory requirements across its various businesses, Blackstone has implemented certain policies and procedures (e.g., information walls) that may reduce the positive synergies that we expect to utilize for purposes of finding attractive investments. For example, Blackstone may come into possession of material non public information with respect to issuers in which its private equity business may be considering making an investment. As a consequence, that information, which could be of benefit to the company, might otherwise be unavailable to the company. As discussed more fully in the section entitled “Certain Relationships and Related Party Transactions,” certain activities of Blackstone or its affiliates could restrict the activities of the company. Furthermore, the terms of confidentiality or other agreements with or related to companies in which any investment fund of Blackstone has or has considered making an investment may restrict or otherwise limit the ability of the company and its affiliates to make investments in or otherwise engage in businesses or activities competitive with such companies.
Various potential and actual conflicts of interest may arise from the activities of GSO or its affiliates.
Various potential and actual conflicts of interest may arise from the overall investment management, and other activities of the external investment adviser, its affiliates, other funds or
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vehicles managed directly or indirectly by the external investment adviser or its affiliates and their respective clients and employees, including in relation to the direct or indirect management by the external investment adviser or its affiliates of other entities in which we may invest.
For further details of these and other conflicts of interest involving other parties that may affect us, please see the section entitled “Certain Relationships and Related Party Transactions — Conflicts of Interest.”
There can be no assurance that our board of directors will be able to find a replacement manager if the agreement with GSO is terminated.
The initial term of our agreement with GSO commenced on September 20, 2013, and automatically renews for one-year periods each September 20. However either party may terminate the agreement at the end of the initial term or any subsequent one year period on 90 days’ prior written notice, and in certain other circumstances. If the agreement is terminated, in certain circumstances we may be requested to pay a termination fee, and in any circumstance our board of directors would have to find a replacement external investment adviser for the company, or hire its own investment staff, and there can be no assurance that such a replacement will be found or that the company’s own investment staff would have the same expertise as GSO. We will enter into an amended agreement with GSO upon the completion of this offering.
GSO is authorized and regulated by the FCA. If GSO fails to comply with legal and regulatory requirements, the company and the value of its common shares may be adversely affected.
The provision of investment management services is regulated in the United Kingdom, and the external investment adviser is authorized and subject to regulation and supervision by the FCA (which has the authority to review and investigate the conduct of the external investment adviser and its employees). Changes to law, regulations or regulatory guidance (including changes in interpretation or implementation thereof), or any failure by the external investment adviser or its employees to comply with such laws, regulations or guidance could adversely impact the external investment adviser and its affiliates, and thereby could adversely affect the company and the value of its common shares. Although the external investment adviser has implemented systems and controls requiring employees to comply with these laws, regulations and guidance, there can be no assurance that all employees will abide by these and, if any were to fail to do so, that such failure would not have an adverse effect on the company.
Risks Relating to this Offering
There is currently no market for our common shares, an active trading market may not develop or continue to be liquid and the market price of our common shares may be volatile.
Prior to this offering, there has not been a public market for our common shares, and an active market for our common shares may not develop or be sustained after this offering, which could depress the market price of our common shares and could affect your ability to sell your shares. In the absence of an active public trading market, you may not be able to liquidate your investment in our common shares. An inactive market may also impair our ability to raise capital by selling our common shares, our ability to motivate our employees through equity incentive awards and our ability to acquire other companies or businesses by using our common shares as consideration. In addition, the market price of our common shares may fluctuate significantly in response to various factors, most of which are beyond our control. The initial public offering price per share was determined by negotiations among us, and the representatives of the underwriters and therefore, that price may not be indicative of the market price of our common shares after this offering. In particular, we cannot assure you that you will be able to resell your shares at or above the initial public offering price. The stock markets have experienced volatility in recent years that has been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common shares. In addition to the factors discussed elsewhere in this prospectus, the factors that could affect our share price are:
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U.S. and international political and economic factors unrelated to our performance;

actual or anticipated fluctuations in our quarterly operating results;

changes in or failure to meet publicly disclosed expectations as to our future financial performance;

changes in securities analysts’ estimates of our financial performance or lack of research and reports by industry analysts;

action by institutional shareholders, including purchases or sales of large blocks of common shares;

speculation in the press or investment community;

changes in market valuations or earnings of similar companies; and

announcements by us or our competitors of significant products, contracts, acquisitions or strategic partnerships.
AVI is a holding company with no meaningful business operations of its own. As a consequence, AVI’s ability to pay dividends on its common shares will depend on the ability of its subsidiaries to make distributions or other payments to it, which may be restricted by law or require affirmative consent of one or more regulatory authorities.
AVI is a holding company that exists for the purpose of facilitating investments in licensed insurance companies operating across multiple jurisdictions. AVI’s primary subsidiaries are insurance companies that own substantially all of its assets and conduct substantially all of its operations. Accordingly, AVI’s ability to pay dividends is dependent on the ability of its subsidiaries to make such cash or other assets available to it, by dividend or otherwise. Dividends or distributions that may be paid by AVI’s insurance subsidiaries to it are limited or restricted by applicable insurance law and/or regulation. AVI’s subsidiaries may not be able to, or may not be permitted to, make distributions to enable AVI to meet its obligations and pay dividends.
AVI’s Puerto Rico insurance company subsidiaries may pay dividends to AVI subject to the restrictions set forth in Chapter 61 of the Puerto Rico Insurance Code. Generally, international insurance companies must be in compliance with applicable liquidity and premium indices in order to declare and pay dividends. Class 5 international life and disability insurance companies, in addition to paying dividends to persons other than policyholders, must at the time a dividend is paid have actuarially certified assets used in the conduct of its business which exceed its total liabilities. Furthermore, the amount of any dividend declared by a Class 5 life and disability international insurance company at any time may not exceed, in the aggregate (i) such excess in assets used to conduct its Class 5 insurance business over liabilities and (ii) other funds available for the payment of dividends which result from any part of its business other than the business conducted pursuant to its Class 5 authority. AVI’s banking subsidiary, AIBC, on the other hand, is prohibited from paying dividends to AVI if its regulator in Puerto Rico, the Office of the Commissioner of Financial Institutions, determines that the payment of a dividend would result in diminishing the safety and soundness of the banking institution paying the dividend. See “Regulation — Puerto Rico — Dividend Restrictions.”
AVI’s Cayman Islands insurance company subsidiaries may pay dividends to AVI without restriction, provided the subsidiary is in good standing with its regulator, the Cayman Islands Monetary Authority, or CIMA. In addition, the payment of any dividend from a CIMA-regulated company must not cause the company to become insolvent or otherwise cause material harm to the company as a result of the dividend payment. For example, payment of a dividend in an amount that would cause the paying company to fail to meet minimum capital requirements is effectively prohibited by Cayman Islands regulation. See ‘‘Regulation —  Cayman Islands.’’
AVI anticipates paying regular cash dividends on its common shares following this offering. Any decision to declare and pay dividends in the future will be made at the discretion of AVI’s board of directors and will depend on, among other things, AVI’s results of operations, financial
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condition, cash requirements, contractual restrictions and other factors that AVI’s board of directors may deem relevant. If AVI does not pay dividends, a return on investment in AVI’s common stock will be dependent upon the appreciation of the price of AVI’s common stock on the open market.
Our election to take advantage of the extended transition periods afforded by the JOBS Act for the implementation of new or revised accounting pronouncements may cause us to be less attractive to investors.
We have elected to take advantage of the extended transition periods afforded by the JOBS Act for the implementation of new or revised accounting pronouncements. This means that we will not be required to apply new or revised accounting pronouncements at the same time as other public companies that are not emerging growth companies. This asymmetry with other publicly traded companies may make us less attractive to investors and it may be difficult for us to raise additional capital as and when we need it. Depending on the applicability and magnitude of the new or revised pronouncement to our business, investors may be unable to compare our business with other companies in our industry. Moreover, they may believe that our financial accounting is not as transparent as other companies in our industry because of our extended transition periods. If our use of the extended transition periods is negatively viewed by investors, our stock price may fall and we may not be able to raise additional capital at all or on terms we consider favorable, and your investment in us may be adversely affected.
We may require a shareholder to sell us its common shares at fair value, as determined by our board of directors, which may be less than market price.
Our certificate provides that Advantage has the option, but not the obligation, to require a shareholder to sell its common shares back to Advantage at a price per share equal to fair value, as determined by our board of directors, if our board of directors determines that ownership of our common shares by such shareholder may result in adverse tax, regulatory or legal consequences to us, any of our subsidiaries or any of our shareholders and that such compulsory repurchase is necessary to avoid or cure such adverse or potential adverse consequences. “Fair value” may be determined to be different than the sales price of shares of our common stock on any particular day, and as a result, you may be required to sell your shares of common stock back to us at a price that differs from what you could sell your shares for in the open market.
We may prevent a stockholder from transferring its common stock in some circumstances.
Our certificate provides that our board of directors may prohibit a transfer of shares of our common stock if the board believes the transfer may give rise to any adverse tax, regulatory or legal consequences to Advantage, any of its subsidiaries or any of its stockholders. As a result, you may be prevented from transferring your shares in certain circumstances, which could adversely affect your ability to sell your shares of common stock or the price at which you can sell your shares.
Provisions of our certificate, the General Corporations Law of Puerto Rico and our corporate structure may each impede a takeover, which could adversely affect the value of our common shares.
Our certificate contains certain provisions that could make it more difficult for a third party to acquire a controlling interest in the company, even if doing so would be beneficial to our shareholders. Our certificate provides that a director may only be removed, with or without cause, at any time by either: (1) the vote of the holders of a majority of the stock of the Corporation issued and outstanding and entitled to vote and present, in person or by proxy, at any meeting of stockholders called for the purpose; or (2) an instrument or instruments in writing addressed to the board of directors directing such removal and signed by the holders of all the shares of capital stock of the Corporation issued and outstanding and entitled to vote. Upon the occurrence of any of the above described events, the term of each such director who shall be so removed shall terminate.
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Our certificate permits our board of directors to issue additional preferred shares from time to time, with such rights and preferences as they consider appropriate. Our board of directors may authorize the issuance of a new class of preferred shares with terms and conditions and under circumstances that could have an effect of discouraging a takeover or other transaction, deny shareholders the receipt of a premium on their ordinary or preferred shares in the event of a tender or other offer, and have a depressive effect on the market price of the preferred shares. However, the board of directors is not permitted to issue any preferred shares or shares with other special rights ranking senior to or equal with the preferred shares. See “Description of Share Capital — Preferred Stock.”
In Puerto Rico, the General Corporations Law of Puerto Rico, together with the other applicable laws and regulations adopted in Puerto Rico, governs the procedures available to us to effect a merger or consolidation of the company. The merger procedures under Puerto Rico law will allow us to effect a merger or consolidation with the approval of the board of directors and our shareholders.
40

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are subject to certain risks and uncertainties. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “seek,” “assume,” “believe,” “may,” “will,” “should,” “could,” “would,” “likely” and other words and terms of similar meaning, including the negative of these or similar words and terms, in connection with any discussion of the timing or nature of future operating or financial performance or other events. However, not all forward-looking statements contain these identifying words. Forward-looking statements appear in a number of places throughout this prospectus and give our current expectations and projections relating to our financial condition, results of operations, plans, strategies, objectives, future performance, business and other matters.
These statements include forward-looking statements both with respect to us specifically and the insurance and reinsurance industry generally. These forward-looking statements include, among others, statements relating to our future financial performance, our business prospects and strategy, anticipated financial position, liquidity and capital needs and other similar matters. These statements are based on certain assumptions and analyses made by us in light of our expertise and perception of historical trends, current conditions and expected future developments, as well as other factors believed to be appropriate in the circumstances. A number of important factors could cause actual results or conditions to differ materially from those contained or implied by the forward-looking statements, including the risks discussed in “Risk Factors.” Whether actual results and developments will conform to our expectations and conditions or not is subject to a number of risks and uncertainties that could cause actual results to differ materially from our expectations, including, but not limited to:

The risk factors contained in “Risk Factors” (and elsewhere) in this prospectus;

Our operating results will fluctuate from period to period;

We operate in a jurisdiction where the government is undergoing a form of bankruptcy proceedings;

There may be uncertainty with respect to the establishment of our reserves;

The cyclicality of the insurance market may affect the industry’s and our profitability;

Loss of key personnel or the services of our external investment adviser could delay or prevent us from implementing our strategy;

We are dependent upon letter of credit issuance by third parties;

We do not have an A.M. Best, KBRA or equivalent rating;

We may not qualify for an exemption from the Investment Company Act;

Our investment strategy may contain greater risks than our competitors’;

We may be deemed to be a PFIC; and

Other factors may affect us, most of which are beyond our control. See generally “Risk Factors.”
Accordingly, all of the forward-looking statements made in this prospectus are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us or our business or operations. Except as expressly required under federal securities laws and the rules and regulations of the SEC, we undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. You should not place undue reliance on the forward-looking statements included in this prospectus or that may be made elsewhere from time to time by us, or on our behalf. All subsequent written and oral forward-looking statements attributable to us or
41

individuals acting on our behalf are expressly qualified in their entirety by this paragraph. You should specifically consider the factors identified in this prospectus which could cause actual results to differ before you make an investment decision.
42

