Pelagos Insurance Capital Ltd Q4 FY2025 Earnings Call

Good morning, ladies and gentlemen, and welcome to Fidelis Insurance Group's Fourth Quarter 2025 Earnings Conference Call. This call is being recorded for replay purposes. 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 Fourth 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, include forward-looking statements. Management's comments regarding expectations, projections, targets and any future results are based upon current assessments and assumptions, and are subject to a number of risks, uncertainties and emerging information developing over time. It is important to note that actual results may differ materially from those expressed or implied today. Additional information regarding factors shaping these outcomes can be found in Fidelis' SEC filings, including our earnings press release issued last night. Management will also make reference to certain non-GAAP and proprietary measures of financial performance. The reconciliation to U.S. GAAP for each non-GAAP financial measure as well as descriptions of proprietary financial measures can be found in our earnings press release and financial supplement available on our website at fidelisinsurance.com. With that, I'll turn the call over to Dan.

Good morning, everyone, and thank you for joining our fourth quarter earnings call. Reflecting on our performance, I want to highlight three key takeaways. Firstly, our ability to deliver excellent results. Our fourth quarter performance is further validation of our business model. We delivered an 80.6% combined ratio, which represents a 47-point improvement year-over-year for the same period. This is the second consecutive quarter of performance exceeding our long-term targets with the second half of the year, highlighting the true strength of our portfolio and risk management. Secondly, the growth of our platform. We remain focused on identifying the most attractive opportunities in the market and partnering with top-tier underwriting teams to execute our strategy. This disciplined approach enables us to allocate capital where we see the best risk-adjusted returns. Gross premium written grew 7.1% for the full year with new underwriting partners contributing 4 points of this total. We're excited about the progress we continue to make in expanding our network of underwriting partners, and we are well positioned to capitalize on attractive growth opportunities while continuing to deliver strong underwriting margins. Our new name and brand, Pelagos Insurance Capital, best captures our identity and future direction, reflecting our positioning as a capital allocator working with best-in-class underwriting partners. And thirdly, our committed focus on being a best-in-class capital allocator. That focus concentrates on three areas: how we underwrite, how we use outwards reinsurance to enhance our risk profile, and how we return capital to shareholders. I'd like to briefly touch on all three pillars. Our underwriting approach focuses on building a differentiated portfolio. As a leader, we are capturing enhanced pricing and structural efficiencies in a verticalized market while maintaining diversification and continuing to add accretive profitable business through selective new underwriting partnerships. Outwards reinsurance enables us to enhance our risk profile and optimize our portfolio. By thoughtfully combining pricing and structural differentials, we improve margin and increase capital efficiency. In terms of capital management, our first port of call will always be profitable underwriting growth. And because of our robust capital position, we were also able to repurchase over 15 million common shares in 2025, including privately negotiated transactions with a founding shareholder. This action contributed $0.90 to our book value per share in 2025. Overall, our strategic approach to share repurchases has contributed $1.24 of book value per share since the inception of our program in 2024. This combination of discipline, flexibility, and execution underscores the strength of our balance sheet and the strategic advantage it provides to pursue both attractive underwriting growth and consistent shareholder returns. Last week, we further increased our common share repurchase authorization to $400 million, providing additional flexibility. We strongly believe that at our current market price, our stock is undervalued and buying shares represents an accretive use of capital. Later in the call, Jonny will go into more detail on our underwriting approach, including the new underwriting partnerships we've added, and our strategic use of outwards reinsurance. Turning to fourth quarter results. We are very pleased to have reported top-line premium growth of 3%, a combined ratio of 80.6%, and an annualized operating ROAE of 18.3%, meaningfully exceeding our through-the-cycle targets. For the full year, we delivered on our growth objectives, posting an increase of 7% in gross premiums across the year, driven by strong retention rates and continued diversification through new business opportunities, including new strategic partnerships across multiple lines of business. 