Fidelis Insurance Holdings Limited

ladies and gentlemen good morning and welcome to the fidelis insurance holdings third quarter and first in nine months 2023 earnings conference call as a reminder this call is being recorded for replay purposes following the conclusion of formal remarks the management will host a question and answer session and instructions will be given at that time Participants are asked to limit themselves to one question and one follow-up during the Q&A session. With that, I'd now like to turn the call over to Jillian Benson, Group Head of Reporting. Ms. Benson, please go ahead.

Good morning, and thank you for joining us to discuss Fidelis Insurance Group's 2023 third quarter earnings results. With me today are Dan Burrows, our CEO, Alan DeClaire, our CFO, Johnny Strickle, our Chief Actuarial Officer, and Ian Houston, our Chief Underwriting Officer. We will start with prepared comments by Dan and Alan, and then we will take your questions. Before we begin, I'd like to remind everyone that certain statements in our press release and discussed on this call do constitute forward-looking statements under federal securities laws within the meaning of Private Securities Litigation Reform Act of 1995. we intend our forward-looking statements to be subject to the safe harbor created thereby. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. These risks and uncertainties are described in our IPO Perspectives dated June 28 and filed with the SEC. Although we believe that the expectations reflected in forward-looking statements have a reasonable basis when made, we can give no assurance that these expectations will prove to be achieved. Consequently, actual results may differ materially from those expressed or implied. For more information, including on the risk and other factors that may affect future performance, investors should also review periodic reports that are filed by us with the SEC from time to time. Management will also make reference to certain non-GAAP measures of financial performance. The reconciliations to US GAAP for each non-GAAP financial measure can be found on our current report on Form 6K furnished to the SEC yesterday, which contains our earnings press release and is also available on our investor relations website at investors.fidelisinsurance.com and on the SEC's website. With that, I'll turn it over to Dan.

Thank you, Gillian. Good morning, everyone, and thanks for joining us today. We have spoken in the past about how our unique business model, capabilities, and expertise allow us to be nimble and opportunistic and generate consistent, compelling performance. This was evident in our third quarter and year-to-date results. On a year-to-date basis, we have delivered an annualised operating ROAE of 17.7% and a combined ratio of 82.4%, demonstrating continued superior underwriting returns. We remain focused on writing a short-tail portfolio across our three pillars, specialty, bespoke, and reinsurance, preserving underwriting integrity while adapting to market conditions and the broader macroeconomic and geopolitical landscapes. We leverage our relationship with Fidelis MGU to strategically capture underwriting opportunities, and we are focused on allocating capital to the areas that deliver the best risk-adjusted returns. From a macro perspective, we believe that the market remains robust and will provide opportunity to deliver attractive returns for the foreseeable future. We expect continued duration across the portfolio, in addition to compound year-on-year rate increases already achieved over the last five years. Market dynamics continue to be fueled by loss activity, with $100 billion of NatCat losses recorded so far in 2023. which we believe is beginning to look like the new expected annual aggregate of losses. This has been compounded by sustained capital constraints with no new significant capital injections into the industry. We will continue to take advantage of the opportunities these factors will create. The leverage created through our leadership and relevance to clients enables us to deliver superior underwriting margin, deploying our significant line size to take advantage of differential pricing in an increasingly verticalized market. I will now give a brief highlight of our performance and strategy across our three pillars. Compared to prior year, gross and premiums for the nine months up to September 30th increased 15% to $2.8 billion. Strong top line growth has been coupled with compelling bottom line profitability. Combined ratio improved year on year, from 101.6% to 82.4% for the first nine months, and our year-to-date annualised operating ROAE is 17.7%. Our growth in 2023 continues to be driven by our specialty insurance portfolio, where following years of compound increases across multiple lines of business and a continued momentum in pricing, we were able to leverage our market lead position, scale on lie size, to achieve favorable participation on targeted accounts. Year-to-date gross written premium is up 46% in the specialty segment, with property DNF a significant driver, with RPIs of over 140% for this class, as demand and pricing in the vertical remain robust. Specialty now represents 65% of year-to-date gross written premium versus 51% for the first nine months of 2022. We continue to focus as a specialty and bespoke insurance carrier where we see the best returns in the current market environment. While bespoke was down on the quarter year over year, we remain confident in this pillar of our business over the long term. Our lead position, along with the non-recurring nature of contracts, allows us to be particularly selective. This segment is more insulated to traditional insurance market cycles than specialty and reinsurance. And the deal flow is impacted by underlying transactional activity and sensitivities to economic and geopolitical trends. Given the lingering concerns around the current environment, we are deliberately taking a measured approach within this segment, assessing deal dynamics. This is a strategy we have deployed successfully before, where in 2020, we took a similar approach when COVID created uncertainty in the market. The portfolio performed well and enabled us to take advantage of opportunities as market conditions changed. Our strategy is to operate nimbly across our three pillars to achieve the best risk-adjusted returns as demonstrated by the company's overall strong year-over-year growth, and we remain well-positioned to respond to any change in conditions. Finally, in our reinsurance portfolio, we continue to experience favorable rating and have been able to maintain year-on-year gross weight and premium levels despite significant optimization and repositioning of the portfolio in line with our view of risk. We continue to carefully manage our capital deployment, managing volatility and exposures with targeted participation on select programs and in select geographies. Premium levels in this space have been significantly rate-driven with a year-to-date RPI of 168%. Overall, we delivered another quarter of profitable underwriting by focusing on risk-adjusted returns across the portfolio while leveraging the momentum established in the first half year to deliver significant year-on-year growth. A strong market position across our lines of business means we can achieve differential pricing and terms, and our expertise across underwriting and capital management enable us to opportunistically navigate the market and respond to prevailing conditions in conjunction with our partners at the MGU. Our relationship enables the MGU to fully focus on current underwriting opportunities. I've asked Richard Brindle, Chief Executive Officer and Chairman of Fidelis MGU, to join us for a pre-recorded segment to outline his views of the market and to provide commentary during this critical time of year.

