Pelagos Insurance Capital Ltd Q2 FY2023 Earnings Call

Ladies and gentlemen, good morning, and welcome to the Fidelis Insurance Holdings Second Quarter and First Half 2023 Earnings Conference Call. As a reminder, this call is being recorded for replay purposes. With that, I'd 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 Holdings Limited's 2023 Second Quarter Earnings Results. With me today are Dan Burrows, our CEO; Allan Decleir, our CFO; Jonny Strickle, our Chief Actuarial Officer; and Ian Houston, our Chief Underwriting Officer. We will start with prepared comments by Dan and Allan, 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 the 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 the IPO prospectus dated June 28 filed with the SEC on June 30. Although we believe that the expectations reflected in the 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 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 U.S. GAAP for each non-GAAP financial measure can be found in our current report on Form 10K furnished to the SEC yesterday, which contains our earnings press release and is 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, Jillian, and good morning, everyone. Let me begin by saying that I'm delighted to be speaking with you today on our first earnings call post-IPO and to be updating you on our view of the market, the progress we've been making against our growth strategy and how that, again, has translated into robust financial and operational performance. We very much look forward to engaging with our analysts, our shareholders and the broader investment community going forward. We are pleased to have this opportunity to discuss our performance at the half year stage, which we believe further reinforces the strength of the Fidelis business model. Our structure is designed to deliver alpha underwriting returns for our exclusive partnership with the Fidelis MGU, which provides us with access to one of the most renowned underwriting teams in the business led by Richard Brindle, with a long track record of outperformance that translates into strong top and bottom line results for our business. We are strongly positioned as a leading specialty and bespoke insurer, underwriting risk into an attractive marketplace, with a portfolio of 84% specialty and bespoke insurance. This is based on our half year net written premium numbers. This is delivering attractive results, as evidenced by our first half year performance. Compared to the prior year, gross written premiums for the first half of the year increased 27% to $2.2 billion. The strong top line growth has been coupled with compelling bottom line profitability. Our combined ratio improved year-on-year from 89% to 80.6% for the half year and our half year annualized operating ROAE is 18.2%. Now this was achieved against the backdrop of heightened loss activity in the industry, which per our recent reports saw reported global insured losses from natural disasters in excess of $50 billion for the first half of the year, which is more than 40% above the 21st century mean. The market continues to be dedicated with a clear supply-demand imbalance, and we expect these market conditions to maintain duration, due in part to no new startups or notable inflow of significant new cash flow to the market, unlike in previous hard market cycles. These market dynamics have presented opportunities for Fidelis, and we have grown our business, leveraging our scale and targeting opportunities across our portfolio, maintaining significant lead status across all underwriting pillars. To recap on our underwriting strategy, our business focuses on three core pillars of underwriting: Specialty Insurance, Bespoke and Reinsurance. Our specialty pillar is focused on traditional specialty business lines, such as aviation, energy, space, marine and property direct and facultative. Our bespoke pillar is focused primarily on highly tailored and specialized products often purchased to facilitate underlying transactions and offer our clients enhanced capital efficiencies. This pillar includes policies covering credit and political risk, political violence and terrorism and transactional liabilities. In reinsurance, we have an actively managed property catastrophe reinsurance book, optimized in line with our house view of risk and concentrated on core client relationships at targeted attachment points in the aim of managing exposure and volatility. Leveraging our experience and deep precision across these pillars, we take a nimble and thoughtful approach to underwriting and risk and capital allocation, which allows us to respond quickly to a consistently evolving marketplace. We have delivered a strong track record of performance, capturing compelling underwriting and combined ratios, while maintaining a strong balance sheet and financial position. We believe our combination of management expertise and access to top underwriting talent positions us well to create value not only in the current hard market, but across market cycles, with the goal of driving a consistent and compelling balance of risk and reward for our shareholders. Now touching on our performance across the three pillars. In our Specialty pillar, we delivered gross written premium growth of 76% for the quarter and 63% for the half year. The growth was driven by Marine, Aviation and Property Direct and Facultative, but we were able to take advantage of the dislocated market to secure significant new lines and participate in accounts with favorable terms. We achieved a renewal price index, which is our measure of year-on-year rate increases, for the half year of 128% across the specialty portfolio. And we would expect to see further increases in this metric in the second half of the year, as premium weighting shifts towards the property direct and facultative book, where considerable pricing momentum continues. Our bespoke pillar continues to be a key focus and an area of differentiation. Driven by transactional activity, the contracts in this pillar tend to be more insulated against market cycles. However, we still saw evidence of pricing momentum with a half year renewal price index of 118%. The markets for our highly specialized products remain strong with high barriers to entry. And I would note that due to the timing and selection of contracts we underwrite, gross written premium bespoke can fluctuate in a single period. From a seasonality perspective, it tends to be weighted towards the second half of the year. In our Reinsurance pillar, as previously documented, we began optimizing our portfolio in late 2021 to reflect our proprietary view of risk and concerns over inadequate pricing and the capture of climate change and inflationary impacts. We continue to refine our portfolio and believe we are well positioned to be opportunistic in our capital deployment, capturing improved rating while continuing to manage exposure and volatility. The half year renewal price index in the Reinsurance pillar was 171%, reflecting the continuing market adjustment. Overall, we delivered another quarter of profitable growth that built on the excellent results we achieved in Q1. Our performance was driven by our scale, our lead positioning and relevance, execution from our dedicated teams and the strength of our balance sheet. When taken all together, these competitive advantages enable us to manage our business for long-term profitable growth and create value for our shareholders. I'll now turn it over to Allan to walk through the financial results in more detail.

