Fidelis Insurance Holdings Limited

Good morning, ladies and gentlemen, and welcome to the Fidelis Insurance Holdings first quarter 2024 earnings conference call. As a reminder, this call is being recorded for replay purposes. Following the conclusion of formal remarks, the management team will host a question and answer session, and instructions will be given at that time. With that, I will now turn the call over to Miranda Hunter, head of investor relations. Ms. Hunter, please go ahead.

Good morning, and welcome to the Fidelis Insurance Group's first quarter of 2024's earnings conference call. With me today are Dan Burrows, our CEO, and Alan DeClaire, our CFO. Before we begin, I'd like to remind everyone that statements made during the call, including the question and answer section, may include forward-looking statements. 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 2023 Annual Report on Form 20F, filed with the SEC on March 15th. 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 risks and other factors that may affect CUPE's 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. Reconciliations to U.S. GAAP for each non-GAAP financial measure and our definition of RPI, which is our Renewal Pricing Index, can be found in our current report on Form 6K, Furnished to the SEC Yesterday, which contains our earnings press release and is available on our website at fidelisinsurance.com. And with that, I'll turn the call over to Dan.

Thank you, Miranda. Good morning, everyone, and welcome to Fidelis Insurance Group's first quarter earnings call. I'm very pleased to report that we delivered a strong start to the year as we successfully capitalized on the continued mature hard market conditions, leaning into our core line, achieving sustained profitable growth, leveraging our lead position to generate alpha results, and broadening the footprint of our business. In the first quarter, we increased gross premiums written by 21.6% and delivered a combined ratio of 85.8%, both of which were in line with our expectations. These excellent results reflect our strong underwriting and risk selection capabilities across our growing and well-diversified book of business. We continue to see positive pricing across our portfolio with an RPI for the first quarter of 112%, demonstrating our ability to achieve preferential terms in a verticalized market. We delivered another strong force of return with an annualized operating ROAE of 14%, again in line with our expectations. We also grew book value per diluted common share to $21.22. For the full year, we remain on track to generate ROAE in the 14% to 16% range as we earn a greater portion of our catastrophe exposed premium in the second half of the year. As our results demonstrate, our strategy and structure are working exactly as intended. We have the flexibility, discipline and market access to deploy capital where we believe there are attractive risk reward opportunities in what continues to be the best market we have seen in decades. We are leveraging our scale, lead positioning and deep relationships with brokers and clients to grow our business and have constructed a diversified portfolio of short-held specialty risks. which we believe is well positioned to deliver combined VHOs in the mid to high 80s throughout the cycle. And as a reminder, would you not write casualty lines? A key strength of our strategy is the daily underwriting calls, which are attended by all underwriters, both the Fidelis Insurance Group and the Fidelis Partnership. These calls provide insight across our entire portfolio, giving a forum to discuss our offering on each individual risk. They enhance our ability to cross-sell across target lines and help us quickly respond to market dynamics and capitalise on areas of opportunity. We continue to see opportunities across our core lines, with property direct and facultative being a great example, where we delivered growth of 36.5% compared to prior periods, and we are capitalising on attractive pricing within our broader subsidy portfolio. In the first quarter, we announced our participation and investment in the new Lloyds Syndicate 3123 with the Fidelis Partnership, exercising our capital and underwriting strategies and broadening the footprint of our business. With a targeted launch date of July 1st, this vehicle is expected to add to our long-term growth by providing access to enhanced racing platforms, global licensing and Lloyds-only business. The syndicate will write business across multiple insurance and reinsurance classes and will be an extension of our strategy to leverage our expertise to take lead positions. Fidelis Insurance Group will be taking a variable credit share across the portfolio, which enables us to access additional business channels that align to our current risk appetite. This is a perfect example of why our underwriting relationship with the Fidelis partnership works so well. Our long-term agreement was designed to enable us to match the right risk with the right capital. Exercising our right of first refusal with this variable process share allows us to do just that, participating in the lines where we have more risk appetite. As we consider industry events in the quarter, we wanted to touch on the March 26 Baltimore Bridge collapse, which will impact the specialty insurance market. Given the complexities surrounding the event, it could take years to fully resolve. We continue to monitor developments and believe any lost resulting from the bridge collapse will be manageable within our diversified portfolio. So in summary, I'm very pleased with our first quarter performance, which positions us for another year of strong profitability growth and return. With that, I'll pass it over to Alan to walk through our financial results in more detail.

