Fidelis Insurance Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 15, 2025

There are 16 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Fidelis Insurance Group's First Quarter twenty twenty five Earnings Conference Call. As a reminder, this call is being recorded for replay purposes.

Operator

Following the conclusion of formal remarks, the management will host a question and answer session and instructions will be given at that time. With that, I will now turn the call over to Miranda Hunter, Head of Investor Relations. Ms. Hunter, please go ahead.

Speaker 1

Good morning, and welcome to Fidelis Insurance Group's first quarter twenty twenty five earnings conference call. With me today are Dan Burrows, our CEO Alan Declare, our CFO and Johnny Strickle, our Group Managing Director. Before we begin, I'd like to remind everyone that statements made during the call, including the question and answer section, may include forward looking statements. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties and emerging information developing over time. These risks and uncertainties are described in our first quarter earnings press release and our most recent annual report on Form 20 F filed with the SEC as available on our website at fidelisinsurance.com.

Speaker 1

Although we believe that the expectations reflected in forward looking statements have a reasonable basis when made, we can give no assurances that these expectations will be achieved. Consequently, actual results may differ materially from those expressed or implied. For more information, including on the risks and other factors that may affect future performance, investors should review the Safe Harbor regarding forward looking statements included in our first quarter earnings press release available on our website fidelisinsurance.com as well as those periodic reports that are filed with us with the SEC from time to time. Management will also make reference to certain non GAAP measures of financial performance. The reconciliation to U.

Speaker 1

S. GAAP for each non GAAP financial measure can be found in our current report on Form six ks furnished to the SEC yesterday, which contains our earnings press release and is available on our website, fidelisinsurance.com. With that, I'll turn the call over to Dan.

Speaker 2

Thanks, Miranda. Good morning, everyone, and thank you for joining us on our call today. I want to begin by reiterating our commitment to executing on our strategy of pursuing profitable underwriting opportunities and strategic capital management. In a period that has seen the highest first quarter industry catastrophe losses in over a decade and global political uncertainty causing volatility in the financial markets, we have remained focused on providing solutions for our clients across the globe and actively managing our capital. We believe our strong capital position, leading and diversified portfolio of short tail risk with no casualty exposure, and our measured approach to investments leave us well positioned to navigate the current environment and capitalize on market conditions that continue to generate good underwriting margin.

Speaker 2

For the first quarter, we recorded top line growth of 14% driven by strong retention levels and new business opportunities across the portfolio. This included new partnerships as well as reinstatement premiums in our reinsurance segment. Our combined ratio for the quarter was a 15.6%, reflecting the impacts of the California wildfires. Specifically, the impact from the wildfires to our first quarter results was a hundred and $67,000,000, which is tracking to the lower end of our expected range. This is net of expected recoveries, reinstatement premiums, and tax.

Speaker 2

The wildfires were yet another reminder of the impacts of climate change and the increasing frequency and severity of secondary perils. We write a leading book of property insurance and reinsurance. And given the relative size of this portfolio, we believe our performance demonstrates the quality of our underlying portfolio and the importance of active exposure management, including the strategic use of outwards reinsurance. Across our portfolio more broadly, we continue to see an attractive trading environment supported by strong margins across our lines of business. After years of compound rate increases, we are still in one of the best underwriting environments I've seen in my career.

Speaker 2

While we have seen increasing competition in some lines, our portfolio is well diversified across over a hundred lines of business, and our lead positioning, long term relationships, distribution channels, and life sign leverage afford us access to the most compelling risks at preferential rates, terms, and conditions. As a short tail writer, our differentiated position is a key advantage at all stages of the cycle. And as a leader in a verticalized market, we are less impacted by the effects of rating pressure. Within insurance, the first quarter is particularly significant for our marine portfolio. We saw continued growth year on year.

Speaker 2

This again was predominantly driven by new construction business, where we saw capacity driven demand as well as the continuation of our strategy to leverage our capacity across the subclasses to optimize margin. Off the back of a strong fourth quarter, asset backed finance and portfolio credit continued to record notable growth as we recognized revenue from our partnership with Euclid Mortgage and executed two new deals with a repeat client in our structured credit portfolio. As a reminder, a large proportion of our structured credit business comes from one off transactions, which do not renew in the same way as traditional insurance risks. Binding business with repeat clients in this space demonstrates the value we are able to bring to clients in structuring capital efficient solutions. In direct property, a core part of our portfolio, we saw strong retention levels in the first quarter and a continued flow of new business.

Speaker 2

We have a market leading direct and facultative account, which after years of compound rate increases, continues to produce one of the best margins in our business. Overall, growth in insurance was partially offset by a reduction in our aviation and aerospace premiums year on year, which was largely driven by the timing of a line slip renewal, which moved from Q1 and closed in the second quarter. Given rating levels and the current loss environment, we continue to take a disciplined approach to aviation, focusing on targeted deployment of capacity in areas of higher margin. We will not write business that does not meet our underwriting hurdles. Turning to reinsurance.

Speaker 2

We recorded strong growth driven by new business as well as reinstatement premiums associated with the California wildfire losses. Overall, we were pleased with the results of January 1 renewal season where we were able to uphold prior year improvements to rates, terms, conditions as well as add new business in both our international and US portfolios as we continue to optimize and refine the portfolio within our view of risk. As we remain focused on deploying our capital to the right risk, we continue to explore new opportunities in highly accretive and profitable business segments to maximize our returns and access new risk and distribution. In addition to our cornerstone relationship with the Videlis partnership, we have now onboarded our first third party partners and recognized revenue from these in the first quarter. While not material to the overall portfolio, we believe these partnerships offer the opportunity to augment our existing book at compelling returns and a part of the strategic evolution of our business.