Thanks, Dan, and I'd also like to welcome everyone to our first earnings call as a public company. I look forward to working with all of you as we execute on our strategy and communicate our progress to the investment community. Please note that while we began trading on the New York Stock Exchange on June 29, the IPO and our primary capital raise of $100 million did not close until July 3. As such, the results I will be discussing are pre-IPO. The IPO will be reflected in our third quarter results. As Dan touched on, we had a strong second quarter performance with net income of $84 million equating to $0.76 per diluted common share. For the first 6 months of 2023, we had net income of $1.8 billion or $16.39 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 half of 2023 was $177 million. Regarding our return on equity metric. In the past, we've shared our operating ROE, which was calculated based on beginning of year shareholders' equity. We are now transitioning to an operating return on average equity, which better aligns with our peers and investor expectations. For the second quarter of 2023, our operating return on average equity was 17.6% on an annualized basis compared with 4% in the prior year period. For the first half of 2023, our operating return on average equity was 18.2% on an annualized basis compared with 4.8% on an annualized basis in the prior year period. Turning to our gross premiums written. We saw growth of 25% to $957 million in the quarter, and 27% to $2.2 billion for the first half of 2023. Looking at our gross premiums written by segment, the significant growth in our gross premiums written was primarily driven by our Specialty segment, which grew 76% to $657 million in the quarter and 63% to $1.5 billion for the first half of 2023. The increases primarily relate to new business and improved pricing and terms and conditions. The largest premium increases were in our Marine, Property Direct and Facultative, and Aviation and Aerospace lines of business. In our Bespoke segment, gross premiums written were $55 million and $206 million in the second quarter and half year of 2023, respectively, compared to $163 million and $298 million in the prior year period. The movement was a result of the timing of new contracts and renewals. Gross premiums written in Bespoke can fluctuate due to the timing and selection of the contracts we underwrite. In addition, and as Dan noted, from a seasonality perspective, we typically experience greater demand in the second half of the year, and therefore, we don't anticipate a change to full year premium. In the Reinsurance segment, gross premiums written remained fairly consistent at $245 million and $506 million in the quarter and half year, respectively, compared to $228 million and $520 million in the prior year periods. We've 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 are predominantly a Specialty and Bespoke insurance business and have intentionally taken a cautious and opportunistic approach to deploying capital and reinsurance. We focus on top-tier scenes and risks that meet our required pricing hurdles. When looking at net premiums on a consolidated basis, net premiums written increased by 35% to $615 million in the quarter and increased by 36% to $1.3 billion for the half year of 2023. The increases were primarily driven by an increase in gross premiums written and the decision to retain more profitable business in this dislocated market. On a net premiums earned basis, our premium earned across all segments increased 27% to $429 million in the second quarter of 2023, and by 24% to $815 million for the half year of 2023. The growth was primarily driven by our decision to reallocate capital to our specialty lines of business from reinsurance during 2022, which earned through into the current year, particularly on Marine, Aviation and Aerospace, and Property Direct and Facultative. Our strong performance resulted in our combined ratio improving to 82% for the second quarter of 2023 from 90.5% in the prior year period and to 80.6% for the half year from 89% in the first half of 2022. This was primarily driven by a decrease in our loss ratio as a result of lower catastrophe and large losses for both the quarter and year-to-date periods, as well as lower attritional losses compared to the first half of 2022. When looking at our capacity and large losses for both the quarter and the half year, they were $64 million, which included losses related to the Sudan conflict, severe convective storms in the U.S., and from cyclone Gabrielle in New Zealand. These events impacted our Aviation and Aerospace, Property Direct and Facultative, and Property Reinsurance lines of business. This compares to $80 million and $144 million of catastrophe and large losses in the second quarter and first half of 2022, which related primarily to the Ukraine conflict, European storms and Australian floods. Moving on to our prior year reserve development. We had net favorable prior year development of $2.4 million and $4.5 million for the quarter and half year of 2023. This compares to net favorable development of $10.9 million and $15.5 million in the prior year periods. I'd like to take a moment here to touch briefly on our exposure to Russia's ongoing invasion of Ukraine, which has impacted multiple lines of business, including Marine, Aviation, political risk, trade credit, and more political violence. Our reserve for losses and loss adjustment expenses, net of reinsurance, was $148 million at June 30, 2023, compared to $146 million at March 31, 2023, and we believe we are well reserved based on our assessment of the current environment. Moving on to expenses. Including all our segments, post the acquisition expenses from third parties increased to $122 million or 28.5 points of the combined ratio for the quarter from $83 million or 24.6 points of the combined ratio in the prior year period. For the first half of 2023, policy acquisition expenses from third parties increased to $227 million or 27.9 points of the combined ratio from $151 million or 22.9 points of the combined ratio. The increase in our policy acquisition expense ratio reflects a change in business mix, primarily driven by the growth of our Specialty segment. Fidelis MGU commissions were $53 million or 12.3 points of the combined ratio for the quarter and $77 million or 9.4 points of the combined ratio for the first half of 2023. The MGU commission relates to seating, 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 $19 million or 4.3 points of the combined ratio for the quarter, a decrease from $42 million or 12.4 points of the combined ratio in the prior year period. For the first half of the year, general and administrative expenses were $35 million or 4.3 points of the combined ratio, a decrease from $77 million or 11.7 points of the combined ratio. The decreases were primarily related to the reduced headcount following the consummation of the separation transactions. The 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 $27 million for the second quarter of 2023 compared with $7 million in the prior year period. For the first half of 2023, our net investment income was $48 million compared with $13 million in the first half 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 half year of 2023, we invested $1.3 billion in fixed maturity available for sale securities with an average investment yield of 5%. We remain conservatively positioned with 98.4% of our investment portfolio held in fixed maturity and short-term securities, with an average duration of 1.7 years at June 30, 2023. This asset strategy approximately matches our liability duration of 2 years and 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 $17.86 at June 30, 2023, an increase of 10% from the adjusted book value per diluted common share following the separation transaction, which was completed on January 3, 2023. The increase was driven by net income and net unrealized gains reported in other comprehensive income. As of June 30, our common shares outstanding were 110,771,897. On July 3, reflecting our primary capital raise in our IPO, our common shares outstanding were 117,914,754. For both periods, we had 960,870 unvested restricted share units. Overall, we are well capitalized against our rating agency and regulatory requirements and are well positioned to continue investing and managing our capital with the goal of generating strong return on average equity for our investors. Given the current environment, our primary focus is on investing in the business and taking advantage of some of the pricing dynamics we are seeing in the hard market. This is exemplified by our raising of an additional $100 million in primary capital during the IPO. Longer term, our goal for our capital returns program is to balance ordinary payouts from operating net income and releases of excess capital with the need to take a prudent and efficient approach to capital sufficiency. To conclude, I'm very pleased with our financial performance in the second quarter and through the first half of the year. I will now turn it back to Dan for additional remarks on our outlook for the market.

