Pelagos Insurance Capital Ltd Q2 FY2025 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Fidelis Insurance Group's Second Quarter 2025 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 Fidelis Insurance Group's Second Quarter 2025 Earnings Conference Call. With me today are Dan Burrows, our CEO; Allan Decleir, our CFO; and Jonny Strickle, our Group Managing Director. 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 and emerging information developing over time. These risks and uncertainties are described in our second quarter earnings press release, our most recent annual report on 20-F and other reports filed with the SEC, which are available on our website at fidelisinsurance.com. 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 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 review the safe harbor regarding forward-looking statements included in our second quarter earnings press release available on our website, fidelisinsurance.com as well as our other 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 reconciliation to U.S. GAAP for each non-GAAP financial measure can be found in our current report on Form 6-K furnished to the SEC yesterday, which contains our earnings press release and is available on our website at fidelisinsurance.com. With that, I'll turn the call over to Dan.

Thanks, Miranda. Good morning, everyone, and thank you for joining us on our call today. I'd like to take a minute before discussing our quarterly results to reflect on the past 2 years since our IPO. I'm incredibly proud of our firm's achievements during this time. We have established ourselves as a market leader with a high-quality scaled and diversified portfolio focused on short-tail specialty risks. Our strategy, structure and lead positioning have provided us with the flexibility, discipline and market access to deploy capital where we believe there are attractive risk-reward opportunities. And we have demonstrated our ability to balance the pursuit of profitable underwriting with capital returns to shareholders. In fact, since 2022, we have delivered gross written premium growth of 54% and increased our book value per diluted share by 39%, including common share dividends. This year also marks the 10-year anniversary of the launch of Fidelis. The Fidelis partnership remains our cornerstone partner, writing over 100 products across our 10 major lines of business. Since our inception, we have maintained a collaborative and innovative approach to underwriting and leveraged our long-standing relationships with brokers and clients to establish lead positioning and facilitate cross-sell opportunities. The Fidelis partnership has set a high bar for any additional partnerships, but we are actively expanding our platform as we continue to evolve our business with a focus on deploying capital to the right risks. This year, we have successfully onboarded new strategic partners with proven track records in highly accretive lines of business, and we continue to see an exciting pipeline. Our structure continues to work exactly as intended, providing access to the best underwriters in the industry and ensuring an enhanced level of rigor around risk selection. Turning to the quarter. I want to highlight 3 key takeaways, all of which will be important context for today's discussion. First, any remaining exposure to the Russia-Ukraine lesser policy litigation is insignificant, and we can now draw a line under this. Secondly, we continue to take advantage of profitable growth, supported by very attractive margins across the portfolio as a whole. And finally, our capital position remains strong, which gives us the flexibility to enhance shareholder returns as demonstrated by the recent expansion of our capital management initiatives announced last week. With this in mind, through the first half of the year, we grew our gross written premiums to $2.9 billion, resulting in year-to-date growth of 9%, driven by high retention levels and new business opportunities across the portfolio, including business from third parties. The combined ratio for the quarter was 103.7%, reflecting the impact of the English High Court judgment on the Aviation and Aerospace line of business in relation to Russia-Ukraine lesser policy litigation, which was within the range of expected outcomes we disclosed last quarter. Our annualized operating ROAE was 2.3% for the quarter with net income of $20 million and operating net income of $14 million. Excluding the impacts of Russia-Ukraine lesser policy litigation, we have outperformed our through-the-cycle targets, achieving a combined ratio in the mid-70s for the quarter and significantly surpassing our ROAE targets. Additionally, we would have significantly outperformed our year-to-date targets on both the combined ratio and ROAE basis. With the line drawn under this, we are focused on capitalizing on the opportunities ahead of us to drive accretive growth and returns. Taking a close look at performance across both of our segments. Our position as a market leader enables us to achieve favorable signings with preferential rates, terms and conditions, upholding a clear differential to markets. Within our Insurance segment, we delivered 7% premium growth in the quarter as we continue to deploy capacity into higher-margin areas, supported by a strong flow of new business across the portfolio. Overall, our segment RPI was