Thank you, Danny, and can I start by saying how delighted I am to be here at your invitation. As statistic companies, we work very closely together. The NGU is now laser focused on the underwriting and origination functions, and I'm able to spend 90% of my time on underwriting. The great results for the quarter demonstrate that we can continue to deliver top-tier performance under the new model. It is worth mentioning our daily underwriting calls. We have pretty much every deal of any consequence comes through one of the daily underwriting calls where we take a multifaceted decision on the risk in the room. Just diving into the different areas of business a little bit, property treaty and CAT, the frequency of floods and convective storm losses, as well as wildfires from Canada to Hawaii, Portugal to Australia, even Hurricane Hillary in California, continues to reflect the increased and ongoing impacts of climate change. Clients impartially in response to this are looking to buy more limits, both in the US and Europe, and our ability to offer private layers helps secure our places on programs. Pricing, we anticipate, will continue to improve, and this is driven by the lack of any new capital coming to our industry. By seeing risk before peers and with substantial capacity to deploy, we not only get the better allocation that I talked about before, but we get better pricing, terms and conditions, and overall metrics. This monetizes our ability to shape deals and work with our clients and brokers to secure the maximum participation. This also allows us to cross sell lines of business with brokers and clients. Our bespoke book, not a regular, predictable schedule of business. There are longer station periods to closure on deals, but the client base is very sticky and the business is very profitable, as you will see from the results. We did hold back a couple of years ago as inflation and rising interest rates became a factor for the first time in many years. And we think that was the right thing to do. A lot of people were talking at that time about a major global recession. And I think we should all be honest and say we didn't know how that would shake out. So we felt it was prudent to hold back. We've had great success with our Pernix political risk and credit Pinewalk sell. And high hopes for the next bespoke Pinewalk MGA, which is a tasker. That's a partnership with a market leader in aviation finance, which further cements our position as a go-to market for these kind of solutions. So finally, before I take up too much time, as we look forward into 2024, it is very notable that despite strong pricing across many segments of the market that we ride, there is no sign of new capital coming into the market in any meaningful way. The old view that the cycle responded to large losses followed by clean years just doesn't hold up anymore. The market is on track for another $100 billion loss year for caps without a major hurricane loss or earthquake. as increasing atmospheric moisture and temperatures drive increased frequency and severity of the secondary perils. It is clear that climate change is changing our market. The market will remain hard in many areas, and we will continue to lead that market as thought leaders, price makers, not price takers, and we will continue to respond to capacity dislocations in our nimble and unique manner. Thank you very much.

Thanks, Richard. I'll now turn to Alan to walk through the financial results in more detail.

