Fidelis raises $1.5bn, launches hybrid underwriting/investing reinsurer

by Artemis on June 9, 2015

Fidelis Insurance Holdings is launching, after a $1.5 billion capital raise, as a hybrid insurance and reinsurance firm seeking to balance the underwriting and investment side of the business in order to generate a total-return that outperforms the market.

The launch of Fidelis Insurance Holdings has been a much-anticipated event as the re/insurer has generated a significant amount of interest, both due to the pedigree of its founders and its hybrid business model.

In terms of its founders, CEO Richard Brindle is particularly well-known for his founding of Lancashire Holdings, while alongside him is Neil McConachie, who was also a founder of Lancashire and takes on the CFO role at Fidelis.

Brindle commented on Fidelis’ successful capital raise and launch announcement today, saying; “We are very excited to introduce a new, stronger model to the insurance industry with Fidelis.”

He went on to explain what he sees as some of the issues with the legacy traditional insurance and reinsurance model and why Fidelis will adopt this hybrid approach.

“By focusing on either assets or liabilities, legacy insurance models have failed to optimize shareholder returns, and the low returns generated by fixed income investments have been challenging,” Brindle explained.

The hybrid strategy will see the firm operating a specialty insurance and reinsurance underwriting model out of its base in Bermuda, as well as an investment-oriented approach which will seek to outperform single manager hedge fund reinsurers.

Fidelis will leverage a panel of investment managers, largely those considered hedge fund managers, and will seek to outperform on the asset side of the business through careful selection and mixing of managers, with an ability to allocate more capital to either underwriting or investment, depending on market conditions.

“Fidelis will pursue a total return strategy by tactically shifting capital and risk between insurance and investments to maximize our return on equity across market cycles,” Brindle continued.

In this way the total-return model will see Fidelis seek to take advantage of opportunities on both sides of the traditional insurance and reinsurance business model. Looking to its underwriting opportunities when rates and market conditions dictate that allocation there is the best use of its capital, and to the asset management side when it will generate the best return.

Brindle explained that he sees this as a good business model for the future of the insurance and reinsurance industry, helping to reduce volatility in returns and getting away from the legacy issues which many re/insurers are currently suffering due to depressed interest rates and financial market returns.

In fact Brindle hopes others will follow the Fidelis approach, which is likely guaranteed to happen given the interest in investment-oriented reinsurers right now. He commented; “We hope that others follow this model, as we strongly believe it will be very good for the industry, resulting in more responsible and less volatile underwriting.”

It’s an interesting statement. Having more flexibility on the asset side of the re/insurance business will take away the urge to deploy capacity into underwriting and also the need to consistently return excess capital to investors. Fidelis will be able to channel those funds into investment when the underwriting cycle is less attractive to it.

Of course the happy medium of making the best of both sides of the business at all times is no doubt the real target, but the flexibility in the business model will be a key attribute and could be the element that helps the re/insurer to outperform its peers, as it hopes to do.

When news originally came to light about the plans that Brindle and McConachie had for Fidelis it raised a significant amount of attention, given their pedigree and the strategy which is seen as bringing together solid underwriting with the best of asset management.

The capital raise targeted up to $2 billion for the launch and has now raised $1.5 billion at the time of the launch announcement. According to reports capital raising is ongoing and Goldman Sachs, tasked with marketing the insurance and reinsurance venture to investors is said to still be adding to that total.

Goldman Sachs also has a larger role in the ongoing business of Fidelis, as the hybrid re/insurer will leverage the investment banks Alternative Investments and Manager Selection (AIMS) service. The AIMS service will enable Fidelis to effectively swap in and out asset or hedge fund managers that it chooses to work with. More detail on this can be found in our previous article on Fidelis.

The aim of working with a manager selection platform is to be able to more actively manage the asset side of an insurance and reinsurance business. It will enable Fidelis to gain diversification benefits for its portfolio, dial up or down the risk on the asset side as it sees fit, and give Fidelis access to whatever hedge fund or investment managers it chooses to agree terms with.

On the underwriting side, Fidelis will focus on underwriting specialty insurance and reinsurance business, across lines which to begin with will principally be focused on property, energy, marine and aviation risks.

Fidelis Insurance Holdings aims to put to work “an innovative model to optimize both the underwriting and asset sides of the balance sheet,” according to its launch announcement today. It cites its “approximately $1.5 billion of equity capital” that it raised as “one of the largest industry capital raises ever,” which the company says “immediately makes Bermuda-based Fidelis an important new underwriter in the global market.”

