Fidelis Insurance Holdings Ltd
NYSE:FIHL
Earnings Call Analysis
Summary
Q2-2023
In the first half of 2023, the company experienced robust growth, punctuated by a notable increase in operating return on average equity to 18.2% from 4.8% in the previous year. The gross premiums written surged by 27% to $2.2 billion, led by a 76% growth in the Specialty segment's quarterly premiums to $657 million, attributed to new business and improved pricing. Net premiums written climbed by 36% to $1.3 billion, and net premiums earned rose by 24% to $815 million. The combined ratio improved to 80.6% from 89% year-over-year, reflecting optimized loss ratios and reduced catastrophe impact. Investment income saw a leap to $48 million, a spike primarily due to higher interest rates. With a strengthened balance sheet and strategic market positioning, the company raised an additional $100 million during the IPO, underscoring confidence in its financial trajectory and commitment to balanced capital returns.
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Ladies and gentlemen, good morning, and welcome to the Fidelis Insurance Holdings Second Quarter and First Half 2023 Earnings Conference Call. As a reminder, this call is being recorded for replay purposes. [Operator Instructions] With that, I'd like to turn the call over to Jillian Benson, Group Head of Reporting. Ms. Benson, please go ahead.
Good morning and thank you for joining us to discuss Fidelis Insurance Holdings Limited's 2023 Second Quarter Earnings Results. With me today are Dan Burrows, our CEO; Allan Decleir, our CFO; Jonny Strickle, our Chief Actuarial Officer; and Ian Houston, our Chief Underwriting Officer. We will start with prepared comments by Dan and Allan, and then we will take your questions. Before we begin, I'd like to remind everyone that certain statements in our press release and discussed on this call do constitute forward-looking statements under federal securities laws within the meaning of the Private Securities Litigation Reform Act of 1995. We intend our forward-looking statements to be subject to the safe harbor created thereby. These statements are based upon management's current assessments and assumptions and are subject to a number of risk and uncertainties. These risks and uncertainties are described in IPO prospectus dated June 28 filed with the SEC on June 30. Although we believe that the expectations reflected in the forward-looking statements have a reasonable basis when made, we can give no assurance that these expectations will prove to be achieved. Consequently, actual results may differ materially from those expressed or implied. For more information, including on the risks and other factors that may affect future performance, investors should also review periodic reports that are filed by us with the SEC from time to time. Management will also make reference to certain non-GAAP measures of financial performance. The reconciliations to U.S. GAAP for each non-GAAP financial measure can be found in our current report on Form 10K furnished to the SEC yesterday, which contains our earnings press release and is available on our Investor Relations website at investors.fidelisinsurance.com and on the SEC's website. With that, I'll turn it over to Dan.
Thank you, Jillian, and good morning, everyone. Let me begin by saying that I'm delighted to be speaking with you today on our first earnings call post-IPO and to be updating you on our view of the market, the progress we've been making against our growth strategy and how that, again, has translated into robust financial and operational performance. We very much look forward to engaging with our analysts, our shareholders and the broader investment community going forward. We are pleased to have this opportunity to discuss our performance at the half year stage, which we believe further reinforces the strength of the Fidelis business model. Our structure is designed to deliver alpha underwriting returns for our exclusive partnership with the Fidelis MGU, which provides us with access to one of the most renowned underwriting teams in the business led by Richard Brindle, with a long track record of outperformance that translates into strong top and bottom line results for our business. We are strongly positioned as a leading specialty and bespoke insurer, underwriting risk into an attractive marketplace, with a portfolio of 84% specialty and bespoke insurance. This is based on our half year net written premium numbers. This is delivering attractive results, as evidenced by our first half year performance. Compared to prior year, gross written premiums for the first half of the year increased 27% to $2.2 billion. The strong top line growth has been coupled with compelling bottom line profitability. Our combined ratio improved year-on-year from 89% to 80.6% for the half year and our half year annualized operating ROAE is 18.2%. Now this was achieved against the backdrop of heightened loss activity of the industry, which per our recent reports saw reported global insured losses from natural disasters in excess of $50 billion for the first half year, which is more than 40% above the 21st century mean. The market continues to be dedicated with a clear supply-demand imbalance, and we expect these whole market conditions to have duration, due in part to no new startups or notable inflow of significant new cash flow to the market, unlike in previous hard market cycles. These market dynamics have presented opportunity for Fidelis, and we have grown our business, leveraging our scale and targeting opportunities across our portfolio, maintaining significant lead status across all underwriting pillars. To recap on our underwriting strategy, our business focuses on 3 core pillars of underwriting: Specialty Insurance, Bespoke and Reinsurance. Our specialty pillar is focused on traditional specialty business lines, such as aviation, energy, space, marine and property direct and facultative. Our bespoke pillar is focused primarily on highly tailored and specialized products often purchased to facilitate underlying transactions and offer our clients enhanced capital efficiencies. This pillar includes policies covering credit and political risk, political violence and terrorism and transactional liabilities. In reinsurance, we have an actively managed property catastrophe reinsurance book, optimized in line with our house view of risk and concentrated on core client relationships, a targeted attachment points in the aim of managing exposure and