Thanks, Dan, and I'd also like to welcome everyone to our third quarter earnings call. Please note that while we began trading in the New York Stock Exchange on June 29th, the IPO and our primary capital raise of $100 million did not close until the 3rd of July, and as such, the IPO results are reflected in our third quarter results. As Dan touched on, we had a very strong third quarter performance with net income of $88 equating to 74 cents per diluted common share. For the first nine months of 2023, we had net income of $1.9 billion, or $16.82 per diluted common share. As a reminder, in the first quarter, we recognized a net gain on distribution of Fidelis MGU of $1.6 billion. Excluding this one-time accounting gain, our net income for the first nine months of 2023 was $265 million. The third quarter of 2023, our operating return on average equity was 17.6% on an annualized basis, compared with a negative 18.4% in a prior year period. For the first nine months of 2023, our operating return on average equity was 17.7% on an annualized basis, compared with a negative 2.8% in the prior year period. Turning to our gross premiums written, We had $593 million in the quarter compared to $688 million in the third quarter of 2022. The change in the quarter was primarily related to bespoke, as Dan described earlier. Both the specialty and reinsurance segments remained consistent in the third quarter compared to the prior year period. For the first nine months of 2023, we had overall gross premiums written growth of 15% to $2.8 billion compared to the same period in 2022. The significant growth in our gross premiums written was primarily from our specialty segment, which grew 46% to $1.8 billion. The increase relates to improved pricing as well as new business. The largest premium increases were in our property DNF, marine, and aviation and aerospace lines of business. This year-to-date growth was partially offset by our bespoke segment where gross premiums written were $367 million in the first nine months of 2023 compared to $573 million in the prior year period. In the reinsurance segment, gross premiums written remained consistent at $610 million in the first nine months compared to $605 million in the prior year period. We have been able to take advantage of the improved rate environment and terms and conditions while moving away from attritional levels of our exposure. As you recall, we've intentionally taken a cautious and opportunistic approach to deploying capital and reinsurance by focusing on top tier students and risks that meet our required pricing hurdles. When looking at net premiums, net premiums written were $313 million in the quarter compared to $495 million in the third quarter of 2022. with the change again due to the bespoke segment. Net premiums written increased by 11% to $1.6 billion for the first nine months of 2023, primarily driven by the increase in gross premiums written in specialty. On a net premiums earned basis, our premium earned increased 18% to $510 million in the third quarter of 2023 and by 21% to $1.3 billion for the first nine months of 2023. The growth was a result of our decision to take advantage of opportunities, particularly in our specialty lines of business. Our strong performance resulted in our combined ratio improving to 85.4% for the third quarter of 2023 from 120.5% in the prior year period and to 82.4% for the first nine months of 2023 from 101.6% in the first nine months of 2022. The improvement was a result of a decrease in our loss ratio as a result of lower catastrophe and large losses for both the quarter and year-to-date periods. Despite another quarter of increased loss activity for the industry, we have seen a significant reduction in our year-on-year losses. Our total catastrophe and large losses were 76 million, of which 21 million related to wildfires in Hawaii in our specialty and reinsurance segments, with the remainder related to other loss events in various lines of business, including energy, credit and political risk, marine, and aviation and aerospace. This compares the third quarter of 2022 catastrophe and large losses of 238 million related to Hurricane Ian and the Ukraine conflict. For the first nine months of 2023, the total catastrophe and large losses were 140 million, which included losses related to the Sudan conflict, severe convective storms in the U.S., the Hawaii wildfires, Cyclone Gabriel in New Zealand, and smaller loss events in various lines of business. This compares to catastrophe and large losses in the first nine months in 2022 of $382 million related to Hurricane Ian, the Ukraine conflict, European storms, and Australian floods. It has been an active year and we are pleased with the measures taken to optimize our portfolio demonstrated by our superior combined ratio. Moving on to our prior year reserve development, we had net favorable prior year development of $43 million and $48 million for the quarter and first nine months of 2023 versus $3 million and $18 million in the prior year periods. The last reserve development in 2023 was primarily attributable to favorable development on Hurricane Ian and favorable attritional loss experience across our reinsurance and bespoke segments. Moving on to expenses across all of our segments. Policy acquisition expenses from third parties were 151 million or 29.6 points of the combined ratio for the quarter. compared to 113 million or 25.9 points of the combined ratio in the prior year period. For the first nine months of 2023, policy acquisition expenses from third parties were 378 million or 28.5 points of the combined ratio compared to 263 million or 24.1 points of the combined ratio. Our policy acquisition expense varies over time depending on our business mix. Our Fidelis MGU commissions were 71 million, or 13.9 points of the combined ratio for the quarter, and 147 million, or 11.1 points of the combined ratio for the first nine months of 2023. The MGU commission relates to seeding, portfolio management, and profit commissions agreed as part of the framework agreement with Fidelis MGU effective from January 1, 2023. Our general and administrative expenses were $22 million or 4.3 points of the combined ratio for the quarter, a decrease from $59 million or 13.5 points of the combined ratio in the prior year period. For the first nine months of the year, general and administrative expenses were $57 million or 4.3 points of the combined ratio, a decrease from $136 million or 12.5 points of the combined ratio. The decreases were primarily related to the reduced headcount following the consummation of the separation transactions. Combined FIDELIS MGU commissions and general and administrative expense ratios are in line with our expectations as set out in the noted framework agreement and our operating model. Turning now to investments. Our strong results reflect net investment income of $33 million for the third quarter of 2023, compared with $11 million in the prior year period. For the first nine months of 2023, our net investment income was $81 million, compared with $24 million in the first nine months of 2022. These increases were primarily due to increases in interest rates during 2022 and 2023. With the short duration nature of our portfolio, means that we are reinvesting at higher rates. During the first nine months of 2023, we invested $2 billion in fixed maturity available for sale securities with an average investment yield of 5.1%. We remain conservatively positioned and our strategy allows us to prioritize taking risk on the underwriting side of our balance sheet. Turning to our balance sheet and financial condition, Our book value per diluted common share was $18.25 at September 30, 2023, an increase of 12.4% from the adjusted book value per diluted common share following the separation transactions, which was completed on January 3, 2023. The increase was a result of net income and net unrealized gains reported in our other comprehensive income. To conclude, I'm very pleased with our superior financial performance in the third quarter and through the first nine months of the year. I will now turn it back to Dan for additional remarks.