2025 has been a year of two distinct halves. In the first half, we worked to proactively resolve legacy challenges relating to our Russia-Ukraine aviation litigation exposure. Having taken actions to resolve this exposure, in the second half of the year, the underlying strength of the business is clearly visible in our results. These results reinforce the resilience of our platform and our confidence in sustaining strong performance moving forward. Notably, we would have delivered combined ratios well ahead of our through-the-cycle targets for the full year in 2025 and for every year since our IPO, if not for the impact of the Russia-Ukraine aviation litigation. Taking a closer look at the dynamics in each of our segments, our portfolio remains approximately 80% specialty insurance and 20% reinsurance. Within insurance, we delivered 6% growth in 2025 gross premiums written, demonstrating our disciplined approach to capturing growth opportunities where price and structure support our return hurdles. Asset-backed finance and portfolio credit was a significant driver of growth and opportunity through the year. We continue to see strong margins across these products, which are insulated from traditional market cycles. We have established ourselves as a leader in the structured credit market, driven by our underwriting expertise and our ability to price and structure effective and repeatable solutions for counterparties. In addition, we have seen growth in our mortgage portfolio through our engagement with Euclid Mortgage, who we partnered with at the beginning of 2025. Asset-backed finance and portfolio credit now comprises over 11% of our total premium. These products are characterized by longer earning patterns compared to the rest of our predominantly short-tail focused portfolio. Jonny and Allan will provide further details on the extended earning patterns associated with these lines. In our direct property segment, we successfully maintained overall income year-over-year, which positively demonstrates our ability to navigate dynamic market conditions. We have a disciplined approach to portfolio management. We deploy capital by focusing on margin, optimizing line size and leverage, and selectively adding new niche and targeted books of business where we have identified attractive risk-adjusted returns. Examples of this include our expansion into data centers and the onboarding of new underwriting partners. We write a leading book of specialty marine business. Throughout the year, we leveraged our capacity to maximize margins across the subclasses, and in response to strong demand, we took advantage of opportunities to convert attractively priced, large capacity-driven construction risks. We have discussed our caution with respect to aviation throughout the year, and we walked away from risks that did not meet our hurdles. While we did see some improvement in pricing in the all-risks market, largely driven by loss activity in the early part of the year, in general, the uplift was not sufficient to meet our return hurdles. Given the complexity of this line of business, we are not willing to compromise on certain terms and conditions at any price, including governing law and jurisdiction, which can significantly impact loss outcomes. As a result, gross written premium in this line of business declined by approximately 50% year-over-year. And we made the strategic decision to pivot into other attractive areas of the market to allocate capital. Across the insurance portfolio, rate adequacy remains strong. Beyond price alone, our positioning allows us to achieve a consistent differential relative to follow markets. By exercising underwriting leadership and leveraging relationships and line size, we are able to influence structure and terms, not simply accept them, driving stronger risk-adjusted outcomes across the portfolio. Turning to the reinsurance book, where we also continue to see strong margin, we delivered 11% premium growth for the year. Our excellent underwriting results reflect our ability to grow profitably and capitalize on favorable market conditions, including post-loss opportunities. So putting it all together, we are very pleased with our 2025 performance. This is an exciting time, and we are confident in our ability to continue delivering strong performance in the year ahead. With that, I'll turn it over to Allan for a detailed review of our financial results. Jonny will then discuss our strategic approach to capital allocation, and then I'll return to share insights on our market outlook and new brand identity.