volatility. Leveraging our experience and deep precision across these pillars, we take a nimble and thoughtful approach to underwriting and risk and capital allocation, which allows us to respond quickly to a consistently evolving marketplace. We have delivered a strong track record of performance, capturing compelling underwriting and combined ratios, while maintaining a strong balance sheet and financial position. We believe our combination of management expertise and access to top underwriting talent positions us well to create value not only in the current hard market, but across market cycles, with the goal of driving a consistent and compelling balance of risk and reward for our shareholders. Now touching on our performance across the 3 pillars. In our Specialty pillar, we delivered gross written premium growth of 76% for the quarter and 63% for the half year. The growth was driven by Marine, Aviation and Property Direct and Facultative, but we are able to take advantage of the dislocated market to secure significant new lines and participate in accounts with favorable terms. We achieved a renewal price index, which is our measure of year-on-year rate increases, for the half year of 128% across the specialty portfolio. And we would expect to see further increases in this metric in the second half of the year, as premium weighting shifts towards the property D&F book, where considerable pricing momentum continues. Our bespoke pillar continues to be a key focus and an area of differentiation. Driven by transactional activity, the contracts in this pillar tend to be more insulated against market cycles. However, we still saw evidence of pricing momentum with a half year renewal price index of 118%. The markets for our highly specialized products remain strong with high barriers to entry. And I would note that due to the timing and selection of contracts we underwrite, gross written premium bespoke can fluctuate in a single period. And from a seasonality perspective, it tends to be weighted towards the second half of the year. In our Reinsurance pillar, as previously documented, we began optimizing our portfolio in late 2021 to reflect our proprietary view of risk and concerns over inadequate pricing and the capture of climate change and inflationary impacts. We continue to refine our portfolio and believe we are well positioned to be opportunistic in our capital deployment, capturing improved rating whilst continuing to manage exposure and volatility. Half year renewal price index in the Reinsurance pillar was 171%, reflecting the continuing market adjustment. Overall, we delivered another quarter of profitable growth that built on the excellent results we achieved in Q1. Our performance was driven by our scale, our lead positioning and relevance, execution from our dedicated teams and the strength of our balance sheet. When taken all together, these competitive advantages enable us to manage our business for long-term profitable growth and create value for our shareholders. I'll now turn it over to Allan to walk through the financial results in more detail.
Thanks, Dan, and I'd also like to welcome everyone to our first earnings call as a public company. I look forward to working with all of you as we execute on our strategy and communicate our progress to the investment community. Please note that while we began trading on the New York Stock Exchange on June 29, the IPO and our primary capital raise of $100 million did not close until July 3. And as such, the results I will be discussing are pre-IPO. The IPO will be reflected in our third quarter results. As Dan touched on, we had a strong second quarter performance with net income of $84 million equating to $0.76 per diluted common share. For the first 6 months of 2023, we had net income of $1.8 billion or $16.39 per diluted common share. As a reminder, in the first quarter, we recognized a net gain on distribution of Fidelis MGU of $1.6 billion. Excluding this onetime accounting gain, our net income for the first half of 2023 was $177 million. Regarding our return on equity metric. In the past, we've shared our operating ROE, which was calculated based on beginning of year shareholders' equity. We are now transitioning to an operating return on average equity, which better aligns with our peers and investor expectations. For the second quarter of 2023, our operating return on average equity was 17.6% on an annualized basis compared with 4% in the prior year period. For the first half of 2023, our operating return on average equity was 18.2% on an annualized basis compared with 4.8% on an annualized basis in the prior year period. Turning to our gross premiums written. We saw growth of 25% to $957 million in the quarter, and 27% to $2.2 billion for the first half of 2023. Looking at our gross premiums written by segment. The significant growth in our gross premiums written was primarily driven by our Specialty segment, which grew 76% to $657 million in the quarter and 63% to $1.5 billion for the first half of 2023. The increases primarily relate to new business and improved pricing and terms and conditions. The largest premium increases were in our Marine, Property D&F and Aviation and Aerospace lines of business. In our Bespoke segment, gross premiums written were $55 million and $206 million in the second quarter and half year of 2023, respectively, compared to $163 million and $298 million in the prior year period. The movement was a result of the timing of new contracts and renewals. Gross premiums written in Bespoke can fluctuate due to the timing and selection of the contracts we underwrite. In addition, and as Dan noted, from a seasonality perspective, we typically experience greater demand in the second half of the year, and therefore, we don't anticipate a change to full year premium. In the Reinsurance segment, gross premiums written remains fairly consistent at $245 million and $506 million in the quarter and half year, respectively, compared to $228 million and $520 million in the prior year periods. We've been able to take advantage of the improved rate environment and terms and conditions while moving away from attritional levels of our exposure. As you recall, we are predominantly a Specialty and Bespoke insurance business and have intentionally taken a cautious and opportunistic approach to deploying capital and reinsurance. We focus on top-tier scenes and risks that meet our required pricing hurdles. When looking at net premiums on a consolidated basis, net premiums written increased by 35% to $615 million in the quarter and increased by 36% to $1.3 billion for the half year of 2023. The increases were primarily driven by an increase in gross premiums written and the decision to retain more profitable business in this dislocated market. On a net premiums earned basis, our premium earned across all segments increased 27% to $429 million in the second quarter of 2023, and by 24% to $815 million for the half year of 2023. The growth was primarily driven by our decision to reallocate capital to our specialty lines of business from reinsurance during 2022, which earned through into the current year, particularly on Marine, Aviation and Aerospace and Property D&F. Our strong performance resulted in our combined ratio improving to 82% for the second quarter of 2023 from 90.5% in the prior year period and to 80.6% for the half year from 89% in the first half of 2022. This was primarily driven by a decrease in our loss ratio as a result of lower catastrophe and large losses for both the quarter and year-to-date periods, as well as lower attritional losses compared to the first half of 2022. When looking at our capacity and large losses for both the quarter and the half year, they were $64 million, which included losses related to the Sudan conflict, severe convective storms in the U.S. and from cyclone Gabrielle in New Zealand. These events impacted our Aviation and Aerospace, Property D&F and Property Reinsurance lines of business. This compares to $80 million and $144 million of catastrophe and large losses in the second quarter and first half of 2022, which related primarily to the Ukraine conflict, European storms and Australian floods. Moving on to our prior year reserve development. We had net favorable prior year development of $2.4 million and $4.5 million for the quarter and half year of 2023. This compares to net favorable development of $10.9 million and $15.5 million in the prior year periods. I'd like to take a moment here to touch briefly on our exposure to Russia's ongoing invasion of Ukraine, which has impacted multiple lines of business, including Marine, Aviation, political risk, trade credit and more political violence. Our reserve for losses and loss adjustment expenses, net of reinsurance, was $148 million at June 30, 2023, compared to $146 million at March 31, 2023, and we believe we are well reserved based on our assessment of the current environment. Moving on to expenses. Including all our segments, post the acquisition expenses from third parties increased to $122 million or 28.5 points of the combined ratio for the quarter from $83 million or 24.6 points of the combined ratio in the prior year period. For the first half of 2023, policy acquisition expenses from third parties increased to $227 million or 27.9 points of the combined ratio from $151 million or 22.9 points of the combined ratio. The increase in our policy acquisition expense ratio reflects a change in business mix, primarily driven by the growth of our Specialty segment. Fidelis MGU commissions were $53 million or 12.3 points of the combined ratio for the quarter and $77 million or 9.4 points of the combined ratio for the first half of 2023. The MGU commission relates to seating, portfolio management and profit commissions agreed as part of the framework agreement with Fidelis MGU effective from January 1, 2023. Our general and administrative expenses were $19 million or 4.3 points of the combined ratio for the quarter, a decrease from $42 million or 12.4 points of the combined ratio in the prior year period. For the first half of the year, general and administrative expenses were $35 million or 4.3 points of the combined ratio, a decrease from $77 million or 11.7 points of the combined ratio. The decreases were primarily related to the reduced headcount following the consummation of the separation transactions. The combined Fidelis MGU commissions and general and administrative expense ratios are in line with our expectations as set out in the noted framework agreement and our operating model. Turning now to investments. Our strong results reflect net investment income of $27 million for the second quarter of 2023 compared with $7 million in the prior year period. For the first half of 2023, our net investment income was $48 million compared with $13 million in the first half of 2022. These increases were primarily due to increases in interest rates during 2022 and 2023, with the short duration nature of our portfolio means that we are reinvesting at higher rates. During the half year of 2023, we invested $1.3 billion in fixed maturity available for sale securities with an average investment yield of 5%. We remain conservatively positioned with 98.4% of our investment portfolio held in fixed maturity and short-term securities, with an average duration of 1.7 years at June 30, 2023. This asset strategy approximately matches our liability duration of 2 years and allows us to prioritize taking risk on the underwriting side of our balance sheet. Turning to our balance sheet and financial condition. Our book value per diluted common share was $17.86 at June 30, 2023, an increase of 10% from the adjusted book value per diluted common share following the separation transaction, which was completed on January 3, 2023. The increase was driven by net income and net unrealized gains reported in other comprehensive income. As of June 30, our common shares outstanding were 110,771,897. And on July 3, reflecting our primary capital raise in our IPO, our common shares outstanding were 117,914,754. For both periods, we had 960,870 unvested restricted share units. Overall, we are well capitalized against our rating agency and regulatory requirements and are well positioned to continue investing and managing our capital with the goal of generating strong return on average equity for our investors. Given the current environment, our primary focus is on investing in the business and taking advantage of some of the pricing dynamics we are seeing in the hard market. This is exemplified by our raising of an additional $100 million in primary capital during the IPO. Longer term, our goal for our capital returns program is to balance ordinary payouts from operating net income and releases of excess capital with the need to take a prudent and efficient approach to capital sufficiency. To conclude, I'm very pleased with our financial performance in the second quarter and through the first half of the year. I will now turn it back to Dan for additional remarks on our outlook for the market.