To echo Alan, I'm pleased with the results for the quarter and, importantly, the first nine months of the year, where we outperformed on our key metrics of combined ratio, ROAE, and gross written premium growth. As market dislocation and the challenging risk environment persists, Our ability to deploy capital and the experience and expertise of underwriting talent in a constrained market puts us in a strong position. Whilst we see significant growth potential in the current market, we are strongly aligned with the MGU in our underwriting philosophy, with both parties focused on delivering underwriting profitability across the cycle to preserve the bottom line. We continue to evaluate the best areas to achieve risk-adjusted returns across our three pillar portfolio, with the ability to be opportunistic in response to market dynamics. As we consider the balance of the year, we are well positioned with significant year-to-date growth driven by the specialty market environment and a strong pipeline of opportunity in front of us. Persistent hard market conditions, in addition to already achieved compound increases, continue to present an attractive specialty marketplace, with our leads positioning major product lines such as property DNF, marine and aviation, allowing us to achieve differential pricing, terms and conditions, and capture significant rate increases, which results in above market terms. This forms part of our underwriting advantage, which helps differentiate us from our peers. In Bespoke, we are still seeing a strong pipeline of future opportunity. and we continue to evaluate this portfolio on a case-by-case basis, in line with the economic and geopolitical environment and deal dynamics. The portfolio is strategically important to us, and whilst there may be fluctuations quarter to quarter, we remain focused on our long-term view of the opportunity, and the nimble approach our lead positioning and expertise allow for. And in reinsurance, we continue to capitalize on favorable market dynamics, deploying capacity at targeted levels without increasing portfolio exposures or compromising our view of risk. The Fidelis Insurance Group strategy remains consistent. To proactively manage and allocate capital to opportunities, to maintain financial strength, to continue to be nimble and target areas of growth, and to focus on profitable underwriting. Our approach remains disciplined, and we continue to demonstrate our ability to create value for shareholders through our platform, which ensures a strong balance sheet and a prudent approach to capital management and investment return to deliver results across both top and bottom line. I'm proud of the talented team of 80 individuals we have brought together at the insurance group. With a wide range of expertise, our performance is only made possible through their commitment and dedication to our business. Now I'll turn to the operator for your questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchstone phone. You will hear a three-tone prompt acknowledging your request. Should you wish to decline from the polling process, please press star followed by the number two. Before we take your questions, I'd like to remind everyone to please limit yourself to one question and one follow-up. With that, our first question comes from the line of Matt Carletti from JMP. Please go ahead.

Hey, thanks. Good morning. Dan, last quarter, there was some talk of, you talked a bit about some of the Russia-Ukraine, you know, exposure and your reserving philosophy, so on. Since then, there's been some what seem like major developments. I'm referencing the AIRCAP settlement and a couple other follow-ons. Can you just update us on kind of your view of that exposure, particularly in light of those developments?

Yeah. Thanks, Matt, and good morning. Thanks for joining us. Good morning. Yeah, I think fundamentally we take – we monitor that situation and I think we see a trajectory that's in line with our expectation. Obviously, three or four negotiations between operators and lessors have come with a positive result, and that long-term has an effect on the exposure to the market. So whilst there's no definitive answer we can give you yet, I think we're just very pleased with the trajectory, and we'll continue to monitor.