Thanks, Dan. And I'd also like to welcome everyone joining our first quarter earnings call. As Stan mentioned, we had an excellent first quarter to operating net income of $87.3 million, or $0.74 per diluted common share, and an annualized operating return on average equity of 14%. Our book value for diluted common share at March 31 was $21.22. Looking at our gross premiums written, we had excellent top-line growth of 21.6% in the quarter to $1.5 billion, compared to the first quarter of 2023. This was driven in large part by the specialty segment, which grew by $199.9 million, or 24%, to $1 billion. This is consistent with our expectations for growth to be broadly in line with what we saw last year. Specialty growth was primarily driven by property DNF, which saw an increase of $62.4 million, or 36.5% from the prior year period, benefiting from the continued strong rating environment and new business. The growth is in line with the overall 38.7% growth we saw in this class across 2023. Other drivers of growth within our specialty book in the quarter included other property, which saw an increase of $55.7 million, and marine, which saw an increase of $49.9 million. As a reminder, there is seasonality within our specialty book, with marine and aviation and aerospace being more heavily weighted to the first half of the year, while in property DNF, which we expect to be the key driver of specialty growth this year, we anticipate a more even distribution of premium across the quarters. Bespoke premiums were consistent with prior periods, with first quarter gross premiums written of $153.5 million, an increase of 1.8% versus prior year. Our reinsurance segment grew by $66.4 million, or 25.5%, driven by property reinsurance. As Dan discussed in our CRN call, We write approximately a third of our reinsurance book at 1-1. And in 2024, we saw strong 1-1 renewals, achieving RPIs of 118%. Looking ahead, premiums from the new Lloyd Syndicate 3123 variable quota share and our 9.9% investment in the Syndicate will flow through each of our three segments. Our participation in the Syndicate won't materially impact our expectations for growth this year. On a net premiums earned basis, we delivered an increase of 26.4% from the prior year to $488 million in the first quarter of 2024, consistent with our growth and gross premiums written. As noted by Dan, our premiums are not earned on a straight line basis. Property catastrophe premiums more heavily weighted to the back half of the year. Our excellent underwriting performance resulted in a combined ratio of 85.8% for the first quarter. which included a loss ratio of 37.4%. This 37.4% is composed of attritional losses, catastrophe and large losses, and prior year development. Looking at attritional losses in the first quarter, we had 146.3 million or 30% compared to 139.5 million or 36% in the prior year period. Catastrophe and large losses for the first quarter were 103 million which includes a $51.2 million provision to the Baltimore Bridge Collapse, in addition to other IBNR and smaller events in various lines of business, including aviation and aerospace, marine, and property DNF. Specific to the Baltimore Bridge Collapse, our exposure is in line with our market position. We anticipate that any settlement will take a few years to play out, and as such, we have set our provision based on a probabilistic model. We had net favorable prior year development of $67 million for the quarter versus $2.1 million in the prior year period. Of the $67 million for the quarter, specialty was $34.4 million, reinsurance was $24.3 million, and bespoke was $8.3 million, and this was all primarily driven by better than expected loss activity. Turning to expenses, policy acquisition expenses from third parties were 27.9 points in the combined ratio for the quarter, consistent with the prior year period. The FIDELIS partnership commissions were 15.7 points of the combined ratio for the quarter, of which 1.8 points related to accrued profit commissions due to the strong underwriting results in the quarter. And finally, our general and administrative expenses were 4.8 points of the combined ratio for the quarter, compared to 4.3 points of the combined ratio in the prior year period. Looking now at investments. Net investment income increased to $41 million for the first quarter of 2024, compared with $20.4 million in the prior year period. During the first quarter of 2024, we sold $201.2 million of securities with an average book yield of 0.9%, resulting in a realized loss of $7.4 million. We reinvested the proceeds in securities with an average purchase yield of approximately 4.9%. At March 31, 2024, the average rating of fixed income securities remains very high at AA minus with a book yield of 4.2%. Duration has lengthened slightly to 2.2 years. Turning to capital management, we remain committed to maintaining a strong balance sheet. As I mentioned last quarter, our capital management strategy includes first, allocating capital to support and grow our business in attractive segments of the market. Second, using outwards reinsurance as a flexible and aligned source of capital. Finally, returning excess capital to shareholders through a combination of share buybacks and dividends. Specifically, during the first quarter, as we mentioned, we grew our premiums and targeted lines, seeing overall premium growth across our book of 21.6%. Regarding outwards reinsurance, We sponsored two new tranches of our Herbie Reef Catastrophe Bond for $150 million of protection to cover earthquakes and main storm events in the U.S., enhancing our overall Outwards program. And we returned $16.8 million to shareholders through $11.8 million of common dividends and repurchases of $5 million. Subsequent to March 31, we have repurchased another $8.3 million of share. As of today, We have $36.7 million remaining in our share repurchase authorization. In summary, I'm very pleased with our excellent financial performance in the first quarter of 2024. Looking ahead, we are confident about the future as we continue to focus on delivering profitable underwriting and book value growth. I will now turn it back to Dan for additional remarks.