flat for the quarter as we maintained our disciplined approach and walked away from underpriced business. Our direct property book continued to deliver strong returns, benefiting from the compound rate increases we have achieved on a sustained basis. It's important to understand that property is a highly verticalized market. This allows us to achieve significant pricing differentials compared to subscription market players. As a market leader, we are positioned to write private layers and leverage our line size and flexibility to deploy across programs and offer clients capacity on a cross-class basis. This has enabled us to achieve high retention levels and maintain our discipline on terms, conditions and rate movement to achieve leadership terms and pricing. Overall RPIs are down slightly, but the pricing adequacy of our portfolio remains at one of the highest levels we have seen in decades. Asset Backed Finance & Portfolio Credit remained a core growth driver as we executed on a number of pipeline structured credit deals and continue to recognize revenue from our third-party relationships. These more bespoke insurance lines, where the buying motivation is often driven by capital relief or underlying transaction facilitation, are insulated from traditional insurance pricing cycles, and we continue to see a healthy pipeline with both new and repeat clients. We need substantially all of this business, demonstrating the value we are able to bring clients on structuring value-adding products. We see aviation as the most challenged part of our portfolio, and we will not write business that does not meet our underwriting hurdles. As such, we have not renewed certain accounts originally forecast for the year. We continue to monitor developments in pricing and leverage our line across the subclasses. We are beginning to see signs of small pricing adjustments on select accounts in the all risk sector given heightened loss activity and remain well positioned to take opportunity where we see margin and adequacy. As a reminder, we are not willing to compromise on our underwriting discipline, and we will continue to deploy capital in more accretive ways until we see signs of sustained market improvement. Turning to Reinsurance. On the back of strong growth over the past few years, our premium in the quarter was broadly in line with prior year as we continue to focus on optimizing the portfolio with core clients. We are seeing some movement in rating in certain parts of the portfolio due to increases in capacity levels, but the fundamentals of this portfolio remain, and we continue to deploy capacity effectively in line with our view of risk. Looking at 4/1 Japanese renewals, being nimble, we shifted capacity from the less compelling excess of loss deals towards proportional coverage, allowing us to benefit from the underlying rate improvements coming through. Rate adequacy largely held at 6/1, which was dominated by U.S. property with a number of exceptions on programs where we maintain discipline and walked away. For the 6/1 renewal, our portfolio saw the largest growth in the nationwide, Northeast and Hawaii segments and a modest decline in Florida, which aligns with our strategy and risk appetite going into midyear. We continue to see attractive opportunities to deploy capacity flexibly in line with our view of risk and continued year-to-date growth. Turning to outward reinsurance. It serves as a core component of our portfolio management strategy. This approach allows us to leverage the market on both the inward and outward sides of our book to optimize margins. Our strategy has always focused on using reinsurance to reduce volatility, minimize potential net losses, enhance margins and secure leading positions across lines. We do this through both traditional reinsurance markets and capital markets instruments, and we constantly review our program to optimize protection and manage exposures. Dynamics within the outward market continue to provide attractive opportunities. And we were able to capitalize on these dynamics to sponsor the HerB 7 cat bond, taking advantage of strong investor appetite to purchase $90 million of limit on an aggregate multi-peril and region basis. This replaces the expired HerB 3 bond, which responded as intended to various cat events across the past 12 months. In the traditional market, we successfully renewed cat protections on the D&F book at 4/1, taking advantage of attractive pricing, attachment levels, and capacity. As a reminder, we are an active buyer of a broad suite of products, including index, and across our whole outward program, we achieved a significant improvement in RPIs year-to-date. Turning to capital management. As I mentioned last week, we announced a meaningful expansion of our capital management initiatives, renewing our common share repurchase authorization to $200 million and raising our quarterly dividend to $0.15. As we have said before, we do not believe our current stock price properly reflects the value of our platform. This current dislocation provides an excellent opportunity to deliver value to our shareholders in a highly accretive way. Our strong capital position gives us the flexibility to enhance returns while continuing to pursue attractive underwriting opportunities. And with that, I will pass over to Allan, who will provide more color on our second quarter financial results.

