Fidelis Insurance Holdings Ltd

NYSE:FIHL

Earnings Call Analysis

Solid Performance Despite Gross Premiums Dip

The company reported a net income of $88 million in Q3 and $265 million for the first nine months, excluding a one-time gain. Gross premiums written slightly decreased to $593 million in the quarter, with a 15% growth to $2.8 billion over nine months, thanks to a 46% increase in the specialty segment. The combined ratio improved significantly to 85.4% for Q3, benefiting from lowered losses including catastrophes. Net investment income rose to $33 million for the quarter, with reinvestments yielding 5.1% due to higher interest rates.

Strong Underwriting Returns and Market Position Enable Consistent Performance

The company has showcased versatility in an evolving market, maintaining a robust annualized operating return on equity (ROE) of 17.7% and an improved combined ratio from 101.6% to 82.4%. Its strategic collaboration with Fidelis MGU has strengthened underwriting opportunities, ensuring growth in the face of a hardening market. While the industry faces substantial natural catastrophe (nat cat) losses and capital constraints, the company positions itself as proactive, ensuring their leverage in pricing and significant line size yield a superior underwriting margin.

Specialty Insurance Drives Growth Amidst Strategic Bespoke and Reinsurance Stability

Significant growth in gross written premiums, rising 15% to $2.8 billion for the nine months up to September 30, 2023, is primarily attributed to a 46% increase in the Specialty segment. This growth not only reflects the company's strong market position but its effective navigation of improved pricing and new business opportunities, particularly within property, marine, and aviation. However, this year's bespoke segment saw a decrease, prompting a careful, case-by-case strategic approach moving forward.

Profitability over Growth: A Focused Collaborative Policy

Top line growth is not the main game; the company stresses the importance of bottom-line profitability. In partnership with Fidelis MGU, both parties are dedicated to delivering sustainable underwriting profitability, leveraging on collaborative decisions and maintaining the underwriting's integrity.

Positive Reserve Development and Effective Expense Management

The company reported net favorable prior year reserve development, mainly owing to favorable development from Hurricane Ian and attritional loss experiences. Expense management appears sound with a decrease in policy acquisition expenses and administrative costs reflecting a lean operating model that aligns with set expectations and reinforces the combined ratio as a key performance metric.

Investment Income on the Rise with Conservative Positioning

Net investment income has increased significantly due to higher interest rates. A conservative approach to investing has enabled the company to take advantage of reinvestment opportunities at higher rates, confirming the strategy of prioritizing risks on the underwriting side and maintaining a robust balance sheet.

Forward-Looking with Confidence in Market Leadership and Opportunities

Looking ahead to 2024, the company remains a leader in driving hard markets with no meaningful influx of new capital in the industry. Despite climate change influencing the market dynamics, the company is poised to continue setting prices and responding adeptly to capacity dislocations with its distinctive approach.

Tax Strategy to Be Determined Amid Bermuda Tax Agreement Discussions

While it's too early to set expectations on future tax rates, the company is actively working with Bermuda's regulatory bodies and government to navigate the evolving tax landscape. As the tax agreement is under development, the company is poised to adapt and offer clarity when more information becomes available.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, good morning, and welcome to the Fidelis Insurance Holdings Third Quarter and First 9 Months 2023 Earnings Conference Call. As a reminder, this call is being recorded for replay purposes. [Operator Instructions]

With that, I'd now like to turn the call over to Jillian Benson, Group Head of Reporting. Ms. Benson, please go ahead.

[Jillian Benson, executive]

Good morning, and thank you for joining us to discuss Fidelis Insurance Group's 2023 third quarter earnings results. With me today are Dan Burrows, our CEO; Allan Decleir, our CFO; Johnny 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 Private Securities Litigation Reform Act of 1995. We intend our forward-looking statements to be subject to the safe harbor created thereby. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. These risks and uncertainties are described in our IPO prospectus dated June 28, and filed with the SEC.

Although we believe that the expectations reflected in forward-looking statements have a reasonable basis when made we can give no assurance that these expectations will 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 6-K furnished to the SEC yesterday, which contains our earnings press release and is also 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.

[Daniel Burrows, executive]

Thank you, Jillian. Good morning, everyone, and thanks for joining us today. We have spoken in the past about how our unique business model, capabilities and expertise allow us to be nimble and opportunistic and generate consistent compelling performance. This was evident in our third quarter and year-to-date results.

On a year-to-date basis, we have delivered an annualized operating ROE of 17.7% and a combined ratio of 82.4%, demonstrating continued superior underwriting returns. We remain focused on rising a short-term portfolio across our 3 pillars: specialty bespoke of reinsurance; preserving underwriting integrity while adapting to market conditions; and the broader macroeconomic and geopolitical landscapes.

We leverage our relationship with Fidelis MGU to strategically capture underwriting opportunities, and we are focused on allocating capital to the areas that deliver the best risk-adjusted returns. From a macro perspective, we believe that the market remains robust and will provide opportunity to deliver attractive returns for the foreseeable future.