Okay, great. And then one other, if I could. I was hoping you could just kind of dig into specialty a little bit more and just, you know, give us your updated thoughts on, you know, there's lots of various lines of business in there, um, you know, but kind of where you see the greatest opportunity, um, and then maybe just remind us of, you know, where, where those renewal dates fall. So in other words, in the coming quarters, you know, where you might, you know, have the most opportunity because there's a lot of seasonality in that business.

And, and, and, you know, Thanks for that question. Specialty, as you know, is the biggest pillar within the portfolio. It's driven primarily by three lines of business, which is direct property, DNF, marine and aviation. I think when we look at the property DNF, which is the biggest component, that is a portfolio that revolves across the year. There are some key renewal dates, 1-1, 1-4, mid-year, but there is a regular flow and a regular pipeline throughout the year. Marine and aviation are probably a little bit more seasonal when we look at aviation that's heavily loaded towards Q4 and marine more around 1.1 although again it does revolve throughout the year but there's a lot of business at 1.1 so when we think about specialty and growth you know year to date or year over year we're up 46% we're 26% ahead of our plan so very pleased with that portfolio that pillar but you know opportunities to grow in marine and aviation are really coming up in the next couple of quarters. What we see is compound increases over the last four or five years. We have seen no signs of softening in that market. Quite the contrary, we're continuing to see increases, improvements in terms and conditions. So very, very pleased with the performance. As you say, you look at our combined ratio year to date, and that's heavily driven by the specialty pillar. Lots of opportunity, very big pipelines, so we can see continued growth in the future in that pillar.

Thanks, Dan. Appreciate the call.

Thanks, Matt.

Our next question comes from the line of Mayor Shields from KBW. Please go ahead.

Great. Thanks, and good morning. This is an operational question, I guess, in bespoke. It sounds like it's less about pure deals coming to you and more about

uh concerns about rate adequacy and i was hoping you could take us through what actually happens when uh you've worked on a deal and your sense is that it's not priced adequately how often does that translate into a better price deal how often does it just go away uh that's a great question i think you know when we when we take we look at the pillar you know we don't manage that on course of the quarter it's a long-term view as we do with our whole portfolio it's a long-term view through the cycle but it's particularly important when looking at bespoke You have to have a long-term view. So Perspoke is also more sensitive than any other pillar to geopolitical and economic landscape changes. So we take a very deliberate and measured approach to how we underwrite that book of business. What we can say, and I think Richard said it in his remarks, when we think about COVID, we had a similar approach and COVID was probably the ultimate stress test on the portfolio. Certainly when we think about aviation financing and that came through with flying colors. So it validates all of your assumptions. We have a high hurdle rate for bespoke. We're just not willing to compromise that in any way for top line growth. It's all about bottom line profitability. And that's how we manage the underwriting process. I think it's a really good demonstration of the alignment between the MGU and the insurance group. They could write for top line growth. But between us, we kind of reset the hurdle. That will evolve as the dynamics change. And that's all about projecting the bottom line profitability and underwriting integrity. So another great kind of demonstration of the alignment of the two structures together.

Okay. That's very helpful. And just a quick follow-up on aviation. I guess we have a sense that it's fourth quarter heavy. Is there any approximation of how much of the aviation market actually is renewed in the fourth quarter? Yeah.

So the airlines is a Q4. There are some manufacturers that we knew in the middle of the year, but it's the majority of the major airline fleets, both the globals and the national, you know, the regional carriers.

Okay, perfect. Thank you so much.

Our next question comes from the line of Tracy Bengigi from Barclays. Please go ahead.

Thank you. My first question relates to your decline in gross written premium year over year, which is mostly driven by bespoke. I appreciate both, Dan, your commentary and Richard Brindle's pre-recorded commentary on bespoke. And I get this business is lumpy, but Dan, I'm intrigued by your comment that you're deliberately taking a measured approach given the lingering concerns around the current environment. It is not clear to me if that was a Fidelis decision or an MGU decision. I'm just trying to get a sense if this is an example.

of your right of first refusal yeah Tracy we always look to collaborate as you know and as we've explained before you know we do on the daily underwriting calls so we're involved from the very beginning uh when deals are sourced you know how they're going to be structured how they're going to be underwritten so it's very collaborative that is a joint decision um so you know Richard you know really really wants to protect the integrity of the underwriting You know, the PC is very important to them. So it's all about bottom line profitability. But neither part is here to grow top line just for the sake of it. It's all about bottom line profitability.

Okay, so it's a collaborative decision. Yeah, absolutely. Okay, great. All right. Year over year, your underlying loss ratio deteriorated, and I get part of that as business mix. While you sounded upbeat about pricing, Can you contextualize if any of this deterioration is due to maybe a more narrow spread of pricing versus loss trends?