Thanks, Dan, and good morning, everyone. Taking a closer look at our quarterly results, our net income was $20 million or $0.18 per diluted common share. We had operating income of $14 million or $0.12 per diluted common share. This resulted in an annualized operating return on average equity of 2.3%. We continue to grow our book value per diluted common share, which now stands at $22.04. In the second quarter, we grew our gross premiums written by 2% to $1.2 billion, bringing our year-to-date gross premiums written to $2.9 billion, an increase of 9% versus the same period last year. In the Insurance segment, gross premiums written increased by 7% in the quarter to $902 million. This growth was driven by increases in our Asset Backed Finance & Portfolio Credit and Political Risk, Violence & Terror lines of business. Meanwhile, in the Reinsurance segment, gross premiums written were $317 million for the quarter compared to $346 million in the prior year period. For the first half of 2025, gross premiums written increased 7% in Insurance and 15% in Reinsurance as we continue to capitalize on attractive growth opportunities while maintaining a disciplined approach to underwriting opportunities that did not meet our thresholds. Our net premiums written increased by 4% versus the second quarter of 2024, and our net premiums earned increased by 7% for the same period, driven by the growth in net premiums written in the current and prior year periods. Turning to the combined ratio of 103.7% for the quarter. I'll break down the components in more detail. During the second quarter, our attritional loss ratio continued to trend positively, improving to 24.7% and for the first half of the year, 23.7%. This compares to 25.9% in the first half of 2024, reflecting the strength of our underlying portfolio. Our catastrophe and large loss ratio was 13.8% or $74 million of losses, reflecting a lighter catastrophe and large loss quarter compared to the same period last year when our catastrophe and large loss ratio was 36.2% or $181 million. Catastrophe and large losses in the quarter included an Air India loss of $26 million in our Aviation and Aerospace line of business. We recognized net adverse prior year development of $89 million in the second quarter. This compares to net favorable prior year development of $69 million in the same period last year. The Insurance segment experienced net adverse development of $113 million in the quarter. As discussed, this primarily relates to the judgment handed down by the English High Court regarding the Russia-Ukraine aviation litigation. Excluding the judgment, we are pleased with the strong performance of the underlying Insurance portfolio as we recognized favorable reserve development across the book, including better-than-expected loss emergence in our Property line of business. We continue to have net favorable development in the Reinsurance segment, which was $24 million in the quarter, driven by positive development on prior year catastrophe losses and benign prior year attritional experience. Turning to expenses. Policy acquisition expenses from third parties were 31.4 points of the combined ratio for the second quarter compared with 28.4 points in the prior year period. While we may see movements quarter-to-quarter, policy acquisition expenses are in line with expectations, and we continue to anticipate our annual policy acquisition expense ratio to be in the low 30s and in the mid-20s in the Insurance and Reinsurance segments, respectively, in line with our half year results of 30.6% in Insurance and 23.4% in Reinsurance. The Fidelis partnerships commissions accounted for 13.1 points of the combined ratio for the quarter compared to 15.0 points in the second quarter of 2024. There was no profit commission accrued in the quarter as the underwriting profits did not meet the required hurdle. Finally, our general and administrative expenses were $22 million versus $24 million in the second quarter of 2024. The decrease in expense was driven by lower variable compensation accrued in the quarter. Moving on to our investment results. Our net investment income for the quarter was $45 million compared to $46 million in the prior year period. In addition to our net investment income, we had net unrealized gains on other investments of $5 million as a result of our strategic deployment of assets into a diversified hedge fund portfolio at the end of 2024. This portfolio now represents approximately 5% of our total investable assets and is part of our ongoing strategy to generate superior risk-adjusted diversified investment returns and enhance shareholder value. As of June 30, the average rating of our fixed income securities remains very high at A+ with a book yield of 5.0%, reflecting the steps we have already taken to optimize our portfolio. Average duration remains consistent with year-end at 2.8 years. Turning to tax. Our effective tax rate for the first half of the year was 18.9% compared to 14.6% in the first half of 2024. This rate reflects a greater proportion of pretax income generated in higher tax rate jurisdictions. For the full year, we expect our effective tax rate to remain in the 19% range given the expected mix of profits and losses across the 3 countries. Looking at our capital management strategy. During the quarter, we executed a number of key actions, and we recently announced a significant expansion of our capital management initiatives. We continue to return capital to shareholders through a combination of dividends and share buybacks. In the second quarter, we repurchased 5.5 million common shares for $88.7 million at an average price of $16.17 per common share. This includes 3.1 million common shares that were repurchased through a privately negotiated transaction with CVC, who remains one of our long-standing shareholders, having owned our shares since our founding. This brings our shares repurchased year-to-date to 6.9 million common shares at an average price of $16.01. That's approximately 73% of our current diluted book value per share and that's highly accretive on both a book value and earnings per share basis to our shareholders. Since the commencement of our share repurchase program in 2024, our strategic approach to share repurchases has provided $79 million to shareholders or $0.73 to our book value per share. Additionally, last week, we announced that our Board approved a renewal of our repurchase authorization given the strength of our balance sheet, which brings our total current authorization to $200 million. The Board also approved an increase to our quarterly common dividend to $0.15 per share, bringing our dividend yield to 3.6%. Also on the capital management front, we successfully completed a $400 million issuance of fixed rate 30-year subordinated notes during the quarter. The offering was met with robust demand from our broad base of high-quality institutional investors, which we view as a clear vote of confidence in our balance sheet, our underwriting strategy and long-term growth outlook. Our debt to total capital ratio stands at 26.6%, which reflects the raising of the subordinated notes and the redemption of our remaining preference securities. Our capital position provides increased flexibility as we look ahead, including as we approach the interest rate reset for our junior subordinated notes in April 2026. Another important part of our capital management strategy is outward reinsurance, and we are constantly optimizing our purchasing program. As Dan noted, we sponsored a new cat bond under our HerB reprogram during the quarter, which resulted in a slight increase in our ceded premium written. For the full year, we continue to estimate that a 40% session rate across our entire portfolio is the right way to think about it. Within the Insurance segment, this rate would be closer to the mid-30s, while in the Reinsurance segment, it will be closer to the 50s. To give some further context around our key natural peril exposure, our 1 in 100 windstorm clash for Southeast Gulf and Caribbean and our 1 in 250 California earthquake PML are both less than 10% of shareholders' equity, excluding AOCI. In conclusion, we remain confident in our business and the strength of our portfolio. We are well capitalized and committed to deploying capital to accretive opportunities that maximize shareholder value. I will now turn it back to Dan for additional remarks.