We expect continued duration across the portfolio in addition to compound year-on-year rate increases already achieved over the last 5 years. Market dynamics continue to be fueled by loss activity with $100 billion of nat cat losses recorded so far in 2023, which we believe is beginning to look like the new expected annual aggregate of losses. This has been compounded by sustained capital constraints with no new significant capital injections into the industry.

We will continue to take advantage of the opportunities these factors will create. The leverage created through our leadership and relevance to clients enables us to deliver superior underwriting margin, deploying our significant line size to take advantage of differential pricing in an increasingly verticalized market.

I will now give a brief highlight of our performance and strategy across our 3 pillars. Compared to prior year, gross written premiums for the 9 months up to September 30, increased 15% to $2.8 billion. Strong top line growth has been coupled with compelling bottom line profitability. Combined ratio improved year-on-year from 101.6% to 82.4% for the first 9 months. And our year-to-date annualized operating ROAE is 17.7%.

Our growth in 2023 continues to be driven by our specialty insurance portfolio. We're following years of compound increases across multiple lines of business and a continued momentum in pricing we were able to leverage our market lead position, scale and life size to achieve favorable participation on targeted accounts. Year-to-date, gross written premium is up 46% in the Specialty segment with Property D&F a significant driver with PIs of over 140% for this class as demand and pricing in the vertical remain robust.

Specialty now represents 65% of year-to-date gross written premium versus 51% for the first 9 months of 2022. We continue to focus as a specialty and bespoke insurance carrier where we see the best returns in the current market environment. While bespoke was down on the quarter year-over-year, we remain confident in this pillar of our business over the long term. Our lease position along with the nonrecurring nature of contracts allows us to be particularly selective.

This segment is more insulated to traditional insurance market cycles than specialty and reinsurance, the deal flow is impacted by underlying transactional activity and sensitivities to economic and geopolitical trends.

Given the lingering concerns around the current environment, we are deliberately taking a measured approach within this segment, assessing dealer dynamics. This is a strategy we have deployed successfully before, where in 2020, we took a similar approach when COVID created our sense in the market.

The portfolio performed well and enabled us to take advantage of opportunities as market conditions changed. Our strategy is to operate nimbly across our 3 pillars to achieve the best risk-adjusted returns as demonstrated by the company's overall strong year-over-year growth, and we remain well positioned to respond to any change in conditions.

Finally, in our reinsurance portfolio, we continue to experience favorable rating and have been able to maintain year-on-year gross written premium levels despite significant optimization and repositioning of the portfolio in line with our view of risk. We continue to carefully manage our capital deployment, managing volatility and exposures with targeted participation on select programs and in select geographies.

Premium levels in this space have been significantly rate driven with a year-to-date RPI of 168%. Overall, we delivered another quarter of profitable underwriting by focusing on risk-adjusted returns across the portfolio while leveraging the momentum established in the first half year to deliver significant year-on-year growth.

Our strong market position across our lines of business means we can achieve differential pricing in terms on our expertise across underwriting and capital management enable us to opportunistically navigate the market and respond to prevailing conditions in conjunction with our partners at the MGU.

Our relationship enables the MGU to fully focus on current underwriting opportunities. I've asked Richard Brindle, Chief Executive Officer and Chairman of Fedenas-MGU, to join us for a prerecorded segment to outline his views of the market and to provide commentary during this critical time of year.

[Unknown Attendee]

Thank you, Danny. And can I start by saying how delighted I am to be here at your invitation. As statistic companies, we work very closely together. The NGU is now laser-focused on the underwriting and origination functions, and I'm able to spend 90% of my time on underwriting. The great results for the quarter demonstrates that we can continue to deliver top-tier performance under the new model.

It is worth mentioning our daily underwriting calls. We have pretty much every deal of any consequence comes through one of the daily underwriting calls where we take a multifaceted decision on the risk in the room.

Just diving into the different areas of business a little bit, property treaty and cat, the frequency of flows and convective storm losses as well as wildfires from Canada to Hawaii, Portugal to Australia, even Hurricane Hilary hit in California continues to reflect the increased and ongoing impacts of climate change. [indiscernible] in partially in response to us are looking to buy more limits both in the U.S. and Europe and our ability to offer private layers helps secure our places on programs. Pricing anticipate will continue to improve, and this is driven by the lack of any new capital coming to our industry.

By seeing risk before peers and with substantial capacity to deploy. We not only get the better allocation that I talked about before, but we get better pricing, terms and conditions and overall metrics. This monetizes our ability to shape deals and work with our clients and brokers to secure the maximum participation. This also allows us to cross-sell lines of business with brokers and clients.

Our bespoke book, not a regular predictable scheduler business. There are longer station periods to closure on deals but the client base is very sticky, and the business is very profitable, as you will see from the results. We did hold back a couple of years ago as inflation and rising interest rates became a factor for the first time in many years, and we think that was the right thing to do.