Thanks, Allan. I'm very pleased with our positive momentum and results for the quarter and overall for the first half year of 2023. We have delivered an annualized ROE for shareholders of 18.2% and we are confident in our ability to deliver our long-term target ROE of 13% to 15%, as consistent with our target communicated at IPO. Demand remains strong, and we continue to see opportunities amidst the challenging risk environment. We believe our exclusive access to Richard Brindle and the world-class underwriting team at the MGU, coupled with our deep risk management and capital application expertise, position us well for continued strong performance. Our agile and focused teams are tirelessly working to create value for our clients and shareholders while prudently pursuing the opportunities presented by the hard markets. As we progress into the second half of the year, we are in a strong financial position and we'll take a balanced, prudent approach in deploying capital. We remain well positioned to benefit from the prevailing hard market conditions and have a strong product line of opportunity across our Specialty and Bespoke business. In Specialty, we expect our Property Direct and Facultative portfolio will continue to offer attractive opportunities to deploy capital, given the market constraints and ability to achieve differentiated pricing and terms and conditions. In Bespoke, we continue to see significant demand for tailored and specialized products. As a result, we anticipate that our gross premiums written will continue to increase in the first quarter of 2023 compared to the prior year quarter. Going forward, we will remain disciplined against our long-term strategic priorities, which are as follows: firstly, to continue to be nimble and proactively manage our portfolio to drive growth with a compelling balance of risk and reward across our three underwriting pillars. Secondly, to focus on underwriting profitability across all market cycles and maintain diversified exposure in our business lines. Thirdly, prudently and proactively manage capital to generate superior risk-adjusted returns. Fourth and finally, continue to operate in a position of financial strength that positions us as a provider of choice for policyholders and allows us to take advantage of large or sudden market pricing dislocations. Our ability to deliver in line with our long-term strategy is evidenced in our half year results. Our structure has enabled us to leverage our expertise and take advantage of marketplace dynamics. We are underwriting attractive business. We are driving increased profitability. We are generating compelling returns and growing our earnings, all while maintaining prudent capital levels and a strong balance sheet. Now before handing over to Q&A, I'd also like to take a moment to touch on the recent wildfires in Hawaii. Our thoughts go out to the families and communities affected by this devastating tragedy. At this time, we'll continue to monitor our exposures closely, and we'll provide updates as appropriate. Now I'll turn it to the operator for your questions.