Thank you, Allan. Looking ahead, our focus remains on striking the optimal balance between underwriting growth and other strategic uses of capital. As I mentioned earlier, we believe share repurchases are a highly accretive use of capital right now given the considerable discount to our net book value. The trading environment remains highly favorable on our nimble underwriting approach and leadership position across core lines means we are well positioned to optimize the portfolio and capitalize on attractive risk-reward opportunities, where price adequacy remains strong after years of compound increases. Given the dynamics of the market and the other capital opportunities at our current share price, we now expect underwriting growth for the full year to be approximately 6% to 10%. In Insurance, we take a holistic view of the market, targeting areas of growth to optimize margin and continue to execute a disciplined approach in areas of increasing competition. In Asset Backed Finance and Portfolio Credit, we are seeing a strong pipeline of structured credit deals and a buildup of activity as we head towards the end of the year. In Property, we continue to forecast high retention rates, margin and profitability, supported by years of compound rate increases, our market differential and the strength and diversity of our distribution network, we continue to take advantage of new business flowing into the E&S market with strong pricing credentials. In Marine, the market is stable, and we continue to build a balanced portfolio by leveraging our capacity across subclasses and leaning into new marine construction opportunities. And in Aviation, while we are beginning to see signs of some pricing adjustments in the all risk sector with single-digit rate increases, we are not willing to compromise on our underwriting discipline, and we'll continue to deploy capacity in more accretive ways until we see signs of sustained improvement. In Reinsurance, with the majority of premiums now written for the year, we continue to optimize the portfolio with a focus on top-tier clients. And as mentioned earlier, we remain focused on managing exposures in line with appetite through targeted deployments and the use of outward reinsurance. At 7/1, we saw a number of loss-impacted California wildfire opportunities with compelling price increases. Post-loss pricing supports an overall positive RPI with better pricing in the U.S. and flatter pricing internationally. As we look ahead, our focus is now on the remainder of the year and the U.S. wind season, which will determine the trajectory of the market into 2026. In summary, I'd like to leave you with a few key points. First, as we move past the uncertainty associated with the Russia-Ukraine litigation, we expect to unlock compelling growth opportunities moving forward. We have unwavering confidence in the business we have built and we are actively managing our portfolio to take advantage of profitable opportunities in what remains an attractive trading environment for market leaders. This includes continuing to actively cultivate a pipeline of new third-party partnerships, which will be accretive to our overall underwriting strategy. And finally, we are leveraging our agility and strong capital position to prioritize an expanded set of capital management initiatives to maximize shareholder value. As we move forward, we are excited to demonstrate the strength of our business and our ability to outperform through the cycle as we unlock new opportunities, capitalize on the current market dislocation and deliver superior returns to our shareholders. With that, operator, we will now open it for questions.