Speaker 2

The bar for new partnerships remains high and must meet our internal underwriting hurdles. Turning to capital management. We remain committed to optimizing shareholder returns, and our strong balance sheet provides us with the flexibility to support profitable growth across our underwriting portfolio and to execute accretive capital management actions. We strategically purchased outwards reinsurance protection across the quarter, enabling us to capitalize on favorable buying conditions and enhanced protection across our portfolio. In addition, given our current share price, we continue to believe share repurchases are accretive use of excess capital.

Speaker 2

Year to date, we have repurchased 41 and a half million dollars of common shares at an average cost per share of $15.63. Alan will touch on this in more detail shortly. I would also like to provide an update on the Russia Ukraine aviation litigation. Since our last call, we have continued to take action to derisk our overall exposure by judiciously settling certain claims. Following continued settlement activity in the quarter, we have now settled or are in various stages of settlement discussions for approximately 80% of our total exposure related to the lesser policy claims in litigation.

Speaker 2

Of the remainder, the majority of the exposure is related to the English trial for which we continue to hold reserves based on a probabilistic model of potential court outcomes. As of this morning, the judgment for the English trial is still pending. Depending on the judgment, we would expect an impact to prior year development. In the event of a favorable judgment, this would result in positive prior year development and would be reflected in the results following final resolution of the legal process, including any appeals. Conversely, should we face an adverse judgment, we anticipate that this would result in a net adverse prior year development impact of up to a hundred and $50,000,000, which would immediately be recognized in our results.

Speaker 2

Once we have received the results of the English trial, we will have resolved approximately 95% of the exposure in respect to lesser policy claims in litigation, putting our exposure to this event essentially behind us. Looking ahead, our underlying portfolio continues to perform well, and we remain focused on capitalizing on attractive opportunities to drive growth and optimize margin. Before turning over to Alan, I wanted to reflect on an important milestone for the company. In the first quarter, we announced the appointment of Johnny Strickle as group managing director. Many of you will know Johnny who has been an integral member of our team since he joined Videlis in 2020, contributing to all aspects of the business.

Speaker 2

Johnny's new role is a recognition of the value he brings to Videlis. He will provide strategic, analytical, and commercial leadership at group level in addition to continuing to have full oversight for the company's actuarial functions. We have an exceptional leadership team and a strong pipeline of talent throughout the organization. Johnny's promotion reflects a high caliber of our people, all of whom drive our company's success. With that, I will pass over to Alan, who will provide more color on our first quarter financials.

Speaker 3

Thanks, Dan, and good morning, everyone. I'd also like to acknowledge Johnny on his well deserved promotion. I am confident that Johnny will continue to play a key role in our strategic growth and value creation opportunities. Now taking a closer look at our quarterly results. We had strong top line growth in the first quarter with gross premiums written of $1,700,000,000 an increase of 14% versus the same quarter last year.

Speaker 3

In the insurance segment, gross premiums written increased by 7% to $1,300,000,000 We saw a new business and asset backed finance and portfolio credit, including our new partnership with Youth Group Mortgage. We also had growth in our other lines from new business, while continuing to demonstrate our underwriting integrity by taking a disciplined approach to underwriting opportunities that didn't meet our thresholds. Meanwhile, in the reinsurance segment, market dynamics remained favorable and we continued to find new opportunities to support our diversified portfolio. We grew gross premiums written by 39% to $456,000,000 due to growth from new business as well as reinstatement premiums related to the California wildfires. Excluding the reinstatement premiums, our growth in reinsurance would have been 15%.

Speaker 3

Our net premiums written increased by 32% versus the first quarter of twenty twenty four, consistent with our continued growth in gross premiums written, reinstatement premiums and timing of Edwards reinsurance purchases. Our net premiums earned increased by 24% compared to the first quarter of twenty twenty four driven by the growth in gross premiums written as well as the impact of the earned reinstatement premiums related to the California wildfires in our Reinsurance segment. Turning to the combined ratio of 115.6% for the quarter. I'll break down the components in more detail. During the first quarter, our attritional loss ratio continued to trend positively, improving to 22.7% compared to 30% in the prior year period, reflecting the strength of our overall portfolio.

Speaker 3

While the first quarter was benign on attritional losses, it was a particularly elevated quarter for cat losses in terms of dollar value. Our catastrophe and large loss ratio was 55.3% or $333,000,000 of losses compared to 21.1% or $103,000,000 in the prior year period. Most of this loss was related to the California wildfires with the remainder and other loss events in various lines of business, including property, aviation and aerospace and other insurance. We recognized strong net favorable prior year development of $41,000,000 in the quarter compared to $67,000,000 in the same period last year with both of our segments contributing. The Insurance segment experienced net favorable development of $8,000,000 including better than expected loss emergence in our property and other insurance lines of business.

Speaker 3

This was partially offset by adverse development in our Aviation and Aerospace line of business. The Reinsurance segment had net favorable development of $33,000,000 in the first quarter, driven by positive development on catastrophe losses and benign prior year attritional experience. Turning to expenses. Policy acquisition expenses from third parties were 27.8 points of the combined ratio for the quarter, consistent with the 27.9 points in the prior year period. As we stated last quarter, we continue to expect the policy acquisition expense ratio to be in the low 30s and in the mid 20s in the insurance and reinsurance segments, respectively.

