Fidelis tests IPO investors with exotic structure

IFR 2489 - 24 Jun 2023 - 30 Jun 2023
5 min read
Anthony Hughes

Fidelis Insurance is testing the limits of the tentative US IPO recovery – which so far rests on one success – by launching a US$323m NYSE offering with a bold corporate structure that splits the Bermuda-based reinsurer's balance sheet from its underwriting function.

Less than a week after restaurant chain Cava reignited animal spirits in the depressed new issue market by doubling on debut, Fidelis was one of three companies to launch a US IPO at the start of the week in anticipation of a listing before the end of the month. Kodiak Gas Services and second-hand clothing retailer Savers Value Village are challenging deals in the current climate, with both raising funds to finance special dividends to their private equity owners, but Fidelis is bringing a new corporate structure to market.

Its offering is timed to tap into a so-called "hardening" cycle, with rising insurance premiums underpinning strong underwriting profits.

Yet a large component of the deal is secondary selling by private equity backers and the company is coming to market with a novel bifurcated structure never tried in an insurance IPO.

The structure will see the public company provide the capital to enable a separate unit to underwrite insurance policies. The unit, known as a managing general underwriting platform, will be led by 39-year Lloyd's of London veteran and Fidelis founder Richard Brindle.

Fidelis last year wrote US$3bn of gross premiums and it will pay sizeable fees and commissions to the underwriting unit, which is not part of the IPO.

Brindle's MGU platform will collect up to 10% commission on insurance originated for the public company, as well as a 3% portfolio management fee and a 20% share of returns on underwriting above a 5% hurdle.

JP Morgan, Barclays and Jefferies are leading the sale of 5.7m new shares at US$16–$19 each and 11.3m from selling shareholders, including Crestview Partners, CVC Capital Partners, Goldman Sachs' investments unit and the Abu Dhabi Investment Authority. The sponsors also hold stakes in the MGU platform.

At the top of the range, Fidelis would command a market capitalisation of up to US$2.2bn. The middle of the range is broadly in line with Fidelis’ estimated post-offering book value of US$17.10 per share, whereas the sector trades at about a 20% premium to book.

The offering, expected to price on Wednesday, comes shortly after reinsurance heavyweights Everest Re and Renaissance Re raised more than US$1bn from follow-on stock sales.

Perverse outcome

Brindle, who will not sit on the board of the public company, told an industry publication last year that the structural separation of the Bermuda-based reinsurer meant that “nobody feels like they’re getting screwed”.

In the roadshow for the IPO, Brindle said the structure would allow him to focus on underwriting rather than day-to-day management of a broader insurance business.

"We suffer from a perverse outcome in this industry, as in many other industries, that the better you are at something in your 20s and 30s, the less you do of that in your 40s and beyond,” he said.

“It’s very true of the insurance industry. You get people who are very good at underwriting and then as they move through their careers they do less and less of underwriting.

“One of the main drivers of the bifurcation of the Fidelis companies was to allow me the time and space to do what I do best, which is underwriting,” he said.

Poor performance

It is unclear whether this line of reasoning will pass muster with investors still skittish about the poor performance of most IPOs in recent years.

They have also historically seen mixed returns from overly engineered structures that involve significant fee leakage. One investor said he expected some price sensitivity in the order book but noted it was early in the process.

Fidelis CEO Dan Burrows told investors that Brindle was “one of the most renowned underwriters in the industry” with an enviable track record of returns.

CFO Allan Decleir said in the roadshow that the MGU platform (which has a 9.9% shareholding in Fidelis) has “strong economic incentive to achieve the highest return on equity possible for Fidelis”.

In the first quarter, Fidelis delivered a combined ratio of 79% (implying significant underwriting profitability) and posted an annualised return on equity of more than 20%.

Those numbers reflect sustained premium increases in the property-exposed catastrophe market and in speciality lines such as political, terrorism and aviation, the risk being that high returns attract competing capital and ultimately bring premiums back to earth.

But Brindle told investors he expects the sector to remain capital constrained for the foreseeable future due in part to rising claim costs and climate change.

"Very sophisticated investors … are just bored with being approached for capital by startups deploying the old-fashioned … models, which have nothing to say about climate change and the last six or seven years of extraordinary weather," he said. "I simply don’t think those people have the credibility to raise any capital.”