The first question we have comes from Meyer Shields with KBW.

Dan, you mentioned that this year's wind season could determine the trajectory of property cat pricing going forward. And I get that as a concept, but I'm wondering maybe more specifically, since California's wildfires didn't seem to have an impact on pricing outside of California, what sort of loss or losses in Florida or in the Southeastern United States from wind season, do you think it would take to impact overall property cat pricing for next year?

Yes. Thanks, Meyer. And I think that really has been a path that we've seen in recent loss activity. Years ago, a decent sized loss would affect the whole market, and we haven't seen that. We've just seen California wild prices with any real movement. I would say it's really about a capital event. That's what's really going to change the market, something that really hits capital and potentially rating. I think for us, we've got a well-managed portfolio. We're a big user of outward reinsurance. We talked a little bit about some of our key PMLs. So we think we're well positioned. But I think it's really a capital event.

Okay. And switching gears a little bit. I was hoping you could talk about maybe demand for Political Risk, Terror and coverages like that and how that compares to recent years?

Yes. Thanks. I think we have been trading in the Political Risk and that kind of bespoke products for the best part of 10 years now, have an incredibly good loss ratio in the low 30s. So it's been a very profitable business. But it's a very innovative, very high barriers to entry. I think what we've seen now we're fully through COVID that there's been an uptick in underlying deal activity. And remember, what we're looking at are protections that facilitate the underlying transactions, the capital relief, the solvency margin, and we've just seen a bigger pipeline. The key thing is to pick the managers of those underlying portfolios that manage geopolitical risk that manage macroeconomic issues. And in that 10 years, we've been through COVID, we've been through various issues that have affected the market, and it's been a very profitable line of business for us. So we have seen two things: new customers coming to us, which is exciting because I think that shows that we can add value to clients, but also repeat customers, which shows that they're very happy with the service that we're providing. But it's an exciting area for us, strong pipeline. As you know, a lot of those deals tend to see an uptick in activity in Q3, Q4. So we're building that pipeline, but we're very pleased with what we're seeing so far.

Your next question comes from Leon Cooperman with Omega.

Congratulations on your results. But I need a little help in my analysis as I'm not an insurance expert. The company has done an seemingly excellent job in capital management and risk management, which has resulted in the company that's selling at a discount valuation relative to its peers. And checking around the street, it seems that our unusual structure is probably responsible plus the Ukraine issue and the California wildfires, which are behind us. Your book value has been able to rise throughout that period of losses, which is impressive. How do you explain the discount valuation? And is it due to the structure? I know Richard Brindle and he's done an outstanding job and he's a good guy having your team. Why are we selling at a discount valuation?

Yes, thank you, Lee. We fully agree that our stock is undervalued right now. If we consider our performance excluding the impact of the Russia-Ukraine situation for the quarter, we would have been in the mid-70s. Even when looking at Q1, taking into account the wildfires and not excluding the Russia-Ukraine factor, we would be ahead of our plan. Our results are exceptional. It's important to note that the business related to Russia-Ukraine was assessed before the bifurcation, which gives us significant confidence in both the trading environment and how the TFP is developing the portfolio. It’s mature, diversified, optimized, and highly profitable. Currently, we are in a strong position to repurchase stock because we believe we are undervalued. The performance truly indicates that our structure is functioning as intended, as they are concentrating on the inward portfolio and generating alpha. We have one of the best combined ratios in the market when excluding Russia-Ukraine. While we acknowledge that we are undervalued, this scenario enables us to take advantage of the current dislocation, buy back shares, and expand our share repurchase program, thereby creating immediate value. We will continue to focus on performance, which we believe will reveal the true value of the business. As you rightly pointed out, it should trade above book value. We think we are undervalued, which presents an opportunity for stock buybacks. The structure is operating as it should, aligning the right capital with the appropriate risk. With the situation post-Russia-Ukraine, we can move forward, and the unencumbered results will demonstrate our value to the market.

Yes, I think you said in your formal remarks that the business conditions are still reasonably strong. And I infer that the 15% return on equity would not be a reasonable expectation.

Sorry, we've got a weak line there. Could you repeat the question, please?

Yes. I would say that the 15% return on equity in this environment would be a reasonable expectation or superior to that?

Yes, thank you. If we look at the performance excluding the Russia-Ukraine situation, it reinforces our confidence in the strength of our underlying business and the market conditions. With that in mind, along with the current market dynamics, opportunities for growth, and our portfolio's maturity and optimization, we are in a strong position to meet our targets throughout the business cycle. The second half of the year will be influenced by catastrophe activity, and we feel poised to handle that effectively. Our performance metrics have been very positive to date, so we are optimistic about achieving our targets as the market evolves.

Your next question comes from David Motemaden with Evercore ISI.

Dan, you mentioned that the property D&F RPI was slightly down this quarter. Could you elaborate on its current level compared to last quarter? Also, did you observe this trend continuing into July?