Our first question comes from an analyst from JMP.

First question, could you provide some insights on how the Property market has progressed so far this year? Specifically, I am curious about whether the lower retention and more attritional segment of the market, which you've managed to avoid losing from, has changed in a way that might make it more appealing for you in the future as losses continue to occur. Or do you still believe that the risk/reward isn't aligned with your objectives?

Yes, I think the short answer is we don't see ourselves moving back into the attritional space under any circumstances. We are very comfortable with how we've positioned the portfolio. As you know, and as we've stated many times, we've had significant concerns about the effects of climate change, claims, and social inflation, and how these factors are incorporated into our model. We have been able to move up and out of attritional losses. We have optimized the portfolio by focusing on core clients who outperform the market. Therefore, I do not believe we will change that strategy regardless of pricing.

Okay. Great. And then just one quick number question probably for Allan. You talked a bit about Net Investment Income and the $27 million in the quarter. It sounds like that's pretty clean, just investing at higher rates? Or is there anything in that number that is one-time in nature that we should take into consideration as we think about how it builds going forward?

Yes, thanks, Matt. There's nothing unusual to report. As you remember, we maintained our cash reserves last year, ending with $1 billion. Since February of this year, we have been actively investing that capital, deploying $1.3 billion at reinvestment rates around 5%. We're comfortable with our current position and have optimized our investment strategy, with no plans for changes in the near future.

Congrats on the quarter.

Your next question comes from Tracy Benguigui from Barclays.

You reiterated your 13% to 15% ROE target, though now you're on an ROAE basis. You're well north of that in the first half of the year. Is your 13% to 15% target long-term through cycles? Or do you view your earnings performance in the first half of the year more of an anomaly?

Yes, Tracy, thanks for that. As we stated in the road show during the IPO process, we do view the 13% to 15% target as a long-term return that we can achieve throughout the market. We believe with our conservative investment strategy, but along with the underwriting strategy we have and our outwards reinsurance purchasing, that we can manage through the cycle and achieve those returns with the best-in-class underwriting team at the Fidelis MGU. So we view that as a long-term target throughout the cycle, especially now that we've pivoted away from some of the Reinsurance segment business that we've previously had and moved more into the Specialty and Bespoke areas; we believe that target is achievable going forward.

To be sure, it feels like your reinsurance premium growth was all rate-driven, not exposure-driven. You mentioned that reinsurance optimization efforts reflect our proprietary view of risk, and you have concerns about inadequate pricing, climate change and inflation. But I mean, you are growing Property Direct and Facultative. You're exposed to similar risks like climate change. Why is the primary side a better spot to be?

Yes, great question, Tracy. We have certainly seen improvements on the reinsurance side. Considering our RPI of 171 this year, it's important to note that there has been some market improvement compared to last year. In the Property Direct and Facultative market, we've experienced compounded increases since 2019, making it one of the most challenging markets we've encountered in our careers. This allows us to take a more focused approach in limiting coverage to strategically position ourselves within a program, particularly regarding certain secondary risks. We can leverage our scale, line size, and leadership to achieve better results in Property Direct and Facultative. Additionally, it's easier to find reinsurance support, as there is a larger pool of capital available for this product line, unlike retrocession, which operates alongside the reinsurance treaty book.