Speaker 3

The Fidelis partnership commissions accounted for 13 points of the combined ratio for the quarter compared to 15.7 points in the first quarter of twenty twenty four. There was no profit commission accrued in the quarter as the underwriting profits did not meet the required hurdle. This reflects our alignment with the Fidelis partnership. Finally, our general and administrative expenses were $22,000,000 versus $24,000,000 in the first quarter of twenty twenty four. The decrease in expense was driven by lower variable compensation accrued in the quarter.

Speaker 3

Our net investment income increased to $50,000,000 for the first quarter of twenty twenty five compared with $41,000,000 in the prior year period, reflecting a higher earned yield on our cash and fixed income portfolio, as well as an increase in investable assets compared to the prior year period. As of March 31, our investable assets were 4,400,000,000 which decreased compared to $4,800,000,000 at year end. This decrease is primarily driven by claims payments for the California wildfires as well as our aviation litigation settlements. As of March 31, the average rating of fixed income securities remains very high at A plus with a book yield of 5%. Average duration is consistent with year end at two point nine years.

Speaker 3

Against the backdrop of market volatility in April, our fixed income and other investment portfolios have continued to perform in line with expectations and have generated an incremental net positive return and the positioning of our portfolio has been resilient to market volatility. Turning to capital management. Our top priority remains reinvesting in the business by deploying capital into attractive growth initiatives. Additionally, we continually seek to optimize our outwards reinsurance purchasing. And when we have excess capital, we look to return it to shareholders through a combination of dividends and opportunistic share buybacks.

Speaker 3

In the first quarter, we repurchased 1,500,000.0 common shares for $22,000,000 at an average price of $15.37 per common share. Subsequent to quarter end, we repurchased 1,200,000.0 shares for $19,000,000 at an average price of $15.95 This brings our shares repurchased year to date to 2,700,000.0 common shares at an average price of $15.63 That's approximately 73 percent of our current diluted book value per share and thus highly accretive on both the book value and earnings per share basis to our shareholders. Since the commencement of our share repurchase program in 2024, our opportunistic approach to share repurchases has added approximately $54,000,000 to our book value or $0.48 to our book value per share. As we look ahead, we have $103,000,000 remaining under our current authorized repurchase plan. We also continue to pay a quarterly common dividend in the first quarter.

Speaker 3

And last week, we announced a $0.10 dividend payable in June. Our strong capital position enables us to pursue accretive growth opportunities across our portfolio, while continuing to take an optimistic approach to share repurchases. In conclusion, we remain committed to our strategic initiatives and are confident in our ability to navigate the evolving market conditions. I'll now turn it back to Dan for additional remarks.

Speaker 2

Thank you, Alan. Before going into the dynamics across our segments in more detail, wanted to spend a bit more time discussing the current global and economic environment and the potential impacts to our industry. Our team has done a comprehensive analysis of potential stress scenarios, including the impact of tariffs and inflation across all classes of business. We believe inflationary pressures will have the highest impact on certain long tail casualty classes, which are already under reserving pressure. As a reminder, we do not have any casualty exposure.

Speaker 2

We write a short tail diversified book of business, which enables us to adapt quickly to changing environments and helps to insulate our portfolio from macro headwinds. Further, our daily underwriting calls with the Videlis partnership are focused on making real time adjustments to our portfolio in order to align our underwriting strategy to our view of risk as the landscape continues to evolve. For example, inflationary impacts are already being factored into pricing and insurance values across our property direct and facultative portfolio as risks renew. And for those lines more susceptible to political tensions, trade disruptions, or economic recession, such as political risks, asset backed finance, and portfolio credit, we already incorporate a risk weighting based on the potential impact of tariffs and country dependence on US exports. We are confident in the positioning of our portfolio, and we will continue to carefully monitor our exposure and any client opportunities that arise from uncertainty.

Speaker 2

Now delving into the dynamics and opportunities we see within our two segments. In insurance, we continue to build out our established book of specialty business, assessing new distribution channels and selling more products to more of our clients across the globe. In property, we are taking a disciplined stance and leveraging our capacity and strong client and broker relationships to maintain retention levels and market differentials. The market is verticalized, and as a leader, we are able to access business at preferential terms to peers. This book performs incredibly well for us, and we see significant margin and opportunity to support new and existing business.

Speaker 2

In addition to high retention rates, we are seeing a strong pipeline of new business flowing into the E and S market from the admitted market as well as opportunities to benefit from rate increases on certain loss impacted accounts. In marine, we continue to take a strategic approach, leveraging our capacity to optimize our business mix across the subclasses and maximize returns. In marine cargo, our capacity and participation on excess layers allows us to achieve a positive differential to market. We are also seeing a pipeline of capacity driven deals in new construction, which are supporting current growth in the portfolio. In aviation, we are monitoring the trading environment following a number of industry losses over the last two quarters impacting the broader market and the subsequent withdrawal of some capacity.

Speaker 2

At current rating levels, we continue to take a measured approach to deployment, focusing on areas that produce the best margin. In our structured credit portfolio, we continue to develop our pipeline of deals following two of our strongest quarters. We work with our clients to ensure good visibility and access to upcoming deal flow, and we also see opportunities for new business. For example, in conjunction with the Vedelas partnership, we see the potential to unlock geographic diversification and distribution as this product expands to clients in new markets who are looking to access the global insurance market for capital relief. As discussed earlier, we are actively monitoring global economic environments when considering rating and deal flow in this sector.