Thanks, Alan. As you can see, we entered 2024 in an incredibly strong position. We are operating in a sustained hard market with attractive levels of pricing across our portfolio, and our strategy remains to actively capitalize on the significant opportunities this presents. Taking a closer look at our segment, in specialty, which is our largest, conditions and pricing remain attractive across our core lines, and in the first quarter, we achieved specialty RPIs of 111%. As a reminder, our key drivers of specialty of property, direct and facultative, marine and aviation and aerospace and our aim is to be a top three market for these classes. Our appetite for property, direct and facultative has increased since late 2019 in response to attractive pricing levels given by the frequency of natural catastrophe and climate driven events and the exit of a number of larger carriers. Following $120 billion of natural catastrophe losses in 2023 and an active start to 2024, including several US severe weather events, the market has remained dislocated with increased demand and no new meaningful supply of capital coming in. We continue to see attractive opportunities to deploy capacity across this key line of business, in line with our targeted risk selection approach, and we are pleased with the continued strong performance of this line during the quarter. Marine also remains a significant market for us, where we're able to leverage our leadership positions to cross-sell and set pricing, terms and conditions across multiple lines. We are seeing particularly attractive opportunities in large marine construction, where significant capacity is required. We've had several new business wins this year. We pride ourselves on our ability to innovate, enabling us to offer meaningful solutions to our clients, We are an established leader in the classes we participate in, always looking to create powerful performance. Looking ahead, the specialty market continues to offer growth across our four lines at attractive returns, and we expect specialty to continue to contribute to our growth throughout 2024. In bespoke, our established relationship with clients and brokers, along with our underwriting expertise, enables us to maintain our position as an industry leader. particularly when considering the high barriers to entry for others, given the nature of the underlying risks. The unique nature of this business results in a less commoditized, more tailor-made product that delivers low volatility underwriting performance with less exposure to typical market cycles. Given the highly tailored nature of this portfolio, premiums do not follow a regular predictable schedule. The first quarter was a solid start for the portfolio, with premium in line with expectations. Looking ahead, our pipeline of structured risk transfer and political risk deals for the second quarter is in line with the prior year period, and we expect opportunities to continue for the rest of 2024. Finally, in reinsurance, we continue to execute our strategy of deploying capacity at targeted attachment points, core clients, and this was an excellent quarter for this segment. Rate remains attractive following an enhanced pricing environment and adjustment of terms and conditions over the past few years. And we were able to achieve higher rate increases across our portfolio, given our thoughts and price leadership. RPI for the quarter was 118% and was the main driver for premium growth year on year. We continue to see clients looking to buy more limit in the US and Europe, where our ability to offer private layers helps us secure our place on programs. And whilst we are beginning to see an uptick in demand, there's been no major influx of new capacity. We continue to manage our portfolio in line with our view of risk and are happy with our position heading into the rest of the year. And briefly on 4.1, we saw a positive rate movement continuing in April, where our portfolio is driven by Japanese pre-trib renewals. We continue to enhance our broad and established relationships in the region to create opportunities on our fees for the growth in our portfolio. As we look ahead for the rest of the year, we are focused on deploying capital, the best underwriting opportunities, that will further enhance our efforts to deliver consistently compelling returns through the cycle and create value for our shareholders. One example is the new Lloyd Syndicate, which opens the door to exploring additional opportunities within Lloyd. In the longer term, we believe this will lead to broader opportunities globally, as we continue our focus on aligning our capital to the right risk. In closing, 2024 is up to an excellent start. We are pleased with the momentum we had coming out of the first quarter and our ability to capitalize on opportunities across our portfolio. We are confident in the outlook for our business and remain on track to deliver operating ROAE in the 14% to 16% range for the full year, which is above our long-term target. We continue to see growth potential in the current market, and our scale, lead positioning, balance sheet strength, and expert execution from our dedicated teams positions us well to deliver sustainable, long-term profitable growth and create meaning value for our shareholders. With that, I'll turn it back to the operator.