A lot of people were talking at that time about a major global recession. I don't think we should all be honest and say we didn't know how that would shake out. So we felt it was prudent to hold back. We've had great success with our Pernix, political risk and credit time will tell, and high hopes for the next bespoke Pine Walk MGA, which is a task that's a partnership with a market leader in aviation finance, which further cements our position as a go-to market for these kind of solutions.

So finally, before I take up too much time, as we look forward into 2024, it is very notable that despite strong pricing across many segments of the market that we write, there is no sign of new capital coming into the market in any meaningful way.

The old view that the cycle responded to large losses followed by clean years, just doesn't hold up anymore. The market is on track for another $100 billion loss year for Cat without a major hurricane loss or earthquake as increasing atmospheric moisture and temperatures drive increased frequency and severity of the secondary perils. It is clear that climate change is changing our market. The market will remain hard in many areas, and we will continue to lead that market as store leaders, price makers, not price takers, and we will continue to respond to capacity dislocations in our nimble and unique matter. Thank you very much.

[Daniel Burrows, executive]

Thanks, Richard. I'll now turn to Alan to walk through the financial results in more detail.

[Allan Decleir, executive]

Thanks, Dan, and I'd also like to welcome everyone to our third quarter earnings call. 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 the third of July. And as such, the IPO results are reflected in our third quarter results.

As Dan touched on, we had a very strong third quarter performance with net income of $88 million, equating to $0.74 per diluted common share. For the first 9 months of 2023, we had net income of $1.9 billion or $16.82 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 9 months of 2023 was $265 million. For the third quarter of 2023, our operating return on average equity was 17.6% on an annualized basis compared with a negative 18.4% in the prior year period. For the first 9 months of 2023 our operating return on average equity was 17.7% on an annualized basis compared with a negative 2.8% in the prior year period.

Turning to our gross premiums written. We had $593 million in the quarter compared to $688 million in the third quarter of 2022. The change in the quarter was primarily related to bespoke, as Dan described earlier.

Both the Specialty and Reinsurance segments remained consistent in the third quarter compared to the prior year period. For the first 9 months of 2023, and we had overall gross premiums written growth of 15% to $2.8 billion compared to the same period in 2022.

This significant growth in our gross premiums written was primarily from our specialty segment which grew 46% to $1.8 billion. The increase relates to improved pricing as well as new business. The largest premium increases were in our property D&F marine and aviation and aerospace lines of business.

This year-to-date growth was partially offset by our bespoke segment, where gross premiums written were $367 million in the first 9 months of 2023 and compared to $573 million in the prior year period. In the Reinsurance segment, gross premiums written remained consistent at $610 million in the first 9 months compared to $605 million in the prior year period.

We have 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've intentionally taken a cautious and opportunistic approach to deploying capital and reinsurance by focusing on top-tier cedents and risks that meet our required pricing hurdles. When looking at net premiums, Net premiums written were $313 million in the quarter compared to $495 million in the third quarter of 2022, with a change again due to the bespoke segment.

Net premiums written increased by 11% to $1.6 billion for the first 9 months of 2023, primarily driven by the increase in gross premiums written in specialty. On a net premiums earned basis, our premium earned increased 18% to $510 million in the third quarter of 2023, and by 21% to $1.3 billion for the first 9 months of 2023. The growth was a result of our decision to take advantage of opportunities, particularly in our specialty leanings of business.

Our strong performance resulted in our combined ratio improving to 85.4% for the third quarter of 2023, from 12.5% in the prior year period and to 82.4% for the first 9 months of 2023 from 101.6% in the first 9 months of 2022. The improvement was a result of a decrease in our loss ratio as a result of lower catastrophe and large losses for both the quarter and year-to-date periods, despite another quarter of increased loss activity for the industry, we have seen a significant reduction in our year-on-year losses.

Our total catastrophe and large losses were $76 million of which $21 million related to wildfires in Hawaii in our Specialty and Reinsurance segments, with the remainder related to other loss events in various lines of business, including energy, credit and political risk, marine and aviation and aerospace. This compares to third quarter of 2022 catastrophe and large losses of $238 million related to Hurricane Ian and the Ukraine conflict.

For the first 9 months of 2023 the total catastrophe and large losses were $140 million, which included losses related to the Sudan conflict, severe convective storms in the U.S., the Hawaii wildfires, Cyclone Gabriel in New Zealand and smaller loss events in various lines of business. This compares to catastrophe and large losses in the first 9 months in 2022 of $382 million, related to Hurricane Ian, the Ukraine conflict, European storms and Australian floods. It has been an active year, and we are pleased with the measures taken to optimize our portfolio demonstrated by our superior combined ratio.

Moving on to our prior year reserve development. We had net favorable prior year development of $43 million and $48 million for the quarter and first 9 months of 2023 versus $3 million and $18 million in the prior year periods. The loss reserve development in 2023 was primarily attributable to favorable development on Hurricane Ian and favorable attritional loss experience across our reinsurance and bespoke segments.