USE OF PROCEEDS
We estimate that our net proceeds from this offering will be approximately $       million, or approximately $       million if the underwriters’ option is exercised in full, and after deducting estimated underwriting discounts and commissions and estimated offering expenses.
We intend to contribute substantially all of the net proceeds from this offering to Life Insurance and Business Insurance operating subsidiaries. The amounts contributed as surplus to our insurance company subsidiaries may be further invested in debt securities including CLOs. We expect that the majority of the net proceeds, after contribution to our operating subsidiaries, will be invested initially in loans, CLO accumulation facilities and CLOs. We believe that the resulting increased total capital will help us receive an “A” category insurance financial strength rating, based on published ratings agency criteria. 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.
This expected use of our net proceeds from this offering represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including any unforeseen cash needs, including cash needs arising from business acquisitions. We have no plans to acquire any particular company or business, but we evaluate acquisition opportunities in the normal course of our business. As a result, our management will retain broad discretion over the allocation of the net proceeds of this offering.
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DIVIDEND POLICY
Although we do not currently pay dividends on shares of our common stock, we intend to declare regular quarterly dividends on our common stock following the offering. The declaration, payment and amount of future dividends will be subject to the discretion of our board of directors. Our board of directors will give consideration to various risks and uncertainties, including those discussed under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this prospectus when determining whether to declare and pay dividends, as well as the amount thereof. In particular, our board of directors expects to take into account a variety of factors when determining whether to declare any future dividends, including (1) our financial condition, liquidity, results of operations (including our ability to generate cash flow in excess of expenses and our expected or actual net income), retained earnings and collateral and capital requirements, (2) general business conditions, (3) legal, tax and regulatory limitations (See “Regulation — Dividend Restrictions”), (4) contractual prohibitions and other restrictions, (5) the effect of a dividend or dividends upon our financial strength ratings and (6) any other factors that our board of directors deems relevant. Accordingly, there can be no assurance that we will declare any dividends in the future, and if any are declared, what amount they will be.
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CAPITALIZATION
The following table sets forth our cash and capitalization as of September 30, 2017, on an actual and as adjusted basis to reflect the issuance and sale by us of         shares of common stock in this offering at an assumed initial public offering price of  $       per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, and our payment of estimated underwriting discounts and commissions and our estimated offering expenses.
The following table should be read in conjunction with the information under “Use of Proceeds,” “Selected Historical Consolidated Financial and Operating Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included in this prospectus.
Actual
As adjusted,
giving effect to
the offering
(dollars in thousands )
(unaudited)
Cash and cash equivalents:
$ 3,985 $       —
Note payable:
$ 11,282 $
Surplus debenture:
851
Total debt
$ 12,133 $
Stockholders’ equity:
Common shares, par value $0.01 per share; authorized – 73,253,158 shares; issued and outstanding – 323,386 shares (actual) and 10,340,294 (as adjusted) (1)
$ 2 $
Preferred shares, par value $0.01 per share; authorized – 50,000,000 shares; issued and outstanding – 7,560,444 shares (actual) and none (as adjusted)
75
Additional paid-in capital
79,581
Accumulated other comprehensive income (loss)
(786)
Retained earnings
14,389
Total shareholders’ equity
$ 93,261 $
Total capitalization
$ 105,394 $
(1)
The “as adjusted” amount includes 10,016,908 shares of our common stock, which we will issue upon automatic conversion of our issued and outstanding 7,560,444 shares of preferred stock in accordance with the terms of our preferred stock.
A $1.00 increase or decrease in the assumed initial public offering price of  $    per share, which is the estimated offering price set forth on the cover page of this prospectus, would increase or decrease each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization on a pro forma as adjusted basis by approximately $    million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discount and estimated offering costs payable by us.
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DILUTION
The following table summarizes, as of September 30, 2017, the total number of common shares purchased or to be purchased, the total consideration paid or to be paid and the average price per share paid or to be paid by the (i) existing shareholders and (ii) new investors purchasing shares in this offering, based on an initial public offering price of  $       per common share (the midpoint of the price range set forth on the cover page of this prospectus) before deducting the underwriting discounts and commissions in connection with this offering and estimated offering expenses payable (dollars in thousands, except per share data):
Common Shares
Purchased or to be
Purchased
Total Consideration
Paid or to be Paid
Average Price
Per Share (2)
Existing holders of common shares (1)
12,500,189 $ 97,444 $ 7.80
New investors
      
