Brindle & McConachie back with $2B Fidelis re/insurance hybrid

Richard Brindle, ex-CEO of Lancashire Holdings, is set to return to re/insurance with Fidelis Insurance, employing a hybrid model looking to extract the best from both the underwriting side of the market and the hedge fund reinsurance model.

Update 10th June 2015: Fidelis Insurance Holdings launched after a successful $1.5 billion capital raising, including $650m from private equity investors Crestview Partners, CVC Capital Partners, and Pine Brook. Brindle commented; “We are very excited to introduce a new, stronger model to the insurance industry with Fidelis.”

It’s been reported that Brindle was going to come back to insurance and reinsurance with a new start-up venture, after he retired from Lancashire almost a year ago, but now Artemis can provide more details on Fidelis and the unique hybrid strategy it intends to follow thanks to a pitch book recently seen.

Fidelis Insurance Holdings Ltd. is a Bermuda based company founded by Richard Brindle, who will be CEO, alongside Neil McConachie, also a founder of Lancashire, who will take on the CFO role. McConachie was President at Lancashire until 2012 and previously worked for Montpelier Re as Treasurer and Chief Accounting Officer.

Fidelis Insurance Holdings Limited was actually registered in Bermuda last August, showing how long this strategy has been in development, while another entity Fidelis Insurance Bermuda Limited, which we assume to be related, was registered in February 2015.

Brindle and McConachie have been closely tracking the evolution of the insurance and reinsurance business model and in particular the asset side of the business and the hedge fund backed strategy.

The resulting business model that Fidelis will follow features “an innovative structure to tactically shift capital between insurance and investments based on prevailing market dynamics.”

Fidelis will follow a total return strategy, so bringing underwriting profits together with asset returns, to offer investors a return that will seek to outperform its peers and maximise the return on equity across both underwriting and investment market cycles.

On the underwriting side Fidelis will underwrite both insurance and reinsurance risks, with a focus on specialty classes of business where its team has significant experience, Lancashire itself a prime example of a successful specialty insurance and reinsurance business.

On the asset side of the business model, Fidelis is partnering with Goldman Sachs AIMS unit. AIMS stands for Alternative Investments and Manager Selection and that hints at perhaps the most impressive features of the Fidelis Insurance Holdings business model.

Instead of being tied to a single asset manager, as is typical of the hedge fund backed reinsurer strategy, Fidelis will use managers as a way to manage the cycle and match the investment strategy and income more closely with underwriting cycles and liabilities.

Fidelis is seeking to raise $2 billion for its launch and already has three key seed investors lined up to take 25% of the common equity. Those three are private equity specialists Pine Brook, Crestview and Oaktree, all of which were backers of Brindle and McConachie when they founded Lancashire.

The three core investors, Pine Brook, Crestview and Oaktree, all have significant sums deployed into insurance and reinsurance businesses already, so it’s clearly an industry they appreciate, as well as a long track record in financial services investing.

Fidelis is raising capital more widely now, with two fund structures set up to allow investors to access its common equity, Fidelis Investors LP and Fidelis Investors Offshore LP.

Fidelis aims to make the most of the structurally changing reinsurance market and aims to represent an evolution of the traditional insurance and reinsurance strategy, by providing a consistent total return across the underwriting cycle.

The strategy will see the re/insurer seek to optimise its balance sheet across both underwriting and asset sides, allowing it to allocate capital where it can provide the best return and better match assets to liabilities.

A flexible investment strategy using multiple asset managers will allow Fidelis to tap into the strategies that best suit certain portions of its book, while also allowing it to maximise return generation. The model may also allow Fidelis to allocate more capital to investing at times when the insurance and reinsurance cycle becomes less conducive to underwriting.

The aim will be to generate a relatively liquid investment portfolio using a number of managers selected through Goldman Sachs AIMS services. This will add diversification to the portfolio, allow the strategy to be dialed up or down, in terms of risk, and give Fidelis access to whatever managers it can agree terms with, we understand the terms negotiated to date are very attractive and include discounts.

There will be the potential to exit the strategy in 3 to 5 years “at an attractive multiple of book value” through an IPO if market conditions are right. The strategy looks set to ensure that as long as pricing and conditions don’t worsen significantly more in insurance and reinsurance, its total return strategy and diversified approach to a hedge fund strategy should guarantee that as an opportunity.

Fidelis believes that the legacy insurance model fail to optimise shareholder returns, given the focus tends to be on either assets or liabilities. At the same time traditional insurers and reinsurers face difficulties due to low fixed income investment returns.