Thanks, Alan. [indiscernible], I'm very pleased with our positive momentum and results for the quarter and overall for the first half year of 2023. We have delivered an annualized ROE for shareholders of 18.2% and we are confident in our ability to deliver our long-term target ROE of 13% to 15%, as consistent with our target communicated at IPO. Demand remains strong, and we continue to see opportunities amidst the challenging risk environment. We believe our exclusive access to Richard Brindle on the world-class underwriting team at the MGU, coupled with our deep risk management and capital application expertise, position us well for continued strong performance. Our agile and focused teams are tirelessly working to create value for our clients and shareholders while prudently pursuing the opportunities presented by the hard markets. As we progress into the second half of the year, we are in a strong financial position and we'll take a balanced, prudent approach in deploying capital. We remain well positioned to benefit from the prevailing hard market conditions and have a strong product line of opportunity across our Specialty and Bespoke business. In Specialty, we expect our Property D&F portfolio will continue to offer attractive opportunities to deploy capital, given the market constraints and ability to achieve differentiated pricing and terms and conditions. In Bespoke, we continue to see significant demand for tailored and specialized products. And as a result, we anticipate that our gross premiums written will continue to increase in the first quarter of 2023 compared to the prior year quarter. Going forward, we will remain disciplined against our long-term strategic priorities, which are as follows: firstly, to continue to be nimble and proactively manage our portfolio to drive growth with a compelling balance of risk and reward across our 3 underwriting pillars. Secondly, to focus on underwriting profitability to all market cycles and maintain diversified exposure in our business lines. Thirdly, prudently and proactively manage capital to generate superior risk-adjusted returns. Fourth and finally, continue to operate in a position of financial strength that positions us as a provider of choice of policyholders and allows us to take advantage of large or sudden market pricing dislocations. Our ability to deliver in line with our long-term strategy is evidenced in our half year results. Our structure has enabled us to leverage our expertise and take advantage of marketplace dynamics. We are underwriting attractive business. We are driving increased profitability. We are generating compelling returns and growing our earnings, all while maintaining prudent capital levels and a strong balance sheet. Now before handing over to Q&A, I'd also like to take a moment to touch on the recent wildfires in Hawaii. Our thoughts go out to the families and communities affected by this devastating tragedy. At this time, we'll continue to monitor our exposures closely, and we'll provide updates as appropriate. Now I'll turn it to the operator for your questions.
[Operator Instructions] With that, our first question comes from [indiscernible] from JMP.
First question, I was hoping you could give us a little color on kind of how the Property market has developed year-to-date. And specifically, I'm interested in -- you guys have done a good job of kind of staying away from attritional losses very purposely. Has anything changed in that kind of lower retention, more attritional part of the market as losses have continued to come through that might make that more attractive for you going forward? Or do you still feel that it's just not the risk/reward that you're looking for?
Yes, I think the short answer, Matthew, is we don't see -- having now moved out of the attritional space, moving back into under any circumstances. So we're very comfortable about how we've positioned the portfolio. As you know, and as we've said many times, we've had a lot of concerns around the impact of climate change, claims and social inflation and how that's captured in the model. So I think we've seen -- we've been able to move up and out of that attrition. We've optimized the portfolio, concentrating on core clients who outperform the market. So I don't think we're going to deviate from that strategy regardless of pricing.
Okay. Great. And then just 1 quick number question probably for Allan. You talked a bit about NII and the $27 million in the quarter. It sounds like that's pretty clean, just investing at higher rates? Or is there anything in that number that is onetime in nature that we should take into consideration as we think about how it builds going forward?
Yes. Thanks, Matt. No, there's nothing -- it's pretty clean. Again, it's really that we've -- as you recall, we kept our powder dry last year. We had a $1 billion of cash at year-end. And we've been investing that since about February of this year. We invested $1.3 billion with reinvestment rates around 5%. So there's nothing unusual in there, and we're keeping to our duration targets. Again, we're getting 5% of short-duration portfolio. So we're comfortable with it, and then there's no -- we've optimized how we look at our investment strategy, and we don't have any plans to change in the near future.
Congrats on the quarter.
Your next question comes from Tracy Benguigui from Barclays.
You reiterated your 13% to 15% ROE target, though now you're on an ROAE basis. You're well north of that in the first half of the year. Is your 13% to 15% target long term through cycles? Or do you view your earnings performance in the first half of the year more of an anomaly?
Yes, Tracy, thanks for that. As we stated in the road show during the IPO process, we do view the 13% to 15% target as a long-term return that we can achieve throughout the market. We believe with our conservative investment strategy, but along with the underwriting strategy we have and our outwards reinsurance purchasing, that we can manage through the cycle and achieve those returns with the best-in-class underwriting team at the Fidelis MGU. So we view that as a long-term target throughout the cycle, especially now that we've pivoted away from the -- some of the Reinsurance segment business that we've previously had and moved more into the Specialty and Bespoke areas, we believe that target is achievable going forward.
[indiscernible] to be sure, it feels like your reinsurance premium growth was all rate-driven, not exposure-driven. And you mentioned that reinsurance optimization efforts reflect our proprietary view of risk, and you have concerns about inadequate pricing, climate change and inflation. But I mean, you are growing Property D&F. You're exposed to similar risks like climate change. Why is the primary side a better spot to be?
Yes. I think great question, Tracy. I think when we look at -- there certainly have been an improvement on the reinsurance side. When we think about the RPI of 171 this year. And obviously, do note that there's been some market improvement year-on-year. What we've seen in the Property D&F market is compound increases since 2019. It's probably the hardest market, most of us have ever seen in our careers. So the ability to take more a pinprick approach to limit coverage per specific to position yourself in a program, excessive certain secondary perils, for instance, is much more available. And it's just being able to leverage the scale, our line size and our leadership. We just think we get more bang for the buck in the property D&F. It's also easier to reinsure. There's a bigger universe of capital that will support that product line, as opposed to retrocession, which sits alongside the reinsurance treaty book.