Thanks, Dan, and good morning, everyone. We had an excellent fourth quarter with operating net income of $110 million or $1.09 per diluted common share, resulting in an annualized operating return on average equity of 18.3%, driven by another quarter of strong underwriting performance. We delivered a combined ratio of 80.6%, an improvement of 47 points over the fourth quarter of 2024. Our book value per diluted common share continued to grow to $24.61. Including dividends, this is an increase of 15.2% in the year. For the full year, our operating net income was $205 million or $1.92 per diluted common share, resulting in an operating return on average equity of 8.5%. Our full year results reflect the actions we took in the first half of 2025 to move past the uncertainty associated with the Russia-Ukraine aviation litigation, judiciously settling claims and including the impact of the English High Court judgment. We believe our third and fourth quarter results are excellent demonstrations of the quality of our business. Turning now to our quarterly results. We grew our gross premiums written by 3% to $978 million, bringing our total for the year to $4.7 billion, an increase of 7% compared to 2024. During the fourth quarter, in the Insurance segment, gross premiums written increased by 6% to $981 million. We saw continued growth, including new underwriting partnerships in several lines of business. The fourth quarter typically has minimal premium volume for our Reinsurance segment. The primary changes during the quarter resulted from a reduction in reinstatement premiums that were initially recognized in connection with the California wildfires. This is in line with us lowering our ultimate loss estimates for the wildfires during the quarter. As mentioned by Dan, we continued to walk away from business in certain lines that didn't meet our pricing hurdles, contributing to a 13% decrease in our net premiums earned in the quarter versus prior year. A few points to highlight. First, our strategic decision to decline business that did not meet our pricing hurdles and our underwriting standards. This was most notable within aviation, where gross premiums written were down 50% from 2024. Second, we have taken advantage of many new opportunities and achieved growth in asset-backed finance and portfolio credit, which in 2025 saw an increase of $132 million in gross premiums written versus the prior year. These lines have a longer earnings pattern, generally of 5 to 7 years, compared to the rest of our portfolio, which typically earns out over 1 to 2 years. Finally, reinstatement premiums that were initially recognized in California wildfires were reduced during the fourth quarter. As I mentioned, this is in line with us lowering our ultimate loss estimates. Looking ahead to the first quarter, we expect net earned premiums to range from $450 million to $500 million in our Insurance segment, and $50 million to $60 million in our Reinsurance segment. Our excellent underwriting performance resulted in a combined ratio of 80.6%. I'll break down the components of our quarterly combined ratio in more detail. For the fourth quarter, our catastrophe and large losses were $51 million or 9.1 points of the combined ratio. This is an improvement compared to the same period last year where our catastrophe and large losses were $133 million or 21 points of the combined ratio. The Insurance segment was impacted by Hurricane Melissa in the fourth quarter as well as a satellite loss in our aerospace book, along with a loss event in our political risk violence and terror line of business. In contrast, the Reinsurance segment had no catastrophe and large losses and benefited from the sale of certain subrogation rights related to the California wildfires. During the fourth quarter, our attritional loss ratio was 30.4%. We are pleased to see that the attritional losses have and continue to come through at a low level. As we look to 2026, we see our overall loss ratio in the mid-40% range, which includes attritional losses and cat and large losses. Of this number, in insurance, about 2/3 is from attritional losses and 1/3 is from catastrophe and large losses. In reinsurance, it is split roughly equally between catastrophe and attritional losses. We recognized net favorable prior year development of $35 million for the quarter compared to net adverse development of $270 million in the prior year period related to the action we took to derisk our overall exposure to Russia-Ukraine aviation litigation. A key driver of this quarter's favorable prior year development was $25.6 million in our Insurance segment due to positive development on prior year cat events and from continuing benign attritional development on prior accident years. Turning to expenses. Policy acquisition expenses from third parties were 26.2 points of the combined ratio for the fourth quarter compared with 33.6 points in the prior-year period. We continue to anticipate our annual policy acquisition expense ratio to be in the low 30s for insurance and in the mid-20s for reinsurance, comparable to our year-to-date results. Policy acquisition expenses to the Fidelis partnership were 16.8 points of the combined ratio in the quarter. Finally, our general and administrative expenses were $25 million, including the benefit from Bermuda's substance-based tax credits. This was compared to $24 million in the fourth quarter of 2024. As we expand our pipeline of new underwriting partners, we continue to make strategic investments in our capabilities. This includes further strengthening our talent base and enhancing our infrastructure and technology to support this growth. For 2026, we anticipate these strategic investments will lead to G&A expenses of approximately $29 million per quarter. It's important to emphasize that our business is designed to have a lean and efficient structure and our expense ratio reflects that. This positions us well to scale effectively while maintaining operational discipline. Moving on to our investment results. Our net investment income and net realized and unrealized gains on other investments for the quarter were $47 million. As of December 31, the average rating of our fixed income securities remains very high at A+, with a book yield of 4.9% and average duration of 2.7 years. Overall, these investment results reflect our disciplined approach to portfolio management and our focus on generating attractive risk-adjusted returns while supporting a broader capital allocation strategy. We anticipate that our 2026 investment results will be broadly in line with those of 2025, with our portfolio, including funds, expected to generate a return of approximately 4% to 4.5%. Turning to tax. Our effective tax rate for the year was 18.2% compared to 16.9% in 2024. This 2025 rate reflects a greater proportion of our pretax income generated in higher tax rate jurisdictions. For 2026, we anticipate a full-year effective tax rate of approximately 16%, reflecting the projected mix of profits across our three operating jurisdictions. Turning to capital management. We are in a very strong capital position, which has enabled us to grow our underwriting portfolio and also return capital to shareholders. In the fourth quarter, we repurchased 6.4 million common shares for $119 million at an average price of $18.47. This includes $83 million through privately negotiated transactions. This brings our 2025 repurchases to 15.2 million common shares at an average price of $17.22. This has been highly accretive on both the book value and earnings per share basis to our shareholders, contributing $0.90 to our book value per share in 2025. Subsequent to December 31 and through February 20, we repurchased an additional 967,000 common shares for $18 million at an average price of $19.12. And as mentioned by Dan and as announced last week, our Board approved an increased share repurchase authorization of $400 million. In summary, we delivered excellent results for the quarter, further demonstrating our strong capital management, the strength of our portfolio, the effectiveness of our approach to investments, and our commitment to delivering returns to shareholders. And with that, I will now turn the call over to Jonny.