Moving on to expenses across all of our segments. Policy acquisition expenses from third parties were $151 million or 29.6 points of the combined ratio for the quarter compared to $113 million or 25.9 points of the combined ratio in the prior year period.

For the first 9 months of 2023, policy acquisition expenses from third parties were $378 million or 28.5 points of the combined ratio compared to $263 million or 24.1 points of the combined ratio. Our policy acquisition expense varies over time depending on our business mix.

Our Fidelis MGU commissions were $71 million or 13.9 points of the combined ratio for the quarter and $147 million or 11.1 points of the combined ratio for the first 9 months of 2023. The MGU Commission relates to seeding 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 $22 million or 4.3 points of the combined ratio for the quarter, a decrease from $59 million or 13.5 points of the combined ratio in the prior year period.

For the first 9 months of the year, general and administrative expenses were $57 million or 4.3 points of the combined ratio, a decrease from $136 million or 12.5 points of the combined ratio. The decreases were primarily related to the reduced head count following the consummation of the separation transactions. 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 $33 million for the third quarter of 2023 compared with $11 million in the prior year period. For the first 9 months of 2023, our net investment income was $81 million compared with $24 million in the first 9 months of 2022.

These increases were primarily due to increases in interest rates during 2022 and 2023, with a short duration nature of our portfolio means that we are reinvesting at higher rates. During the first 9 months of 2023, we invested $2 billion in fixed maturity available-for-sale securities, with an average investment yield of 5.1%. We remain conservatively positioned and our strategy 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 $18.25 at September 30, 2023, an increase of 12.4% from the adjusted book value per diluted common share following the separation transaction, which was completed on January 3, 2023. The increase was a result of net income and net unrealized gains reported in our other comprehensive income.

To conclude, I'm very pleased with our superior financial performance in the third quarter and through the first 9 months of the year. I will now turn it back to Dan for additional remarks.

[Daniel Burrows, executive]

To echo Allan, I'm pleased with the results for the quarter and, importantly, the first 9 months of the year, where we outperformed on our key metrics of combined ratio ROAE and gross written premium growth. As market dislocation and the challenging risk environment persists, our ability to deploy capital and the experience and expertise of underwriting talent in a constrained market puts us in a strong position.

Whilst we see significant growth potential in the current market, we are strongly aligned with the MGU and our underwriting philosophy, with both parties focused on delivering underwriting profitability across the cycle to preserve the bottom line.

We continue to evaluate the best areas to achieve risk-adjusted returns across our 3 pillar portfolio with the ability to be opportunistic in response to market dynamics. As we consider the balance of the year, we are well positioned with significant year-to-date growth driven by the specialty market environment and a strong pipeline of opportunity in front of us.

Assistant hard market conditions, in addition to already achieved compound increases continue to present an attractive specialty marketplace, with our lead positioning in major product lines such as property D&F, marine and aviation, allowing us to achieve differential pricing, terms and conditions, and capture significant rate increases, which results in above market terms. This form is part of our underwriting advantage which helps differentiate us from our peers.

In bespoke, we are still seeing a strong pipeline of future opportunity, and we continue to evaluate this portfolio on a case-by-case basis in line with the economic and geopolitical environment and deal dynamics.

The portfolio is strategically important to us. And whilst there may be fluctuations quarter-to-quarter, we remain focused on our long-term view of the opportunity and the nimble approach on lead positioning and expertise allow forth.

And in reinsurance, we continue to capitalize on favorable market dynamics, deploying capacity at targeted levels without increasing portfolio exposures or compromising our view of risk. The Fedelis Insurance Group strategy remains consistent. To proactively manage and allocate capital to opportunities to maintain financial strength to continue to be nimble and target areas of growth and to focus on profitable underwriting.

Our approach remains disciplined, and we continue to demonstrate our ability to create value for shareholders through our platform, which ensures a strong balance sheet and a prudent approach to capital management and investment return to deliver results across both top and bottom line.

I'm proud of the talented team of 80 individuals we have brought together at the insurance group. With a wide range of expertise, our performance is only made possible through their commitment and dedication to our business.

Now I'll turn to the operator for your questions.

[Operator]

[Operator Instructions] With that, our first question comes from the line of Matt Carletti from JMP.

[Matthew Carletti, analyst]

Dan, last quarter, there was some talk of -- you talked a bit about some of the Russia, Ukraine exposure in your reserving philosophy, so on. Since then, there's been some what seem like major developments, I'm referencing the AerCap settlement and a couple of other follow-ons. Can you just update us on kind of your view of that exposure, particularly in light of those developments?

[Daniel Burrows, executive]

Yes. Thanks, Matt, and good morning. Thanks for joining us. Yes, I think fundamentally, we take -- we monitor that situation. And I think we see a trajectory that's in line with our expectation. Obviously, 3 or 4 negotiations between operators and lessors have come with a positive result, and that long term has an effect on the exposure to the market. So whilst there's no definitive answer we can give you yet, I think we're just very pleased with the trajectory, and we'll continue to monitor.