Your next question comes from Meyer Shields from KBW.
First question, with regard to the Russia-Ukraine reserves, was it just a $2 million change? Or were there any paid losses in the quarter?
Yes, I think there's nothing in the first current half of this year that's led us to change how we view our exposure to Russia-Ukraine. And what I'll do is ask Jonny Strickle, who's our Chief Actuary insurance group, and he was the former Head of Reserving at Fidelis when the conflict started. And he'll give you a bit more detail on our approach and methodology regarding the reserves and the losses during the conflict.
Yes. As you recall, our main exposure here is around the Aviation portfolio. A year ago, we established a framework reserving for that. So we gave consideration to all the various outcomes that has come as a result of this, so you might recall 2 different policies that play 2 different perils. And a lot of uncertainty around the amount of aircraft that could ultimately be subject to [indiscernible]. So there's no real change on that over the year. What we do is update if new information becomes available. So we tweak the assumptions that feed the framework. But over this quarter, there's been no material change to that at all. And any movement in the reserve is mostly due to FX and earnings coming through on some of the other much smaller exposures.
Okay. Fantastic. Switching gears, if I can. The -- you talked about the portfolio duration obviously being short, and I understand that. It's a little sort of than the liability duration and I'm wondering whether that's intentional and/or subject to change?
Yes. So what happened last year, Meyer, if you recall from our earlier discussions during the road show was that during the mid part of 2022, given the rapid increase in interest rates and the Fed's movements in terms of fighting inflation, we decided that any maturities in our portfolio in the latter half of the year, we would not reinvest. We wanted to sit on the sidelines. So we parked it in cash. So as a result, our duration during the course of 2022 fell from our target of around 2 to like 1.2 at the end of the year. We got more comfortable with where the Fed is headed and with the investment -- reinvestment rates in the early part of this year. So we started reinvesting the cash that we had sit on the sidelines along with new maturities during this year. So as I mentioned in my opening remarks, we've invested already $1.3 billion in 2023 through June, getting a 5% yield. So we are now ramping up back to that duration. And again, it was a conscious decision in 2022 to shorten it, given everything that was going on. But we do plan to work up to our liability duration of 2 as we progress through 2023. We do it on a measured basis. We didn't go all in right away. And we do expect that in the near term, we will be back up to that target duration of 2.
Your next question comes from Mike Zaremski from BMO.
I think you might have touched on this a bit, but on the pricing environment, it's clear that you expect kind of hard market conditions to persist. But curious if you could put any kind of numbers on kind of the sequential change in pricing. I noticed in your release, there's a measure of RPI, which, Fidelis -- it says Fidelis uses to assess an approximate index of rate increase of a particular set of contracts. I wasn't sure if that's something you could share, how that PI trended?
Yes. I think we can talk about what we -- as we mentioned earlier, what we've seen half year by pillar. We saw in our Bespoke pillar that we had a rate increase of 118%. Now normally, that pillar would be insulated against market cycle by its nature is unique hovered products, but we do have terror, political risk, and obviously, that's seen dislocation through the conflict. Specialty, we've seen an RPI at half year of 128%. And if you think about Specialty, certainly Marine, Aviation and the Property direct and fabricated books have seen price increases compound year-on-year for the last 4 or 5 years. And then Reinsurance, as I said, was 171. What I would say, we see no evidence that the market is softening. The insurance group, we attend the daily underwriting calls with the underwriting team of the MGU, which gives us real time insight into the rating environment across all our lines of business. And we see those compound increases daily as the supply-demand imbalance continues. So we're not going to predict the future. But at the moment, we still see material increases. We still see a supply-demand imbalance. We still see the secular issues that we've talked about for the last 3 or 4 years, climate change, deterioration in casualty, cost and social inflation and geopolitical context as drivers of the hard market. So we don't think anything has changed.
And of course, importantly, there's no new capital of any significance entering the market. There have been no start-ups, which is very, very unlike previous hard market cycles. So we only think capital will return with any scale once the industry can produce stable and consistent returns. So hopefully, that gives you a little bit more color. So we've seen good rate increases. We have a strong pipeline across all those pillars, but we don't see that imbalance between supply and demand changing at the moment.
Got it. Okay. I'll dig in more on the RPI numbers and try to compare them to last quarters. But my follow-up is on the Bespoke segment, excellent results. There was, again, a decent amount of reserve releases. Is it worth any color on those releases? It says the color says just lower loss experience in our assumptions. Is this a segment where we're going to just have volatility in releases? Or is this -- do you -- is this a segment where you're just trying to build in more cushion? Or just any color on that would be great.
Well, I'll ask our Chief Actuary to take that one. Jonny?
Yes. So if I need one where it's easy to explain to this advert is there's a couple of things to call out and we can name it. But the case of Bespoke at a favorable this year really is just an absence of claims coming through. So we got more adding asset side and have released through the year, and nothing's really come against it. In terms of volatility and how to think about PYD and that pillar going forward, there's definitely a need to put some caution into the initial loss estimates that losses on the dispersed pillar. And that is because of one-off losses -- that one-off contracts as they tend to have the good comparison that require a specific pricing model. They just need more assumptions to get to that starting point. So I think if you build up something in a more complex way, by nature, you kind of end up adding a little margin on each little bit. And we've seen that so far through Fidelis' history. I mean, Bespoke's had consistent favorable PYD for a number of years. We don't make any allowance for it in our numbers or in any forecast we have internally. We just continue to monitor the products until we feel comfortable enough to start lowering those initial assumptions. I don't see that in the near-term future, because it's constantly evolving, the type of products we look at that.