$        $       
(1)
Includes (i) 323,386 shares of our common stock outstanding as of September 30, 2017, (ii) 10,016,908 shares of our common stock resulting from the automatic conversion of our 7,560,444 shares of issued and outstanding preferred stock upon the completion of this offering, and (iii) 2,159,895 shares of our common stock that we are obligated to issue to holders of warrants to purchase our common stock at an average exercise price of  $7.80 per common share.
(2)
Includes exercise of all outstanding warrants.
If you invest in our common stock, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our common stock in this offering and the net tangible book value per share of common stock upon completion of this offering.
Net tangible book value per diluted common share represents the amount of our total tangible assets less total liabilities and any preferred stock, divided by the total number of shares of common stock outstanding. Net tangible book value is a non-GAAP financial measurement. Our net tangible book value as of September 30, 2017 was $91.2 million, or $8.82 per diluted share of common stock, based upon 10,340,294 shares of common stock, which is comprised of both our existing common shares outstanding and the common shares outstanding resulting from the automatic conversion of our outstanding preferred stock in accordance with the terms of our preferred stock. Including the pro forma effect of all outstanding warrants, which become exercisable upon completion of the offering, our net tangible book value as of September 30, 2017 was $108.1 million, or $8.65 per diluted share of common stock.
After giving effect to the sale of         shares of our common stock by us at the initial public offering price of  $       per share, the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our book value as of September 30, 2017 would have been approximately $       million, or approximately $       per share of common stock. This represents an immediate increase in net tangible book value of  $       per share to existing common stockholders, and an immediate dilution of  $       per share to investors participating in this offering. If the initial public offering price is higher or lower, the dilution to new stockholders will be greater or less, respectively.
A $1.00 increase (decrease) in the assumed initial public offering price of  $       per share would decrease (increase) our as adjusted net tangible book value (deficit) by $       million, or $       per share, and increase (decrease) the dilution per share to new investors in this offering by $      , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and estimated expenses payable by us.
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UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma condensed income statement is based on our historical consolidated financial statements and USCL historical consolidated financial statements as adjusted to give effect to the October 1, 2016 acquisition of USCL. The unaudited pro forma condensed income statement gives effect to the October 1, 2016 acquisition of USCL and related financing, as though those transactions had occurred on January 1, 2016.
The pro forma adjustments related to the purchase price allocation of the USCL acquisition are preliminary and are subject to revision as additional information becomes available. Revisions to the preliminary purchase price allocation of the USCL acquisition may have a significant impact on the unaudited pro forma information.
The unaudited pro forma financial information is not necessarily indicative of our results of operations or financial position had the events reflected herein actually been consummated at the assumed dates, does not include any cost savings that may be realized from the USCL acquisition, and is not necessarily indicative of our results of operations or financial position for any future period. The unaudited pro forma financial information should be read in conjunction with our consolidated financial statements and related notes and the USCL consolidated financial statements and related notes, in each case included elsewhere in this prospectus.
As of December 31, 2016
Advantage
Insurance
Inc. Actual
U.S.
Commonwealth
Life, A.I.
Actual
Pro Forma
Adjustments
Notes
Pro Forma
Combined
(dollars in thousands)
Revenue
Policy charges, premiums and fee income
$ 7,313 $ 3,258 $ 62 (a) $ 10,633
Reinsurance, net
(1,158) (6) (1,164)
Investment & Other income
17,339 64 (62) (a) 17,341
Total revenue
23,494 3,316 26,810
Expenses
Underwriting, general & administrative
14,408 449 14,857
Loss and loss adjustment expenses
1,986 1 (1) 1,986
Amortization and finance charges
1,017 1,419 952 (b) 3,388
Total expenses
17,411 1,869 951 20,231
Operating income (before tax)
$ 6,083 $ 1,447 $ (951) $ 6,579
Notes to Unaudited Pro Forma Condensed Income Statement
Note 1.   Presentation
The unaudited pro forma condensed income statement is based on our historical consolidated financial statements and USCL historical consolidated financial statements as adjusted to give effect to the October 1, 2016 acquisition of USCL. The unaudited pro forma condensed income statement gives effect to the October 1, 2016 acquisition of USCL and related financing, as though those transactions had occurred on January 1, 2016.
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Note 2.   Purchase price allocation
On September 30, 2016 we entered into a Stock Purchase and Sale Agreement to acquire 100% of USCL, a Class 5 life insurance company operating under Chapter 61 of the Insurance Code of the Commonwealth of Puerto Rico which became effective on October 1, 2016. The acquisition was part of our ongoing strategic initiative to expand our specialty life insurance business. The purchase price for USCL consisted of  (i) 178,723 convertible preferred shares; (ii) 8,511 common stock units consisting of one share of common stock and twenty (20) warrants to purchase preferred shares at an exercise price of  $11.75 per share; and (iii) a promissory note for three future annual cash installment payments estimated to total $12.8 million. The cash installment payments began in 2017 and are subject to adjustment based on the financial performance of USCL and its life insurance business in 2016, 2017 and 2018.
The company’s total purchase price for USCL at October 1, 2016 was calculated as follows (dollars in thousands, except per share data):
Advantage Insurance Inc. common share units
Common shares issued by Advantage
8,511
Value per common share unit as of October 1, 2016
$ 11.75
$ 100
Advantage Insurance Inc. preferred shares
Preferred shares issued by Advantage
178,723
Value per preferred share as of October 1, 2016
$ 11.75
2,100
Contingent consideration payable
1,361
Note payable
11,394
Total purchase price
$ 14,955
The assets and liabilities assumed have been included in the company’s consolidated financial statements as of the acquisition date. The transaction resulted in a bargain purchase gain of  $1.4 million recognized in the consolidated statements of comprehensive income.
Shareholder’s equity of USCL at October 1, 2016
$ 3,019
Adjustments for fair value
Deferred acquistion costs
(690)
Reinsurance recoverable
(1,398)
Unearned revenue
952
Value of business acquired
14,478
Bargain purchase gain
(1,406)
Shareholder’s equity of USCL at fair value
14,955
Total net purchase price paid by Advantage
$ 14,955
Note 3.   Pro forma adjustments
The following adjustments have been reflected in the unaudited pro forma condensed income statement:
(a)
Reflects the reclass of policy loan interest of  $0.06 million to policy charges, premiums and fee income from investment and other income.
(b)
Reflects an adjustment of  $0.3 million for amortization of deferred acquisition costs and value of business acquired. In addition, it reflects $0.6 million of finance charges for the note payable.
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Reconciliation of Pro Forma Book Value per Share to GAAP Financial Statements
Pro forma book value per share is a non-GAAP measurement. In this prospectus, we reference our pro forma diluted book value per share. The reconciliation of this financial measurement to our GAAP financial statements is as follows (dollars in thousands, except per share data):
At or For the Nine Months
Ended September 30,
At or For the Years Ended December 31,
2017
2016
2016
2015
2014
Shareholders’ equity (A)
$ 93,261 $ 89,064 $ 93,513 $ 86,040 $ 81,922
Diluted shares outstanding:
Number of common shares outstanding (B)
323,386 365,199 323,386 365,199 449,127
Number of preferred shares
outstanding
7,560,444 7,431,721 7,610,444 7,701,721 7,600,000
Conversion Ratio applied (1)
1.32491x 1.32491x 1.32491x 1.32491x 1.32491x
Pro forma number of
common shares issued for
preferred shares (C)
10,016,908 9,846,361 10,083,153 10,204,087 10,069,316
Pro forma total diluted shares (B) + (C)
10,340,294 10,211,560 10,406,539 10,569,286 10,518,443
Pro forma book value per diluted share
$ 9.02 $ 8.72 $ 8.99 $ 8.14 $ 7.79
Fully diluted shares outstanding:
Number of warrants outstanding
1,630,220 1,520,000 1,630,220 1,520,000 1,520,000
Warrant preferred shares
1,630,220 1,520,000 1,630,220 1,520,000 1,520,000
Conversion Ratio applied (1)
1.32491x 1.32491x 1.32491x 1.32491x 1.32491x
Pro forma number of
common shares issued for
warrant preferred shares
(D)
2,159,895 2,013,863 2,159,895 2,013,863 2,013,863
Warrant exercise price
$ 10.34 $ 10.17 $ 10.34 $ 10.17 $ 10.17
Pro forma warrant proceeds
(E)
16,856 15,458 16,856 15,458 15,458
Pro forma shareholders equity (A) + (E)
$ 110,117 $ 104,522 $ 110,369 $ 101,498 $ 97,380
Pro forma total fully diluted
shares (B) + (C) + (D)
12,500,189 12,225,424 12,566,434 12,583,149 12,532,306
Pro forma book value per fully diluted share
$ 8.81 $ 8.55 $ 8.78 $ 8.07 $ 7.77
(1)
Conversion ratio applied is as of September 30, 2017.
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
The following tables set forth our selected historical consolidated financial and operating data. The selected historical consolidated financial data as of September 30, 2017, and for the nine months ended September 30, 2016 have been derived from our historical unaudited condensed consolidated financial statements and notes thereto included elsewhere in this prospectus. The selected historical consolidated financial data, as it relates to the years 2015 and 2016 has been derived from our annual financial statements. The selected historical consolidated financial data as of December 31, 2016 and 2015, and each of the two years in the period ended December 31, 2016, have been derived from our historical audited consolidated financial statements and notes thereto included elsewhere in this prospectus. The selected historical consolidated financial data as of December 31, 2014 and for the year ended December 31, 2014 has been derived from our historical consolidated financial statements not included in this prospectus. Our historical results are not necessarily indicative of future operating results and the results for any interim period are not necessarily indicative of the results that may be expected for a full fiscal year.
You should read this information in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto included elsewhere in this prospectus.
Selected historical consolidated financial and operating data are as follows (dollars in thousands, except per share data):
At or For the Nine Months
Ended September 30,
At or For the Years Ended December 31,
2017
2016
2016
2015
2014
Income Statement Data:
Revenue
$ 16,675 $ 15,810 $ 24,539 $ 17,737 $ 10,127
Investment income
5,686 7,383 9,709 9,140 3,168
Net income
1,192 3,924 6,482 6,866 951
Other comprehensive (loss)/income
(875) 2,051 2,125 (2,882) 294
Total comprehensive income
317 5,975 8,607 3,984 1,245
Balance Sheet Data:
Total assets
$ 1,478,278 $ 552,750 $ 1,253,737 $ 435,275 $ 422,297
Separate account assets
1,345,892 446,516 1,114,849 337,803 330,681
Other assets
54,703 27,929 55,165 19,238 11,970
Investments and cash
77,683 78,305 83,723 78,234 79,776
Total shareholders’ equity
93,261 89,064 93,513 86,040 81,922
Per Share Data:
Basic earnings per common
share
$ 3.69 $ 10.74 $ 18.18 $ 16.89 $ 1.99
Diluted earnings per common share
0.11 0.40 0.66 0.73 0.11
Weighted average common shares outstanding
323,386 365,199 356,467 406,428 478,316
Diluted average common shares outstanding
10,405,326 9,704,885 9,867,467 9,352,747 8,686,316
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At or For the Nine Months
Ended September 30,
At or For the Years Ended December 31,
2017
2016
2016
2015
2014
Selected Performance Ratios:
Investment income as % of
Investments
7.7% 9.6% 12.6% 12.1% 4.1%
Ratio of net investment income to net income
4.77 1.88 1.50 1.33 3.33
Corporate expense as % of revenue
14.2% 14.8% 12.3% 12.7% 21.1%
Change in pro forma book value per diluted share
$ 0.30 $ 0.54 $ 0.85 $ 0.35 $
Percent change in pro forma
book value per diluted
share
3.4% 6.7% 10.4% 4.5%
Other:
Number of offices
4 4 4 4 3
Number of full-time equivalent employees
43 38 41 34 32
Number of life insurance policies in force
329 194 319 187 156
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Management’s discussion and analysis of our financial condition and results of operations should be read in conjunction with the sections entitled “Prospectus Summary — Summary Financial Data,” “Selected Historical Consolidated Financial and Operating Information” and our consolidated financial statements and notes thereto included elsewhere in this prospectus. This discussion includes forward-looking statements and involves numerous risks and uncertainties, including, but not limited to those described in the “Risk Factors” section of this prospectus. See “Special Note Regarding Forward-Looking Statements.” Future results could differ significantly from the historical results presented in this section. The following discussion and analysis contains forward-looking statements and involves numerous risks and uncertainties, including those described under the heading “Risk Factors.” Actual results may differ materially from those contained in any forward-looking statements. You should read this discussion and analysis together with our audited consolidated balance sheet and related notes included elsewhere in this prospectus.
Overview
We underwrite specialty insurance contracts and provide related insurance services to business owners and HNWIs for their risk management and financial planning needs. We are organized into three reportable segments: Life Insurance, Business Insurance and Corporate. Through our Life Insurance segment, we underwrite private placement life insurance policies and annuity contracts. Our Business Insurance segment specializes in providing customized risk finance, risk protection and risk transfer solutions for small and medium-sized businesses using captive insurance and other alternative risk transfer methods. We also underwrite property and casualty insurance and reinsurance risks in the Lloyd’s of London insurance market, for our own account and on behalf of our Business Insurance clients. Our Corporate segment provides administrative and organizational support services to our active insurance businesses and operates our holding company structure.
AVI is the successor to Advantage Insurance Holdings Ltd., or AIH. Following the close of business on September 30, 2016, AIH merged with and into its 100% owned subsidiary AVI, with AVI continuing as the surviving corporation. AVI was incorporated under the laws of the Commonwealth of Puerto Rico on May 18, 2015. It holds certain tax benefits accorded to it by a grant from Puerto Rico under Act 399 of Puerto Rico law. Its registered office and corporate headquarters is located at American International Plaza, Suite 710, 250 Muñoz Rivera Avenue, San Juan, Puerto Rico 00918. We continue to have a significant presence in the Cayman Islands, where we have our largest office measured by equity capital invested in subsidiaries and our second-largest office measured by employees.
In 2016, we acquired our largest Puerto Rico-based competitor in life insurance, USCL. The USCL acquisition and new business originated subsequent to our acquisition transformed our company into the third-largest U.S. private placement life insurance company, behind Lombard International and Crown Global. In 2016, our Life Insurance division’s separate account assets attributable to policyholders increased from $337.8 million to $1,114.8 million. The significant change in the separate account assets and liabilities is attributable to the USCL acquisition that resulted in an additional $555.1 million of separate account assets on the date of acquisition and subsequently increased to $729.4 million as of December 31, 2016. Total policy count increased from 187 to 319, or 70.6%. 82 of the 132 net new policies added in 2016 were attributable to the acquisition of USCL. We recorded a one-time bargain purchase gain from the acquisition of USCL in 2016 for $1.4 million. This bargain purchase arose due to the non-interest bearing seller note we issued to the former shareholder of USCL as purchase price consideration. The bargain purchase amount represents the discount to fair market value of the seller note attributable to its non-interest
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bearing terms. We recorded a non-cash finance charge of  $0.2 million in 2016 and $0.5 million in the first nine months of 2017 due to amortization of the bargain purchase discount. We expect to fully amortize the discount in 2019, when the final installment payment of the seller note is due.
Investment income is critical to our earnings. In 2016, our investment portfolio generated $9.7 million of investment income, net of direct fees and expenses. Investment income exceeded our net income of  $6.5 million for 2016 by $3.2 million. In 2015, investment income was $9.1 million, compared to net income of  $6.9 million, or $2.2 million higher. In each period, we expended approximately the same amount as the difference between net investment income and net income on Corporate expenses, which were $3.2 million in 2016 and $2.2 million in 2015, respectively. In the period ending September 30, 2017 net investment income was $5.7 million, compared to net income of  $1.2 million, or a gap of  $4.5 million. For the period ending September 30, 2016 the gap was $3.5 million. Corporate expense for the two nine-month periods was $2.4 million and $2.3 million, respectively. Our goal is to earn stand-alone underwriting profits within our Life Insurance and Business Insurance divisions, before investment income, such that net income exceeds net investment income on a consolidated basis.
We generate investment income primarily from our portfolio of CLO investments, which we classify as held-to-maturity on our balance sheet. We elect to hold our CLOs to maturity because the self-liquidating nature of CLO securities returns principal to us on a quarterly basis, if the CLO investment is performing as expected. Because we receive principal over the life of the CLO investment, we are not forced to sell a CLO investment in the market in order to realize a cash return. Furthermore, CLO securities have experienced significant market price volatility in the past, and market liquidity for CLOs has been unreliable. Because of our long-dated insurance liabilities, we are able to hold CLOs to maturity and to utilize the expected quarterly cash flows from the portfolio for our operating needs. In 2016, our CLO portfolio returned approximately $7.7 million of net investment income and $5.9 million of principal to us. In 2015, the CLO portfolio generated $5.0 million of net investment income and returned $4.2 million of principal. For the first nine months of 2017, the CLO portfolio earned $6.6 million of net investment income and returned $2.3 million of principal.
CLO cash flows can be volatile, resulting in periods of rapid amortization and periods of slow amortization compared to expected amounts. We update the projected future cash flows of each CLO investment in our portfolio as events and information become known. These updates can result in a change to the effective interest rate we apply to cash flows from a CLO, which has the effect of increasing or decreasing the amortization rate of the principal balance, and the amount of cash flow that we record as investment income. If the projected total amount of future cash flows for a particular CLO investment is lower than its amortized cost, we will record an other-than-temporary impairment, or OTTI charge through income, writing down the cost of the investment to reflect the lower expected return. One factor that we use to determine whether or not an OTTI charge should be applied to a CLO investment is the relationship between the reported fair market value of the investment compared to its amortized cost.
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The table below sets out the amortized cost and fair market value of our held-to-maturity CLO portfolio:
Held-to-Maturity Investments as of September 30, 2017
Investment
CUSIP
ISIN
Bloomberg
Amortized
Cost
Fair Market
Value
FMV as % of
Amortized
Cost
Jamestown II
47047NAC9 US47047NAD75
JTWN 2013- 2A SUB
$ 2,559,272 $ 2,398,889 94%
Ares XXVIII 00214DAE3 USG33025AC42
ARES 2013-3A SUB
4,524,300 4,446,793 98%
Tryon Park 89852UAC9 USG91086AB70
TPCLO 2013-1A SUB
3,828,414 3,745,272 98%
Seneca Park 817174AE5 USG8027VAC03
SPARK 2014-1A SUB
2,203,491 1,675,738 76%
Stewart Park
860443AC4 USG77759AB75
STWRT 2015-1A SUB
24,609,596 24,033,057 98%
Webster Park
948210AC3 USG95136AB63
WPARK 2015-1A SUB
2,732,735 2,895,718 106%
Westcott Park
95753VAB6 USG95521AB90
WSTCT 2016-1A SUB
27,753,603 24,990,161 90%
Grippen Park
39862DAB2 USG4133EAB05
GRIPP 2017-1A SUB
3,548,309 3,505,426 99%
$ 71,759,720 $ 67,691,054
Our operating segments, Life Insurance and Business Insurance, generate sufficient cash flow to support their operations with internally-generated cash. Our Corporate segment has no revenue, and receives intra-company transfer payments from our operating segments to fund its expenses. Most of the amounts paid to our Corporate segment from our Life Insurance and Business Insurance segments are for services rendered. Some of the Corporate expenses are funded by dividends and/or return of capital payments from our subsidiaries to the holding company. Our goal is to minimize Corporate expenditures, where possible, and to charge our operating subsidiaries fair market value for services provided to them by Corporate. In the first half of 2016, we recorded a one-time charge of  $0.7 million in our Corporate segment related to the re-domicile of our holding company from the Cayman Islands to Puerto Rico.
We have made three acquisitions of insurance businesses since our recapitalization in 2013. Each of these acquisitions was funded with a combination of cash and seller notes, and in the case of USCL, additional common share units (comprised of common stock and warrants) and preferred stock. The total consideration we paid for USCL was initially valued at $15.0 million at the time of acquisition in October 2016. The value of the consideration is tied to the performance of USCL and the value of its work-in-progress at the time of acquisition. Measurement of the USCL business upon completion of its stand-alone 2016 audited financial statements resulted in an increase to the total value of the consideration paid to the selling shareholder of  $5.5 million, spread over four installments commenced in 2016. As of September 30, 2017 we had paid a total of  $8.2 million of cash and shares for the USCL purchase and the present value of the estimated future payments due in satisfaction of the promissory note as of September 30, 2017 was $11.3 million, in each case subject to adjustment for the performance of the USCL business compared to expectations agreed with the seller at the time of the acquisition.
Because our CLO portfolio returns cash to us on a quarterly basis, we have relied upon CLO distributions for liquidity needs. At times when our insurance businesses require additional cash investment, such as with the acquisition of USCL, we have diverted CLO cash flows away from reinvestment into additional CLO investments towards our operating needs. In 2016 and 2015, we received $13.0 million and $8.7 million of total cash distributions from our held-to-maturity CLO investments. For the first nine months of 2017, we received $10.7 million. We intend to deploy most of the proceeds from this offering over time into additional CLO investments, or to fund the operating needs of our insurance businesses, potentially including future acquisitions. We currently do not have any arrangements, agreements or understandings with respect to any potential future acquisitions.
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Industry Trends and Competition
We participate in a growing market for wealth protection, preservation and tax optimization products and services sold or provided to HNWIs and family groups. The market for these products and services is global, with HNWI clients located worldwide that seek out locations and methods of wealth storage and investment other than in their location of historic residence or wealth creation. Our business is affected by fluctuations in valuations of currencies, commodities and securities; taxes and regulations; and geopolitical events such as wars and revolutions. In general, we benefit from the trend towards relocation of wealth and personal residency from countries such as Brazil, China, India, Indonesia, Korea and Russia to the United States and secondarily the Cayman Islands. The competition for global HNWI clients is robust, with numerous global banks, boutique investment managers, trust and insurance companies all seeking to sell products and provide services to this market. While we expect that our ability to continue to add new clients will continue if the United States continues to be a preferred destination for mobile capital, we are exposed to changes in HNWI sentiment towards the United States and Cayman Islands, as well as general market and economic conditions.
Because we do not sell meaningful amounts of life insurance products with fixed-rate guarantees or other embedded options or minimum payments, we are not exposed in a material way to interest rates. Furthermore, our investment portfolio is comprised of mostly floating-rate investments, or investments such as CLOs that hold floating-rate loans. We do not estimate the sensitivity of our earnings to shifts in interest rates, or apply other interest rate scenarios to our earnings in the same way as other insurance companies are required to do by regulation. If HNWI clients choose to purchase life insurance policies with embedded rate guarantees or other investment return guarantees, instead of variable return private placement policies, our growth will be limited or we may be forced to issue policies with embedded guarantees in order to compete. While we do not believe that HNWI consumers will leave the variable private placement life insurance market for guaranteed insurance products, rising interest rates will make fixed returns more attractive to our clients than in the recent, prolonged low interest rate environment.
We operate in highly regulated markets and business locations. In 2015 and 2016, the IRS placed certain types of captive insurance companies on its “Dirty Dozen” list of potentially abusive tax shelters. Taking specific action to identify abusive captive insurance arrangements, in December 2016 the IRS issued Notice 2016-66 that placed a significant compliance requirement on our Business Insurance division. In 2015, the Department of the Treasury proposed new regulations that would expand the definition of what constitutes a passive foreign investment company, or PFIC, among non-U.S. insurance companies. If our company were to be deemed a PFIC under new IRS regulations, we would be likely to make significant changes to our business and capital structure in order to avoid subjecting our U.S. shareholders to taxes imposed on them for holding our shares. Globally, the implementation of FATCA in 2014 and 2015, and the OECD’s success in implement the Common Reporting Standard, or CRS in 2016 and 2017, has substantially increased the compliance burden on our Cayman Islands operations. In general, we have experienced higher than expected compliance costs through September 30, 2017 and in each of 2016 and 2015. We expect compliance requirements to increase in future years, and we expect to invest in information technology systems and to employ additional personnel to adhere to increased compliance obligations. Because compliance activities are integral to our business, we do not have a reliable estimate or means of calculating the amount of our operating expenses that are solely attributable to compliance requirements.
Critical Accounting Policies and Estimates
This management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our financial statements. We evaluate our estimates and judgments, including those related to derivative liabilities, stock-based compensation and accrued
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expenses on an ongoing basis. We base our estimates on historical experience, known trends and events and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. You should consider your evaluation of our financial condition and results of operations with these policies, judgments and estimates in mind.
While our significant accounting policies are described in the notes to our financial statements appearing elsewhere in this prospectus, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial statements.
Investments
The company’s principal investments are collateralized loan obligations, or CLOs, CLO loan accumulation facilities, debt and equity securities and investment funds. The amounts of our principal investments relative to each other vary from period to period. The accounting policies related to each are as follows:
The company classifies its CLO investments held in the general accounts of its insurance subsidiaries as held-to-maturity as management has the intent and the company has the ability to hold the investment until the final maturity or payment date. These investments are recorded at amortized cost in the consolidated balance sheets.
Cash flows received from the CLOs are allocated to net investment income and/or principal repayment based on the effective interest rate established for the specific CLO investment. To determine the effective interest rate for a CLO investment, management obtains projections of the timing and amount of future expected cash flows from the CLO investment, taking into account assumptions including future loan default and recovery rates, loan prepayment rates, interest rates on new loans purchased, and changes in short term benchmark interest rates. Management further validates these assumptions used in projecting future cash flows by comparing them to those used by other market participants, research analysts and ratings agencies in analyzing substantially similar or identical investments. These assumptions used to project future cash flows from the company’s CLOs significantly impact interest income recognition in the consolidated statements of total comprehensive income. Management periodically reviews the effective interest rate applied to each CLO investment and, based on information and events that give reasons to change assumptions used in the original cash flow projection, management will obtain a new cash flow estimate and derive a new effective interest rate for the CLO investment.
The company classifies its investments in CLO loan accumulation facilities, equity securities and some fixed maturity securities as available-for-sale. These are recorded in the consolidated balance sheets at their fair value, with any unrealized gains or losses, calculated by reference to cost or amortized cost as appropriate, included as a component of accumulated other comprehensive income in the consolidated balance sheets.
CLO loan accumulation facilities are typically single-purpose, exempt companies limited by shares that invest in loans to be held for future securitization. The loan accumulation facility utilizes a non-recourse credit facility provided by a third party lender with the company’s liability limited to the funds contributed. The fair value of the loan accumulation facility is equal to its net asset value. Net asset value is based on the fair market value of cash and loans held less the funded amount of the credit facility and accrued financing, collateral management and administrative costs. Fair market values for loans held in the facility are obtained from independent pricing sources as of the close of business on the last business day of the measurement period.
The company classifies its investments in debt and equity securities held by Lloyd’s syndicates and investments in investment funds as available-for-sale. The fair value of investment funds and mutual funds are considered to be readily determinable as the respective net asset values are published and the funds stand ready to transact at the published net asset values.
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Realized gains and losses on disposal are calculated on the average cost method and are included in the consolidated statements of total comprehensive income.
Sensitivity to Changes in Estimates
The company’s reported investment income is sensitive to the assumptions used in projecting the future cash flows of its CLO investments. Changes in assumptions increase or decrease the effective interest rate applied to actual cash flows received. Key assumptions used in the projection of future cash flows of a CLO investment and the effective interest rate derived from the projections include:

default rates of Collateral;

timing and amount of recovery of cash from defaulted Collateral;

future benchmark interest rates, including 1-month and 3-month LIBOR;

prepayment rates of performing loans;

interest spread margins for reinvestment of principal payments; and

amounts of cash held by the CLO and rates of return on cash.
In the nine months ended September 30, 2017, the company adjusted its projections of future cash flows for four of its held-to-maturity CLO investments. The aggregate annualized impact of the adjustments was a reduction of approximately $0.6 million of investment income per year compared to the previous cash flow forecasts. Prior to 2017, the company’s periodic assessment of projected future cash flows of its held-to-maturity CLO investments did not result in any changes to effective interest rates or overall expectations of the economic return to the company from the specific CLO investments. The changes in assumptions in the first half of 2017 resulting in the reduced expectation of future cash flows were primarily the reduction in interest spread margins for reinvestment of principal payments on Collateral. CLO market participants generally refer to the impact of reduced reinvestment spreads compared to expectations as spread compression. If spread compression in CLO securities continues, the company expects to further reduce its projections of future cash flows for its remaining five CLO investments in amounts comparable to the reduction applicable to the three investments adjusted in the first half of 2017.
Other-than-temporary impairments
The company reviews its available-for-sale and held-to-maturity investment securities with unrealized losses regularly and at each quarter end to identify other-than-temporary impairments in value, or OTTI.
For CLOs, the company performs a comprehensive review for OTTI when the market price of a CLO as reported by the company’s appointed third party valuation service is less than 90% of the CLO’s amortized cost for two consecutive quarterly reporting dates. For CLOs in unrealized loss positions that meet this criteria, the company evaluates whether the decline in value is other-than-temporary based on: (1) the extent and the duration of the decline in fair market value; (2) the reasons for the decline, including but not limited to changes in credit quality, changes in credit market conditions including credit spread widening, and/or changes in benchmark index levels or interest rates; and (3) the financial condition of and near term prospects of the issuer. If management concludes from its analysis that the future cash flows of a debt security are unlikely to recover its amortized cost, it will recognize an OTTI for the security.
When management determines that an OTTI of a CLO has occurred, the OTTI recognized in earnings is equal to the entire difference between the CLOs amortized cost basis and its fair value at the impairment measurement date. For OTTI of CLOs that meet the criteria, the company allocates the OTTI amount between the portion representing the credit loss and the amount related to all other factors. The amount representing the credit loss is the difference between the amortized cost and the net present value of the company’s best estimate of future cash flows, discounted at the original effective interest rate of the security. This credit loss amount is recognized in earnings.
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The OTTI related to all other factors is accounted for as other comprehensive income (loss) for the period during which the OTTI is recognized. In the nine months ended September 30, 2017, an other-than-temporary impairment of  $1.7 million occurred. The OTTI representing the credit loss was determined to be $0.9 million which has been recognized in earnings and the $0.8 million related to all other factors has been accounted for as other comprehensive loss for the three months ended September 30, 2017.
Fair value measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In most cases, the exit price and the transaction (or entry) price will be the same at initial recognition.
Subsequent to initial recognition, fair values are based on unadjusted quoted prices for identical assets or liabilities in active markets that are readily and regularly obtainable. When such quoted prices are not available, fair values are based on quoted prices in markets that are not active, quoted prices for similar but not identical assets or liabilities, or other observable inputs. If these inputs are not available, or observable inputs are not determinable, unobservable inputs and/or adjustments to observable inputs requiring management judgment are used to determine the estimated fair value of assets and liabilities.
The company categorizes its assets and liabilities measured at estimated fair value into a three-level hierarchy, based on the significant input with the lowest level in its valuation. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to valuation techniques that use at least one significant input that is unobservable (Level 3).
The levels of fair value hierarchy are as follows.
Level 1: Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2: Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model based valuation techniques for which all significant assumptions are observable in the market.
Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market.
These unobservable assumptions reflect the company’s own assumptions about the assumptions market participants would use in pricing the assets or liabilities. Level 3 investments may also be adjusted to reflect illiquidity and/or non-transfer ability with the amount of such discount estimated by the company in the absence of market information. Assumptions used by the company due to the lack of observable input may significantly impact the resulting fair value and therefore the company’s results of operations.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement of the asset or liability.
The company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and the company considers factors specific to the asset or liability.
In order to determine if a market is active or inactive for a security, the company considers a number of factors, including, but not limited to, the spread between what a seller is asking for a security and what a buyer is bidding for the same security, the volume and frequency of trading activity for the security in question, the price of the security compared to its par value (for fixed maturity investments), and other factors that may be indicative of market activity.
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Variable interest entities
The company accounts for variable interest entities, or VIEs, in accordance with FASB ASC 810 Topic Consolidation, which requires the consolidation of all VIEs by the primary beneficiary, that being the investor that has the power to direct the activities of the VIE and will absorb a majority of the VIE’s expected losses or residual returns.
The company determines whether it is the primary beneficiary of a VIE by performing an analysis that principally considers: (i) the VIE’s purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders; (ii) the VIE’s capital structure; (iii) the terms between the VIE and its variable interest holders and other parties involved with the VIE; (iv) which variable interest holders have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; (v) which variable interest holders have the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE; and (vi) related party relationships.
The company has determined that it is not the primary beneficiary of certain VIEs for which it holds an equity ownership interest, including a CLO loan accumulation facility and an interest in a limited liability company as it does not have both (i) the power to direct the activities of the VIE that most significantly impact the economic performance of the entity and (ii) the obligation to absorb losses of the entity that could be potentially significant to the VIE or the right to receive benefits from the entity that could be potentially significant.
The company reassesses its initial determination of whether the company is the primary beneficiary of a VIE upon changes in facts and circumstances that could potentially alter the company’s assessment.
Deferred policy acquisition costs
Costs that are directly related to the successful acquisition of new and renewal insurance and annuity business are deferred to the extent such costs are deemed recoverable from future premiums or gross profits.
Such deferred policy acquisition costs include commissions and consulting fees, costs of policy issuance and underwriting, and certain other expenses that are directly related to successfully negotiated contracts. Deferred policy acquisition costs are subject to periodic recoverability testing. The company engages an independent actuary to assist with the calculation of the amortization of the deferred policy acquisition costs.
Value of business acquired
As a result of its acquisition of USCL in 2016 and the application of purchase accounting, the company records the value of the business acquired, or VOBA, on its consolidated balance sheets. VOBA represents an adjustment to the stated value of inforce insurance contract liabilities to present them at fair value, determined as of the acquisition date. VOBA balances are subject to recoverability testing, in the manner in which they were acquired. VOBA is amortized in proportion to gross profits arising principally from investment margins, mortality and expense margins, and surrender charges, based on historical and anticipated future experience, which is updated periodically. The effect of changes in total gross profits on unamortized VOBA is reflected in the period such total gross profits are revised.
Reinsurance recoverable
Reinsurance recoverable is recognized in a manner consistent with the liabilities relating to the underlying reinsured contracts, using the same assumptions. The gross cost of reinsurance is the present value of the reinsurance cash flows.
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The expected cash flows are projected using the same assumptions to calculate the estimated gross profits for deferred acquisition costs and unearned revenue. The amortization method used is a prospective method whereby the amount amortized in a given year is based on the expected gross profits for that year. All differences between actual and expected reinsurance cash flows are recognized in the consolidated statements of total comprehensive income.
Reserves for future policy benefits
The reserves for future policy benefits are based on methods and underlying assumptions in accordance with GAAP and applicable actuarial standards. Principal assumptions used in the establishment of reserves for future policy benefits are mortality, morbidity, policy lapse, renewal, investment returns and expenses. The company utilizes an independent actuary to assist in the assessment of the adequacy of its reserves for future policy benefits, on an annual basis.
The company issues variable life insurance and annuity policies. The reserve established for future policy benefits is equal to the sum of  (i) the balance that accrues to the benefit of policyholders at the date of the financial statements; (ii) amounts that have been assessed to compensate for services to be performed over future periods; (iii) amounts previously assessed against policyholders that are refundable on termination and (iv) any probable loss (premium deficiency).
Premium deficiency reserves are established, if necessary, when the liability for future policy benefits plus the present value of expected future gross premiums are determined to be insufficient for expected future policy benefits and expenses. Premium deficiency reserves do not include a provision for the risk of future adverse deviation from expected policy benefits and expenses.
The company records its estimated reserves for future policy benefits gross of any amounts recoverable under the reinsurance agreement described in note 17 to our audited financial statements included in this prospectus, which amounts are recorded separately in the consolidated balance sheets.
In the event that the company’s reinsurers are unable to meet obligations under the reinsurance agreement, the company would be liable to pay all related claims but would only receive reimbursement to the extent that the reinsurers can meet their obligations.
Insurance revenue and expense recognition
The amounts collected from policyholders for universal life insurance contracts are considered deposits and are not included in revenue.
Policy charges and fee income for universal life insurance contracts consist of cost of insurance charges, policy administration fees, asset administration fees and surrender charges that have been earned and assessed against the policyholder account balances during the period. The timing of revenue recognition as it relates to fees assessed is determined based on the nature of such fees. Cost of insurance charges and administration fees are assessed on a periodic basis and recognized when due.
Surrender charges are recognized upon surrender or partial surrender of a policy in accordance with its contractual terms. Policy administration fees are determined on either a fixed or variable rate based on the separate account asset value at the end of the relevant financial period, either quarterly or annually.
Amounts charged for origination of a life insurance contract are recognized as unearned revenues and amortized over the expected life of the contract in proportion to gross profits. Interest income on policy loans is recognized in policy charges and fee income at the contract interest rate when earned. Policy loans are fully collateralized by the cash surrender value of the associated insurance policies. The company does not establish any reserves for non-collectability of policy loans.
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Establishment fees charged for the origination of immediate variable annuity contracts are deferred and recognized over the life of the contract based on the life expectancy of the annuitant at the time of the contract inception.
Claim and claim adjustment expenses are recognized when incurred.
Net premiums earned
Net premiums earned are the amount of revenue recognized in the period from the company’s non-life insurance underwriting activity. Premiums are recognized as income, net of any applicable reinsurance or retrocessional coverage purchased, over the life of the related contracts and policies. Premiums written are based on contract and policy terms, including estimates based on information received from insured parties, brokers, agents and where applicable, reinsurers. Subsequent differences between estimated and actual premium earned are recorded in the period in which the difference is determined.
Unearned premiums represent the portion of premiums written that relate to the unexpired insurance coverage period of contracts and policies in force. Unearned premium amounts are calculated on a pro rata basis, taking into account the remaining time period of contracts and policies in force.
Reinsurance ceded
In the normal course of business, the company seeks to limit its exposure to loss on any single insured life and to recover a portion of benefits paid by ceding reinsurance to third party insurers, reinsurers or other risk transfer counterparties under facultative reinsurance agreements or equivalent risk transfer contracts. Reinsurance ceded is recorded and expensed in the period in which the purchased reinsurance coverage is in effect.
Loss and loss adjustment expenses
The reserve for loss and loss adjustment expenses includes estimates for unpaid claims and claim expenses on reported losses as well as an estimate of losses incurred but not reported. The reserve is based on individual claims, case reserves and other reserve estimates reported by insureds and ceding companies as well as management estimates of ultimate losses. The Company considers various information sources to establish, corroborate and adjust the loss and loss adjustment expenses, including the UK member agent’s market reports, audited financial statements of the underlying syndicates and general industry reports.
Inherent in the estimates of ultimate losses are expected trends in claim severity and frequency and other factors which could vary significantly as claims are settled.
Net investment income
Net investment income is comprised of interest and dividend income, realized gains and losses on sales of investments, impairment losses and changes in valuation allowances net of investment management fees. Interest income is recognized as it accrues and is calculated using the effective interest rate method.
Fees and commissions that are an integral part of the effective yield of the financial asset or liability are recognized as an adjustment to the effective interest rate of the instrument.
Dividend income is recognized when the right to receive payment is established. This is the ex-dividend date for listed stocks and the notification date for private equity instruments.
The effective interest rate applied to variable distributions from CLOs is determined at the time of initial investment in the CLO. It is based on the total projected cash flow to be received from the CLO over the life of the investment. The company adjusts the effective interest rate applied when events or information about the CLO investment result in a material change to the timing and/or amount of the expected remaining cash flow.
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Consolidated Results of Operations — Nine months ended September 30, 2017 and 2016
Overview
For the nine months ended September 30, 2017, we reported net income of  $1.2 million, compared to net income of  $3.9 million in the 2016 period. The 2017 results included the results of our USCL subsidiary acquired in October 2016. The 2016 results did not include the USCL acquisition. For pro forma comparison of the 2016 results including USCL, see “Unaudited Pro Forma Financial Data.”
In the first nine months of 2017, we experienced two significant, non-recurring events:

We recorded an other-than-temporary impairment of  $1.7 million on one of our CLO investments.

We recorded a valuation allowance of  $0.4 million for non-capital losses for which deferred tax assets had previously been recognized.
In the first nine months of 2016, we experienced two significant, non-recurring events:

We recorded a one-time restructuring charge of  $0.7 million related to the relocation of our corporate headquarters from the Cayman Islands to Puerto Rico.

We recorded a one-time gain of  $2.4 million from the sale of loans in our CLO loan accumulation facility in connection with their securitization and creation of a CLO.
Revenue
Total revenue increased by $0.9 million to $16.7 million for the nine months ended September 30, 2017, compared to $15.8 million in the prior period. The increase was driven by the inclusion of USCL operations, offset by a decline of  $0.2 million in net premiums earned from our P&C underwriting, from $2.3 million in the 2016 period to $2.5 million in 2017. Investment income declined by $1.7 million, from $7.4 million in the first nine months of 2016 to $5.7 million in the first nine months of 2017. The 2016 period included a one-time gain of  $2.4 million from the securitization of loans held in our accumulation facility and creation of a new CLO described above. In the third quarter of 2017, we reduced the effective interest rates of two of our CLO Equity investments to reflect current estimates of future cash flows. The reductions were attributable to weighted average spread compression and its expected effect on future cash flows.
Expenses
Total expenses increased by $3.1 million to $15.1 million for the nine months ended September 30, 2017 compared to $12.0 million in the prior period. The increase was driven by the unfavorable increase in loss and loss adjustment expenses pertaining to the company’s participation in Lloyd’s syndicates, increase in amortization of VOBA attributable to the USCL acquisition, and amortization of deferred acquisition costs related primarily to new Life Insurance business written in 2016. We also incurred a non-cash finance charge for the future installment payments arising from the USCL acquisition. The increase in these expenses was offset by a decrease of  $0.3 million of underwriting, general and administrative expenses, which included the one-time restructuring charge of  $0.7 million for the 2016 period.
Loss and loss adjustment expenses increased by $1.7 million to $3.0 million for the nine months ended September 30, 2017 from $1.3 million in the prior period. This increase is attributable to increased provisions for loss and loss adjustment expense in our P&C underwriting, attributable to hurricanes Harvey, Irma and Maria in addition to the Mexico City earthquake. We believe that our loss experience in the first nine months of 2016 was consistent with industry experience for the period.
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Net Income
Net income was $1.2 million for the nine months ended September 30, 2017, compared to $3.9  million for the nine months ended September 30, 2016. Return on average equity decreased primarily due to the other-than-temporary impairment noted above to 1.3% in 2017 from 4.5% in the first nine months of 2016.
Book Value Per Share
Pro forma book value per diluted common share increased from $8.72 at September 30, 2016 to $9.02 at September 30, 2017, or 3.4%. The increase was attributable to growth in shareholders’ equity, as affected by our net repurchase of  $3.0 million of preferred and common shares in the nine month period ending September 30, 2016.
Consolidated Results of Operations — Years ended December 31, 2016 and 2015
Overview
For the year ended December 31, 2016, we reported net income of  $6.5 million, compared to net income of  $6.9 million in 2015. The 2016 results included the results of our USCL subsidiary for the fourth quarter only, as we completed the acquisition of USCL in October 2016. The 2015 results did not include USCL. For pro forma comparison of the results including USCL, see “Unaudited Pro Forma Financial Data”
We experienced three significant unusual or non-recurring revenue or expense items in 2016 and one such item in 2015:

In the fourth quarter of 2016, we recorded a one-time bargain purchase gain of  $1.4 million from our acquisition of USCL.

In the second quarter of 2016, we recorded a one-time restructuring charge of  $0.7 million related to the relocation of our corporate headquarters from the Cayman Islands to Puerto Rico.

In the first quarter of 2016, we recorded a one-time gain of  $2.4 million from the sale of loans in our CLO loan accumulation facility in connection with their securitization and creation of a new CLO.