[Matthew Carletti, analyst]

Okay. Great. And then one other, if I could. I was hoping you could just kind of dig into specialty a little bit more. And just give us your updated thoughts on -- there's lots of various lines of business in there. kind of where you see the greatest opportunity? And then maybe just remind us of where those renewal dates fall.

So in other words, in the coming quarters where you might have the most opportunity because there's a lot of seasonality in that business.

[Daniel Burrows, executive]

Thanks for that question. So Specialty, as you know, is the biggest pillar within the portfolio. It's driven primarily by 3 lines of business, which is direct to property D&F, marine and aviation. I think when we look at property D&F, which is the biggest component, that is a portfolio that revolves across the year. There are some key renewal dates on for midyear, but there is a regular flow and a regular pipeline throughout the year.

Marine and Aviation are probably a little bit more seasonal. When we look at aviation, that's heavily loaded towards Q4. And marine more around 1, 1, although again, it does evolve throughout the year, but it's a lot of business 1, 1. So when we think about specialty and growth, year-to-date or year-over-year, we're up 46%. We're 26% ahead of our plan. So very pleased with our portfolio, that pillar. But opportunities to grow in marine and aviation are really coming up in the next couple of quarters.

What we see is compound increases over the last 4 or 5 years. We have seen no signs of softening in that market. Quite the contrary, we continue to see increases, improvements in terms and additions -- so very, very pleased with the performance. As I say, if you look at our combined ratio year-to-date, and that's heavily driven by the specialty pillar. So lots of opportunity, very big pipelines. So we can see continued growth in the future in that pillar.

[Operator]

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

[Meyer Shields, analyst]

Great. An operational question, I guess, in bespoke. It sounds like it's less about fewer deals coming to you and more about concerns about rate adequacy. And I was hoping you could take us through what actually happens when you've worked on a deal in your sense is that it's not priced adequately.

How often does that translate into a better price deal happens it just go away?

[Daniel Burrows, executive]

That's a great question. I think when we take -- when we look at the growth pillar, we don't manage that on quarter-to-quarter. It's a long-term view as we do with our whole portfolio. It's a long-term view through the cycle but it's particularly important when looking at the stake, you have to have a long-term view.

So -- but it's also more sensitive than any other pillar to geopolitical and economic landscape changes. So we take a very deliberate and measured approach to how we underwrite that book of business.

What we can say, and I think Richard said it in his remarks, when we think about COVID, we had a similar approach, and COVID is probably the ultimate stress test on the portfolio, certainly when we think about aviation financing and that came through with flying colors.

So it validates all of your assumptions. We have a high hurdle rate for bespoke. We're just not willing to compromise that in any way for top line growth. It's all about bottom line profitability. And that's how we expect to manage the underwriting process.

I think it's a really good demonstration of the alignment between the MGU and the insurance group. They could drive for top line growth. But between us we kind of reset the hurdle, that will evolve as the dynamics change, and that's all about protecting the bottom line profitability and underwriting integrity. So another great kind of demonstration of the alignment of the 2 structures together.

[Meyer Shields, analyst]

Okay. That's very helpful. And just a quick follow-up on Aviation. I guess you have a sense that it's fourth quarter heavy. Is there any just approximation of how much of a agent market actually is reduced in the fourth quarter?

[Allan Decleir, executive]

The airlines is Q4. There are some manufacturers that we knew in the middle of the year, but it's the majority of the major airline fleets, both the globals and the national regional carriers.

[Operator]

Our next question comes from the line of Tracy Benguigui from Barclays.

[Tracy Dolin-Benguigui, analyst]

My first question relates to your decline in gross written premium year-over-year, which is mostly driven by bespoke. I appreciate both Dan, your commentary and which our results recorded commentary bespoke, and I get this business is lumpy.

But Dan, I'm intrigued by your comment that you're deliberately taking a measured approach, given the lingering concerns around the current environment. It is not clear to me if that was a Fidelis decision or an MGU decision. I'm just trying to get a sense if this is an example of your right of first refusal.

[Daniel Burrows, executive]

Yes. Tracy, we always look to collaborate, as you know, and as we explained before, we do on the daily underwriting calls. So we're involved from the very beginning when deals are sourced, how they're going to be structured, how they're going to be underwritten. So it's very collaborative. That is a joint decision.

So Richard really, really wants to protect the integrity of the underwriting. The PC is very important to them. So it's all about bottom line profitability. But we're not neither parties here to grow top line just for the sake of it. It's all about bottom line profitability.

[Tracy Dolin-Benguigui, analyst]

Okay. So it's a collaborative decision?

[Daniel Burrows, executive]

Yes. Abolutely.

[Tracy Dolin-Benguigui, analyst]

Okay. Great. All right. Year-over-year, your underlying loss ratio deteriorated, and I guess part of that is business mix. While you sounded upbeat about pricing, can you contextualize if any of this deterioration is due to maybe a more narrow spread of pricing versus loss terms?

