As a younger lad, Lancashire Group was in my orbit, I believe by virtue of the Corner of Berkshire and Fairfax forum that I used to frequent back then. Lancashire was the small kingdom of a one Richard Brindle, somewhat a legend in the industry. The group followed the simple, and common strategy, of writing paper when pricing was good and the less common strategy of returning money to shareholders when pricing was bad. Brindle exited Lancashire in 2014 to “retire” and sell all his shares only to reboot publicly only six months after his non-compete expired on January 1, 2015. His reboot was named Fidelis and it stayed private for the better part of eight years, receiving equity and sidecar co-invest funding from large institutional investors.
Brindle watched and keenly understood how General Partner (GP) and MGA / MGU businesses traded versus balance sheet investors and balance sheet insurers. To get his PE investors some liquidity without selling the MGU at a discount to his perceived idea of true value, he took the balance sheet part of Fidelis public in 2023. The structure is similar to other publicly traded PE balance sheets that are externally managed by PE GPs. Think BBU, CODI, etc. The fees the balance sheet pays the MGU include ceding commissions, management fees, and carry. The publicly traded Fidelis balance sheet (called Fidelis Insurance Group or FIG) basically eats a steady diet of Brindle underwritten paper from Fidelis MGU. The MGU is also taking on other “star” underwriters by giving them a seat, capital, and admin support allowing them to focus on trading. Does this sound familiar to the pod shops that are all the rage these days? In my opinion, it rhymes.
In any case, FIG was slated to go public at book value, roughly speaking. The range was adjusted downwards as IPO conditions were rocky, appetite to pay up up for an externally managed vehicle was (and is) low, and incentives were (and are) unclear. Pricing cleared around 80c on the book value dollar with existing investors pulling out of the offering and the company was left as the only seller of about $100m in primary equity. After its second earnings report as a public company, the stock dropped to ~$12 as premium growth softened.
Its mission is 12-15% (shocker) net returns to equity (post-fee) through the cycle. Currently it is printing high teens [adjusted] ROE in the face of a very hard P&C market. The reasons one invests in FIG are simple. You believe that Brindle cares about FIG’s success, will write good paper, and pass on bad paper. You believe that there may be an extended hard market. You believe that he will return capital when things get soft. And last, you believe you’re getting compensated for the fee arrangement through purchase at 65% of book value. That’s it.
It remains to be seen if this entity can trade at a healthier multiple to book value, especially given the fee arrangement. Furthermore, there is substantial equity overhang from existing investors that likely need to get out as limited life funds near end of life. Last, while Brindle’s very direct guidance that he and the entity exist to make money above all, that includes issuing shares at FIG at a discount to book if the math on the paper pencils positive. Said differently, FIG will likely issue at 65% of book if it can price slugs of paper at sufficiently high prices.
Nothing is guaranteed. Investing is best when one’s interests cross with some form of value, and in this case, I was probably destined to own Fidelis at some point. That time came sooner than expected, time to buckle up for the ride.