Fidelis will focus on achieving attractive returns on both the asset and liabilities side of the business, and with both sides being diversified it should be able to better protect itself against financial market impacts that using a single asset manager could result in.

Fidelis believes that as a result it has the only insurance and reinsurance strategy that will be focused on specialty risks, be able to allocate to multiple asset managers and that will have the ability to dynamically switch its hedge fund allocations, as well as add or remove managers it works with.

As a result it expects its returns to be optimised throughout the insurance cycle as well as through the cycle of financial market ups and downs. That’s a pretty compelling prospect for investors who like the returns possible from re/insurance, who also appreciate the total return model but who want something more consistent, with less chance of a downside (if the strategy is executed well).

Fidelis will likely return capital to investors using dividends, as is typical in a total return model and as Lancashire was very well-known for. However, given the flexibility on the asset side the firm will also have the option of adding even more return by retaining capital in its asset strategies, up to a certain level of capitalisation after which returns would be required.

The pitch book makes a compelling case and the way this hybrid insurance, reinsurance, hedge fund model is put together, as well as the founding team members, will be very attractive for investors.

Interestingly, Fidelis believes the re/insurance market is being to show signs of a turn, citing the expectation that re/insurer earnings have been artificially buoyed by low losses and reserve releases, that M&A activity signals a potential shift and that a return to more normal loss levels would also point to a turn in pricing. Fidelis also believes that the M&A activity in reinsurance could provide it with opportunities.

Fidelis wants to raise its capital now and get launched so as to build relationships and a track record to be ready for any turn in the market, as well as to benefit from market share that becomes available due to consolidation trends.

It will target underwriting primary insurance, specialty insurance and reinsurance and quota share business, where it feels the pricing has been under less pressure and it has significant management experience. Lines of business will likely feature energy and marine, property risks, aviation, political risks and terrorism, as well as whole account quota share business. It will also seek to take advantage of low reinsurance pricing in order to protect its own portfolio at attractive pricing.

In a soft underwriting market, as we see today, Fidelis will add more risk on the investment side allocating to hedge fund strategies. When the re/insurance market turns it will use its dynamic investment allocation model to dial back the risk and shift assets into safer classes such as fixed income.

This model puts Fidelis between the traditional re/insurers and the hedge fund re/insurers, but with the ability to move closer to one group or the other, to adjust strategy, depending on the market conditions at the time.

Interestingly the pitch book shows that Fidelis expects to work with asset and hedge fund managers such as Blackrock, York Capital, Orange, Omega, Seminole and Crabel Capital. Of those managers Crabel already has its own reinsurance vehicle, while Blackrock is of course working with ACE on ABR Re.

For the others, working with Fidelis Insurance Holdings will provide them with a route to benefit from insurance premium float as a source of new capital, an attractive opportunity, which should make signing up new asset managers an easier job for Fidelis.

Leveraging Goldman Sachs AIMS platform will provide important asset management considerations such as risk monitoring and due diligence. While Fidelis expects to be able to negotiate preferential fees with asset managers, who will no doubt be keen to work with the re/insurer.

Fidelis has already identified a CEO for both its UK and Bermuda operations, according to the pitch book, although these remain unnamed. Brindle himself will be the Chief Underwriting Officer for the insurance and reinsurance group.

No doubt Fidelis Insurance Holdings will generate a lot of buzz as it nears its launch. With the capital raise underway its assumed that Fidelis will target getting up and running maybe as quickly as the mid-year renewals, in fact the pitch book explains that getting up and running as soon as possible is the target.

Fidelis could be a disruptive force in the insurance and reinsurance market if it chooses to leverage its flexible and dynamic asset strategy in order to lower its overall cost of underwriting capital. That could give it an edge over others, as well as boosting the total return to its investors.

The re/insurer will not be immune to market forces though and the fact that insurance-linked securities (ILS) and other investors are increasingly targeting specialty risks will not have gone unnoticed by the founders. As that trend increases, the chances of the specialty re/insurance market remaining softer increases with it.

But that is where the total return strategy and ability to increase the risk and return on the asset side, almost on demand, will seek to ensure that Fidelis remains a strong performer for its shareholders and seed investors.

As hybrid business models continue to emerge in insurance and reinsurance it is also set to ramp up the pressure on incumbents. Start-ups like Fidelis Insurance could disrupt a number of legacy players, as it grows into the specialty underwriting space, especially if the asset side becomes a tool it chooses to wield to lower its cost of capital and increase its competitiveness.