And underwriting remains the core focus, Brindle explained, saying; “We are first and foremost an underwriting company. We have a vastly experienced management team that is strongly supportive of the traditional broker distribution network and has, over decades, developed many strong broker and client relationships. These relationships will sit at the heart of everything we do at Fidelis.”

Founding investors in Fidelis are various funds of private equity firms Crestview Partners, CVC Capital Partners, and Pine Brook, which all have financial services expertise including reinsurance and between them have invested a combined $650 million of the total raised.

Principals from all three private equity managers have backed some of the Fidelis team at their previous companies, including at Lancashire. Individual investors, family offices and institutional investors contributed the rest of the capital raised, which consists of both preferred and common equity.

On the investment side, Fidelis will allocate its capital to top-tier investment and hedge fund managers with more diverse strategies that it believes are well-suited to different parts of its book. The key ability to change managers and allocations will be at the core of the investment strategy and will allow Fidelis to react swiftly to market movements and opportunities it identifies.

Chief Investment Officer of Fidelis Edward Russell will manage the re/insurers investment portfolio under the direction of the firms Investment Committee, working closely with Goldman Sachs and its AIMS group.

“In addition to seeking returns that outperform peers, we believe the diversification in assets will protect Fidelis against financial market volatility better than a single-manager strategy would,” explained McConachie.

“Optimizing across hard and soft underwriting markets, as well as through different investment cycles makes Fidelis not only a strong new player, but also very attractive for investors looking to reduce downside risk,” he stated.

Fidelis intends to begin underwriting immediately and we’d imagine also allocating to the investment managers it has selected for its launch panel of partners.

Rating agency A.M. Best said today that it has assigned a financial strength rating of A- (Excellent) and an issuer credit rating (ICR) of “a-” to Fidelis Insurance Bermuda Limited (Fidelis). At the same time the rating agency assigned an ICR of “bbb-” to Fidelis’ holding company, Fidelis Insurance Holdings Limited and a debt rating of “bb” to its $292 million 9% cumulative preference shares due 2050.

A.M. Best commented on the “excellent projected risk-adjusted capital position, prudent business plan and knowledgeable management team” of Fidelis.

Partially offsets to these positive rating factors are “the start-up nature of the company, the investment risk associated with the company’s alternative investment strategy, as well as the competitive conditions and excess capacity in the reinsurance marketplace that may challenge the execution of the business plan,” Best said.

A.M. Best is always a little cautious with any re/insurance business plan that includes a more active or alternative investment strategy and notes Fidelis’ “elevated risk profile that could adversely influence the company’s risk-adjusted capitalization.”

Mitigating these concerns, however, is Fidelis’ “prudent underwriting leverage” as well as the planned “diversified, multi-manager investment strategy” that are detailed in its business plan.

The Wall Street Journal interviewed Brindle and interestingly the WSJ says that Fidelis could have as much as 90% of its capital “invested in hedge funds” when underwriting conditions are not as attractive, or conversely investing 90% in risk when the re/insurance market allows.

We’re not certain on those figures, whether they are indeed the level of flexibility with funds that Fidelis believes it could have, but they could raise eyebrows given the discussions of active conduct and ratios of underwriting to asset management, with respect to hedge fund reinsurance strategies.

Whatever the numbers around its flexible approach to deploying capital are, it’s certain that this hybrid model, if operated in a prudent manner, could be extremely compelling.

Brindle told the WSJ that “The problem with most of the legacy players is they operate with one hand tied behind their backs.” He said that Fidelis would target returns in the high-single digits from its investment managers, which compared to the very low returns traditional players seek makes the potential out-performance of a total-return strategy clear to see.

However the strategy works out, in terms of capital devoted to underwriting versus investing, Fidelis is going to be an extremely interesting company to watch develop over time. It sets a new bar for the hybrid business models that are often discussed in start-ups and asset manager circles.

With so many asset managers keen on the reinsurance industry we could see others seek to emulate this through partnerships. However it is often much harder for an existing firm, with a long-held business plan and a rating, to adjust its business model so drastically. It is perhaps easier for a start-up to achieve.

Fidelis Insurance Holdings has a first-mover advantage here and is likely to generate a lot of attention from all corners of the insurance, reinsurance and insurance-linked investing markets.

Also read: Brindle & McConachie back with $2B Fidelis re/insurance hybrid.

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