Fidelis can cut property reinsurance in hard market, pivot faster into specialty

Fidelis will trim property reinsurance while  doubling down on bespoke and specialty covers as it chiefly seeks to “pivot quickly to the most attractive opportunities” in a fast-moving marketplace to capture lines suffering heavy dislocation, management is telling would-be investors in the company.

“We are planning to take advantage of reinsurers’ increased bargaining power in such hard market to reduce our aggregate exposures,” management of outlook in its early pre-IPO documentation. They expect the hard property reinsurance market will further continue into 2024.

That’s not the same as an outright ban on property. Fidelis has a long list of “significant market opportunities” – a set of lines where rate has been driven by outsized losses for cat-surprised rivals – and gladly named property catastrophe, property direct & facultative, specialty markets such as aviation, marine, energy and select contingency and casualty markets.

In place of property re, capacity will be funnelled to bespoke and specialty where Fidelis feels its wields “a nimble approach” for capturing the margin inherent in dislocated sectors quickly. Expect Fidelis to seek to deploy “significant line sizes” which could “allow us to be a ‘rate maker’ rather than a ‘rate taker’,” management said.

Given the current outlook, that will push the bespoke segment to limit its growth in traditional mortgage products and focus instead on lines such as intellectual property, political violence, political risk and transactional liabilities.

In the specialty insurance segment, rates in the aviation market should continue to gain following losses from the Russian invasion of Ukraine. Rates for property direct and facultative underwriting should harden further following losses from Hurricane Ian, management said.

Casualty remains comparably anathema. Fidelis sees reserve deficiencies across the industry and heavy claims threats and stands behind its decision to avoid traditional casualty classes such as general liability, financial lines, directors and officers, and errors and omissions.

Moves to date in those directions have notably altered the book in 2022. Gross written premium rose 8% for the year, masking major changes in portfolio structure. GPW rose by 44% in specialty to $1.61 billion and 33% in bespoke to $783 million, all offsetting a 44% decline in reinsurance as the group turned away from property re.

Growth in specialty followed dislocation “across almost all lines and subclasses,” especially in loss affected areas. Marine and aviation classes were called out for dominant gains. Growth in bespoke was led by intangibles and contract frustration lines of business. The decline in reinsurance was put to property in North America in Japan.

As a result, the target segments of bespoke and specialty accounted for 87.2% of the portfolio by net written premium in 2022 and management “expect to see continued market hardening across most lines.”

Together with adept underwriting choices and “prudent” capital management that may include an increase in underwriting leverage over time, Fidelis expects operating return on equity at 13 to 15%, management said of its vows to pending shareholders.

Everywhere you read, Fidelis is counting heavily on the talent and market speed of its partner stable of MGAs which it spun off from its group earlier in 2023 ahead of the pending IPO.

Sides have exclusive agreements for underwriting on a rolling 10-year term involving fees at 11.5% of net premiums written of open market business, 3% on NPW outsourced to third-party MGUs, a profit commission of 20% of the operating profit generated on the sourced business, subject to a 5% ROE hurdle rate and a portfolio management fee of 3% of NPW of the business sourced by Fidelis MGU.

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