In the second quarter of 2015, we recorded a one-time gain of  $4.7 million from the sale of loans in our CLO loan accumulation facility in connection with their securitization and creation of a new CLO.
Revenue
Total revenue for the year ended December 31, 2016 increased by $6.8 million to $24.5 million compared to $17.7 million in 2015. The increase was driven by the inclusion of the USCL operations beginning in October 2016, an increase of  $2.5 million in net premiums earned from our P&C underwriting, from $1.1 million in 2015 to $3.6 million in 2016. Net investment income increased by $0.6 million from $9.1 million in 2015 to $9.7 million in 2016. The 2016 year included realized investment gains of  $2.2 million, compared to $4.6 million of realized gains in 2015. The realized investment gains were primarily from securitizations of loans held in our CLO loan accumulation facility, which created one new CLO in 2016 and one new CLO in 2015. The realized gains from CLO securitizations reflect the interest earned by loans held for securitization, which we do not record as interest income, but instead record as a one-time gain at the end of the accumulation period.
Expenses
Total expenses for the year ended December 31, 2016 increased by $6.6 million to $17.9 million from $11.3 million in 2015. The increase was driven by increased underwriting, general and administrative expenses, increased loss and loss adjustment expenses related to higher
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volumes of premium earned in our P&C underwriting activity, increased amortization of VOBA and deferred acquisition costs related to our acquisition of USCL in 2016 and organic growth of new life insurance policies issued, and a non-cash finance charge related to the installment payment structure of the USCL acquisition.
Underwriting, general and administrative expenses for the year ended December 31, 2016 increased by $4.1 million to $14.5 million from $10.4 million in 2015. The increase is attributed to additional costs incurred in preparation for an initial public offering, which include increased costs for information technology, accounting and auditing, professional fees and human resources. In addition, we incurred additional costs in connection with the USCL acquisition.
Loss and loss adjustment expenses for the year ended December 31, 2016 increased by $1.3 million to $2.0 million, compared to $0.7 million in 2015. This increase is attributable to increased underwriting activity, evidenced by the increase in the volume of net premiums earned for the year. Within the loss expenses, we recorded provisions for loss and loss adjustment expenses in our P&C underwriting, attributable to multiple, non-catastrophe insured loss events. We believe that our loss experience in 2016 and 2015 was consistent with industry experience for the period.
Taxes
Income tax expenses for the year ended December 31, 2016 increased by $0.6 million to $0.2 million, compared to a tax benefit of  $0.4 million in the prior year. The increase is attributed to the company earning profits in its taxable Life Insurance subsidiary, and recording a valuation allowance of  $0.2 million for $0.6 million on non-capital losses for its taxable Business Insurance operations. We did not experience any significant change in our business mix in 2016 that would result in an ongoing, significant increase in our effective corporate income tax rate compared to prior years.
Net Income
Net income for 2016 was $6.5 million, which was $0.4 million less than the $6.9 million recorded in 2015. Return on average equity in 2016 was 7.2% in 2016, compared to 8.2% in 2015. The largest single item impacting 2016 compared to 2015 was the decrease of  $2.3 million in realized gains from our loan accumulation and CLO securitization activity. The second largest single item impacting 2016 compared to 2015 was the favorable impact of the $1.4 million bargain purchase in the fourth quarter of 2016 arising from our acquisition of USCL.
Book Value Per Share
Pro forma book value per diluted common share increased from $8.14 at December 31, 2015 to $8.99 at December 31, 2016, or 10%. The increase was attributable to net income driving growth in shareholders’ equity, as affected by our net repurchase of  $1.2 million of preferred and common shares in 2016, or approximately 1% of our average shareholders’ equity in 2016.
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Results of Operations by Segment
The following summarizes our operating income, net of tax by segment for the periods indicated. Segment information for 2014 is audited, but the financial statements are not included in this prospectus (dollars in thousands):
For the Nine Months
Ended September 30,
For the Years Ended December 31,
2017
2016
2016
2015
2014
Income/(loss) before income tax, by segment
Life Insurance
$ 4,572 $ 6,293 $ 9,839 $ 9,084 $ 2,652
Business Insurance
(593) (133) (186) (376) (120)
Corporate
(2,366) (2,345) (3,025) (2,249) (1,736)
Income/(loss) before income tax
1,613 3,815 6,628 6,459 796
Net income
$ 1,192 $ 3,924 $ 6,482 $ 6,866 $ 951
Life Insurance
For the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, the contribution of our Life Insurance segment to net income decreased by $1.7 million. This decrease was attributable to an other-than-temporary impairment of  $1.7 million attributed to one CLO investment. Total life insurance policies in issue increased by 135 individual contracts, or 69.6%, from 194 at September 30, 2016, to 329 at September 30, 2017, primarily from the acquisition of USCL. New business written in the first nine months of 2017 was similar to the business mix in the comparable 2016 period, consisting primarily of non-U.S. persons purchasing life insurance and annuity-type contracts for wealth planning purposes. We did not experience any unusual mortality rates or cancellation rates during either period.
For the year ended December 31, 2016, compared to 2015, the contribution of our Life Insurance segment to net income increased by $0.7 million. This increase was attributable to organic growth and the acquisition of USCL, offset by the decline in one-time CLO securitization gains discussed in the consolidated results. Total life insurance policies in issue increased by 132 individual contracts, or 70.6%, to 319 at December 31, 2016 from 187 at December 31, 2015. Of the total increase, we acquired 82 policies with USCL in 2016. New business written in 2016 was similar to the business mix in the 2015, consisting primarily of non-U.S. persons purchasing life insurance and annuity-type contracts for wealth planning purposes. We did not experience any unusual mortality rates or cancellation rates during either year.
For the year ended December 31, 2015, compared to 2014, the contribution of our Life Insurance segment to net income increased by $6.4 million. This increase was attributable to organic growth and the increase in one-time CLO securitization gains of  $4.7 million. Total life insurance policies in issue increased by 31 individual contracts, or 19.9%, to 187 at December 31, 2015, from 156 at December 31, 2014. New business written in 2015 was similar to the business mix in 2014, consisting primarily of non-U.S. persons purchasing life insurance and annuity-type contracts for wealth planning purposes. We did not experience any unusual mortality rates or cancellation rates during either year.
Business Insurance
For the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, our Business Insurance adversely impacted net income by $0.9 million. This decrease was driven by an unfavorable increase in loss and loss adjustment expenses arising from participation in Lloyd’s syndicates and P&C underwriting 2017 results included a provision for loans of  ($0.3) million attributable to catastrophic events occuring in September 2017.
For the year ended 2016 compared to 2015, there was an overall improvement in the Business Insurance segment as our net loss was reduced by $0.2 million. This improvement is attributed to the acquisition of 17 captive management contracts in late 2015.
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For the year ended 2015, compared to 2014, net income was adversely impacted by $0.3 million. The impact was driven by an increase in human resources as well as increased overhead costs incurred within the Lloyd’s syndicates and P&C underwriting.
Corporate
For the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, the expenses incurred by our Corporate segment were unchanged, after considering the one-time restructuring charge of  $0.7 million for the 2016 period.
For the year ended December 31, 2016, compared to 2015, the expenses of our Corporate segment adversely impacted net income by $0.8 million. This increase in expenses is attributed to additional costs incurred in preparation for an initial public offering, which include increased costs for information technology, accounting and auditing, professional fees and human resources. In addition, we incurred one-time restructuring charge of  $0.7 million related to the relocation of our corporate headquarters from the Cayman Islands to Puerto Rico for the 2016 period.
For the year ended December 31, 2015, compared to 2014, the expenses of our Corporate segment adversely impacted net income by $0.5 million. This increase in expenses is attributed to the continued costs with the restructuring of the company. These costs were primarily driven by information technology and human resources costs.
Separate account assets and liabilities
We had separate account assets and liabilities of  $1,345.9 million, $1,114.8 million and $337.8 million as of September 30, 2017, December 31, 2016 and December 31, 2015, respectively. The significant change in the separate account assets and liabilities is attributable to the USCL acquisition that resulted in an additional $555.1 million of separate account assets on the date of acquisition and subsequently increased to $729.4 million as of December 31, 2016. As of September 30, 2017, the USCL in-force book accounts for approximately 70% of the company’s separate account assets and liabilities.
Reserves for insurance liabilities
We had reserves for insurance liabilities of  $6.6 million, $3.5 million and $1.2 million as of September 30, 2017, December 31, 2016 and December 31, 2015, respectively. The significant change in the reserves for insurance liabilities is attributable to the reserves for loss and loss adjustment expenses for the company’s participation in Lloyd’s syndicates for the underwriting Years of Account 2015, 2016 and 2017. Commencing in 2015 and thereafter, the company has added one additional underwriting Year of Account. Approximately 85%, 76%, and 56% of reserves for insurance liabilities as of September 30, 2017, December 31, 2016 and December 31, 2015 are attributed to the company’s participation in Lloyd’s syndicates. In addition to the Lloyd’s syndicates, the company has reserves for insurance liabilities for several fixed annuities, which have numbered between two and three as of September 30, 2017, December 31, 2016 and December 31, 2015.
Note payable and surplus debenture
We had a note payable and a surplus debenture of  $12.1 million, $16.2 million and $0.9 million as of September 30, 2017, December 31, 2016 and December 31, 2015, respectively. The significant change in note payable and surplus debenture is the issuance of a note payable for the USCL acquisition. Under the terms of the USCL Stock Purchase and Sale Agreement, the company issued a three-year, variable principal note payable to the selling shareholder of USCL. The terms of the note require the company to make three annual payments beginning in 2017. In addition to the note payable during the fourth quarter of 2014, the company’s APCC subsidiary issued a $1.0 million surplus debenture to a shareholder. Proceeds from the debenture were used to support APCC underwriting activities at Lloyd’s for the 2015 Year of Account. The repayment amount of the debenture is linked to the final underwriting profit or loss experienced by the company for the 2015 Year of Account.
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Liquidity and Capital Resources
We manage our capital to ensure that our company including all of its operating subsidiaries has sufficient cash on hand to meet all of its contractual obligations, including expected insurance claims payments and regulatory requirements for minimum liquidity amounts. Because of the long-dated nature of our Life Insurance segment’s insurance liabilities, we are comfortable investing our surplus capital in higher risk, less liquid investments that offer higher expected returns over time than more liquid investments. Our Business Insurance liabilities are shorter-dated and less predictable than the mortality risk we assume in our Life Insurance underwriting, and as such we invest the capital supporting our P&C risk in liquid, short-dated available-for-sale investments. We also limit of our risk by underwriting through Lloyd’s, where our maximum loss exposure is limited to our Funds at Lloyd’s collateral deposit of approximately $4.0 million. We have no material P&C risk that is not fully reinsured other than our Lloyd’s exposure.
At present, our favored higher risk and less liquid type of investment for our surplus is CLO Equity. We believe CLO Equity is well-matched to our insurance liabilities because, if held to maturity, the expected returns from CLO Equity at the time of investment should approximate the actual, realized returns over the holding period. The self-liquidating characteristics of CLOs are beneficial to us because we do not need to make timely sales of appreciated investments in order to realize cash returns. When performing as expected, CLO Equity investments distribute between 15% and 20% of their stated face value per year in cash. The following table sets out our CLO Equity portfolio and historical cash distributions as a percent of stated face amount (dollars in millions):
2017
2016
2015
30-Sep
30-Jun
31-Mar
31-Dec
30-Sep
30-Jun
31-Mar
31-Dec
30-Sep
30-Jun
31-Mar
Portfolio Face Value
$ 96.4 $ 96.4 $ 96.4 $ 92.4 $ 92.4 $ 61.6 $ 61.6 $ 58.2 $ 58.2 $ 58.2 $ 27.5
Cash Distributions
$ 2.8 $ 3.7 $ 4.1 $ 3.8 $ 3.4 $ 2.7 $ 3.2 $ 3.9 $ 1.6 $ 1.6 $ 1.7
% of Face Value
2.9% 3.8% 4.3% 4.1% 3.7% 4.4% 5.2% 6.7% 2.7% 2.7% 6.2%
We have designated our CLO Equity investments to be treated as held-to-maturity under GAAP, which limits our ability to sell a particular CLO Equity investment without reclassifying the entire held-to-maturity portfolio as available-for-sale. This additional, self-imposed limitation on liquidity for our surplus leads us to hold, at times, larger amounts of cash and cash equivalents than we reasonably need for our operations.
The most likely future event that would cause us to need to liquidate our long-term investment portfolio in a short period of time is a mass human mortality event. At present, we limit our non-reinsured exposure per individual life insured to $250,000. Because we transfer most of our mortality risk to our reinsurers, the risk to our capital and need for liquidity would likely be due the insolvency of one or more of our reinsurers. One of the reasons we are raising more capital in this offering is to provide us with an additional margin of safety to allow us to remain solvent in the event of default of one of our reinsurers. We do not believe that we can remain solvent if multiple life reinsurers fail.
If we should have immediate needs to raise cash to pay insurance claims, cover a disputed reinsurance claim, or meet any other urgent, unexpected needs, CLO Equity is usually marketable and can be sold for cash within five business days in a normal market. However, during periods of market dislocation, financial crisis, or other times of societal stress, we are unlikely to be able to find a buyer for our CLO Equity investments that will pay a price that is reasonable, or pay any price at all. We will likely realize losses if we are forced to sell CLO Equity to meet unexpected liquidity needs, as the events causing our need for liquidity will likely be the same events that cause the market for CLO Equity to become illiquid.
We have commitments to pay the seller of USCL over the next three years. The present value of the estimated future payments due in satisfaction of the promissory note as of September 30, 2017 was $11.3 million. We expect to fund these payments from internally-generated cash flows,
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including quarterly distributions from our CLO Equity investments. If our CLO Equity investments stop making quarterly distributions for any reason, we will need to find alternative sources of liquidity to make the required payments. Based on our current projections of future quarterly CLO cash flow payments, we should receive amounts from our CLOs significantly in excess of the remaining USCL instalment payments. We have no material indebtedness other than the remaining USCL payments. In the future, we may obtain a revolving credit facility or bank line of credit to provide for any short-term liquidity needs. We believe that numerous banks and alternative lenders would provide us with sufficient credit to meet routine working capital needs including term financing to address the remaining USCL payments.
Insurance Subsidiaries’ Liquidity
Our Life Insurance subsidiaries have sufficient liquidity to meet obligations to policyholders, including reinsurance. We rely upon reinsurance to meet our death benefit obligations, and non-payment of death claims by one or more of our reinsurers would significantly strain the available liquidity and capital of our Life Insurance subsidiaries. All of our reinsurers are rated “A” category or better by a major rating agency. In addition to traditional reinsurance, we utilize non-traditional reinsurance that typically is provided by an affiliate of the purchaser of the policy. We believe that the non-traditional reinsurance structures are reliable and will not result in any situation where there is a claim on one side, and non-collectible reinsurance on the other. We do not hold any insurance reserves to cover any non-collectability of reinsurance.
Almost all of the life insurance and annuity policies that we issue are separate account policies, where the issuing insurance company does not make any return or liquidity guarantees to the policy owner. Almost all of our insurance contracts allow us to pay out policy assets in kind to the beneficiary, or to the owner in the event of an early surrender or cancellation. Because of this feature of our life insurance contracts, we do not face the risk of mass surrender that would require us to liquidate general account assets to fund payouts. Liquidity risk of assets held in our life insurance policies issued is borne by the policy owner and beneficiaries, not by us.
The expense and working capital needs of our Life Insurance subsidiaries is met by policy charges and fee income. For the first nine months of 2017, we recorded $6.5 million of policy charges and fee income net of reinsurance costs, compared to $5.9 million of underwriting, general and administrative expenses, generating approximately $0.6 million of cash before cash CLO distributions of  $3.5 million. We expect to continue to receive more cash fees and net policy charges in the future than the cash costs of operating our Life Insurance subsidiaries.
Business Insurance operates close to break-even on a cash basis, recording for the first nine months of 2017 $4.4 million of revenue compared to $5.0 million of expenses. In 2016, Business Insurance recorded $6.7 million of revenue compared to $6.9 million of expenses. In 2015, Business Insurance recorded $2.8 million of revenue compared to $3.1 million of expenses. In each of 2016 and 2015, we have contributed additional capital to our Business Insurance subsidiaries to fund expansion, working capital and collateral deposit needs. We also hold highly liquid investments at our two regulated P&C subsidiaries, which are available as a source of temporary liquidity in the event that we have unexpected claims or other calls on capital. We expect our Business Insurance segment to continue to operate approximately break-even from a cash point of view for the foreseeable future, as we invest in the growth of the division by hiring additional personnel and expanding our underwriting activity. If we are unable to continue to fund our Business Insurance segment’s growth with capital contributed from our holding company AVI, we will be forced to reduce our underwriting activity at Lloyd’s and may scale back our new business efforts in Puerto Rico and elsewhere. Some of the proceeds of this offering will be used to fund the growth of our Business Insurance subsidiaries.
We project that our overall capital expenditure needs for 2017, 2018 and 2019, including relocation of our Cayman Islands office and continuing investment in our Life Insurance policy administration system or PAS, will be less than $1.0 million in each year. This excludes any capital required to fund regulatory deposits for new insurance underwriting activity, over and above current levels.
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Holding Company Liquidity
AVI is a holding company whose primary liquidity needs are for corporate expenses. The primary source of AVI’s cash flow is dividends and expense allocation reimbursements from its subsidiaries, which are expected to be adequate to fund cash flow requirements based on current estimates of future obligations. As of September 30, 2017, AVI had no financial leverage.
The ability of AVI’s insurance subsidiaries to pay dividends is limited by applicable laws and regulations of the jurisdictions where the subsidiaries are domiciled, as well as agreements entered into with regulators. These laws and regulations require, among other things, the insurance subsidiaries to maintain minimum amounts of capital, and limit the amount of dividends these subsidiaries can pay without receiving regulatory approval. We believe that our insurance subsidiaries, specifically ALAC which holds most of our investment capital, have high capacity to pay dividends or return capital to AVI in amounts necessary to fund both its obligations and optional expenditures, such as acquisitions.