Your next question comes from Meyer Shields from KBW.

First question, with regard to the Russia-Ukraine reserves, was it just a $2 million change? Or were there any paid losses in the quarter?

Yes, I think there's nothing in the first half of this year that's led us to change how we view our exposure to Russia-Ukraine. What I'll do is ask Jonny Strickle, who's our Chief Actuary insurance group, and he was the former Head of Reserving at Fidelis when the conflict started. He'll give you a bit more detail on our approach and methodology regarding the reserves and the losses during the conflict.

Yes. As you recall, our main exposure here is around the Aviation portfolio. A year ago, we established a framework reserving for that. We considered all the various outcomes that have come as a result of this, and you might recall two different policies that play two different perils. There is a lot of uncertainty around the amount of aircraft that could ultimately be subject to loss. So there's no real change on that over the year. What we do is update if new information becomes available. We tweak the assumptions that feed the framework. But over this quarter, there's been no material change to that at all. Any movement in the reserve is mostly due to FX and earnings coming through on some of the other much smaller exposures.

Okay. Fantastic. Switching gears, if I can. You talked about the portfolio duration obviously being short, and I understand that. It's a little shorter than the liability duration and I'm wondering whether that's intentional and/or subject to change?

Last year, we decided not to reinvest any maturities in our portfolio during the latter half of 2022 due to the rapid increase in interest rates and the Fed's efforts to combat inflation. This led to our duration dropping from around 2 to approximately 1.2 by the year's end. As we gained more confidence in the Fed's direction and the reinvestment rates early this year, we began reinvesting the cash we had set aside along with new maturities. By June 2023, we had invested $1.3 billion, achieving a yield of 5%. We are now returning to our target duration as it was a deliberate choice to shorten it in 2022 given the circumstances. We plan to gradually work our way back to a liability duration of 2 throughout 2023, doing so in a measured manner rather than jumping in all at once. We anticipate being at our target duration soon.

Your next question comes from Mike Zaremski from BMO.

I think you mentioned this briefly, but regarding the pricing environment, it’s evident that you anticipate tough market conditions to continue. I'm interested if you could provide any figures on the sequential change in pricing. I saw in your release that there's a metric of RPI, which Fidelis uses to evaluate an approximate index of rate increases for a specific set of contracts. I'm wondering if you could share how that RPI has trended.

Yes. As we mentioned earlier, we've seen trends for the first half of the year by pillar. In our Bespoke pillar, there was a rate increase of 118%. Typically, this pillar is insulated from market cycles due to its unique products, but factors such as terrorism, political risk, and the ongoing conflict have caused some dislocation. In Specialty, the rate per index, or RPI, at the halfway point was 128%. Specialty areas like Marine, Aviation, and the Property Direct and Facultative books have experienced year-on-year price increases for the past four or five years. In Reinsurance, the RPI reached 171. I would like to emphasize that we see no signs of the market softening. Our insurance group participates in daily underwriting calls with the underwriting team, providing real-time insights into the rating environment across all our lines of business. Daily, we are witnessing those compound increases as the supply-demand imbalance continues. While we are not making predictions about the future, we currently observe significant increases, the ongoing supply-demand imbalance, and persistent issues like climate change, deteriorating casualty costs, social inflation, and the geopolitical landscape as key factors sustaining the hard market. Nothing significant has changed in this regard. Notably, there hasn't been any new substantial capital entering the market, nor have there been any start-ups, which is unusual for previous hard market cycles. We believe that capital will return in significant amounts only when the industry can deliver stable and consistent returns. Overall, we have seen good rate increases and maintain a strong pipeline across all pillars, but we do not expect the supply-demand imbalance to shift at this time.

Got it. Okay. I'll dig in more on the RPI numbers and try to compare them to last quarters. But my follow-up is on the Bespoke segment, excellent results. There was, again, a decent amount of reserve releases. Is it worth any color on those releases? The color says just lower loss experience in our assumptions. Is this a segment where we're going to just have volatility in releases? Or are you trying to build in more cushion? Just any color on that would be great.

Well, I'll ask our Chief Actuary to take that one. Jonny?