Thank you. We will now begin the question and answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. and your questions will be pulled in the order they are received. Should you wish to decline from the pulling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Before we take your questions, I'd like to kindly ask everyone to please limit your questions to one primary question along with a single follow-up. And if you have any further questions, please rejoin the queue. With that, our first question comes from the line of Matt Carletti with CitizenJMP. Your line is now open.

Thank you. Good morning. Good morning, Matt.

How are you?

Very well. Yourself?

Yeah, good, thanks.

Great. I want to start, I guess, a two part question on the on the Baltimore Bridge loss. I guess one, if you could give us a little more perspective on kind of how you set that loss reserve specifically, if you can kind of what your view of industry losses or if you've been able to kind of translate in those terms. And then secondly, just what impact do you think that loss might have on on the related, you know, particularly marine but related markets?

Thanks for the question. I think Firstly, we look at Baltimore and say it's within expectation given our market profile. As you know, we take a standard reserving approach. We would weight limits against the full range of probabilistic outcomes. We've written over a billion dollars of specialty in the quarter. We think, therefore, the loss, any loss is very manageable within that sort of diversified portfolio. But it's very complex and it's very early. So I think to talk about the second part of your question, how we think about it will impact the market. We'll just wait for it to develop and see what the impact to the market will be in the future. I just think it's too early to think about exactly how pricing will be affected.

OK, fair enough. And then maybe it's a modeling follow up question. Policy acquisition costs by segment had some variation and you referenced mix of business and reinsurance seeding commissions. Is there is there any is it just kind of quarterly to quarterly fluctuation there? Or is there anything kind of more forward looking we should think about, I guess, asked another way? Is there any reason to think kind of where we sat by segment on like a full year 23 level, it would look materially different for full year 24?

Hi, Matt, thanks for the question. It's Alan. No, I think you have the right answers. One important factor to always consider in our book of business is that we do buy a significant amount of outwards reinsurance, and that can also significantly impact the post-acquisition costs on a quarter-to-quarter basis. If it's quarter share business that we buy on an outwards basis, there is a seating commission and a profit commission that comes back to us. So it can fluctuate quarter to quarter depending on the mix of business that is written and earned in the quarter. But I think overall the rate, the run rate in acute in the first quarter and in 2023 is the way to think about it.

OK, great, thank you. Appreciate it.

Your next question comes from Mike Zaremski with BMO. Your line is now.