Speaker 2

Turning to reinsurance. We have built a diverse portfolio both by territory and peril. We continue to actively shape our portfolio with a focus on attachment points and program structure and targeted deployment of capacity with top tier clients at attractive margins. As a leader, we are able to set pricing on programs and take a proactive approach to secure terms and deals ahead of other markets. We have long established partnerships with our clients and continue to achieve strong market differentiation by offering meaningful capacity across programs and securing private layers.

Speaker 2

The market at April 1 was dominated by Japanese renewals. We have strong relationships with our core clients and brokers in the region, and we were able to effectively deploy capacity. As part of our nimble approach and focus on margin, we shifted capacity towards proportional coverage where we see the benefit from underlying rate improvements coming through and away from CATXOL programs where rating was less compelling. We also took advantage of market conditions with our ATWAS program, purchasing additional coverage at favorable terms. As a reminder, our strategy is to leverage the market on both the inwards and outward side of our book to optimize margin.

Speaker 2

We continue to buy a broad suite of outwards products, which includes traditional reinsurance as well as ILS supported products, including the sponsoring of catastrophe bonds. As we look ahead, we are confident in our ability to deliver approximately 10% growth in gross premiums written for the year. We see considerable opportunity across the market as a whole, and we are in constant dialogue with both the Vedalus partnership and third parties to identify new opportunities to match our capital to the right risk. The way we approach underwriting, taking a holistic view of the market, and reviewing risks across the portfolio on a daily basis provides us with opportunities to drive growth and optimize margin. We are broadening distribution, bringing more products to our clients, and leveraging our positioning as a leader to drive market differentials.

Speaker 2

We are confident in our underlying portfolio and our ability to generate profitable underwriting opportunities in what remains an incredibly attractive market environment. And coupled with our strong balance sheet and active capital management, we are focused on maximizing returns for our shareholders. With that, operator, we will now open it for questions.

Operator

Thank you. We will now begin the question and answer session. Before we take your questions, I would like to kindly ask everyone to please limit your questions to one primary question along with a single follow-up. And if you have any further questions, please rejoin the queue. Our first question is from Andrew Anderson from Jefferies.

Operator

Your line is now open.

Speaker 4

Hey, morning. If I back out the reinstatement premiums, it seems consolidated growth was maybe 8% or 9%, but I think there was also a timing headwind here. And if I think of Aviation and Aerospace, I think that's a little bit more weighted to the first half of the year. So I guess the question is on an underlying basis, would you think there's some better growth opportunities in the second half of the year?

Speaker 5

Hi. Yes. It's Alan. I'll answer the first part, and then I'll let Dan jump in. You're right.

Speaker 5

We we had a one contract that moved from, in the aviation line of business. It moved from a March renewal to an April renewal, And that was pretty much the same, amount by coincidence as the reinstatement premiums that we had for the quarter, which were on a gross basis about $80,000,000.

Speaker 6

Yeah. Thanks, Alan, and thanks for the question. What I would say, in our portfolio, have over a hundred different lines of business, so highly diversified. We're confident in the 10% growth ambition for the year. We do see a lot of opportunity in what is still one of the best trading environments we've seen in many years.

Speaker 6

So there are pockets of pressure, but we are seeing healthy margins across the portfolio. We have new distribution channels. We have the BRICS initiative with the TFP and then Middle East office, Lloyds Syndicate, new distribution channels. So we're very confident we can grow the market, grow our portfolio at that 10% during 2025.

Speaker 4

Thanks. And then just on the reserve movement in the quarter, 41,000,000 favorable. Could you talk about some of the drivers there?

Speaker 5

Yeah. It's Alan again. I'll start again. The just to note, as we have previously advised, it's a legal requirement to keep settlement details, from their Ukraine Russia events confidential. So we're not able to talk about specifics on any particular case or settlement in that regard.

Speaker 5

As you know, overall, we're very pleased with our positive prior year development for the quarter, 41,000,000 overall, Both segments contributing 33,000,000 in reinsurance, 8,000,000 in insurance. The core driver of our PYD was continuing strong performance of the attritional book as well as some reserve releases from prior cat event cat reserves from recent events, in 2024. So, again, we're very pleased with how the attritional book is performing as well as some of these cat events and how they're performing. We did reflect further Russia Ukraine settlement activity in our results this quarter through PYD as we continue to derisk the exposure from Russia Ukraine, and we went from two thirds to eighty percent settled, on those cases. And I would also add that of the 80% that is on a settlement basis, 90% of that has already been paid.

Speaker 4

Thank you.

Operator

Thank you. Your next question is from Leon Cooperman from Omega Family Office. Your line is now open.

Speaker 7

Thank you. Congratulations on your excellent risk management underwriting results in a difficult environment. Frankly, I'm a generalist, so I'm not a specialist. I'm surprised your stock sells at a discount to book value. You've repeatedly said in the past that over a cycle, you expect to earn 13 to 16% in equity.

Speaker 7

I've looked at all the insurance companies that earn those kind of returns. They also at a premium to book value. You're selling a discount to book value. You seem to agree on the undervaluation given you repurchase activity. Do you have any explanation as to why the discount?

Speaker 7

And what can you do about it?

Speaker 6

Yes. Thanks, Leon. Thanks for the question, and nice to hear you on the call. I think, yes, we're in total agreement. We think the business is undervalued given the underlying performance.