Yes. So if I need one where it's easy to explain to this advert, there's a couple of things to call out. In the case of Bespoke, a favorable this year really is just an absence of claims coming through. So we got more adding asset side and have released through the year, and nothing's really come against it. In terms of volatility and how to think about prior year development and that pillar going forward, there's definitely a need to put some caution into the initial loss estimates. The losses on the dispersed pillar need more assumptions to get to that starting point. We've seen that so far through Fidelis' history. I mean, Bespoke has had consistent favorable prior year development for a number of years. We don't make any allowance for it in our numbers or in any forecast we have internally. We just continue to monitor the products until we feel comfortable enough to start lowering those initial assumptions. I don't see that in the near-term future, because it's constantly evolving, the type of products we look at.

Your next question comes from Yaron Kinar from Jefferies.

My first question probably ties back to Tracy's question earlier with ROEs. And I'm actually looking more at the combined ratio, which was running at just over 80% for the first half of the year. I think that compares to mid-80s or higher than you were expecting over the long run. So I guess, again, similar to Tracy's question, is this really driven by a hard market and you'd expect that ratio to go up over time? Or are there other elements that are allowing you to achieve that 80% or a much better than expected combined ratio?

Yes, it's Allan. Thanks, Yaron, for the question. It's a great point. As you know, we focus on combined ratio, which is our key metric along with return on equity when we assess our internal performance. You are correct about our targets for combined ratio and its impact on return on equity. We've had a great quarter and a strong half year, and we would love to maintain this combined ratio moving forward. As mentioned in our prepared remarks and filings, the lack of large losses and catastrophes in 2023 has positively influenced our loss ratio. Additionally, attritional losses are performing better than anticipated. We've made advancements in our programs, particularly in the reinsurance area, which has also contributed to our favorable attritional loss ratio and our management of catastrophes. In our Specialty segment, as Dan pointed out, we can better target the risks we prefer, both geographically and in terms of the type of risk involved. However, we would never claim that our current half-year performance or combined ratio is something that can be consistently maintained. Over the long term, we believe that the percentages you mentioned earlier are likely achievable throughout the cycle. Much of it is rate-driven; it's not solely about losses but also about the premiums. The supply-demand imbalance in the market persists, allowing us to secure strong rates. Therefore, we believe that the combined ratio percentages you referenced are attainable over the cycle, and currently, we are seeing favorable conditions that have resulted in our combined ratio exceeding those impressive figures.

Yes. I think working with the MGU that has a track record of outperformance and with our capital management throughout the cycle, we're well positioned to produce peer-leading performance on combined ratios and returns. Our job here is to manage the capital through the cycle, but we're certainly having a very strong underwriting team to work with, especially market, which is really helping that process.

That's a very comprehensive answer. And then maybe shifting a little bit to another area. We saw some headlines regarding Fidelis in the industry with recent developments regarding collateralized reinsurers. Do you have any exposure, whether directly or to collateralized reinsurers?

We did not have a trading relationship with recent developments and we have no direct exposure. We have over our history, both collateralized products. We tried and tested partners. We've been through a lot of scenarios with them. So we feel confident, but we're always evolving how we analyze review, check to make sure the process is robust. But to answer your question, we have no exposure.

Okay. And what about letters of credit? Do you have exposure to collateralized reinsurers with those letters of credit?

It's Allan, thanks, Yaron. No, generally, we stick to highly rated reinsurers and we go through a very thorough security committee process with each and every purchase of reinsurance. There are the odd contracts, though, where we do have collateral, often in trust. You think of our Herbie rebounds; there are a few letters of credit, but very immaterial to our overall portfolio. Again, we focus on working with partners that have high ratings, are in the market. We work with them long term, so very minimal exposure to any letters of credit.

Your next question comes from Mike Ward from Citi.

In the press release, Mr. Brindle mentioned new opportunities in products and distribution arising from the new structure. Just wondering if you could maybe expand on that a bit.

Yes, I can do that, Mike. We have a very solid pipeline of new opportunities. We're just actually getting to the stage of bringing a new contract in September in the Aviation segment. That's just one that's happening at the moment, and we have a pipeline of several others. We're always interested in looking at evolving market conditions and seeing where we can fit in and actively grow the portfolio, and we'll continue to do that.

Yes. I think today, this has obviously built a reputation for innovation through the Bespoke pillar. So we have a number of contract frustration ventures that we hope to establish during the second half of the year. We're also seeing a resurgence of interest in political risk with a strong deal flow there. I think with our Bespoke pillar, especially, we're very much on track to meet the goals for the year. We had a couple of contracts that moved in Q2, and we'll hopefully bind in Q3 with substantial premium. So very much on track in terms of innovation pipeline, both of Bespoke and Specialty.

Awesome. And then maybe a longer-term question. Just curious if you could elaborate on the plans for potential capital return?

