Following the announcement that Bermuda-based re/insurer Fidelis will delegate its underwriting authority to newly created Fidelis Managing General Underwriter (Fidelis MGU), S&P Global Ratings has revised the re/insurer outlook to stable from positive.
As Fidelis is delegating all its underwriting to Fidelis MGU and that Fidelis Balance Sheet Companies will exclusively depend on Fidelis MGU to produce its premiums, S&P has reassessed Fidelis’ competitive position and lowered it to satisfactory from strong.
The rating agency believes this underwriting arrangement will limit Fidelis Balance Sheet Companies’ competitive position in the market.
Additionally, S&P said that after the restructuring, the operating expenses will increase because of the fixed and variable fees paid to Fidelis MGU, which could reduce Fidelis Balance Sheet Companies’ margins and further solidify our view of a satisfactory competitive position.
The rating agency has also affirmed its ‘BBB’ long-term issuer credit rating on the holding company as well as its ‘A-‘ long-term issuer credit and financial strength ratings on Fidelis’ three core operating subsidiaries.
S&P said: “The stable outlook reflects our view that Fidelis will sustain its redundant capitalization at the ‘AAA’ confidence level through 2024, and maintain strong risk controls, while implementing robust checks and balances regarding its relationship with Fidelis MGU.”
S&P is not the only rating agency that has reacted to Fidelis underwriting separation. Moody’s has previously said that this separation has execution risk potential as it is an untested process and adds to the complexity of risk management at the insurance group.
The new separate entities, S&P explained, will benefit from keeping the existing experienced management teams. However, both will have their own separate and independent management teams and governance structures.
Fidelis Balance Sheet companies will enter into a multi-year binder agreement with Fidelis MGU, delegating underwriting authority across all business lines. The binder services will be provided on a two-way right of first offer such that Fidelis Balance Sheet Companies will have the first opportunity to accept the business written by Fidelis MGU.
Similarly, Fidelis MGU will have the first opportunity to use the available capital of Fidelis Balance Sheet Companies, S&P added. There will be no material change to Fidelis Balance Sheet Companies’ capitalization or its risk profile in terms of either the business written or the investment assets it will hold.
S&P noted that raising their ratings during the next two years would be unlikely, this is because of the corporate underwriting structure, which is limiting the competitive position.