Thanks, Allan, and good morning, everyone. Today, I want to emphasize that our core strength lies in being a strategic capital allocator, an approach that not only drives our strong current performance, but also positions us to capitalize on future opportunities and outperform the market going forward. As Dan highlighted, our capital allocation approach consists of three core pillars. First, finding the most attractive areas of the market to allocate capital to, and the best partners to execute on our underwriting strategy within those areas. Second, using outwards reinsurance as a flexible tool to support growth, improve margins, and optimize our capital structure. And third, leveraging our strong balance sheet to return excess capital to shareholders through dividends and share buybacks. I will focus the remainder of my comments on how we advance those first two pillars during the year. Starting with underwriting. Each underwriting partner we work with brings expertise and proven track records in specific underwriting areas, allowing us to deploy capital where we see the most attractive risk-adjusted returns. We have exclusive first right of access through a 10-year rolling agreement to all business written by The Fidelis Partnership, a leading specialty insurance and reinsurance MGA. Only business outside our underwriting appetite, which we choose not to support, can be offered and placed with other capital providers. Expanding our underwriting partnerships builds on our proven strategy. Since the start of 2025, we have continued to broaden our network by establishing a growing number of select long-term underwriting partnerships in areas where we see profitable growth. To give you a sense of these new partnerships, I'll highlight a few of the larger ones that we're working with. At the beginning of 2025, we began our first new underwriting partnership with Euclid Mortgage. We entered this partnership with long-standing relationships with the Euclid leadership team. Our first year together has been exceptional, successfully accessing U.S. mortgage risk in a market dominated by the larger players. Our growth in these lines demonstrates both Euclid's technical expertise and our ability to identify and back high-quality partners. We view Euclid as a long-term partner in 2026 and beyond. By providing committed long-term capital and active partnership, we are helping them execute their strategy while benefiting from their level of differentiated access to risk. This is a clear example of how we combine careful partner selection with the capacity to support specialist businesses in building credible, scalable platforms. Later in 2025, we partnered with Bamboo Insurance, a property MGA backed by industry-leading talent. Bamboo is a data-enabled insurance distribution platform, providing homeowners insurance and related products to the residential property markets in California and Texas. The collaboration builds on our property expertise and is highly accretive to our existing portfolio. We are aligned in our view of risk and exposure management, and we are excited to help Bamboo continue to scale their platform into 2026. At 1/1/2026, we initiated a portfolio-wide partnership with Oak Global, providing funds at Lloyd's for their syndicates and making a long-term commitment that we intend to expand as their business grows. We chose to partner with the team at Oak because of the exceptional performance track record of their leadership group and the strong data-driven people-powered culture that they have built. Oak is bringing disciplined specialist capacity into the market, underpinned by technology, data-driven insights, and deep expertise, addressing a gap in the Lloyd's market for a scaled reinsurance-focused platform. By committing meaningful long-term underwriting capital, we are supporting both Oak's expertise and the structural opportunity, partnering with a platform built for durability across market cycles. Today, including those noted above, we are actively collaborating with a select group of leading global insurers and reinsurers as well as top-tier MGAs. Our approach to identifying and engaging with partners remains highly selective. We focus on partnering with organizations that demonstrate strong underwriting discipline, deep market expertise, broad market access, and a proven track record of performance. We anticipate that contributions from new underwriting partnerships will become an increasingly meaningful component of our premium over time. And our goal is to achieve this growth with a small number of trusted partners that we can grow alongside. In fact, we turn down the vast majority of opportunities we review, underscoring our commitment to quality over quantity. Now let me spend a few minutes talking about why partners seek to work with us. A key reason is that, across our management team, we have decades worth of diverse experience, working directly with industry leaders. We have always placed a strong emphasis on building and maintaining trusted relationships. Underwriters and brokers know that our approach is based upon collaboration, trust, and true partnership because they've seen it in action. In addition, I would cite our long-term focus. We are committed to long-term value creation, transparency, and alignment of interest with our partners that goes well beyond one-time transactional interactions. This approach ensures that our clients and partners can rely on us for consistent support. Finally, our proven expertise in analyzing portfolio-level deals, combined with a structure that enables engagement from the entire management team on every opportunity, gives us the conviction to deploy bespoke solutions at scale, something that our partners have found of great value. Our onboarding of additional underwriting partnerships is a natural extension of what we have been doing successfully since inception. By executing our strategy of partnering with multiple best-in-class underwriting teams, selecting the most compelling opportunities and sizing them appropriately, we expect to further improve portfolio diversification, tightly manage exposures, and optimize margins throughout the cycle. Our second strategic pillar is the disciplined use of outwards reinsurance. Our outwards program delivers robust portfolio protection while driving ongoing margin improvement. By combining disciplined execution with long-standing industry relationships and expertise, we secure broad multi-class coverage at strong risk-adjusted pricing. Trusted partnerships with top-tier reinsurers built over decades are a cornerstone of this strategy and a clear competitive advantage. We balance core program development with opportunistic purchases, working with counterparties who understand our portfolio and our underwriting discipline. Our organizational structure and depth of expertise support this approach. Close collaboration between management, underwriting, and our inwards partners gives us access to a wide range of products and market insight. This enables us to set an optimized reinsurance program each year and consistently improve outcomes. Throughout 2025, we strengthened our outwards program by securing additional coverage at attractive terms using a blend of traditional reinsurance and ILS. This broadened protection has enhanced overall portfolio margins as we continue to optimize the interplay between our inwards and outwards exposures. We use outwards reinsurance not only to manage downside risk but also as a flexible tool to support gross line size while still controlling net exposure. This approach reduces volatility and supports a more resilient risk profile across stress scenarios. In January, when we placed the majority of our annual program, we capitalized on favorable market conditions to expand coverage and improve terms, delivering a really strong outcome, which included meaningful rate reductions of around 20%, while upgrading both coverage quality and counterparty security, enhanced structural protection through new aggregate purchases that were not previously available to improve overall margin protection, and targeted enhancements that broaden coverage, improving terms where needed and strengthening program efficiency. In addition, we also sponsored another Herbie Re catastrophe bond, securing $75 million of U.S. earthquake protection, leveraging the pricing available in the cat bond market with what we can achieve writing the inwards portfolio. This renewal underscores the role of outwards reinsurance as a flexible and active portfolio and capital management tool. While January marks the core placement period, we remain opportunistic throughout the year, adding coverage when it improves margins, enhances our risk profile, or increases capital efficiency. To provide context on risk exposure, as of January 1, our 1-in-250 California earthquake probable maximum loss is in the mid-single digits as a percentage of shareholders' equity. And our 1-in-100 Southeast Gulf and Caribbean clash exposure remains below 10% of shareholders' equity, which is consistent with our view of risk and return metrics. In closing, we are excited with the progress we continue to make. We have expanded our network of new underwriting partners, which will be key to our growth moving forward. Our strategic use of outwards reinsurance has been proven throughout market cycles to enhance our risk and return profile. And our balance sheet is in a very strong position with broad protection in place to manage peak exposures. And with that, I'll turn it back to Dan to cover our outlook for 2026.