Thank you, David, for the question. The sentiment this earnings season suggests that pricing has become somewhat more challenging in certain areas, particularly in Aviation, which we can discuss later. Looking at the D&F program, we are a leader in our vertical, allowing us to secure better pricing, rates, and conditions. Over the past 5 to 6 years, we've experienced multiple years of compound increases in our book. Our loss ratios have remained in the low 40s, indicating a profitable business. Margins are very strong. It's important to differentiate between market leaders and the subscription market. As one of the larger players in this market, we've experienced flat to approximately a 10% increase in some areas. We have the capability to reallocate capacity across various structures to optimize margins, and we will not chase inadequately priced business. Our retention rates are high, around 90% for the year, which reinforces our relevance to brokers and clients, enhancing our distribution network and contributing to our success. We're witnessing consistent patterns, along with new business shifting from the admitted market into E&S, where some pricing is actually increasing. As a result, we expect our RPIs to be slightly better than the market average, primarily due to our leadership position. While brokers might report headline prices with small lines experiencing significant reductions, this is not the case for leaders like us who can cross-sell and leverage our line size. It may be becoming more challenging to grow, but we have an exceptional and very profitable portfolio.

Got it. Understood. And is it Lloyd's syndicates that are being more competitive and sort of impacting the market there? Just as a follow-up to what you were saying there earlier.

Yes. I think we've talked about this before. It's people who have smaller line sizes and don't have the leverage who can't cross-sell that joined the party a bit late, and they're really in the subscription world and they're fighting over a much smaller percentage of the overall structural placement, and they're very competitive, right? But we're not in that world, and we're not following them down into those sort of reductions because we don't operate in that space. So yes, it's more difficult. But then you have to leverage your relationships, and we're well placed because we worked hard with the clients when they needed us.

Got it. And then I guess just for my follow-up, I think last quarter, you had talked about timing of a renewal in the Insurance segment that shifted from 1Q to 2Q. Just wondering if we sort of normalized for that, I think the growth was flat, maybe down a little bit in the Insurance segment. Is that sort of a good way to think about the growth? Or is there just more lumpiness and pipeline of ABF deals and stuff like that, that might be coming through in the back half of the year that will get you up to the 6% to 10% for the full year?

That's a valid question. It's important to note that our portfolio experiences fluctuations between quarters, particularly in some Specialty lines. We focus on annual performance rather than quarterly changes. Renewals are expected, and shifts between segments are normal, so we shouldn't overanalyze that. Our portfolio is optimized, and we will not engage in underpriced business. Specifically in the Aviation sector, we have been underwhelmed by pricing in light of the loss activity over the past year and a half. However, we are starting to see some positive trends in the all-risk sector, which we are monitoring. Overall, we have a robust pipeline and are confident in achieving our targets and growth estimates for the cycle.

Your next question comes from Pablo Singzon with JPMorgan.

First question, you've been consistently releasing property reserves like a lot of other insurers, which I think is a reflection of the strong pricing environment as well as your good underwriting. Can you give us a sense of how long it takes for property reserves to fully materialize? I know they're short dated, right, but maybe perhaps distinguish between the major lines you write, like D&F or property cat. I just want to get some sense of potential reserve leases down the line.

Pablo, it's Allan. I'll start and then I'll pass over to Jonny. If I understand your question, you're asking about our Reinsurance segment and our cat positive prior year development. Yes, that book is performing extremely well. We had positive prior year development in the quarter of $24 million both on prior cats and on attritional type experience in the Reinsurance segment. And we don't forecast prior year development. We book as we see the results coming through, and that segment can certainly see the results coming through quite quickly. I'll pass it over to Jon, if you have any further comment.

Yes, I couldn't hear you too well, Pablo. So apologies if this isn't where you're aiming and let me know. But as a short tail writer, our prior year development is more driven by the loss experience we get. So claims coming through in the quarter or an absence of claims in the quarter. It's not really driven by us moving assumptions around or making changes to methodology. So actually, if you think about the consistent PYD we've seen across reinsurance and across our attritional experience more generally over the past couple of years, that's really the assumptions have been saying more IBNR margin at the end of the year than the claims we actually see coming through in the following year, and that's what's generated it. So although we don't plan for any PYD, I think if you look consistently, it's come through in the past couple of years.

Second question, maybe for Allan. There was a comment in the press release about an updated estimate of outwards reinsurance recoveries. Can you talk about that for a bit?

