Seeing the sharp market downturns of recent months, the management of Formula Insurance Solutions (FIS) was deterred from submitting a prospectus for an Initial Public Offering on the NASDAQ. However, company chair Yaron Polak, who took office about two years ago when Genesis first invested in the company, says that the NASDAQ launch is only a matter of time. If the markets recover in the near future, and the company decides to get the prospectus out of the drawer, it could raise $ 50 million at a company value of $180 - $200 million. “I don’t want the company to be floated in a small stock exchange, I want a proper issuance. We checked out the possibility of floating the company in London, but we prefer to issue in the United States”, says Polak. “An issuance, it should be borne in mind, is not only money, it is also currency that will enable us to acquire companies.
“The financial services field is a field I greatly developed as CEO of Ness Technologies”, explains Polak, who served in that position for about eighteen months, until May 2001. “Today I am competing with Ness”, he notes. “I took office as active chairman in order to provide the company with support and expand its activity by means of acquisitions. We have recently been in touch with four companies that are potential acquisitions, two of them being American companies, we but preferred to wait. We may wait until going public to acquire a company, and we may make the move prior to the initial capital-raising round”.
Formula Insurance Solutions (FIS) was founded in 1984 by CEO Eyal Hakner, and co-CEO Zeev Alon, who is seen as the company’s predominant technological leader. The company currently has a payroll of about 350 employees, 170 of whom are in the UK, eight in Israel and the remainder in France, Australia, Spain and other countries. FIS engages in the development and marketing of software systems for the insurance industry. These systems support all stages of life insurance, including pension and health insurance. The company’s flagship product is the ALIS system, which enables insurers to manage and administer life insurance, pensions, investment and superannuation products, for individual and group clients. It offers full life cycle management of life insurance policies and pension insurance of all types, as well as an investment management system: group pension and risk insurance coverage and personal pension and risk coverage. “An important advantage of the system that we sell is that it accommodates very many requirements without rewriting a fund. We have a product generator with principles that can apply regulatory changes and adapt products”, Polak explains.
Burgeoning revenues
Polak’s connection with Genesis began when Polak invested his own personal funds in Genesis, and he now serves as a venture partner in the fund. He initially took office in FIS in order to promote the company’s issuance and expand business activity, which focuses on mainly three countries: the UK, Israel and France. The UK is responsible for sales in South Africa and Australia, Israel is in charge of activity in Greece and France directs all operations in Central Europe.
The company’s principal shareholder is Formula Vision, which acquired 50% of the company in 2000. Its holdings were diluted to 38% following an investment by venture capital funds Genesis and Giza, which, in 2002, invested some $9 million in the company at a value of $30 million before money. This investment on the part of the funds secured them holdings of 15% and 9% respectively (Genesis invested $5 million and Giza $3 million). The remaining shares are held by Clal Insurance (19%) and the founders’ group headed by Hakner (19%). “The negotiations for the entry of Genesis and Giza lasted about a year, reaching a conclusion when Danny Goldstein realised that the funds had to be given preference shares in consideration of their investment. The investment was made when the shares of commercial public companies started to lose altitude, and we have since levelled out”.
According to figures quoted by FIS and having their source in Datamonitor, the IT market volume of the insurance world may be expected to reach $50.7 billion by 2005. Of that amount, $ 24.5 billion will flow from insurance companies and other elements in the industry, to external entities. The software niche, on which FIS is focused, is expected to amount to some $ 1.98 billion.
In the year the funds started investing in the company, FIS recorded sales of $ 21 million. A year later, it was posting a profit of $1.5 million with a growth rate of 47% in revenues, up to $31 million. In the first half of 2004, the company’s operational profit margins amounted to some 7% of income, at $22 million, and the company is expected to wind up the year with sales of $46 million and to continue to grow at an accelerated rate, bringing it to revenues of some $ 70 million in 2005. The company’s profit margins are expected to amount, this year, to 7% of revenues ($3.2 million), and the company has set itself the target of posting profits margins of 12% of revenue in the future. We would point out that the company’s revenues derive principally from activity in the UK, where it has succeeded in positioning itself well among a number of leading insurance companies, and its results are affected by changes in the rate of exchange.
Gross profit margins in 2003 amounted to 44% and are expected to rise to 52% in 2004. The volume of spending on research and development amounted lasted year to 18% of sales (some $5.6 million) and is expected either to increase or to remain unchanged this year.
Reluctant to sell
According to Polak, the company is free of debt, and its revenue mix consists of 35% licenses, 35% assimilations and 30% repeat services to customers. The price of packages offered by FIS is a function of the number of policies held by the customer, and not the number of users. In a typical project of ALIS, that takes between nine and eighteen months, the company puts in some $1.5 - 6.5 million as licensing fees and assimilations in a volume of $2.5 to $5 million, while sundry post-assimilation costs amount to $ 0.5 million to $3 million. “The company has some $9 cash in hand and 70% of anticipated revenues is already present in the orders backlog. We operate in the field of financial services, and customers in England come to us naturally. Investors on the NASDAQ like this, and they like to see a correct mix of license selling, and sales of additional services”, Polak says.
Polak explains that an average system is sold to the customer at some $10 million and includes modules that are suitable for all requirements of the insurance field: the administrative handling of agents, collection, billing, commissions, policies, re-insurers, customer management, claims and other modules. “Insurance companies developed a new system and thought it was giving them a competitive edge. But today, they understand that it is not a matter of a unique system providing added value”, Polak explains. FIS customers include insurance giants such as AXA, Fidelity Investment, Swiss Life, Merrill Lynch, and also Israeli insurance companies such as Menorah and Phoenix.
"Globes": Why did Genesis take the decision to go into the company when it was already fairly mature?
Polak: “The investment in FIS, does, in fact, represent an investment in a company at a late stage; but it was a correct move at its time. In difficult times, a fund may invest at reasonable values in companies that are at a relatively advanced stage”.
"Globes": Have you been approached by competitors wanting to acquire the company?
“It would not suit us to be acquired, and the company’s concept is not to be sold”.
"Globes": Who are your chief rivals?
“There are several companies operating in the field and a few niche players. Noteworthy among the public companies are CSC of the United States, which is considered a dominant player, and offers various packages, Sunguard of the UK, and Marlborough Stirling. Worth noting among private companies are Navisys and AdminServer of the United States and Tacit of New Zealand”.
Published by Globes [online] - www.globes.co.il - on Thursday, September 09, 2004