[Daniel Burrows, executive]

I wouldn't say, Tracy, it was a narrowing of the spread between pricing and loss trends. I think we tend to look at it over a longer time period. So if you look at the year-to-date run rate, we're pretty much in line year-on-year. this quarter last year was particularly low on the attritional side.

We also tend to focus on the overall loss ratio, and there's a number of reasons for that. I mean, if I look at the difference between prior year development and current year to kick that off.

On the attritional side, we tend to hold classes around our planned expectation for the current year, unless something there made us increase really. So it really can only go up on the current accident year typically. And then what you get is all the favorable development will come through the next year as prior year development. So for me, on the attritional side, you really need to put the current and prior accident years together to get a view of that. I appreciate you can't get that split currently in what we report.

Moving over to attritional versus cap. There's a couple of points there. One is mix. I mean mix does impact us more than some others because we're a nimble company, so it's constantly changing. And if I give some live examples of how that impacts attritional versus large split. If you think about a war account, that would have a very low attritional run rate, but more loading towards the large side.

And if you compare that to an airlines account or marine hold, that would have a much higher attritional run rate. So the mix between those different lines even within a single pillar such as specialty can change how attritional versus large looks.

In addition, as the actuals come through, I mean, we often see some quarters with we often see some quarters where we have 2 medium-sized losses and no large losses which makes the attritional look inflated when compared to the large cap. And if 1 of those increased a bit, then it would flip over on the story be the other way.

So while I think you can look through the buckets at this level of detail over a longer time period is something that we expect some variation on quarter-to-quarter for those reasons.

[Tracy Dolin-Benguigui, analyst]

Could you -- because you mentioned it, can you define the threshold for large losses?

[Allan Decleir, executive]

Yes. Tracy, it's Allan. We currently don't define that, I think, for there is a clue in the fact that we have disclosed that hurricane -- sorry, the wildfires in Hawaii were $21 million. So that's a threshold that you can think about in terms of what we disclose as not cut.

[Daniel Burrows, executive]

Just we do define it internally. It's just not something we've shared externally at this point.

[Operator]

Our next question comes from the line of Mike Zaremski from BMO.

[Michael Zaremski, analyst]

Great. just sticking with bespoke segment. So the loss ratio was approximately 10 points above consensus expectations. And I usually don't ask the question this way, but just since your more recent IPO, just trying to understand is was this the loss ratio this quarter, normal volatility? Or is this considered normal?

And any help you could provide? You gave good color on why the premiums are down. So maybe that's what's correlated with the loss ratio being a bit higher. But if you could offer any context on the last [indiscernible] be helpful.

[Daniel Burrows, executive]

Yes. Sure, I'll take that one. So on the bespoke segment, we've got a couple of large losses that have come through this quarter. I mean, again, if we look at it over a slightly longer time horizon and you look at the year-to-date loss ratio, we're well ahead of our own expectations there.

So for me, it's just a timing issue. We had 1 large loss, we probably would have been on plan this quarter, 0 ahead of plan. And if you look over a wider time period if those losses have been more evenly distributed through the year, then you wouldn't have seen this impact on a quarter.

So there's no trend or anything we're reacting to in that pillar, and I would call it normal quarter-to-quarter variation in the loss ratio in line with our expectations.

[Michael Zaremski, analyst]

Okay. And those large losses are geopolitical-related losses?

[Daniel Burrows, executive]

They're on the intellectual property accounts. No, they're not geopolitical-related.

[Michael Zaremski, analyst]

Okay. Understood. Okay. And maybe just switching gears to the expense ratio. It looks like it sounds like from the prepared commentary, this is like -- obviously, there's moving parts on business mix. But would you say at this level of ROE, the -- this is the type of expense ratio we should be thinking, including the MGU ceding commission ratio?

[Allan Decleir, executive]

Yes. I think that both the MGU expenses and our general and administrative expenses are in line with expectations. -- given the framework agreement we have in place and given our current operating model. Ultimately, we believe our combined ratio represents the best measure of our performance.

And year-to-date performance is clearly above what we had in our original target ROE that we disclosed in our IPO. So as a result, there is an increased profit commission to the MGU and there's some increase in expenses as a result of above-planned performance. There is variation in fees from quarter-to-quarter.

However, the ceding commission should be relatively knowing going forward. And as a result of -- again, as a result of good performance going for the first 9 months, there's commission payable under the profit commission structure. But otherwise, it's totally in line with what we would expect.

[Michael Zaremski, analyst]

Okay. Got it. And maybe, Allan, 1 last follow-up. Just on -- I think there's still some points need to be hammered out on Bermuda and the tax agreement. But should we be kind of directionally thinking closer to 15% tax rate in '25 or still TBD, and we need to kind of just keep our years field for how the framework comes together?