Yes, I can take that one as well, Pablo. It's Jonny here. So there was a reallocation of recoveries in the quarter. So recoveries coming out of the reinsurance pillar and going into specialty. There's no overall impact to the overall P&L from that. And actually, the number is relatively small in the context of our overall recoveries in 2025. The reason we get any reallocation at all is that some of our outward programs would cover multiple classes of business. They operate on an aggregate basis, and they could actually cover multiple events from different accident years. You can have '24 accident year events and '25 accident year events going into the same cover. And where that generates a recovery, we then allocate that back out to the underlying events. So you can have some movement in where the recovery is split if the underlying losses move, in particular, if they move between segment or various other changes that can happen there. Now you get most of that would come through the first quarter after a big event, i.e., Q2 this year. So it's not really something I'd expect to see in the future. And I think it's important to note that overall, our estimate for Cal wildfires, which is the main cat in this year, has actually come down slightly over the quarter when you look at the sum between the two pillars.

We now have Mike Zaremski with BMO.

I wanted to follow up on the important point you all are making about your pricing levels being down less than the market. You quantified a decline of flat to off 10% in certain property lines because I believe you're a leader in the syndicate. You mentioned that cross-selling is a factor in this. I'm trying to understand how that works. Are you suggesting that the pricing you receive is better than others in the syndicate because you're writing additional lines of business? Or are you accounting for those other lines when considering your pricing? Perhaps you could elaborate on the details of how this functions.

Yes. Thanks, Mike. I think firstly, you've got to differentiate between the syndicate and the partnership underwriting. The syndicate is a fairly small part of the overall portfolio. So the lead position is really held within the partnership. They're the guys that really built the portfolio back from 2018, '19. So when you think about the daily underwriting calls that we have, maybe 2, 3 times a day, on those calls, if you look at certain clients, you might be selling them terror, casualty, property and being able to leverage across those 3, 4, maybe even 5 different cross-class offerings gives you a differentiated position. So that's the first thing. Specifically, when you think about the syndicate, they're more of a primary underwriter. As you know, we only take a 20% variable quota share. So we don't really participate at that end. But if the syndicate are offering a primary line, then it helps us leverage the excess play that we've got. So that's purely for the syndicate, but it also translates back into the bigger portfolio, which is with the partnership where we can use that as leverage as well. So it's leveraging how you deploy on a particular deal, and then it's leveraging your relationships with the brokers and the clients, and it's leveraging the fact that you're selling multi-class products to those clients. And you're making the price, you are the price maker on those deals. It's a very different outcome than actually just being a subscription market asked to write a couple of million dollars at the end, take it or leave it.

That's very helpful. In your prepared remarks, you mentioned that PMLs are under 10% of equity for certain events at 1 in 100 and 1 in 250. Could you provide a rough estimate of the corresponding industry loss for those events? For example, does a 1 in 100 imply a $30 billion event? Any clarity on this would be appreciated.

Mike, it's Allan. Yes. We don't really think about the industry loss. Again, this is a ground-up model where we work through our PMLs based on various metrics. It is a verticalized market that we participate in as discussed. So it really is not based on industry losses. It's based on our portfolio. And again, it's driven by a ground-up analysis for those particular two key natural perils.

Yes, and it's Jonny here, and it really varies by peril as well. If you think about the wildfires, that was probably a $40 billion to $50 billion loss taking various points from the market. And some people would have that on their wildfire model out of the 1 in 500, for example. But obviously, if you've got a $40 billion or $50 billion wind loss into Florida, that would be a much shorter return period than that. So it's quite difficult to assign industry loss to any particular return period. You really need to think about the peril and think about your own view of risk around that at the same time as well.

We now have Alex Scott with Barclays.

First one I had for you is just on some of the comments you made on Aviation and the price adequacy there and some of the actions you're taking. Can you talk about what kind of impact do you expect that to have on premium growth? Like how much of that's been completed already versus maybe we need to consider that over the next 12 months in premium growth?

Yes. I think it's going to be challenging to achieve growth in Aviation unless we see significant improvements in pricing. It has not yet responded to the overall impact of the losses we've experienced in the all-risk sector. Since the Russia-Ukraine conflict, we have written over $1 billion in premium with an 11% loss ratio. We can take steps forward because there is rate adequacy and a good margin in the business. The aviation market is seeing a lot of activity toward the end of the year, and we are hopeful that these improvements will allow us to write new business. However, at this time, we are disappointed with this segment.

Can you discuss the MGU commission? I want to understand how recent results will affect it as we consider the next year or two. Specifically, it seems like the situation with Russia-Ukraine was established before that. What factors have impacted combined ratios, and how will they influence that level moving forward?

