Fidelis Insurance is expected to price its NYSE IPO well below the marketing range later on Wednesday amid investors' reluctance to pay up for its unorthodox "bifurcated" corporate structure.
A syndicate led by JP Morgan, Barclays and Jefferies told accounts the offering of 17m shares in the Bermuda-based insurer/reinsurer was likely to price at US$14.00, down from the US$16-$19 indicative range set at launch last week.
Even so, the offering is well-oversubscribed with demand from long-only investors, including insurance specialists, according to syndicate sources.
Fidelis' IPO is timed with a so-called "hardening" industry cycle as rising insurance premiums underpin strong underwriting profits.
Yet a large component of the offering (11.3m shares or two-thirds of the shares offered) represents secondary selling by private equity backers, among them Crestview Partners, CVC Capital Partners, Goldman Sachs' investment unit and the Abu Dhabi Investment Authority.
But a more concrete source of pushback is Fidelis' first-of-its-kind split corporate structure whereby the company going public is providing the balance sheet/capital for a separate underwriting operation led by founder and insurance veteran Richard Brindle.
The underwriting business, known as a managing general underwriter (MGU), is not part of the IPO but will collect commissions and management/performance fees from Fidelis in return for managing its insurance exposures. Fidelis wrote US$3bn of gross premiums last year and US$1.2bn in the first quarter of this year.
“In any situation where there is an external management arrangement, whether it’s a mortgage REIT or an equity REIT or specialty insurance, there are going to be questions around alignment of interests," a banker in the underwriting syndicate said.
“With Fidelis, you are betting on management by extension – Brindle is highly esteemed, but you’re getting exposure to his underwriting expertise indirectly."
At the top of the range, Fidelis would command a market capitalisation of up to US$2.2bn. The expected pricing outcome means Fidelis will come to market at around 0.8x the company's estimated book value of US$17.10 per share.
In the roadshow for the IPO, Brindle said the novel structure would allow him to focus on underwriting rather than day-to-day management of a broader insurance business.
“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.
Fidelis argues the MGU (which also 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 annualized 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, though one risk is that high returns attract competing capital and ultimately bring premiums back down.
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.
Fidelis shares are scheduled to debut on the NYSE on Thursday.