Speaker 6

I think we always knew with this structure coming to market a couple of years ago, would take time. People are building that out. We're spending more time with our investors, getting them more comfortable. We do see ourselves in a very attractive market. We have a hundred different lines of business, very diversified.

Speaker 6

We're a leader in a verticalized market, so we're able to leverage our position across those lines of business to get the best margin that we can. But ultimately, I think we just got to keep on performing. I think when we look at the wildfire losses specifically, given the size of our property book, property premium, the use of reinsurance to manage our exposure there is another demonstration of the good performance of the portfolio against our peer group. So I I think in essence, we just keep on doing what we're doing. We can keep on growing in an attractive market, and we obviously believe, you know, the current book prices or the the current stock price is very much undervalued.

Speaker 7

Let me ask you a follow-up question. 105,000,000 is left on your repurchase program if the stock continues to sell it with prices in the current area. Will you expect to use it this year?

Speaker 6

Yeah. As you as you know, we had a share repurchase program authorization of $200,000,000, and our strategy is always to balance profitable underwriting opportunities with capital management. So we're in a fortunate position to be able to our first port of call will always be to put capital behind profit underwriting, but we are in this privileged position to be able to do that as well as manage capital. At the current share prices, we will be buying back more stock. We're able to add about €0.48 to our book value per share.

Speaker 6

So that's a very accretive capital action. We'll continue to do that.

Speaker 7

Thank you. Good luck. Thank you very much.

Speaker 6

Thanks very much, Leon.

Operator

Thank you. Your next question is from Matt Corletti from Citizens Capital Markets. Your line is now open.

Speaker 8

Hey, thanks. Good morning. Dan, I think I heard you right that, on kind of the 20% of Russia, Ukraine outstanding, that most of it relates to UK. If things go well, there could be some favorable. And if things don't go well, it sound I think you said worst case, hundred and 50,000,000 of of adverse.

Speaker 8

If that's right, my question is, is that a kind of probabilistic measure similar to, you know, your your current point estimate, or is that of more of a hard stop in terms of that's the limits remaining on the policies that remain kind of unsettled?

Speaker 9

Matt, it's Johnny here. I'll take that one. It's more a hard stop. So that's looking at the worst case if we were to losing court and the impact from where we're currently reserved on the 15% that would be resolved as a result of The UK trial. That leaves 5% outstanding, and we would expect an insignificant impact to our book depending on where that landed.

Speaker 6

Yeah. I think I think for me, to simplify things, Matt, yeah, other than the English judgment, essentially, you know, this is now behind us.

Speaker 8

Yeah. No. That's super helpful. Thank you. That's all I got.

Speaker 8

Appreciate it.

Operator

Thank you. Your next question is from Meyer Shields from KBW. Your line is now open.

Speaker 10

Great. Thanks so much and good morning. From an underwriting perspective, are you assuming that the higher frequency of aviation incidents is random or that there's something there that needs to be factored into expected losses?

Speaker 6

Thanks, Meyer. That's a really good question. I think there are clustering effects that happen from time to time in the market. I think the really important thing is how does pricing terms and conditions react to that. And I think we're seeing a bit of a lag there.

Speaker 6

I think we all know aviation as a class of business has been under pressure for a number of quarters. We use our position as a leader to leverage our life size and the multi class offering, so we'll offer clients a broader policy in terms of we're able to look at, you know, war, the actual hull, etcetera, etcetera. And we manage that through the daily underwriting course, so we can do that in real time to leverage our position. So we're we're monitoring it closely. You know, we go to the business that has the highest margin.

Speaker 6

We will not support any line of business that doesn't hit our our hurdle rate. So we're so we're watching aviation and waiting for, you know, positive reaction.

Speaker 10

Okay. No. That's helpful. Thank you. Second question.

Speaker 10

In the past, I guess, maybe last year, you talked about viewing property on a primary basis as more attractive than reinsurance. And I was hoping you could update us on your thinking of the relative attractiveness of deploying capital between these two lines.

Speaker 6

Yeah. I think, you know, we we've talked about the property market direct having combined sort of compound increases since 02/1839. So we kind of lent into that market. We thought that had superior terms to the reinsurance. We also publicly stated in o one 02/2021, rather, we didn't think the market was really pricing on the reinsurance side for climate change or social inflation.

Speaker 6

That kind of caught up in 2022. And since then, we've seen attractive margins on both sides. So we continue to grow the D and F portfolio. We've grown in the reinsurance space as, you know, pricing has improved, terms and conditions have improved. And we're also able to manage the other side in terms of our buying hat, buying out with reinsurance to improve the margin.

Speaker 6

So we're always looking to do that on both sides, you know, get the best possible possible margin on the inwards, but also use the reinsurance retrocession market as a buyer to improve margin there. And, certainly, when we think about the kind of three segments insurance, reinsurance retrocession, retro, we feel, was the most competitive market. So we're able to buy broader cover, more cover than we did last year at attractive terms, which has improved the margin on the inwards.

Speaker 5

Okay, great. Thank you very much.

Operator

Thank you. Your next question is from Brian Meredith from UBS. Your line is now open.

Speaker 5

Yes. Thanks. Alan, just a little clarification

Speaker 11

on the reinstatement premiums. I think you said you had $80,000,000 Is that just on the reinsurance side? And then what was the impact adverse on the, insurance side?

Speaker 5

Yeah. The reinstatement premiums, $80,000,000, but substantially all in our Reinsurance segment. There is just a minor amount in our Insurance segment.