Along with regulation, another primary consideration in determining the dividend capacity of our subsidiaries is the level of capital needed to maintain desired financial strength ratings from rating agencies, including A.M. Best and KBRA. If we are successful in obtaining an “A” category rating from one or more of the insurance-specialist ratings agencies, we may be reluctant to utilize our dividend capacity if it would result in a downgrade to our ratings. However, if we are to obtain an “A” category rating, it will likely be awarded based on the proceeds of this offering and the additional financial resources and liquidity provided.
We intend to pay a quarterly dividend following completion of this offering and listing of our shares on the New York Stock Exchange. We may retain a portion of the net proceeds of the offering at the holding company level to partially fund future dividends in order to avoid superfluous contributions and distributions of capital to and from our regulated subsidiaries. In general, our policy is to deploy all of our surplus capital into our insurance businesses to support underwriting risk. In the future, we expect to declare dividends from the holding company to holders of our common shares when the operating performance of our insurance subsidiaries generates sufficient earnings, on a consolidated basis, to cover the dividend.
Cash Flows
Our cash flows and cash position for the periods presented below were as follows (dollars in thousands):
Nine months ending
September 30,
Year ending December 31,
2017
2016
2016
2015
2014
(unaudited)
Net cash provided by/(used in) operating activities
$ 1,556 $ 95 $ 4,607 $ 1,805 $ (8,807)
Net cash (used in)/provided by investing activities
(4,219) 1,805 2,527 3,609 (30,061)
Net cash (used in)/provided by financing activities
(2) (2,951) 3,273 (4,755) 21,213
Net change in cash and cash equivalents
(2,665) (1,051) 3,861 659 (18,195)
Cash and cash equivalents, end of period
$ 3,985 $ 1,738 6,650 2,789 2,130
Other Sources of Funding
We intend to utilize substantially all of the net proceeds from this offering to support our Life Insurance and Business Insurance operating segments.
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We do not have a corporate line of credit or other committed, unrestricted financing source available to us today. We believe that if needed, we could obtain such a facility in an amount and on terms that would be favorable to us. However, any additional funding may not be available on terms favorable to us or at all, depending on our financial condition or results of operations or prevailing market conditions. See “Risk Factors — Risks Relating to Our Investment Strategy.’’
Contractual Obligations
The following table summarizes by period the payments due for our estimated contractual obligations as of December 31, 2016:
Total
Less than 1
year
1 – 3 years
3 – 5 years
More than
5 years
Operating lease obligations
$ 1,092 $ 449 $ 523 $ 120 $
Note payable (1)
16,980 5,660 11,320
Surplus debenture
780 780
Reserves for future policy benefits
861 36 825
Reserves for loss and loss adjustment expenses
2,675 2,675
$ 22,388 $ 6,145 $ 16,123 $ 120 $    —
(1)
Payment obligations for the note payable include implied interest. Total cash payments remaining on the note payable and reported elsewhere in this prospectus are $12.8 million, which reflects the discount to present value attributable to the note payable’s non-interest bearing terms.
Recently adopted accounting pronouncement
In May 2015, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update (“ASU”) 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). ASU 2015-07 eliminates the requirement to categorize certain investments in the fair value hierarchy if their fair value is measured at net asset value, or NAV, per share (or its equivalent) using the practical expedient in the FASB’s fair value measurement guidance. The amendments in ASU 2015-07 are effective for financial statements issued for fiscal years beginning after December 31, 2015, and interim periods within those fiscal years. The company has separately identified the investments measured at NAV in the fair value hierarchy disclosure in its consolidated financial statements.
Future adoption of new accounting pronouncements
In November 2016, the FASB issued new guidance on restricted cash, ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The new guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, and should be applied on a retrospective basis. Early adoption is permitted. The new guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, the new guidance requires that amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new guidance does not provide a definition of restricted cash or restricted cash equivalents. The company is currently evaluating the impact of this guidance on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 320): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 clarifies the classification of receipts and payments in the statement of cash flows. ASU 2016-15 provides
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guidance related to (1) settlement and payment of zero coupon debt instruments, (2) contingent consideration, (3) proceeds from settlement of insurance claims, (4) proceeds from settlement of corporate and bank owned life insurance policies, (5) distributions from equity method investees, (6) cash receipts from beneficial interests obtained by a transferor, and (7) general guidelines for cash receipts and payments that have more than one aspect of classification. ASU 2016-15 is effective for public business entities for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The company is currently evaluating the impact of this guidance on its consolidated financial statements.
In June 2016, the FASB issued new guidance on the measurement of credit losses on financial instruments ASU 2016-13, Financial Instruments — Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments. The amendments in this new guidance are effective for public entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other entities, this update is effective for fiscal years beginning after December 15, 2020, and interim periods with the fiscal years beginning after December 15, 2021.
The new guidance requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial assets. The company is currently evaluating the impact of this guidance in its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which, among other things, requires lessees to recognize most leases on-balance sheet. This will increase their reported assets and liabilities, in some cases very significantly. Lessor accounting remains substantially similar to current GAAP. ASU 2016-02 supersedes Topic 840, Leases. ASU 2016-02 is effective for annual periods in fiscal years beginning after December 15, 2019, and interim periods in fiscal years beginning after December 15, 2020. ASU 2016-02 mandates a modified retrospective transition method for all entities. The company is currently evaluating the impact of this guidance in its consolidated financial statements.
In January 2016, the FASB issued new guidance ASU 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, on the recognition and measurement of financial instruments. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for the instrument-specific credit risk provision.
The new guidance changes the current accounting guidance related to (i) the classification and measurement of certain equity investments, (ii) the presentation of changes in the fair value of financial liabilities measured under the FVO that are due to instrument-specific credit risk, and (iii) certain disclosures associated with the fair value of financial instruments. The company is currently evaluating the impact of this guidance in its consolidated financial statements.
In May 2015, the FASB issued new guidance on short-duration insurance contracts ASU 2015-09, Financial Services — Insurance (Topic 944): Disclosures about Short-Duration Contracts. The amendments in this new guidance are effective for public entities for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016 and other entities have a one year delay. The new guidance should be applied retrospectively by providing comparative disclosures for each period presented, except for those requirements that apply only to the current period.
The new guidance requires insurance entities to provide users of financial statements with more transparent information about initial claim estimates and subsequent adjustments to these estimates, including information on: (i) reconciling from the claim development table to the balance sheet liability, (ii) methodologies and judgments in estimating claims, and (iii) the timing, and frequency of claims. The Company has evaluated the impact of this guidance in its consolidated financial statements and will adopt the guidance in its 2017 financial statements, in accordance with the pronouncement’s transition rules.
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In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 provides comprehensive guidance on the recognition of revenue from customers arising from the transfer of goods and services. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also provides guidance on accounting for certain contract costs and will also require new disclosures. ASU 2014-09 will be effective for public business entities in annual and interim periods beginning after December 15, 2017. The company is currently evaluating the impact of this guidance in its consolidated financial statements.
Key Operating and Non-GAAP Measures
We include certain non-GAAP measures in our results of operations because we believe that they are important to the users of our financial statements. Specifically, we use book value per diluted share because we believe it is the single most relevant key measurement of our financial performance over time, because book value per share takes into account both the performance of the business as a whole and the capitalization structure that determines the amount of the claim held on the company’s equity by each share of stock. Book value per share is a universally accepted measurement in insurance and financial services broadly, but is specifically ignored by the U.S. Financial Accounting Standards Board (FASB) Accounting Standards Codification®. The FASB Accounting Standards Codification® or Codification is the source of authoritative generally accepted accounting principles (GAAP) recognized by the FASB to be applied to nongovernmental entities. The Codification is effective for interim and annual periods ending after September 15, 2009. The Securities and Exchange Commission requires us to calculate tangible book value per share in the Dilution section of this prospectus. (See “Dilution”). We provide book value per share and other non-GAAP measures to be useful to the readers of our financial statements. These should be considered supplementary to our results in accordance with GAAP and should not be viewed as a substitute for the GAAP measures.
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BUSINESS
Overview
We are an underwriter of specialty life insurance policies for high net worth individuals, business owners and family groups worldwide. In addition, we provide P&C insurance underwriting services to small and medium-sized businesses. Our goal is to build and maintain a stable base of earnings from insurance underwriting and servicing revenue, including investment income. In our Business Insurance segment, we underwrite and service captive and other self-insurance insurance programs for clients with whom we have continuing, long term relationships. In addition to our captive insurance business, we assume property and casualty risk by participating in Lloyd’s of London syndicates. In our Life Insurance segment, we issue long-term private placement life insurance policies with stable, recurring policy charges that have predictable future loss payments based on actuarial experience. We underwrite captive insurance and PPLI because we believe these lines of business are more predictable and thus offer favorable risk-adjusted economic returns to us compared to other types of insurance business with less predictable loss experience and high rates of individual customer turnover.
Our company began operating in 1993 as a captive insurance services provider in the Cayman Islands. We entered the life insurance business in 1998, expanded captive insurance services to the United States in 2002 and life insurance to Puerto Rico in 2009. We recapitalized in 2013 to obtain balance sheet capital to support our insurance operations. Using part of the proceeds from capital raised from private investors in 2013 and 2014, we launched our CLO investment strategy managed by GSO. The company’s predecessor, AIH, was merged with and into the company in 2016. In 2016, we relocated our headquarters to Puerto Rico and acquired USCL, our largest Puerto Rico-based competitor in life insurance. We also launched our internal banking capability, AIBC, in 2015. The purpose of this offering and associated listing of our shares on the New York Stock Exchange is to raise additional balance sheet capital to support growth and to provide liquidity for investors who want to buy or sell our shares.
We are headquartered in Puerto Rico, where we operate within the International Insurance Center framework of insurance and tax laws. Puerto Rico created its International Insurance Center to induce insurance and reinsurance companies to establish operations there that they would otherwise choose to locate in traditional insurance domiciles such as Bermuda, the Cayman Islands or Switzerland. Prior to relocating to Puerto Rico in 2016, our headquarters was in the Cayman Islands, where we continue to have a significant business presence. We believe that our Puerto Rico location offers significant benefits for our business, including customer preferences for purchasing insurance from companies governed under U.S. law and the low corporate income tax rate applicable to us due to our participation in Puerto Rico’s economic incentive programs. We also believe that Puerto Rico offers competitive advantages for attracting Latin American HNWI clients because of language and historic cultural ties Puerto Rico has within the region.
We have chosen Puerto Rico and the Cayman Islands as corporate domiciles for our subsidiaries that assume insurance risk because they offer low tax rates compared to the United States and other countries. Our consolidated current income tax rate in 2016 was 2% of income before income tax and in 2015 it was 0%. In Puerto Rico, our operating subsidiaries pay corporate income tax at a rate of 4%. Our Cayman Islands companies pay no corporate income tax. Our U.S. and UK subsidiaries pay full corporate income taxes, and one of our Puerto Rico subsidiaries has voluntarily elected to pay full U.S. corporate income taxes under Section 953(d) of the Internal Revenue Code in order to exempt its clients from the federal excise tax imposed on the purchase of foreign life insurance by U.S. tax residents. Overall, we expect that absent any significant changes to tax law in Puerto Rico or the Cayman Islands, our effective corporate income tax rate in future years will be consistent with past years.
To facilitate management of our different lines of insurance business, we have three reporting segments: Business Insurance, Life Insurance, and Corporate. Business Insurance is all other revenue-generating activity, including some reinsurance for human morbidity related to accident and illness. Life Insurance includes all activity related to the provision of insurance for human
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lives. Our third segment, Corporate, administers our holding company structure and services the capital requirements of our operating subsidiaries. The segmenting of our business for financial reporting purposes is consistent with the way our board of directors oversees our activities and the organizational structure and reporting lines of our management team.
We have developed the organizational and operating infrastructure required to grow our business meaningfully. As of September 30, 2017 we had 40 full-time employees and 3 full-time consultants operating seven licensed insurance subsidiaries located in Puerto Rico (4 licensees), the Cayman Islands (2 licensees) and United Kingdom (1 licensee). We also operate one risk transfer business in the United States which is not licensed as an insurance carrier.
Including the pro forma effect of the USCL acquisition, our company generated $26.8 million of total revenue in 2016 and $21.8 million in 2015, including net investment income of  $9.7 million and $9.1 million for each year. See “Unaudited Pro Forma Financial Data.” Separate account assets, a GAAP balance sheet measurement of the volume of our life insurance business, increased from $338 million in 2015 excluding USCL to $1,115 million at the end of 2016, including USCL. Business insurance revenue grew to $6.7 million in 2016, an increase of  $3.9 million or 139% over 2015. We have grown our business recently without the benefit of a favorable financial strength rating from an insurance rating agency such as A.M. Best or KBRA. We believe that we will sell more life insurance and attract more captive insurance clients if we can obtain an “A” category rating from a respected source. We intend to apply for one or more financial strength ratings upon the completion of this offering and the contribution of most of its proceeds to our operating subsidiaries that would be individually rated.
Our insurance liabilities are backed by investments in corporate loans and CLO securities representing interests in diversified pools of corporate loans. We invest in the corporate loan asset class because we believe that the long term outlook for their performance is favorable due to (1) the security offered by their senior claim on the borrower’s assets reduces the severity of any default, and (2) the floating rate nature of interest payments reduces risk of volatility in the value of our loan investments. Because corporate loans and CLOs are self-liquidating investments and return principal to us over time, we use a buy-and-hold strategy that does not rely upon active trading of investments to deliver returns to us. The periodic cash flow we receive from our loan investments provides us with the liquidity needed to pay routine insurance claims, after amounts recovered from reinsurers. We believe that the continuing need of companies to borrow money and the secondary market for corporate loans and CLOs will provide us with multiple avenues for reinvestment of cash flows not used to pay insurance claims or otherwise use directly in our insurance businesses.
To facilitate our access to the market for loan and CLO investments, we have engaged GSO to serve as our external investment adviser. GSO also serves as Collateral manager for six of the eight CLOs we own, and would continue to manage the Collateral held within these CLOs irrespective of any termination of their investment advisory services provided to us. As of September 30, 2017 GSO managed over $99 billion of credit investments, including over $20 billion of CLOs. Our Chief Investment Officer and Chief Executive Officer have extensive experience in corporate finance, leveraged loans and CLOs that enables us to benefit from GSO’s extensive market access and investment experience, but on favorable terms compared to other insurance companies that have exclusive, long-term outsourced investment management arrangements with related parties.
We measure our success by the total economic return to shareholders as demonstrated by growth in book value per common share, plus any dividends paid. In the year ended December 31, 2016, our pro forma book value per diluted share increased from $8.14 to $8.99 or 10%. In the year ended December 31, 2015 our pro forma book value per diluted share increased from $7.79 to $8.14 or 4%. Book value per share is a non-GAAP measurement dividing total shareholder’s equity by diluted total shares outstanding as of the measurement date, taking into account the proceeds from exercise of warrants. We believe book value per share is the statistic that most closely measures our financial results for shareholders because it takes into account our net income, unrealized gains and losses in investments, and changes in capitalization from share issuance and
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repurchases. We manage our business with the goal of growing book value per share over time by: (1) selecting underwriting risks that we expect to deliver total premiums and fees paid to us that exceed direct administrative costs and paid losses to policy beneficiaries; (2) purchasing investments with predictable timing and amount of cash flows that match the liquidity needs of our underwriting businesses; and (3) locating our underwriting activity and investments in places where our tax expense is lowest.
We are raising capital because we believe that we can grow book value per share at a faster rate and with less risk than if we continue with the amount of capital we have as of now. A more substantial capital base should allow us to increase our underwriting revenue by helping us attract new clients, and to retain profitable insurance risks that we would otherwise reinsure. New capital should also improve our potential to receive a favorable financial strength rating from A.M. Best or KBRA. See “Use of Proceeds.”
Global Private Wealth Trends
The number of HNWIs globally continues to grow. We believe that many individuals and family groups that have recently acquired significant liquid wealth or that will become wealthy in the near future will adopt wealth planning strategies that address one or more commonplace desires of HNWIs and family groups, including:

Desire to emigrate to the United States.   Many newly wealthy individuals or children of wealthy individuals in emerging market nations seek to emigrate to the United States. Our PPLI policies are highly useful to both protect family-owned assets during and after the emigration process, and may minimize the tax impact of becoming subject to U.S. federal income tax on global-source income.

Desire to manage risk and protect assets.   Individuals and families who attain HNWI status, as opposed to those who inherit wealth, usually take steps to minimize the risk of losing HNWI status. Our PPLI policies and captive insurance strategies may help HNWI families and business owners manage a broad range of risks, including risks of confiscation or legal expropriation of financial assets. In particular, PPLI and captive insurance may provide a legal and tax compliant framework for positioning wealth in jurisdictions where it is not subject to seizure and is not exposed to double taxation.

Desire to maintain privacy.   In many countries, public knowledge of HNWI status causes personal security risks including kidnapping and ransom, and financial risks including theft, extortion, blackmail, and imposition of extralegal taxes. Because our PPLI policies are subject to privacy laws and requirements, and allow the family members who create and control wealth to structure its transfer to successive generations without immediate disclosure to recipients or third parties, we believe many HNWI individuals will seriously consider utilizing insurance as a prominent feature of their wealth planning.

Desire to legally minimize personal taxes.   In general, people who obtain wealth prefer to pay the minimum required amount of tax on economic gains creating their wealth, and subsequent taxes on income generated by the financial assets which denominate the wealth. Also, in locations that impose a direct tax on financial wealth in addition to income taxes, many individuals seek to legally avoid having the value of their financial assets eroded by wealth taxes. PPLI and captive insurance are widely recognized as legal and substantive wealth planning techniques, and have favorable tax treatment in many jurisdictions. As tax loopholes and avoidance structures are eliminated or made less effective by new laws and regulations, PPLI and captive insurance should have less competition from other structural alternatives.

Desire to legally minimize corporate taxes.   Many HNWIs and family groups hold their wealth through ownership of operating businesses. These businesses may often reduce their current tax burden through provisions of applicable tax laws by using self-insurance
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techniques such as captive insurance. We believe that insurance structures such as captive insurance companies managed by a reputable service provider such as us that underwrite true insurance risk will continue to be used by companies owned by HNWIs and family groups.

Desire to avoid offshore domiciles.   Historically, many HNWIs have utilized financial institutions and/or corporate structures located in island and other domiciles including Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Guernsey, Isle of Man, Jersey, Liechtenstein, Malta, Monaco, Panama and Switzerland to hold their financial wealth. Some of these domiciles have fallen out of favor with many HNWIs because of bad publicity and association with money laundering activities of corrupt government officials, political officials and business executives. We believe that insurance structures such as PPLI issued by a reputable insurance company located in a U.S. territory do not have the stigma associated with corporate structures in certain other offshore domiciles.

Desire for simplicity and structural transparency.   We believe that many HNWIs prefer simplicity in their wealth planning strategies when offered a choice between various wealth planning alternatives. Compared to complex trust and corporate structures, we believe PPLI can be perceived as straightforward and transparent. We have observed HNWIs selecting PPLI as a replacement for opaque corporate layers and multiple trust structures, with associated high operational costs and unknown risks of future taxation and anti-privacy trends.
Industry Trends and Opportunities
Within our industry, our strategy is to grow our business by offering insurance products and services that have favorable demand outlooks and by competing with larger companies that have structural obstacles or legacy business that reduces their ability to respond to market demand. We have designed our business in response to the overall insurance industry environment today and for the direction that we expect it to follow in the future. Specific insurance industry trends that we observe, and our plans to take advantage of those trends, include:

Growing Demand for Insurance-based Wealth Protection Products.   We believe that the growth in the number of HNWIs globally will result in increased demand for captive insurance management services and PPLI products because we anticipate that HNWIs will increasingly pursue insurance-based solutions for risk financing, risk transfer and estate planning purposes. Rising tax rates and lower interest rates have meaningfully reduced the amount of after-tax investment income earned by owners of capital, which combined with volatile stock market performance has caused investors to seek alternative strategies to manage their business ownership interests and financial investments. We believe that our PPLI products are ideally suited to meet this growing demand.

Growth of Captive Insurance.   Captive insurance companies are now entering their fourth decade of widespread acceptance as a standard business practice in the United States, and risk financing benefits provided by captive insurance are being adopted by small and mid-size companies that previously would not have considered using a captive insurer. According to industry data sources, the number of captive insurers worldwide increased from approximately 4,000 in 2002 to approximately 7,000 in 2016. We expect future industry growth to come from continuing penetration of captives into corporate risk management programs, especially for smaller and medium-sized companies. We believe that our efficient operating platform and high levels of client service will allow us to compete successfully with larger, more established competitors to win management and services business for newly created captive insurance companies.

Conditions Favoring New Market Entrants.   Many of the largest companies in the insurance industry have been and continue to be severely challenged by the effects of the financial market crisis of 2008 and the ensuing low interest rate environment that has reduced their investment income. Large competitors are selling lines of business, or
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exiting certain businesses altogether. We believe consumers of insurance products and services who have previously relied on company size or credit ratings are now more selective, and are willing to consider well-capitalized new companies with more transparent balance sheets than is typical of the large established companies. We believe that our simplified capital structure, absence of legacy liabilities, and ability to provide asset segregation and other collateralization of our liabilities to our clients will help us to gain business from clients who would otherwise purchase insurance products and services from larger, more established companies.

Low Interest Rate Environment.   A key component of any insurance business is the investment returns earned on the company’s reserves and surplus. The ongoing low interest rate environment has increased the economic cost of insurance because of the reduced benefit from low-risk or risk-free investments such as investment grade corporate and government bonds. In addition, downgrades in credit ratings of many government issuers, including the United States, highlight the increased relative risk of holding government bonds in an insurance company portfolio. This creates an opportunity for companies such as us with a differentiated investment strategy to outperform companies choosing to, or required to, continue with traditional insurance company investments. We believe that our CLO investment strategy is capable of outperforming traditional insurance investments over a multi-year time period, which will support the growth of our insurance business without requiring dilutive capital raises or lowering underwriting standards to earn incremental premium, which may lead to higher future loss expense.

Global Competition in Corporate Tax Rates.   Many companies now recognize the benefits of choosing headquarters locations and corporate domiciles in low-tax countries. More companies of all sizes are operating globally, with operations, customers, suppliers and shareholders spread across many different nations. High corporate tax rates in the United States have led companies to relocate to other, lower-tax jurisdictions, or to manage their non-U.S. revenue and income to minimize their U.S. corporate income tax liability. We believe that our Puerto Rico domicile will help us to compete with other companies located in high tax areas, as we will be able to offer broadly similar products and services at a lower all-in cost to the client.

Preference for Investment Transparency.   Investors in financial services companies and financial services products have experienced unexpected losses due to fraud or risks that were not visible to investors, or in some cases to company management. Investors in large banks and insurance companies are unable to know, with certainty, what risks the companies are taking based on public disclosures. In order to understand the risks associated with a particular investment or investment product, and to protect against potential fraud, investors are choosing companies and products with high levels of transparency and in the case of investment products, security of the invested assets. We believe that our simplified capital structure, focused investment portfolio and segregated asset custody arrangements for our captive insurance clients and PPLI policies will continue to be attractive to our existing and potential clients.
We intend to take advantage of the growing acceptance of our core insurance products and underwriting services offerings among our prospective c