Your next question comes from Yaron Kinar from Jefferies.
My first question probably ties back to Tracy's question earlier with ROEs. And I'm actually looking more at the combined ratio, which was running at just over 80% for the first half of the year. I think that compares to mid-80s or higher than you were expecting over the long run. So I guess, again, similar to Tracy's question, is this really driven by a hard market and you'd expect that ratio go up over time? Or there other elements that are allowing you to achieve that 80% or a much better than expected or long-term expectation combined ratio?
Yes. It's Allan. Thanks, Yaron, for the question. It's a great point. As you know, we focus on combined ratio. That is our key metric along with ROE, when we look at our performance internally. You're right on our targets for combined ratio and how that flows through the ROE. Obviously, we've had a great quarter and a great half year. We'd love to have this combined ratio going forward. I think anyone would. I think that as we mentioned in the prepared remarks and in our filings is that the absence of large losses and cats during 2023 has helped our loss ratio. But attritional losses are also running better than expected. We've moved up in programs, especially in the reinsurance pillar. And I think that has helped our attritional loss ratio as well as our cats. And our Specialty pillar, we -- again, as Dan mentioned, we can pinprick more the risks we like and geographically as well as the types of risk we're involved. So I -- we would never suggest that the current half year or combined ratio is something that is achievable. In the long run, we do believe that the percentages you gave earlier probably achievable throughout the cycle though. A lot of it is rate-driven as well. Again, it's not just the losses, it is in terms of the premium. The supply-demand imbalance is still out there. So we're still getting great rate. But we think through the cycle, certainly, the percentages on the combined ratio that you mentioned are achievable. And right now, we are certainly right -- have great tailwinds and our combined ratio is even better than those great combined ratios.
Yes. I think working with the MGU that have a track record of outperformance and with our capital management throughout the cycle, we're well positioned to produce peer-leading performance on combined ratio and returns. So I think that our job here is to manage the capital through the cycle, but we're certainly having a very strong underwriting team to work with, especially market, is really helping that process.
That's a very comprehensive answer. And then maybe shifting a little bit to another area. We see -- we saw some headlines not regarding Fidelis in the industry with [indiscernible] and letters of credit and whatnot. Do you have any exposure, whether to [indiscernible] directly or to collateralize reinsurers with LOCs, maybe specifically in the Bespoke book?
We had -- we did not have a trading relationship with [indiscernible] we have no direct exposure. We have over the -- of our history, both collateralized products. We tried and tested partners. We've been through a lot of scenarios with them. So we feel confident, but we're always evolving how we analyze review, check to make sure the process is robust. But to answer your question, we have no exposure to [indiscernible].
Okay. And what about letters of credit? Do you have exposure to collateralize reinsurers with those letters of credit?
It's Allan, thanks, Yaron. No, generally, we stick to highly rated reinsurers and we go through a very thorough security committee process with each and every purchase of reinsurance. There are the odd contracts, though, where we do have collateral, often in trust. You think of our Herbie rebounds, there are a few letters of credit, but very immaterial to our overall portfolio. Again, we focus on working with partners that have high ratings, are in the market. We work with them long term. So very minimal exposure to any letters of credit.
Your next question comes from Mike Ward from Citi.
In the press release, Mr. Brindle mentioned new opportunities in products and distribution arising from the new structure. Just wondering if you could maybe expand on that a bit.
Yes, I can do that, Mike. It's Ian Houston here. Yes, we -- we have a very solid pipeline of new opportunities. We're just actually getting to the stage of bringing a new [indiscernible] in September in the Aviation segment. So that's just one that's happening at the moment, and we have a pipeline of several others. So we're always interested in looking at evolving market conditions and seeing where we can fit in and actively grow the -- working with the MGU, actually growing and diversifying the Fidelis portfolio, and we'll continue to do that.
Yes. I think today, this has obviously built a reputation for innovation through the Bespoke pillar. So we have a number of contract frustration ventures that we hope to buy during the second half of the year. We're also seeing a resurgence of interest in political risk with a strong deal flow there. So I think with our Bespoke pillar, especially, we're very much on track to meet the goals for the year. We had a couple of contracts that moved in Q2, and we'll hopefully bind in Q3 with substantial premium. So very much on track in terms of innovation pipeline, both of Bespoke and Specialty.
Awesome. And then maybe a longer-term question. Just curious if you could elaborate on the plans for potential capital return?