Speaker 11

Okay. So really no, not much in that, I Okay. That's helpful. Dan, I'm just wondering if if we if we think about your, you know, D and F book, property book, where are we right now with respect to rate adequacy? And and, you know, how much let's call it, you know, what do returns look like relative to kinda, like, target range?

Speaker 11

Just to get a perspective on, you know, how how good the market is right now.

Speaker 6

Yeah. Look. I think, you know, '23, '20 '4, I think it's been acknowledged that there's you know, two of the best in underwriting environments in the last couple of decades. This year, we're we're pretty close to that. I think we see attractive margins in that business.

Speaker 6

We've seen demand being still strong, business moving from the affliction market into the E and S market. We have a very strong retention rate, and we see new business. I think also we've been able to have a positive impact on our IPIs because we're very nimble post loss. So we don't we don't follow the crowd in our underwriting. We're very much in need during a verticalized market.

Speaker 6

We don't really look at the primary kind of sectional programs, and I think there's been a lot of noise around rate reduction there, especially in the London market, but we're not really a player in the insurance group in the primary. We focus on the excess layers where we think there's better margin, and it's still a, know, a very, very strong market. Helpful. Thank you.

Operator

Thank you. Your next question is from David Motemaden from Evercore. Dan,

Speaker 12

I was hoping you could just maybe level set us here just in terms of the RPIs on the D and F book, where they're at now relative to where they were maybe at the beginning of the year. And I think you had said it was like 100% 107%. So I'm just wondering where they are relative to that.

Speaker 6

Yeah. Look. I think, as as I've said, we've had compound increases for the last six or seven years. When we look at the overall portfolio, the RPI for one one was about 104%. And I guess, you know, we've had positive impacts because we are nimble, and we will take post loss opportunities.

Speaker 6

Okay. Yeah. P and and f is certainly flatter than it has been in previous years, but the margin is excellent. And we're also able to improve that margin through our outwards buying. So that's a really important kind of impact on on margin improvement year over year as well.

Speaker 12

Got it. Thanks. Any sort of quantification there just on that the outwards buying, what you guys are seeing in terms of what you guys are paying on that?

Speaker 6

Yeah. I think, you know, certainly yeah. I think when we look at the program as a whole, it they we were getting something like 80% optimized. So in other words, a kind of 20% reduction, which obviously makes a huge impact on the Inman's margin. In fact, we found retro to be the most competitive market.

Speaker 6

And as a buyer of retro, we don't write retro. You know, that was very positive for us.

Speaker 12

Got it. Yeah. Wow. Okay. That's helpful.

Speaker 12

And then maybe just a question for Alan just on the excess capital position. I was wondering if you could just how you guys are thinking about the excess capital and it doesn't seem like the pending outcome of The UK aviation cases has dented your appetite for doing share repurchases yet this first or yet here in the second quarter. But, I guess, how does that pending decision impact your appetite for repurchasing stock?

Speaker 5

Yeah. Thanks, Steve. It's Alan. We're, our capital is strong. We continue to reinvest in the best profitable underwriting opportunities we can find, and we still, do pursue those opportunities where they meet our hurdles.

Speaker 5

In terms of capital management, again, as as Dan just touched on, we're always looking at optimizing our outwards reinsurance, and that can really, not only affect the profitability of the book, but also be a capital enhancer for us overall. As you say, when we have excess capital, what what do we do with it? We will consider, returning to shareholders through dividends and buybacks. And the way I think about our, capital position is, as I said, it's strong,

Speaker 4

and we have a hundred

Speaker 5

and 3,000,000 remaining under our share repurchase authorization. And we will consider using that if the price is right and on an opportunistic basis throughout 2025.

Speaker 8

Thank you.

Operator

Thank you. Your next question is from Pavel Singh Zhen from JPMorgan. Your line is now open.

Speaker 13

Hi, good morning. Maybe first for Dan or Johnny, just a follow-up on Ukraine here. Can you give a dollar amount for the carried reserves representing claims still in litigation? I think you cleared up the adverse PYD of 150,000,000 being a hard stop. But just I was just wondering how much can be released if you end up with a favorable court decision.

Speaker 9

Hey, thanks for the question. It's Johnny here. We haven't disclosed our overall book position for this event or the impact within the quarter. We still have some exposures going through the legal process and some ongoing settlement discussions. In addition, the settlements we have completed were private and confidential transactions.

Speaker 9

So it makes it difficult for us to provide detailed information around citing them. I think what we would point to is that over the quarter, we've been able to derisk the book going from two thirds to 80% on a settlement basis, as Dan said. We're really pleased with the reduced uncertainty that we get from that. And despite doing that, we still delivered favorable PYD overall in the quarter.

Operator

Thank you. Your next question is from Alex Scott from Barclays. Your line is now open.

Speaker 14

Hey, good morning. I want to see if you could talk about the competitive environment in property. We're obviously hearing a lot about softening. I heard your comments in the prepared remarks that we're just mentioning you're already beginning to price potential impacts from tariffs into the property book. And I guess I hadn't necessarily heard some of that same commentary from other primaries on the property side.

Speaker 14

It didn't sound like maybe they were doing it as real time as more of a wait and see approach. So I was just wondering, like, what are you seeing in the competitive environment? Are you able to still get the kind of growth you're looking for, but still being disciplined around some of those adjustments you're making?

Speaker 6

Yes. Thanks for that. I think, as a reminder, across the whole portfolio, it's a very short tailed book, so we're able to implement what we see as the effects of potential tariff impacts. When we think about it, that would be inflation, credit risk, effect on GDP, so demand, rebuild cost, supply chains, are all things to factor in. And it's about the power of the daily underwriting call.