Thanks, Jonny. I'd like to emphasize that our top priority is creating shareholder value. We are confident that our focused and strategic approach to capital allocation across our three core pillars will continue to differentiate us in the marketplace and drive sustainable value creation for our shareholders. Turning to what we are seeing in the marketplace entering 2026. The broader environment has clearly evolved over the past year. Consistent with what others in the industry have reported, we are seeing a moderation in pricing in some areas. But importantly, we do not see this as a return to the old soft cycle. The correction we have experienced across the portfolio since 2019, including higher attachment points and tighter terms and conditions, has created a more durable trading environment. Those features have largely remained intact. Even as headline pricing may have come off a bit, margins and adequacy across the portfolio remain strong. It's important to note that in overall pricing terms, this is taking the market back to levels seen a few years ago, a period widely viewed as one of opportunity and margin, underpinned by underwriting discipline. When I think about the market, the message I really want to get across is that the impact, as we move through the cycle, is not the same for everyone. Outcomes are increasingly differentiated by not only market positioning, but also relevance to clients and quality of relationships. Our portfolio is highly diversified across products, geographies, and increasingly underwriting partners. We benefit from strong long-standing market relationships and, most importantly, we have the flexibility to allocate our capital dynamically. We remain focused on identifying new areas of opportunity, and we are partnering with those best positioned to execute alongside us. That's why we are confident in our ability to deliver top line growth of mid-single digits in 2026, delivering strong performance through the cycle and continuing to create value for our shareholders. Yesterday, we announced our new brand identity, Pelagos Insurance Capital. This branding underscores our positioning as a capital allocator, working with best-in-class underwriting partners. Pelagos comes from the root of the word archipelago, a community of islands, each unique, yet connected and working together. It reflects how we're built: a global community of teams, locations, and trading partners, each bringing distinct expertise and made stronger by the connections between us. We are confident that the Pelagos Insurance Capital brand identity, which we expect to launch in May, provides greater clarity for our people, our clients, and our shareholders, highlighting our unique market presence and reinforcing our commitment to building lasting partnerships and meaningful connections. Let me leave you with one final thought on the market. As a capital allocator, we navigate an environment shaped by macroeconomic shifts and ongoing geopolitical disruptions. The evolving risk landscape is creating new opportunities across our industry. In times of uncertainty, our sector's ability to provide innovative solutions becomes even more relevant. For those organizations that can adapt quickly and lead with innovation, these changes are not just challenges, they are catalysts for growth and differentiation. We remain committed to staying at the forefront, leveraging our agility and expertise to deliver value for our clients and our shareholders. And with that, operator, we will now open the line for questions.