I wouldn't say, Tracy, it was a narrowing of the spread between pricing and loss trends. I think we tend to look at it over a longer time period. So if you look at the year-to-date run rate, we're pretty much in line year-on-year. This quarter last year was particularly low on the attritional side. We also tend to focus on the overall loss ratio. And there's a number of reasons for that. I mean, if I look at the difference between prior year development and current year, to kick that off, on the attritional side, we tend to hold classes around our plan expectation for the current year, unless something there made us increase, really. So it really can only go up on the current accident year, typically. And then what you get is all the favorable development will come through the next year as prior year development. So for me, on the attritional side, you really need to put the current and prior accident years together to get a view of that. I appreciate you can't get that split currently in what we report. Moving over to attritional versus CAP, there's a couple of points there. One is mix. I mean, mix does impact us more than some others because we're a nimble company, so it's constantly changing. And if I give some live examples of how that impacts attritional versus large split, If you think about a war account, that would have a very low attritional run rate, but more loading towards the large side. And if you compare that to an airline's account or marine hold, that would have a much higher attritional run rate. So the mix between those different lines, even within a single pillar, such as specialty, can change how attritional versus large looks. In addition, as the actuals come through, I mean, we often see some quarters with... we often see some quarters where we have two medium-sized losses and no large losses, which makes the attritional look inflated when compared to the large and cap. And if one of those increased a bit, then it would flip over and the story would be the other way. So while I think you can look through the buckets at this level of detail over a longer time period, it's something that we expect some variation on quarter to quarter for those reasons.

Could you, because you mentioned it, can you define your threshold for large losses?

Yeah, Tracy, it's Alan. We currently don't define that. I think for there is a clue in the fact that we have disclosed that hurricane, sorry, the wildfires in Hawaii are 21 million. So that's a threshold that you can think about in terms of what we disclose is not cut.

We do define it internally. It's just not something we've shared externally at this point.

Okay. Okay. Our next question comes from the line of Mike Zaremski from BMO. Please go ahead.

Hey, great. Good morning. Just sticking with the bespoke segment, the loss ratio was approximately 10 points above consensus expectations. And I usually don't ask the question this way, but just since you're a more recent IPO, just trying to understand, Was the loss ratio this quarter normal volatility? Is this considered normal? Any help you could provide? You gave good color on why the premiums are down, so maybe that's what's correlated with the loss ratio being a bit higher. But if you could offer any context around the loss ratio, that'd be helpful.

Yeah, sure. I'll take that one. So on the bespoke segment, we've got a couple of large losses that have come through this quarter. I mean, again, if we look at it over a slightly longer time horizon and you look at the year-to-date loss ratio, we're well ahead of our own expectations there. So for me, it's just a timing issue. If we'd had one large loss, we probably would have been on plan this quarter, zero ahead of plan. And if you look over a wider time period, if those losses had been more evenly distributed through the year, then you wouldn't have seen this impact on a quarter. So there's no trend or anything we're reacting to in that pillar, and I would call it normal quarter-to-quarter variation in the loss ratio in line with our expectations.

Okay, and those large losses are geopolitical-related losses?

They're on the intellectual property accounts, and no, they're not geopolitical-related.

Okay, understood. Okay. And maybe just switching gears to the expense ratio, it looks like, sounds like for the prepared commentary, this is like the, obviously there's moving parts on business mix, but what do you say, you know, at this level of ROE, the, you know, this is the type of expense ratio we should be thinking, including the MGU seating commission ratio?

Yeah, I think that both the MGU expenses and our general and administrative expenses are in line with expectations given the framework agreement we have in place and given our current operating model. Ultimately, we believe our combined ratio represents the best measure of our performance. And year-to-date performance is clearly above what we had in our original target ROE that we disclosed in our IPO. So as a result, you know, there's an increased profit commission to the MGU and there's some increase in expenses as a result of above planned performance. There is variation in fees from quarter to quarter. However, the seating commission should be relatively known going forward. And as a result of, again, as a result of good performance going for the first nine months, there is a commission payable under the profit commission structure. But otherwise, it's totally in line with what we would expect.

Okay, got it. And maybe, Alan, one last follow-up. Just on, I think there's still some Points need to be hammered out on Bermuda and the tax agreement, but should we be kind of directionally thinking closer to 15% tax rate in 25 or still TBD and we need to kind of just keep our ears peeled for how the framework comes together?

Yeah, still too early to comment, but we continue to engage with our trade group, the Association of Bermuda Insurers and Reinsurance, as well as the Bermuda government. We will evaluate the tax proposal as it develops. There's still a lot of moving parts on the proposed taxes, and we'll provide more clarity as time moves forward.