Hey, great good morning. just just following up because um i think some of us are are you know trying to track uh all the you know what each company's uh thinking on the uh baltimore uh bridge um losses so are you you know so some companies have said like you know the range is one to three billion they're reserving at the upper end just just curious if you if you wanted to provide any kind of color on that if not i can just move on to the next question yeah i think when as i said we wait against all of the probabilistic outcomes and I think if you think of the top end of our range it will be bang in line with the commentary you've heard from some of our peers okay got it um okay so just uh switching gears to um a lot of talk uh in recent months about property pricing power decelerating but but you know still increasing and coming off of uh know record levels uh in many cases is you know i'm looking at some of your rpi kpis that are helpful is is that kind of directionally it looks like that's what you guys are also seeing i don't think bespoke rpi is broken out as often but uh is you know what's your thought process and kind of pricing power and the overall marketplace yeah thanks mike it's a really good question firstly on bespoke because of the nature of that product line

tends to be more insulated against market cycles so we do see some improvement in terms on some of those lines but generally it's kind of flatter as opposed to the reinsurance and the specialty but you know when we think about market duration it's still the best or you know or pricing in the market still the best market you've seen for 20 to 25 years we've had compound increases over the last three or four or five years it's still a very verticalized market So we talked about this before, so not everyone starts in the same place. So as a leader across the portfolio, about 90% of the business, then we're able to dictate terms, conditions, and we get better pricing, better coverage. And obviously we see the opportunities early as well. So we're able to have, we think, a better risk selection on that basis. But we're still seeing positive movement. There's a lot of demand in the market. And despite those secular factors that we've talked about long and hard, climate change, catastrophe reserves, inflation. There's really been no new influx of significant capacity into the market, but inflation is driving demand, and we've seen that. So having that lead line that's scalable, it gives us leverage, we're important and relevant to brokers and clients, and that's how we get the differential terms. That's what creates the alpha.

Definitely. That's helpful. And just lastly, just on the share authorization, you know, stocks, you know, outperformed meaningfully since you announced that. Just, you know, anything we should think about in terms of how you all kind of are going to pace it going forward based on valuation?

Hi, it's Alan. Thanks for the question. No, I think when we announced the program In the latter part of December 2023, there was a $50 million buyback program. We said we'd be measured, but it certainly had the values of our shares. It was certainly accretive to shareholders. I think given our current $21.22 book value, we could still continue executing on the program throughout 2024. There's a 12-month authorization. So I think the pacing was right. And I think we will be in the market depending on share price and whether it's a creative to book by.

Thank you.

Your next question comes from Yaron Kinar with Jefferies. Your line is now open.

Thank you. Good morning. I want to start with the bespoke segment, if we could. You offered some very helpful guidance last quarter talking about a pipeline that was relatively flat year over year. I think where there's still a bit of fluctuation is on the session rate there, and I'm guessing it's because the book is essentially all new as opposed to renewed every quarter, and therefore you can see pretty significant fluctuations. But is there any, I guess, guidance or rule of thumb you can offer us in terms of thinking of what a proper seeding rate should be there? A, and B, maybe you can talk about maybe the differences in the composition of the portfolio year over year that would have resulted in the change in session rate.

Thanks, John. It's a great, great question. So, Stan, I'll start. I think specifically this is about business mix and The difference in session rate this time was around a cyber relationship that we have, and we buy a lot of proportional reinsurance on it. And, you know, Alan said earlier, we see that as a very fungible form of capital that helps scale our line and, you know, really gives us leverage as a leader. But in that particular instance, it's because we're seeding out premium because of the scale of the proportional program that we buy on it.

Okay. And is there a way for us to think about, like, Is a 50% session rate a reasonable number to think about going forward? Obviously, there's going to be some fluctuation quarter to quarter, but I just want to make sure we're thinking about it correctly.

Thanks, Yaron. It's Alan. Yeah, as you mentioned at the start of your question, the bespoke segment by its nature has some fluctuations on the Ministry of the Right, and they tend to be unique. They're not necessarily all renewals, but in general, I would go with the sort of 2023 overall yearly session rates, which we think of as more in the 40%, maybe as high as 50%, again, depending on the type of deal. But it'd be more around the range of 40% session.

Got it. Thanks. And my second question, I realize it may be my third, but I'll try it anyway. The timing of reserve reviews, this was a very significant release this quarter. I think the largest disclosed quarterly release that I remember. Can you maybe talk about what drove that specifically and maybe how you look at the reserves over the course of the year as well, what books are reviewed?