With that, our first question comes from Matt Carletti from Citizens.

Thank you for the color on kind of the partnerships you've established outside of The Fidelis Partnership. I think that's very helpful in terms of kind of understanding how you go about it. I don't know if this is for Dan or Jonny, but as we think about kind of how that plays out going forward and new partnerships, should we think more about lines of business? Is it more about geographies that maybe you don't have exposure to? Is it more about kind of bespoke products that maybe don't really exist in the market today? I'm just trying to get a feel for kind of how your bingo card looks and what the missing pieces are.

Thank you, Matt. I appreciate the lengthy introduction as there was a lot to cover. If we can't address all questions during this call, feel free to reach out to us in the coming days with any inquiries you have. Regarding underwriting, we always start by considering our risk strategy and capital allocation, aiming to find the best risk-reward opportunities in the market across our options. This could involve underwriting as well as other capital actions. We're flexible with our arrangement with TFP and have the right of first refusal on any business they originate. Additionally, we are keen to capitalize on relationships where we identify attractive margins in other complementary lines of business. It's a mixed approach; we remain open to opportunities but there are certain lines, like aviation and casualty, that currently do not meet our criteria. Our focus is on the quality of the underwriter, their track record, the leadership team, and whether they help diversify and create margins for our portfolio. We're also working to expand our distribution channels through new partners, geographies, or product lines. Jonny, do you have anything to add?

Yes, I think you covered most of it, Dan. All I'd add is it's a very high bar. I think The Fidelis Partnership has performed very well. If you look at our combined ratio this quarter, it's obviously mostly driven by them. It's down 80%, 79% last quarter, and we're really pleased with that. And we're not going to lower the bar for new partners. They have to meet or beat that hurdle. I think the other thing I'd highlight is where a partner does meet that, where they do fit in well and hit those characteristics that Dan mentioned, then we're really in a position where we can get comfortable with that very quickly. As I said, the entire management team is able to look at every opportunity. And that gives us the conviction to commit at size and for the long term where we think that's the right thing to do. And I think that's the key to what we bring to partners. We can lead them to concentrate on the underwriting, which is what we've done with The Fidelis Partnership, and benefit from the extra alpha that's generated by allowing that time to them. The only other bit I'd mention is, as I mentioned in the pre-remarks, we're really looking to concentrate on a small number of partners and have something that's meaningful and something that can grow over time with them. This isn't something that we see being 100, 200 partners very quickly. It's a small number of core partners that we want to do something meaningful with.

I have a follow-up question for Allan. I appreciate the guidance you provided on the net earned premium. When looking at the Insurance segment, it seems the relationship between net earned and net written has definitely declined. It was in the 90s for 2024, and now it’s 75% earning through in 2025, with an even lower estimate for Q1. Can you help us understand if the longer earnings patterns for certain credit type products are contributing to this? Also, should we expect the lower levels we are seeing in Q1 to continue throughout the year? Will it grow as premiums increase, or will that relationship remain the same?

Thank you, Matt. This is Allan. We're pleased with our growth in gross premium written, which was 7% for the year, and it's reflected in our portfolio with a combined ratio of 80.6% in Q4. There are three main factors affecting the difference between earned and written premiums this quarter, some of which will carry into 2026. First, our loss experience improved regarding California wildfires, which reduced our reinstatement premiums, contributing around 40% to the variance between written and earned growth. Second, as Dan pointed out, we exited aviation business throughout the year, accounting for another 40% of the variance. Importantly, our business mix highlights the positive initiatives we've taken to expand in areas with better margins, like asset-backed finance and portfolio credit, which have longer earning patterns. So, the three key reasons for the difference between earned and written are favorable loss experience, disciplined underwriting, and a portfolio focused on higher-margin business. As I noted in my prepared remarks, the guidance on net premium earned reflects this new expected business mix going forward. The earnings from asset-backed finance and portfolio credit typically span 5 to 7 years, unlike aviation, which earns in 1 to 2 years.