Speaker 6

We get everyone together. We have an information loop with the claims team, legal, underwriting, analytics, actuaries all sit on this call every day, which allows us to price and shape the portfolio in real time. So we where we can enhance coverage through an evolving view of risk, we can we can do that immediately. And that's already started happening on classes like the DNF book. We've incorporated changes quickly.

Speaker 6

And as I said earlier, we are seeing more demand coming again from the admitted market to the ENS, so we're able to take advantage of that. We see inflation historically has always driven more demand. So as a leader in that market, we see deals before other people. We get our terms and conditions out. We cross sell.

Speaker 6

We have one very large US corporate where we're able to support the property, the terror. Although we don't write casualty, the partnership do. So again, that gives us kind of a benefit without actually being exposed to casualty because we're giving the client a very broad solution. But yes, we're seeing opportunity in that market. Again, we have 100 different lines of business, over 100 different lines of business.

Speaker 6

When we think about some of the bespoke products we have in specialty, you know, historically, they've they've never really been impacted by the the regular insurance cycles. So we're very positive on the outlook for the future.

Speaker 14

That's helpful. Second question I have is on the combined ratio that you've talked about in the past sort of being in the mid to high 80s. And I know there's been a lot of volatility. I think we have to strip away some of what's happened in the last couple of quarters certainly. So maybe it's, call it, running around the high 80s excluding sort of aviation in the wildfire.

Speaker 14

I mean, is that the right way to think about it? Is that sort of where you feel like you're running right now? Because I'm just trying to think about if that's the goal in this environment, as you mentioned, I think a few different times, is very favorable for you right now. You know, even if it deteriorates a little bit, may maybe as favorable as it's gonna get. So are we are we sort of already run rating in that zone?

Speaker 14

And, you know, if if that's the case, you know, how do you weigh that opportunity versus buybacks? Because, you know, you're talking about taking, I think, less net, buying back more stock, and I get that your stock's cheap. But, you know, those kind of combined ratios, I would think, be generating very strong risk adjusted

Speaker 6

That's a great question and great points within the question. I think, as I said earlier, our strategy is always to balance profitable underwriting opportunities and strategic capital management. We've got a strong balance sheet and the capital to do both. When we think about Q1, it's the worst quarter for Nat Cat losses in over a decade, but it is still a very good trading environment. Given that and given the underwriting talent that we have, we are confident in our targets.

Speaker 6

So as you say, we can get to 13 to 15 ROA throughout the cycle with a combined ratio of mid-80s to high 80s, and we can execute the 10 growth. We can do that alongside our strategic capital management, which we've demonstrated quarter over quarter, you know, that we're we're willing and able to buy back shares and support good underwriting opportunities in the market.

Speaker 14

Got it. Okay. Thank you.

Operator

Thank you. Your next question is from Pablo Singzon from JPMorgan. Your line is now open.

Speaker 13

Hi. Thanks for taking my follow-up. So Dan, I heard your comments about Fidelis having a lead position on property deals and how capacity at upper layers tend to get hit versus pricing price compression. So I think most people, including myself, recognize that property margins are still strong in the current market. But what I'm more interested in is how pricing trends, which I presume are not as strong as they used to be, might impact top line growth.

Speaker 13

So your property premiums grew something like 30% last year. Relative to the 10% premium portfolio number that you put out for this year, do you think property falls above or below that? Yes,

Speaker 6

thanks. That's a good question. I think you know, we'll we look to maximize the opportunity in front of us. So, you know, probably DNF has, as an RPI, has been flatter than previous years. Over the last two or three years, we've had substantial growth.

Speaker 6

So we also see opportunity in the reinsurance treaty market, so we want be nimble between the two. But we want to remain a leader in that market. I don't particularly want to put a number on it in the first quarter, but we do see opportunity to grow in line with our overall growth prospects for the year.

Speaker 5

Thank you.

Operator

Thank you. Your next question is from Mike Zaremski from BMO. Your line is now open.

Speaker 15

Hey, thanks. Good morning. Couple of probably quick ones. Just a clarification on the California wildfire update. You say net of expected recoveries.

Speaker 15

Is, what do you mean by recoveries? Is that subrogation? Or or, if you can clarify?

Speaker 5

Yeah. Good good question, Mike. It's Alan here. No. By net of recoveries, we mean outward reinsurance recoveries.

Speaker 5

Again, as you know, in our insurance book, we buy outwards reinsurance coverage for about 40 spending 40% of our premium dollars in outwards reinsurance protection and in reinsurance 50%. Not saying it's prorated for that, but we do spend a lot on outwards reinsurance, and so that's net of those outwards collections.

Speaker 15

Okay. Got it. I I figured. I just wanna make sure. Maybe a a a more macro question.

Speaker 15

I think in the prepared remarks, you talked about construction being strong. And I guess when we look at just very high level US constructions spend data, it looks like the construction market is growing much slower. Just wanted to are you guys, you think, taking market share? Maybe you're writing some more global construction? Any additional commentary?

Speaker 6

Think it's bit of confusion there. The comment around construction is marine construction. So we write a lot of yard business. We're seeing people spending more in defense, so military vessels. There's a huge pipeline for that.

Speaker 6

We're also seeing more cruise ships. So it's not referring to US property construction. That comment was referring to construction within the marine market.