Yes. Obviously, we just raised capital as part of the IPO. We raised $100 million and we are planning capital where we think we can get the best returns for our insurers and stakeholders, including our investors. Right now, we believe given the dislocation in the market that deploying it in the insurance and reinsurance space is the best strategy. We will, as we move forward into our planning process for 2024, consider our capital plans in terms of dividend strategy and how much capital we're going to deploy in underwriting. We believe we are well-capitalized against our rating agency and regulatory requirements, and we see no constraints on that perspective. In the longer term, our goal is to implement a dividend strategy, which will be based on ordinary payments from operating income. We will release excess capital as needed and when we see the time is appropriate, in the form of special dividends and share buybacks. While it's still early, we will work with our Fidelis MGU to see where we can deploy capital and where we think it's best in the underwriting cycle. We'll communicate with you transparently when we start implementing a potential dividend strategy or any other capital returns to shareholders.

Your next question comes from Brian Meredith from UBS.

Two quick questions for you. The first one, any exposure to the Hawaii wildfires?

Yes, thanks. As we mentioned earlier, the assessment is ongoing, and we're continuing to closely monitor our exposure. We are trying to get our arms around the situation, so we're not ready to provide a figure at this time, but we will provide an update when we've got more data at an appropriate time.

Great. And then second question, I'm just curious, what impact, if any, would some of the proposed changes to the media tax rate happen on your tax rate?

Yes, I'll take that one, Brian. Thank you, I am Allan. Obviously, we're a Bermuda company, incorporated here. It's too early to comment really on the tax proposal that Bermuda has. We continue to engage with our trade group, the Association of Bermuda Insurers and Reinsurers, as well as with the Bermuda government. We are working with our advisors to look at the implications of it and we'll continue to work with them through the proposal process. We've historically worked with our advisors as well, because Pillar 2 came out in the U.K. and Europe a couple of years ago. We've been working on our tax strategy in the background. We're pleased to be in Bermuda. We have a productive work environment here. The regulatory capital and human resource pool here is very strong. We'll continue to evaluate the tax proposal as it develops and communicate with you on any plans or changes in the future. It's too early to comment on any impacts at this point in time.

Your next question comes from Pablo Singzon from JPMorgan.

I just wanted to follow up on the combined ratio discussion. MGUs were higher than we had thought this quarter, but I think they're still below the run rate level, right? So if you start with this quarter as a base, I think they were about 9% of net written premiums. Where do you think that ratio ultimately settles? What offsets the components to the combined ratio do you see as MGUs fully ramp up?

Yes, I'll take that one, Pablo. Thanks for the question. As you know, we look at combined ratio overall. We have a best-in-class underwriting platform with the Fidelis MGU and best-in-class underwriters there. We believe our first half performance is a clear demonstration of our model with them, and our alignment of interest and the performance of the MGU reflects that. The MGU expenses of $77 million in the first half are within the range we expected, and the agreement is operating as intended. We may see some variation in fees from quarter to quarter, given the fee structure. A reminder on how the fee structure works: There are two primary components: a ceding commission and a profit commission. We believe the way they operate reflects the alignment of interest between the two parties. We had a very good first half underwriting result, 80% combined ratio. As a result, there is a profit commission payable to the MGU, which is why the percentage may be a little higher than you would see in a quarter when there are no profit commissions. Ultimately, we believe our combined ratio represents the best measure of performance on this front, and our performance here is among the best in the industry. We're comfortable with the fee structure. We believe in aligned interests. In terms of run rate, it can fluctuate from quarter to quarter, and we'll certainly be transparent in the calculations on how the ceding commission works and how the profit commission works going forward.

Okay. And Dan, I just wanted to follow up on your Hawaii comments. I'm not looking for specific numbers. And I know Hawaii is not a large insurance market, but it's viewed by some insurers as a diversifier to the global profit portfolios partly because of a scenic exposure to hurricane risk. Is there anything unique about your exposure there? For instance, are your attachment points lower than other geographies? Are you more exposed to local companies? And as you think about your net limits, are you more exposed to commercial property or homeowners in Hawaii?

Yes. As I said, it's just too early. We're still waiting for data points to come through. We do write reinsurance and obviously, direct. So it will probably be more commercial-based. What I can say is we do buy significant reinsurance to protect that particular territory. But we're still working through a loss number. So I don't think it's appropriate to comment any further.

Your next question comes from Meyer Shields from KBW.

I just wanted to follow up quickly to see if there's any equivalent to the RPI on the loss side or whether you can comment on generally what the loss trend looks like in the Specialty segment for you?