Yes, we can discuss aviation. It's crucial that we maintain disciplined underwriting in that sector. We have identified the challenges, particularly due to significant loss activity over the past 18 months. Midyear, we noticed some positive developments, especially in the risk market, influenced by that loss activity. However, the pricing ultimately fell short of our requirements, and our strategy focuses on the balance between risk and reward. Since much of that business is finalized in the fourth quarter, it's challenging to predict its performance and execution at this late stage, which has contributed to the decrease in net earned premium. This decline is partly due to pricing and partly due to non-negotiable terms and conditions. Governance and jurisdiction can greatly influence loss outcomes, and we are not willing to compromise on that. As a result, we reduced 50% of the premium. Nonetheless, our strong capital position and market access through partnerships have allowed us to continue growing. There are over 100 other lines of business where we see significant margins in the current environment. To achieve growth, we must be disciplined, focus on margin, and ensure profitability, which is our goal throughout the market cycle. However, as Allan mentioned, this has substantially affected the net earned premium.

Our next question today comes from the line of Meyer Shields from KBW.

One question to start with regarding the new underwriting partners. How should we view the timeline for reaching your targeted participation in their book? I assume that with The Fidelis Partnership, it's immediate. Is there a longer period before you achieve your targeted share with the new partners' book?

Yes, it's a really good question. Obviously, when we're looking at partnerships, first and foremost, it's risk-reward. The characteristics are all very similar, high barriers to entry in that particular market, different distribution, strong teams with good track records with good technical underwriters. So the hit ratio is not going to be extremely high. We probably decline more than 90% of what we see. But we have identified, over the last couple of years, the relationships with those teams that we see being accretive to our business plan. So yes, I think we're in a very strong position now, given our capital strength, the performance of the business. It's working exactly as designed with the partnership. So adding on the complementary new partnerships, diversifying is a smart thing to do. I think in terms of timeline, we haven't really set a timeline. But certainly, what we'd be aiming for in the medium term is 25% to 30% plus of the book will be with new partnerships. But look, we're also looking for growth with the TFP. So I think we're in a strong enough position from a capital sense that we can do both as long as it's profitable, as long as we hit the very high benchmark that TFP sets and it's accretive to the business.

And what makes it so hard to split between TFP and new underwriting partners is it's not really how we think about it. We don't have a plan for how much to grow with each. We have a plan for where in the market we want to grow, where in the market we think things best add to our risk profile. And then we decide which partner we think is best placed to execute on that. So as the market evolves, that mix between things that TFP execute on for us and things that other partners execute for us shifts, if that makes sense, Meyer.

Yes, it does. Second question, sort of unrelated, but as the mix shifts more towards longer-duration contracts like asset-backed finance and so on, does that imply an opportunity for extending the investment portfolio duration?

Thank you, Meyer. It's Allan here. We consider this as part of our capital allocation process. We are satisfied with our investment portfolio yielding 4.4% this year. Our returns reflect our strategy of focusing on attractive investment income while aiming for an above-average risk-adjusted return through all cycles. We take risks primarily on the liability side rather than the asset side, which aligns with our capital allocation strategy. As mentioned earlier, part of this year's investment income was reduced because our capital strategy involved repurchasing a significant amount of shares, totaling $261 million, which decreased the total amount of investable assets and consequently impacted our investment income. We also distributed $52 million in dividends this year, contributing to returns for our shareholders. Looking ahead, we anticipate our returns to remain broadly in line, projecting a return of 4% to 4.5% for 2026. While we will consider duration, we will not make immediate changes. We need to observe how new underwriting partners develop and how the asset-backed portfolio evolves regarding duration. That will always be a consideration.

And, Meyer, just to add on, some of the business that we write, it's not like casualty business. It's more long tenure than long tail is how we phrase it. And some of those asset-backed finance policies, as a result of that, you get the premium over time. You don't necessarily get it all upfront. So there's not as big a shift in terms of our cash flow pattern as you might expect if we had gone in and written a big casualty book, for example.

Our next question today comes from the line of Leon Cooperman from Omega.

Can you hear me?

Yes.