Yes. Obviously, we just raised capital as part of the IPO. So we raised $100 million of capital and we are planning capital where we think we can get best returns for our insurers to our stakeholders, including our investors. And so right now, we believe given the dislocation in the market, that deploying it in the insurance and reinsurance space is the best thing to do. We will obviously, as we move forward into our planning process for 2024, we are going to consider our capital plans in terms of dividend strategy and how much capital we're going to deploy in underwriting, how we're going to look at our risk dollars that we allocate to investments. We believe we are well-capitalized against our rating agency and regulatory requirements, and we see no constraints on that -- from that perspective. In the longer term, our goal is to implement a dividend strategy, which will be based on ordinary payments from operating income. And then we will obviously release excess capital as needed and when we see the time is appropriate, in the form of special dividends and buyback -- share buybacks. Well, it's still early. We are -- as I mentioned, we're in the process of looking at 2024 and beyond. We will work with our Fidelis MGU to see where we can deploy capital and where we think it's best in the underwriting cycle. And we'll communicate with you transparently when we start implementing a potential dividend strategy or any other capital returns to shareholders.
Your next question comes from Brian Meredith from UBS.
Two quick questions for you. The first one, any exposure to the Hawaii wildfires?
Yes, thanks. The -- as we mentioned earlier, the assessment is ongoing, and we're continuing to closely monitor our exposure. But at the moment, like most people, we're trying to get our arms around the situation, so we're not ready to provide a figure at this time, but we will provide an update when we've got more data at an appropriate time.
Great. And then second question, I'm just curious, what impact, if any, would some of the proposed changes to the media tax rate happen on you all's tax rate?
Yes, I'll take that one, Brian. Thank you, I am Allan. The -- obviously, we're a Bermuda company, we're incorporated here. It's too early to comment really on the tax proposal that Bermuda has. We continue to engage with our trade group, the Association of Bermuda Insurers and Reinsurers, as well as with the Bermuda government. We are working with our advisers to look at the implications of it, and we'll continue to work with them through the proposal process. Obviously, we worked with our advisers historically as well, because Pillar 2 came out in the U.K. and Europe a couple of years ago. So we've been -- in the background, we have been working on our tax strategy. But I was just pleased to be in Bermuda. We have a productive work environment here. The regulatory capital and human resource pool here is very strong in Bermuda, but we'll continue to evaluate the tax proposal as it develops, and we'll communicate with you on any plans or changes in the future, and we'll certainly embedded in our planning process for '24, '25 and beyond as we go through. But it's really -- it's too early to comment on any impacts at this point in time.
Your next question comes from Pablo Singzon from JPMorgan.
I just wanted to follow up on the combined ratio discussion. MGUs were higher than we had thought this quarter, but I think they're still below the run rate level, right? So if you start with this quarter as a base, I think they were about 9% of net written premiums. Where do you think that ratio ultimately settles? And what offsets the components to the combined ratio do you see as MGUs fully ramp up?
Yes, I'll take that one, Pablo. Thanks for the question. As you know, we look at combined ratio overall. We have a best-in-class underwriting platform with the Fidelis MGU and best-in-class underwriters there. We believe our first half performance is a clear demonstration of our model with them, and our alignment of interest and the performance of the MGU reflects that. The MGU expenses of $77 million in the first half are within the range we expected, and the agreement is operating as intended. We may see some variation in fees from quarter-to-quarter, given the fee structure. And a reminder on how the fee structure works. There's 2 primary components. There's a ceding commission, and then there's a profit commission. And we believe the way they operate, they reflect the alignment of interest between the 2 parties. We had a very good first half underwriting result, 80% combined ratio. And as a result, there is a profit commission payable to the MGU. And hence, why the percentage may be a little higher than you would see in a quarter when there are no profit commissions. Ultimately, we believe our combined ratio represents the best measure of performance on this front, and our performance here is among the best in the industry. We're comfortable with the fee structure. We believe in aligned interests. And in terms of run rate, it can fluctuate from quarter-to-quarter, and we'll certainly be transparent in the calculations on both how the ceding commission works and how the profit commission works going forward.
Okay. And Dan, I just wanted to follow up on your Hawaii comments. I'm not looking for specific numbers. And I know Hawaii is not a large insurance market, but I think it is viewed by some insurers as a diversifier to the global profit portfolios partly because of a scenic exposure to hurricane risk. Is there anything unique about your exposure there? For instance, are your attachment points lower than other geographies? Are you more explosive to local companies? And as you think about your net limits, are you -- hello? Yes. And as you think about net limits, are you more exposed to commercial property or homeowners in Hawaii?
Yes. As I said, it's just too early. We're still waiting for data points to come through. We do write reinsurance and obviously, direct. So probably, it will be more commercial-based. What I can say is we do buy significant reinsurance to protect that particular territory. But we're still working through a loss number. So I don't think it's appropriate to comment any further.
Your next question comes from Meyer Shields from KBW.
I just wanted to follow up quickly see if there's any equivalent to the RPI on the loss side or whether you can comment on generally what loss trend looks like in the Specialty segment for you?
Yes. So I'll take that. So we can -- it's sort of -- we do consider the loss trend when we're looking at the RPI measure as well. And when we build it into the filing process, we'll consider additional trends that we want to go on top. So for example, we think the inflation environment has changed materially from the point of pricing, we'll factor that in as well. So what I mean is you can't let the RPI trend go straight down to the loss ratio. You have to make other announcements that will take in consideration for the '24 planning process, which we're going through now.
And your next question comes from Tracy Benguigui from Barclays.
Just real quick, going back to the 13%, 15% ROE target. I'm going to take a short at this. Are you comfortable sharing a near-term ROAE target, given where we are in the cycle?