It's Alan again. I'll take that question. For context, I would note again that we do not write any casualty business. We are a short duration company. Our average duration of our reserves is two years. As a result, we have always had a process of looking at our reserves on a timely basis, quarter to quarter. And so each quarter, you will see that we do release reserves or strengthen reserves based on loss activity for that particular quarter. We do not wait for a particular quarter or year-end reserve review. In Q1 2024, the activity in prior years was fairly benign across all three segments. And again, the results that would flow through are purely based on experience. There was no change in assumptions. It was purely based on the actual flow through of results for the quarter.

Got it. Thank you.

Your next question comes from Mayor Shields with KBW. Your line is now open. Great. Thanks so much.

Dan, one first question. I just want to make sure I understand it. It sounds like the syndicate is going to be writing reinsurance as well. Should we assume that Fidelis is willing to take on more exposure in reinsurance through the syndicate in addition to whatever pricing momentum there is?

Yeah, thanks, Mike. It's a really good question. As you know, we have a variable quota share. So we'll lean into lines where we do have appetite and where we have less appetite, we'll take smaller shares. I think we have seen some very positive movement in terms of pricing on the reinsurance portfolio. And as I said in the script, we've taken premium increases rather than exposure increases. So we'll monitor it. There are some deals that flow into Lloyds and Lloyds only. that we'd like to have access to. That's one of the whole purposes of the syndicate, is getting access to business we can't originate now. But we'll stay away from attritional. That's not really in our appetite. But depending on the risk, I think this is the key thing around the rotor, is that we get to see every deal. If it looks attractive, we can bind it. But if it's not within appetite, we just won't match our capital to those risks. OK.

That's helpful. And then maybe on the flip side.

I think I just put out there that, sorry, sorry, Maya, sorry to interrupt you. What I would say, you know, that is going to have no, whatever we do would have no impact on our kind of premium for 2024. You know, it's a very small premium item for 2024.

No, that's helpful. That clarifies things. With regard to the direct and facultative book, I was hoping for an update on reinsurance purchasing strategy based on, I guess, current expectations for mid-year property pricing, property reinsurance pricing.

Yeah, another good question, and actually very timely. So as you know, we buy a very broad range or suite of products, both proportional, non-proportional, index, and one-one is a very busy time, as is... We tend to buy the DNF program there. It's coming within expectation. We've actually bought a bit more limit. You'll know we've just renewed the Herbie rebonds, two tranches, 150 million, or in total 150 million, and that gives us protection for US name storm and US quake. So as the portfolio's growing, then we'll look to take opportunity in the reinsurance market just to help us scale our line You know, once again, being a leader in a verticalized market, especially like DNF, gives you a very, very differential result. And we'll take advantage of that market if we can.

Great. Fantastic. Thank you so much.

Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the one. Your next question comes from Mike Ward with Citigroup. Your line is now open.

Thanks. Good morning. I was wondering if, just technical, if the Lloyds Structure Seeding Commission is comparable to the rest of the MGU-sourced business?

Hi, yeah, it's Alan. Thanks, Mike. I think overall the Lloyds expense structure is similar to how we have currently, and I wouldn't expect any material change until our expenses overall as a result of the Lloyds participation.

OK. Okay, thanks. And then there is potential, there's hurricane forecasts coming out. Just wondering if you guys could remind us your exposure, if we do see some of the relatively extreme forecasts.

Yeah, we don't give out details on PMLs.

As you know, what we would say, you know, We are exposed at 1 and 250 to quake and then southeast clash. But we do, as I just mentioned, buy. We have a lot of proportional protection on that portfolio in both the treaty and the DNS. And we buy a very broad suite of products. So we have non-proportional. We have index products. Just renewed the bonds, as I said a moment ago. So we think we're very well protected in that portfolio.

OK, thank you, guys.

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

Thank you, everyone, for joining us today. We appreciate your interest in our company. And if you do have any follow-up questions, we'll be around to take your calls. So thank you very much and have a great day.

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