Yes. So we do consider the loss trend when we're looking at the RPI measure as well. When we build it into the filing process, we'll consider additional trends that we want to go on top. For example, we think the inflation environment has changed materially from the point of pricing, and we'll factor that in as well. You can't let the RPI trend go straight down to the loss ratio. You have to make other announcements that will take into consideration for the '24 planning process, which we're going through now.

And your next question comes from Tracy Benguigui from Barclays.

Just real quick, going back to the 13%, 15% ROE target. Are you comfortable sharing a near-term ROAE target, given where we are in the cycle?

Yes. Again, great question, Tracy. Obviously, we're in a hard market. It's the hardest market we've seen in many years. As we head into Q3, which is a heavy catastrophe season, even though we don't write a lot of reinsurance anymore, it's really difficult to say the short-term target. We're focused on the long-term target of 13% to 15% ROE, as we said during the IPO, that is achievable. We're not comfortable in updating or giving guidance in the short term.

Really quick back to the discussion on the new Bermuda tax rate proposal. I thought I saw one of your SEC disclosures that you have existing exemption until 2035. Is that the case?

Our Bermuda operating subsidiary, Fidelis Bermuda, currently holds the 2035 certificate, which most in the industry apply for. We plan to collaborate with the Bermuda government on this. We are exempt in our Bermuda operating subsidiary for now, but we may decide against proceeding with it for various reasons. We will assess the tax credits available and other offsets we are exploring with the government. We appreciate working in Bermuda and value our company’s base there. Although we have the certificate, we intend to work cooperatively with the Bermuda government.

Many others have asked about the Maui wildfires are still assessing. But is there anything you could share on Hilary or California quake?

Yes, it's Allan. Obviously, no, it's too early to call, especially in California. The quake and the storm that went through has obviously happened this week. There's nothing we can really point to at this point.

Some of your London-based competitors are establishing U.S. E&S carriers, I believe it's to improve distribution efficiencies. I'm sure you're thinking of this. Is that a strategy you would also want to replicate?

No, I think we get great access effectively to that E&S market through our Direct and Facultative underwriting. We get very strong support in Bermuda from Bermuda brokers and U.S. brokers, in London from the London and Continental brokers. So that is our distribution path. That is our strategy.

Your next question comes from Lee Coperan from Omega Family Office.

I think you really addressed most of the questions. I'm just wondering whether you're sandbagging things. Your investment portfolio is well situated, and we're having a rising rate environment, and you're in a very hard market. I'm wondering whether your 13% to 15% normalized ROE is too low. As the world gets used to more climate change issues, it seems your risk in your business is greater, and maybe you should be shooting for a higher ROE over the cycle. Also, since we have a follow-up question, what is your guys' view of your stock price versus your book value versus your normalized earnings?

Hi, Lee. Thanks, it's Allan. I'll address both questions. Obviously, as a newly public company and with changes in our portfolio and pivot from reinsurance to Specialty, we have looked hard at our target ROE through the cycle. We believe that target is achievable with less volatility than some of our peers who may take on more risk on the capital front. The term sandbagging has certainly been mentioned. We don't think that's how we view it in the long term. We think that hard markets, soft markets, the transition to those markets at the 13% to 15% return on equity is an achievable amount. We're sticking to that, as we reported during the IPO road show. In terms of our share price, our shares were issued less than 2 months ago. Obviously, we did a lot of work and a lot of investor relations, met with a lot of people. I worked with our sell-side analysts, many of whom are on the call today, who are a great group following us. We would like to increase that price, and we think that producing best-in-class underwriting results, working with the best-in-class underwriting team at Fidelis MGU, producing results like we had this quarter, and proving that the model works, and management is good at managing capital as well as the investment portfolio, we believe the share price will get where it needs to be and where it should be going forward.

Okay. Thank you. We are now out of time. Thank you for all your questions. Thank you for your patience and attendance today. I'd just like to close out with a few comments. Thank you again for joining us today. In closing, we have built on our strong first quarter performance with an excellent second quarter that demonstrated the value of our market lead positioning, our business model and a structure that allows for strong execution across all aspects of our strategy alongside the MGU. Looking ahead, we believe we have a unique and diverse portfolio mix with scale across our three business pillars. A differentiated underwriting position does us well to take advantage of the opportunities we see in the markets today, as well as to navigate across market cycles. A 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. Thank you very much for your time today, and have a great day.

This concludes today's conference call. Thank you for joining, and you may now disconnect your lines.