Speaker 15

Okay. Interesting. And then lastly, on you talked about expected rate increases in midyear on, I believe, loss impacted accounts. Just kind of curious at a high level, what percentage of the market was loss impacted over the last year? Is it a very small percentage?

Speaker 15

Or is it a meaningful percentage? Just others have have said the same thing and wasn't sure to size that up.

Speaker 6

I think I think you've got three events. Mean, Helane, Milton, wildfire, I think that would be different depending on on the individual losses. You you tend to see what we've seen is appropriate adjustments for loss impacted covers, and I think for non impacted covers, we've seen a dampening kind of pressure on rating there. But, you know, we're we're obviously we're in mid year renewals now, so it's not really appropriate to comment on that at the moment. Yeah.

Speaker 6

I I think we've seen appropriate, you know, appropriate adjustments. On the back and remember, this is on the back of years and years of compound improvement. So that's what makes it such a compelling underwriting environment.

Speaker 15

Okay. Yep. Understood. Thank you.

Operator

Thank you. Your next question is from Rob Plaks from Goldman Sachs. Your line is now open.

Speaker 4

Hey, thanks. The first question was on the tariff impacts. I appreciated you all sharing your analysis. And I thought it was interesting that the analysis pointed to inflationary impacts from tariffs being more meaningful for long tail casualty lines of business. So I was hoping you all could unpack the underlying drivers or or reasons for that conclusion.

Speaker 6

Yeah. I just think, you know, when we have a short tail account, and as we attach risks looking forward, we're able to price in and kind of look into short values. They're much more difficult to do with a legacy portfolio that you actually found four or five years ago, ten years ago. So I think it's it's widely acknowledged in the market. There's been a lot of reports that the biggest impact will be on the casualty lines, motor liability, etcetera, etcetera.

Speaker 6

We will see supply chains, effects on demand, rebuild costs, property post loss, but we're able to factor that in now. That's the difference between legacy portfolios and risk attachment going forward.

Speaker 4

Thanks. That makes sense. Then I also wanted to ask on the Fidelis partnership ceding commissions. Those came down about a point year over year. I was wondering if that was driven by business mix and how sustainable that is.

Speaker 5

Yeah. Thanks, Rob. It's Alan. Absolutely. We, as you know, there's several components to the commission.

Speaker 5

We pay the sales partnership, a ceding commission, a portfolio fee, and as well as a profit commission. There is a, in the ceding commission line itself, there is some mix adjustment going on. And as we've mentioned before, in their book of business, they also, have the PineWalk incubator cells, and those companies have a slightly different commission rate than the main business that they write. So that can affect the the amount of senior commission we pay.

Speaker 4

Okay. Got it. Thank you.

Operator

Thank you. Your next question is from Leon Cooperman from Omega Family Office. Your line is now open.

Speaker 7

Just listening to you Dan speak and your colleagues, it seems to me that what you're saying is that if you think that 13% to 16% ROE is reasonable over cycle, that we're in an environment now where you could do better than that because pricing is as good as you've ever seen since you've been in the business.

Speaker 6

Yes. I think we as we say, just to reiterate, that's our target through the cycle. We have had one of the worst first quarters for cats in over a decade, but it is a very good trading environment. You know, to outperform as in any other year, you know, you need a a kind of beat your loss ratio plan for the year. It's possible, but we have a difficult start to the year, but we are in a very good trading environment.

Speaker 7

Let me ask you. I don't know enough about this, so I got to be very careful the way I phrase the question. There seems to be some question about the nature of the structure with you, how you're relying upon an outsider to present you with the underwriting opportunities. You obviously, think that's gonna work, but is your period of time and I think what you said before is accurate. It takes five years to have a five year record.

Speaker 7

So people are just not yet comfortable with the structure. But if you reach a conclusion that the market just won't accept that structure, are you prepared to revisit that whole issue?

Speaker 6

No. I think I think we feel it's working exactly as it should do, exactly as it planned. We can put the right capture to the right risk. Richard and the team are you know, have a fantastic track record, you know, best underwriting team in the market, we feel, and best people, best place to get us the business we want with the best margin. There are opportunities with other partners as well.

Speaker 6

We explore those over time. Do have we have onboarded a couple of partners already. Youthsaid Mortgage, that's going well. So, you know, the partnership will always be our our core engagement, our core partner, but there are opportunities to be on that as well. But they are best placed in this market, we think, to deliver help us deliver the through the cycle of financial metrics.

Speaker 7

All right. Well, I think it's probably a more elaborate answer to that question, but I'll take that offline. Very good. Thank you.

Operator

Thank you. And our last question is from Meyer Shields from KBW. Your line is now open.

Speaker 10

Great. Thanks so much. I suspect this is for Alan. I was just wondering whether we can get the net earned premium impact of the reinstatement so we can sort of see underlying excluding that.

Speaker 5

Hi, Meyer. Yeah. It's Alan. Yeah. As I mentioned earlier, the gross premiums, from reinstatements were 80,000,000, almost all of it in the reinsurance segment.

Speaker 5

We also pay reinstatement premiums to our Reinsurance partners on the outwards business, and the net of the two was approximately $20,000,000

Speaker 10

Perfect. Thank you so much.

Operator

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

Speaker 6

Thank you very much, and we appreciate everyone joining us today. If there are any additional questions, we're here to take your calls. Thank you for your ongoing support, and I'll turn it over to the operator to wrap up the call. I hope you enjoy the remainder of your day.

Operator

Thank you. That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.

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Earnings Conference Call
Fidelis Insurance Q1 2025
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