Yes. Again, great question, Tracy. Obviously, we're in a hard market. It's -- hardest market we've seen in many years. As we head into Q3, which is a heavy cats season, even though we don't write a lot of reinsurance anymore, it's really difficult to say the short-term target. We're really focused on through the cycle hard market, soft market, whatever, we believe that our target of 13% to 15%, as we said during the IPO is achievable. We're not really comfortable in updating or giving guidance in the short term.
Really quick back to the discussion on the new Bermuda tax rate proposal. I thought I saw one of your SEC disclosures that you have existing exemption until 2035. Is that the case?
Our Bermuda operating subsidiary, Fidelis Bermuda, does indeed have the 2035 certificate. I think pretty much everyone in the industry applies for that. Certainly, that is -- no, we're going to work with the Bermuda government on this. This is -- with our trade association and with the government that does exist. We -- technically, we are exempt in the Bermuda operating subsidiary until then. However, there are other factors why we may decide to not follow through with that. And we'll see as this develops, the tax credits we can get, some other offsets that we're looking at with the government. Again, we love working here. We love the Bermuda base for our company. And so while we technically do have that certificate, I think we'll work very cooperatively with the Bermuda government.
Many others have asked about the Maui wildfires are still assessing. But is there anything you could share on Hilary or California quake?
Yes, it's Allan. Obviously, no, it's too early to call, especially in California, the quake and the storm that went through has obviously happened this week. So there's nothing that we can really point to at this point.
Some of your London-based competitors are establishing U.S. E&S carriers, I believe it's to improve distribution efficiencies. I'm sure you're thinking of this. Is that a strategy you would also want to replicate?
No, I think we get great access effectively to that E&S market through our D&F underwriting. We get very strong support in Bermuda from Bermuda brokers and U.S. brokers, in London from the London and Continental brokers. So that is our distribution path. That is our strategy.
Your next question...
Just coming out to close, maybe we could go to [ Lee Coperan ] -- let me take that question?
Your next question is from [ Lee Coperan ] from Omega Family Office.
I think you really addressed most of the questions. I'm just wondering whether you're sandbagging things. Your investment portfolio is well situated and we're having a rising rate environment, and you're in a very hard market. I'm wondering whether your 13% to 15% normalized ROE is too low. As the world gets used to more climate change issues, you would seem to me your risk in your business is greater, and maybe you should be shooting for a higher ROE over a cycle. And second, since we have a follow-up question, what is your guys' view of your stock price versus your book value versus your normalized earnings?
Hi, Lee. Thanks, it's Allan. I'll address both questions. Obviously, as a newly public company and with changes in our portfolio and our pivot from reinsurance to Specialty, we have looked hard -- very hard at our target ROE through the cycle. And as I mentioned on earlier calls, it's not just a short-term target, it is through the cycle. And I think that -- we believe that target is achievable with less volatility than some of our peers who may take on a little more risk on the cap front. So yes, the sandbagging term certainly is something that has been mentioned. We don't think that's how we think about it in the long term. We think that hard markets, soft markets, the transition to those markets at the 13% to 15% return on equity is an achievable amount. And we're sticking to that, as we reported during the IPO road show.
I think -- yes, I'd just add to that, 1 or 2 good quarters don't make the year. So I think we're going to be very cautious around that. And as we move into Q3, hopefully, we'll have more evidence of exactly performance, and we can think about it from there.
In terms of our share price, our shares were issued less than 2 months ago. Obviously, we did a lot of work, a lot of investor relations, met with a lot of people. I worked with our sell-side analysts, many of whom are on the call today, who are a great bunch following us. Obviously, we would like to increase that price, and we think that producing best-in-class underwriting results, working with the best-in-class underwriting team at Fidelis MGU, producing results like we had this quarter, proving that the model works, proving that management is good at managing capital as well as the investment portfolio, we believe the share price will get where it needs to be and where it should be going forward.
And who would you list as your comparables? Who in the public arena would be comparable to you?
We did a lot of extensive outreach on this during our test of waters and roadshow process over the last 1.5 year. We list our 11 peer group in our prospectus. So it's a mix of specialty writers in the U.S., some Bermuda peers and a few London folks. So it's a broad-based -- we don't believe there are any peers exactly that are identical to us. But again, that's why we picked a broad base of 11 peers that we measure ourselves against in terms of metrics and performance metrics and they're listed in our prospectus.
Okay. Thank you. We are now out of time. So thank you for all your questions. Thank you for your patience and attendance today. I'd just like to close out with a few comments. So thank you again for joining us today. In closing, we have built on our strong first quarter performance with an excellent second quarter that demonstrated the value of our market lead positioning, our business model and a structure that allows for strong execution across all aspects of our strategy alongside the MGU. So looking ahead, we believe we have a unique and diverse portfolio mix with scale across our 3 business pillars.
A differentiated underwriting position does us well to take advantage of the opportunities we see in the markets today, as well as to navigate across market cycles. And a highly experienced management team brings valuable relationships spanning across multiple disciplines in the insurance ecosystem. So we remain focused on deploying capital towards profitable underwriting opportunities, while increasing our scale to drive long-term sustainable growth and value for all of our shareholders. So again, thank you very much for your time today, and have a great day. Thank you.
This concludes today's conference call. Thank you for joining, and you may now disconnect your lines.