Yes. Thank you, Alex. It's Allan. The profit commission with the TFP is based on GAAP calendar year numbers, with some adjustments that are largely calendar-based and linked to the financials you have in front of you. Regarding Russia-Ukraine, we have indicated that it is behind us. Consequently, in 2026, assuming underwriting performance remains within the ranges we’ve observed, excluding the effects of Russia-Ukraine, there should be a profit commission for the TFP. Our interests align with the TFP in this regard; they will focus on writing profitable business. Once they reach the hurdle rate, the commission is based on that year's calendar results. There is a carryforward mechanism, but there are currently no losses to carry forward since they have maintained an approximate 100% combined ratio. Therefore, it will be calculated on a calendar year basis. So, in 2026, and hopefully even in 2025, there will be a profit commission, but this will depend on the actual calendar year underwriting results.

The next question comes from Rob Cox with Goldman Sachs.

I just wanted to ask on the tax rate guidance, firstly. It seems like a step-up from the mid-teens guidance previously. And I just wanted to understand if that's really all just distribution geographically of income there? And would you guys expect a similar rate in 2026 and beyond?

Rob, it's Allan. Thanks for the question. You answered correctly regarding 2025. The tax accounting regulations require projections up to the end of the year. Where do you think the profits will be among our three subsidiaries, one in the U.K., one in Ireland, and one in Bermuda, each with different tax rates? Currently, a larger share of our profits comes from our U.K. operations due to the beginning of the year and the impact of the California wildfires on Bermuda. We anticipate that for the remainder of the year, the effective tax rate will be 19%. It's too early to predict for 2026 as we are currently in the planning stage. Over the next three months, like all our peers, we will refine our approach post wind season. Once we have clarity on our business plan expectations for 2026 and know which subsidiary applies, we will provide further updates on the tax rate for that year.

Got it. That's helpful. And just a follow-up on the new share repurchase authorization. Is there any way to think about how you might anticipate using that up in sort of a base case scenario?

Yes, it's Allan again. We are using a multifactor approach. As we mentioned earlier, we focus on overall capital management and prioritize reinvesting in our own business. Following that, we assess our outward reinsurance program both strategically and tactically. After these considerations, we look to return capital to our shareholders. There isn’t a simple answer regarding share buybacks. The current undervalued price makes it an attractive option, but we have a $200 million authorization that can remain unused for up to 2 to 3 years. We will evaluate this based on our capital position and other considerations, including reinvesting in profitable opportunities in outward reinsurance. I wish I could provide more definitive guidance, but given the current share price, you can expect that we will act in the best interest.

We have another question from Andrew Anderson with Jefferies.

Maybe following up on tax. I think there's been some discussion that there could potentially be offsetting credits to operating expenses in outer years. Are you considering that in any future plans or hearing of that?

Yes, thanks, Allan. I believe you're referring to Bermuda tax law. In accounting, you can't record any offsetting credits until the government officially implements tax law changes. We haven't received those credits yet, and we're eagerly waiting to find out what they will be. For now, we aren't accounting for them or making any predictions. Once the legislation changes, we will incorporate that into our calculations, which will influence our effective tax rate. However, nothing is considered at this point.

Okay. And then on the Asset Backed Finance and Credit portfolio, can you maybe talk about the sensitivity to interest rates there, either on the loss ratio or premium growth outlook?

Yes, it’s Jonny here. I’ll discuss the loss ratio briefly. In that type of portfolio, we aim for diversification. We want to avoid exclusive exposure to interest rates and strive for a balance across different geographies and economic factors to create a well-rounded portfolio. When we engage in pricing and exposure management, we run various scenarios to assess sensitivities to different economic variables to ensure we are content with the overall exposure. This is a fundamental aspect of the portfolio. Considering its historical performance, we have experienced significant interest rate shocks recently, yet we haven't observed any material losses as a result. Regarding other economic factors, one of the most significant challenges has been COVID. Before the pandemic, such a global scenario would have raised concerns for us, impacting multiple variables simultaneously. However, the portfolio managed remarkably well during that period, with almost no losses from COVID, maintaining a low 30s loss ratio in aggregate during that time. So, we feel very comfortable with the level of risk and the adequacy of pricing in that segment overall.

Yes. It's Dan here. Just to add to that, I think the other thing, the daily underwriting calls when we think about interest rates, tariffs, the impact, we're able to make adjustments in real time. So on a daily basis, the underwriters are able to reprice, readjust their thoughts on how the deal should be structured every single day. So that's a really important difference for us that we can do that in real time.

I can confirm that does conclude the question-and-answer session today. And I'd like to turn the call back to Dan Burrows for closing remarks.

Thank you. Well, we appreciate everyone joining us today. Thank you very much. And as usual, if anyone has any additional questions, we're here to take your calls. We thank you all for your ongoing support, your really good questions. Enjoy the remainder of your day and hope to speak to you soon. Take care. Bye-bye.

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