I've learned that the value of a company's book is determined by the return on that book value. Considering your returns, your market performance appears to be a well-kept secret. There are nine analysts forecasting your value, and they expect it to be significantly below your book value. However, I believe you're actually worth more than that. A company that can generate a 15% to 18% return on its book value should have a valuation of at least twice the book value. I can foresee your book value exceeding 30% in a year, with earnings around $4.5 to $5 per share. Currently, your stock is priced at five times earnings, while the market averages 23 times earnings. Your return on book value outperforms the S&P, yet your valuation is only a quarter of it. So, are you not communicating your story effectively, or are you sharing it but no one is paying attention?

Thank you, Leon. It's good to hear from you. We agree that we're undervalued. Since the inception of the business, our book value has grown by 57%, and our dividends have increased by 15% in the last year. If you look at our return on average equity and combined ratio from the last quarter, there are very few companies with better numbers. However, it's not just about the figures; it's about the overall narrative. We've paid attention to the market feedback. There have been inquiries regarding our structure, but when we assess our performance and business growth, everything is functioning as intended. We've addressed concerns related to Russia-Ukraine and the liquidity overhang. ADIA, one of the larger private equity firms, is set to exit in 2025. We’ve actively purchased shares in the open market and seized private equity opportunities when they arise, while also expanding our partnerships for diversification. We believe these steps will effectively communicate our strategy. Consistency is essential, and we are committed to delivering strong results each quarter. We have an important conference in Naples this weekend where we will be proactive in sharing our strong performance. It’s crucial for you to view us as a capital allocator, and we are working diligently to ensure our valuation reflects that.

I'm not trying to undermine your business in terms of selling, but I recently saw that Zurich made an offer to buy Beazley for more than double its book value and around 10 to 12 times its earnings. In a slow-growing market where companies are seeking growth, I believe we would be very appealing at a multiple of earnings.

Completely agree. And I think, as I said, if we continue on the path that we're on, then we would expect to see a similar run rate in terms of book value growth over the next couple of years. So yes, north of 30%, absolutely. And we would expect our valuation to come to par with that. We think the valuation should be a multiple of book. When you look at our results, they are exceptional. But it's got to be consistent we get that.

The next question today comes from the line of Peter Knudsen from Evercore.

The first one, I thought the reinsurance renewal commentary was interesting. I'm just wondering if you could maybe talk about any changes to the retention, if at all, on the XOL program, given the 20% rate decline? And then, in addition, it sounded like you guys were able to purchase an aggregate cover for the first time. And so, a, could you provide some details on that? And then b, what does that say about the market? Why do you think you were able to now versus I think you said in the past that wasn't available?

Yes. Thanks. Great question. It's Dan. I'll just put into context, the agg deal we spoke about actually was not for cat. We've had agg deals since the inception of Fidelis in 2015. So specifically the natural perils, this was a volatility agg for other lines of business that we kind of said you couldn't have bought that a year ago. So we're very pleased with that. But Jonny, do you want to answer the other question?

Yes. I think we found ourselves in a completely different market to a year ago, Peter. I mean on top of the agg Dan mentioned, we also bought aggregate cover in our cat program as well. That certainly wasn't available a year ago. In terms of attachment points, I mean, the exposure going through was up in some ways. I mean you see rates have come off to some extent. Our premium is the same. So that aligns to that story. And we haven't had to push attachment points up at all. In fact, in some places, we've been able to either bring them down or broaden coverage. So we've got more perils attaching at lower attachment points in that. So we're very, very pleased. I mean we've always said that our preference is usually, rather than to cash in on the price reduction, to spend the extra money on getting better, broader and more coverage, and that's what we've done this time. I mean, as I said, we also remain opportunistic. I think there might be opportunities to add to that program as we move through the year. And what really helps us there is we can buy in any market. We buy UNL covers, we buy quota share, we buy ILWs, we buy cat bonds. And we're literally looking at options every week. We're looking at some stuff right now, in fact.

Okay. That's really helpful. I’m wondering if you could talk a little bit about the intellectual property line within ABS and portfolio credit, particularly in relation to some of the software concerns in the market today. Is that a risk or concern for you?

Peter, intellectual property is something that we pulled out of a couple of years ago. And we've given commentary in prior calls that we really didn't have many exposures there. I think we're down to a couple of policies that will run off over the next year or so. We've not seen any real loss activity movement on that in the past few quarters. And it's certainly not something we'd be looking to go back into.

We have now hit the top of the hour, so this will conclude today's question-and-answer session. I'd like to turn the call back over to Dan Burrows for closing remarks.

Yes. Look, thank you very much. We really appreciate you joining the call today. As I said earlier, for any additional questions, we're here to take them in the coming days and weeks. Thanks for your support, and I hope you enjoy the remainder of the week, and have a great weekend. Thank you.

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