[Allan Decleir, executive]

Yes. Still too early to comment, but we continue to engage with our trade group, the Association of Bermuda Insurers and reinsurance as well as the Bermuda government. We will evaluate the tax proposal as it develops. There's still a lot of moving parts on the proposed taxes, and we'll provide more clarity as time moves forward.

[Michael Zaremski, analyst]

I guess this is a follow-up, would you say, Allan, if the headline comes within 15%? Will there be potential offsets that we should be that companies are paying that could make it less than 15%? Or sorry, it's my last follow-up.

[Allan Decleir, executive]

Yes. Clearly, there are offsets coming even in the latest press release from the government a couple of weeks ago indicated that the offsets are being worked on, but that is the 1 area that is the least developed. So we're not clear on those offsets,

Hence, why our caution in terms of communicating how it affects us. But everyone knows the headline rate, but it's the offsets that we're not clear on at this point.

[Operator]

Question comes from the line of Yaron Kinar from Jefferies.

[Yaron Kinar, analyst]

I wanted to turn back to the bespoke segment. So I understand you're being prudent here with choosing maybe to not maybe for choosing to prioritize profits and margins over growth. That said, I think part of the story as you came to market was improving the operating leverage and given that these are very long-term contracts, multiyear contracts, the earn-in of premiums takes a while.

So as you prioritize profits here, ultimately, how are you thinking about the ability to get to targeted operating leverage?

[Allan Decleir, executive]

Yes, Yaron, it's Allan. Thanks for that. Absolutely. We -- as we have communicated previously, the bespoke segment premium does take a little longer to earn than certainly reinsurance nat cat or some of our specialty lines and hence, why we are very measured in terms of that line of business.

And as we communicated previously, they can be lumpy in terms of when they come in from quarter-to-quarter. Our operating leverage is an area that we continue to look at. We're in line with our peers, we believe, in terms of our underwriting leverage underwriting premium written versus our equity.

However, as we've pivoted from more of a reinsurance nat cat entity to a specialty and bespoke company going forward, we believe that there's some efficiencies that we can develop in terms of underwriting leverage and bespoke is certainly 1 area where you get capital efficiency when you do write that business. But ultimately, it's about risk versus reward, and we're not going to put new premium on the books that we're not comfortable with.

[Daniel Burrows, executive]

Yes. I think we have a very, very significant pipeline in the bespoke pillar. So as we've coded, we took a very measured approach and then you're able to take the upside, you're able to go risk on when you know there's more certainty in the market. And I think that's the approach we'll be talking over the next couple of quarters.

[Operator]

Got it. And maybe 1 follow-up on the bespoke side. So I would have thought, and please correct me if I'm wrong here, but I would have thought that a time of greater uncertainty geopolitical and other, would actually create greater opportunities and maybe would be an opportunity to really see an acceleration of growth. So can you help us think about that?

[Daniel Burrows, executive]

Yes. And I think that's what we saw post-COVID. So it was a kind of short-term pause we saw the deal has come back better price, better terms and conditions, better structures. That's exactly what we expect to see this time. So we -- I'd be more worried if there was no pipeline, but it has created a pipeline. It's now about executing on those trades as they hit our hurdle rate.

[Operator]

Our next question comes from the line of Pablo Singzon from JPMorgan.

[Pablo Singzon, analyst]

So the first question I have is on bespoke. I appreciate your more cautious stance in writing business there, but I was curious if the economic concern affects any of the loss picks and reserving on your in-force book, given that these policies were priced several years ago.

[Daniel Burrows, executive]

We factor that in when we write the underlying risk. So we're comfortable with the portfolio we've already written. It's -- and the best stress test it had was through the COVID process. So we've taken a similar approach as to what we did there. We'll go back, we'll revisit the underlying assumptions, and we'll decide if we want to make any adjustments in how that should flow through to reserving.

But because when we price that business originally, we tend to include loadings around current economic conditions, so we kind of take a more prudent view anyway, then quite often, we're comfortable with the overall level that we reserved at and don't need to make any adjustment.

So I take the most comfort on how we came through COVID on that, which had a wide economic impact over a number of lines of business. and a very specific economic impact for things like our AFIC account, which was loans on aircraft, which are heavily impacted by COVID, for example.

So this time around, it feels like it's not quite as intense as COVID, I don't think, but we're well prepared to react to anything as it happens. But no, we haven't felt the need to make any adjustments on the reserving side to date.

[Pablo Singzon, analyst]

Got it. Okay. And then my follow-up question was on the Specialty business. So Dan, recognizing your comments that net driven premiums there have grown more than 40% year-to-date. But growth did slow from the first half of the year, right?

And from your comments, it seems like market conditions have not deteriorated while Aviation & Marine has key renewal dates, property D&F gets placed more evenly. So as you just focus on this quarter, I think about the year-on-year growth here, is that just a reflection of more challenging comparisons, maybe some other effect? Or can you just talk it up to the seasonality and normal variation?