I guess this is a follow-up, but what do you say, Alan, if the headline comes in as 15, will there be potential offsets that we should be that companies are paying that could make it less than 15? Sorry, that's my last follow-up.

Yeah, clearly there are offsets coming. Even the latest press release from the government a couple weeks ago indicated that the offsets are being worked on, but that is the one area that is the least developed, so we're not clear on those offsets, hence why our caution in terms of communicating how it affects us. But everyone knows the headline rate, but it's the offsets that we're not clear on at this point.

Thank you.

question comes from the line of Yaron Kinar from Greece. Please go ahead.

Thank you. Good morning, everybody. I wanted to turn back to the bespoke segment. So I understand you're being prudent here with choosing maybe to, or not maybe, but choosing to prioritize profits and margins over growth. That said, I think part of the story as you came to market was improving the operating leverage, and given that these are very long-term contracts, multi-year contracts, the earning of premiums takes a while. So as you prioritize profits here, ultimately, how are you thinking about the ability to get to targeted operating leverage?

Yeah, Yaron, it's Alan. Thanks for that. Absolutely. As we have communicated previously, the bespoke segment premium does take a little longer to earn than certainly reinsurance, Nat Cat, or some of our specialty lines, and hence why we are very measured in terms of that line of business. And as we communicated previously, they can be lumpy in terms of when they come in from quarter to quarter. Certainly our operating leverage is an area that we continue to look at. We're in line with peers, we believe, in terms of our underwriting leverage, underwriting premium written versus our equity. However, as we've pivoted from more of a reinsurance NATCAT entity to a specialty and bespoke company going forward, we believe that there's some efficiencies that we can develop in terms of underwriting leverage. And bespoke is certainly one area where you get certain capital efficiency when you do write that business. But ultimately, it's about risk versus reward. And we're not going to put a new premium on the books that we're not comfortable with.

Yeah, I think we have a very, very significant pipeline in the bespoke pillar. So as with COVID, we took a very measured approach. And then you're able to take the upside. You're able to go risk on when there's more certainty in the market. And I think that's the approach we'll be taking over the next couple of quarters.

Got it. And maybe one follow-up on the bespoke side. So I would have thought, and please correct me if I'm wrong here, but I would have thought that at a time of greater uncertainty, geopolitical and other, would actually create greater opportunities and maybe would be an opportunity to really see an acceleration of growth. So can you help us think about that?

Yeah, and I think that's exactly what we saw post-COVID. So it was a kind of short-term pause. We saw the deals come back, better price, better terms and conditions, better structures. That's exactly what we expect to see this time. So I'd be more worried if there was no pipeline, but it has created pipeline. It's now about executing on those trades as they hit our hurdle rate.

Thank you.

Our next question comes from the line of Pablo Singson from J.P. Morgan. Please go ahead.

Hi, thank you. So the first question I have is on bespoke. I appreciate your more cautious stance in writing new business there, but I was curious if the economic uncertainty affects any of the loss picks and reserving on your enforced buck, given that these policies were priced several years ago.

We factor that in when we write the underlying risks. So we're comfortable with the portfolio we've already written. And the best stress test it had was through the COVID process. So we've taken a similar approach as what we did there. We'll go back, we'll revisit the underlying assumptions, and we'll decide if we want to make any adjustments and how that should flow through to reserving. But because when we price that business originally, we tend to include loadings around current economic conditions, so we kind of take a more prudent view anyway, then quite often we're comfortable with the overall level that we're reserved at and don't need to make any adjustments. So I take the most comfort on how we came through COVID on that, which had a wide economic impact over a number of lines of business and a very specific economic impact for things like our AFIC account, which was loans on aircraft, which were heavily impacted by COVID, for example. So this time around, it feels like it's not quite as intense as COVID, I don't think, but we're well prepared to react to anything as it happens. But no, we haven't felt the need to make any adjustments on the reserving side to date.

Got it okay, and then my follow up question was on the specialty business so Dan recognizing your comments that you know net real improvements there have grown more than 40% year to date. But 3Q growth did slow from the first half of the year right and from your comments, it seems like you know market conditions have not deteriorated. And you know, while aviation marine have key renewal dates, you know property DNF gets placed more evenly. So as you just focus on the score and think about the year-on-year growth here, is that just a reflection of more challenging comparisons, maybe some other factor, or you just chalk it up to the seasonality and normal variation?

Yeah, I think we chalk it up to seasonality. You know, we don't run the business quarter to quarter. We look at the year to date. We're above plan or well above where we were this time last year. So that's pleasing, and we're more profitable. So, you know, when we look at our key metrics, we're outperforming, outdelivering. And that's how I look at the business, not on a quarter-to-quarter basis.