[Daniel Burrows, executive]

Yes, I think we check up to seasonality. We don't run the business quarter-to-quarter. We look at the year-to-date, we're above plan or well above where we were this time last year. So that's pleasing. And we're more profitable. So -- when we look at our key metrics, we're outperforming out delivering. And that's how I look at the business, not on a quarter-to-quarter basis.

[Pablo Singzon, analyst]

Okay. And would it be fair to assume, given what you've said about aviation that there should be an uptick from the third quarter number as we look into 4Q? Yes. I think it's heavily focused. The renewal date is that kind of Q4 period. So we would expect to see an active season for the aviation portfolio.

[Operator]

Our next question comes from the line of Mike Ward from Citi.

[Michael Ward, analyst]

Maybe on the IP space, some losses this quarter, some headlines elsewhere on IP. Just wondering if that is impacting your appetite and bespoke. And if you could help us quantify the total exposure of reserves for IP?

[Daniel Burrows, executive]

Well, I'll take the first part. I think when we look at bespoke, what we try and build is a very diversified portfolio. So we try and have product lines that don't correlate. So yes, we have an IP loss or 2 in the quarter. That doesn't really impact our view on the other lines of business. IP is a new product line. It's the innovation is kind of growing in that space. Obviously, it had some impact ifrom Vest as well. But maybe I'll pass to Jonny to talk about the reserving.

[Allan Decleir, executive]

Yes, it's a higher rate online product and some of the other products we write in the bespoke pillars. So what that means is we'd expect a higher run rate of claims as a result of that. Given there's a small number of deals done to date, we're able to monitor them at an individual level, so we can look at the individual economics of some of the ongoing deals and react to that from a reserving point of view as we go. So that helps with the reserving in that area.

In terms of claims, the main ones we've had to date are the 2 that we've disclosed this quarter in the spoke -- so comfortable where reserves because we're able to actively monitor things quarter-to-quarter. It's a small number of deals so far.

[Michael Ward, analyst]

Okay. Okay. And then I think you mentioned economic slowdown in some of the commentary. Just wondering if anything has changed in the quarter that sort of caused you to be a little bit more cautious or -- is there any overall shift in the targeted mix?

[Daniel Burrows, executive]

No, I think we're consistent with the plan, and we're out delivering against that plan. So whilst there are tensions in the Middle East to consider now as well, I think we just continue to take that kind of very deliberate measured view. But I think to the earlier question, it creates a lot of opportunity. We saw that of Russia-Ukraine. So we're well positioned to take advantage of that as well

[Operator]

We have a follow-up question coming from the line of Mike Zaremski from BMO.

[Michael Zaremski, analyst]

Great. Just 1 quick follow-up on the IP losses. Since you said it's a new line of business, maybe you could just give us a really quick education on what is an IP claim? And what -- maybe I'm being asked what type of insurance you're offering, so we better understand how to think about this line of business for IP?

[Daniel Burrows, executive]

So these are loans that are backed by intellectual property assets. So it's similar to sort of our AFIC product where we back a loan backed by an underlying aircraft as the collateral, but here the collaterals, the we think about it in a similar way. I mean we look at the credit risk of the company when we're pricing it and also look at the valuation around the IP.

And then as the claim materializes, it's about looking at ways to restructure to minimize that claim to us. is thinking about how we can realize any value from the underlying IP assets. And then quite similar to other lines of business that we write in the bespoke pillar really. The difference is the type of asset that's backing the loan here is intellectual property rather than something like an aircraft.

[Operator]

Our next question comes from the line of Pablo Singzon from JPMorgan.

[Pablo Singzon, analyst]

So any major changes you back in your reinsurance program, your outward reinsurance program? And I guess, more specifically, if you could touch your expectations on the fabric count coated shares we approached at the beginning of 2024 here.

[Daniel Burrows, executive]

Yes, I'm happy to do that, take that one, Pablo. No, the short answer is it's a very similar strategy year-on-year. we already have indications of the altogether partnership, which will continue into '24. We're looking to maintain our core quota share relationships. We're very thankful to the part to share our risk with us.

And also moving forward to '24, we will look to renew the cast those platforms fall due. So a very similar year-on-year strategy.

[Operator]

That concludes today's question-and-answer session. I'd like to turn the call back to Dan Burrows for closing remarks.

[Daniel Burrows, executive]

Thank you. And thank you again, everyone, for joining us today. So in closing, we have built on our strong first half year performance with an excellent third quarter that's demonstrated the value of our market lead positioning, our business model and our structure, which allows for strong execution across all aspects of our strategy.

Now looking ahead, we believe we have a unique and diverse portfolio mix with scale across our 3 business pillars. Our differentiated underwriting positions us well to take advantage of the opportunities we see in markets today as well as to navigate across market cycles and our highly experienced management team brings valuable relationships spanning across multiple disciplines in the insurance ecosystem.

We remain focused on deploying capital towards profitable underwriting opportunities while increasing our scale to drive long-term sustainable growth and value for all of our shareholders. So again, thank you for joining us, and have a great day.

[Operator]

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