Okay. And would it be fair to assume, given what you've said about aviation, that there should be an uptick from the third quarter number as we look into 4Q?

Yeah, I think it's heavily focused. The renewal date is that kind of Q4 period. So we would expect to see an active season for the aviation portfolio.

Okay. Thank you.

Our next question comes from the line of Mike Ward from Citi. Please go ahead.

Hi. Thanks, guys. Good morning. Good morning. Maybe on the IP space, some losses this quarter, some headlines elsewhere on IP. Just wondering if that is impacting your appetite and bespoke, and if you could help us quantify the total exposure reserves for IP.

well I'll take the first part I think when we look at bespoke you know what we try and build is a very diversified portfolio so we try and have product lines that don't correlate so yes we have had an IP loss or two in the quarter that doesn't really impact our view on on the other lines of business you know IP is a new product line it's the innovation and is kind of growing in that space. Obviously, it had some impact from Vestu as well, but maybe I'll pass to Jonny to talk about the reserving.

Yes, it's a higher rate online product than some of the other products we write in the bespoke pillars, so what that means is we'd expect a higher run rate of claims as a result of that. Given there's a small number of deals done to date, we're able to monitor them at an individual level, so we can look at the individual economics of some of the ongoing deals and react to that from a reserving point of view as we go so that helps with reserving in that area in terms of claims that the main ones we've had to date are the two that we've disclosed um this quarter in the in the spoke so comfortable where we're reserved because we're able to actively monitor things quarter to quarter it's a small number of deals so far um okay okay um and then

I think you mentioned economic slowdown in some of the commentary. Just wondering if anything has changed in the quarter that sort of caused you to be a little bit more cautious or is there any overall shift in the targeted mix?

No, I think we're consistent to the plan, you know, and we're out delivering against that plan. So, you know, whilst there are, you know, tensions in the Middle East to consider now as well, I think we just continue to take that kind of very deliberate measured view. But I think to the earlier question, it creates a lot of opportunity. We saw that of Russia-Ukraine. So, you know, we're well positioned to take advantage of that as well. Thanks, Chris.

Thank you. We have a follow-up question coming from the line of Mike Zeromsky from BML. Please go ahead.

Hey, great. Just one quick follow-up on the IP losses. Since you said it's a new line of business, maybe you could just give us a really quick education on what is an IP claim and maybe I'm being asked just what type of insurance you're offering so we better understand how to think about this line of business for IP.

So these are loans that are backed by intellectual property assets. So it's similar to sort of our AFIC product where we back a loan backed by an underlying aircraft as the collateral, but here the collateral is the IP. So we think about it in a similar way. I mean, we look at the credit risk of the company when we're pricing it and also look at the valuation around the IP. And then as the claim materializes, it's about looking at ways to restructure, to minimize that claim to us. It's looking about how we can realize any value from the underlying IP assets. And then quite similar to other lines of business that we write in the bespoke pillar, really, the difference is the type of asset that's backing the loan here is intellectual property rather than something like an aircraft.

Thank you.

Our next question comes from the line of Pablo Singson from J.P. Morgan. Please go ahead.

Hi, thanks for taking my follow-up, and so any major changes you expect in your reinsurance program, your outward reinsurance program, and I guess more specifically if you could touch your expectations on the Favreau's whole account quota share as we approach the beginning of 2024 here?

Yeah, I'm happy to do that one, Pablo. No, the short answer is it's a very similar strategy year on year. We already have indications of the whole-account quota share partnership, which will continue into 2024. We're looking to maintain our core quota share relationships. We're very thankful to the partners that share our risk with us. And also, moving forward to 2024, we will look to renew the Herbie cap bond suite as well as those cap bonds for June. So a very similar year-on-year strategy.

Great. Thank you.

Thank you. That concludes today's question and answer session. I'd like to turn the call back to Dan Burrows for closing remarks.

Thank you. And thank you again, everyone, for joining us today. So in closing, we have built on our strong first half-year performance with an excellent third quarter that's demonstrated the value of our market lead positioning, our business model, and our structure, which allows for strong execution across all aspects of our strategy. Now, looking ahead, we believe we have a unique and diverse portfolio mix with scale across our three business pillars. Our differentiated underwriting positions as well to take advantage of the opportunities we see in markets today, as well as to navigate across market cycles and our highly experienced management team brings valuable relationships spanning across multiple disciplines in the insurance ecosystem. We remain focused on deploying capital towards profitable underwriting opportunities while increasing our scale to drive long-term sustainable growth and value for all of our shareholders. So again, thank you for joining us and have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.