Fidelis Insurance Holdings Ltd

NYSE:FIHL

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the Fidelis Insurance Group's Third Quarter 2024 Earnings Conference Call. As a reminder, this call is being recorded for replay purposes. Following the conclusion of formal remarks, the management team will host a question-and-answer session and instructions will be given at that time.

 

With that, I will now turn the call over to Miranda Hunter, Head of Investor Relations. Ms. Hunter, please go ahead.

[Miranda Hunter, executive]

Good morning, and welcome to the Fidelis Insurance Group's Third Quarter 2024 Earnings Conference Call. With me today are Dan Burrows, our CEO; and Allan Decleir, our CFO; and Johnny Strickle, our Chief Actuarial Officer.

 

Before we begin, I'd like to remind everyone that statements made during the call, including the question-and-answer session, 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 third-quarter earnings press release and our most recent annual report on Form 20-F filed with the SEC. Both are available on our website at fidelisinsurance.com.

 

Although we believe that the expectations reflected in forward-looking statements have a reasonable basis when made, we can give no assurance that these expectations will be achieved. Consequently, actual results may differ materially from those expressed or implied. For more information, including on the risks and other factors that may affect future performance, investors should review the safe harbor regarding forward-looking statements included in our third quarter earnings press release available on our website, fidelisinsurance.com as well as those 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 and our definition of RPI, which is our renewal pricing index, can be found in our current report on Form 6-K furnished with the SEC yesterday, which contains our earnings press release and is available on our website at fidelisinsurance.com.

 

With that, I'll turn the call over to Dan.

[Daniel Burrows, executive]

Thank you, Miranda. Good morning, everyone, and thank you for joining us. As usual, I will make a few comments before handing over to Allan to go through the quarter in more detail. In the third quarter, we once again demonstrated the strength of our business, our access to Alpha underwriters, and the steps we have taken to optimize our risk-adjusted returns through a resilient portfolio. We also continued our track record of disciplined capital management as we strategically executed against our share repurchase program. Despite an active quarter in terms of global natural catastrophes, we delivered strong quarterly results with robust top-line growth and sustained profitable underwriting.

 

Gross premiums written increased by 25%, driven by the focused and disciplined execution by our team and the compelling value we offer to the market. Year-to-date, gross premiums written have increased 23%. And for the full year, we remain on course to achieve premium growth of approximately 20%, in line with last year.

 

We continue to benefit from a strong rating environment across our portfolio with an overall RPI of 112% for the quarter as we leverage our position as a leader in a verticalized market to deliver preferential rates, terms, and conditions. This quarter marked our first period of transacting business through the new Lloyd's Syndicate 3123, which launched on July 1st. As a reminder, we participate through both a direct investment and a variable quota share. The syndicate is creating new opportunities across all three segments, most notably within Bespoke.

 

Looking at our segments in more detail, in Specialty, gross premiums written increased by 22% for the quarter with RPIs at 114%, which is driven by our leadership in major lines. Strong retention rate and new business resulted in growth of 35% in Property Direct & Facultative. In Marine, we continue to leverage our participation across marine subclasses and lean into areas of opportunity such as new construction. And in aviation, where the market remains competitive, we have maintained our disciplined approach while still taking advantage of opportunities that meet our underwriting criteria and rating hurdles.

 

In Bespoke, we expanded our client base and delivered strong gross premium growth, closing a number of transactions in structured credit and political risk.

 

Finally, Reinsurance also saw strong growth in gross premiums written, again driven by both expanding existing client relationships and attracting new business. Reinsurance market discipline around rates remained following significant positive adjustments in prior years with RPIs of 105%.

 

In addition to strong top-line performance, we delivered compelling bottom-line profitability with a combined ratio of 87.4% in the quarter, and year-to-date, our combined ratio is 88.6%. Both are within our target of mid to high 80s across the cycle.

 

We also delivered annualized operating ROAE of 16.4%, bringing year-to-date annualized operating ROAE to 13.3%. Finally, active capital management remains a cornerstone of our strategy. While our first priority is to reinvest into the underwriting business, our strong capital position has also allowed us to return excess capital to shareholders. Since we initiated our dividend and share buyback programs at the beginning of this year, we have returned $141 million to shareholders.

 

During the third quarter, we continued to buy back shares, including the execution of a privately negotiated transaction with Platinum Ivy, a wholly owned subsidiary of ADIA, who remains one of our long-standing shareholders. Allan will go into this and our broader capital management strategy in more detail shortly. 



In summary, I'm very pleased with our third quarter results and the ongoing dedication displayed by our team. 



I'll now pass it over to Allan to walk through our financial results in more detail.

[Allan Decleir, executive]

Thanks, Dan, and I'd also like to welcome everyone joining our third-quarter earnings call. We had excellent top-line growth compared to the same quarter last year, growing by 25% to $742 million. Against the backdrop of active global natural catastrophes, we generated operating net income of $105 million or $0.92 per diluted common share and an annualized operating return on average equity of 16.4%. We continue to grow our book value per diluted common share, which now stands at $23.43, an increase of 13% from year-end and an increase of 8% from last quarter. 



Building on Dan's comments, our growth of gross premiums written for the quarter was primarily driven by new business and rate increases with Specialty increasing by 22% or $72 million, Bespoke increasing by 15% or $24 million, and Reinsurance increasing by 52% or $54 million. Consistent with our growth of gross premiums written, our net premiums earned increased by 24% versus the third quarter of 2023 to $635 million. 



Turning to the combined ratio, we delivered a strong ratio of 87.4% in the quarter. Looking at the components in more detail, our loss ratio was 37.5% for the third quarter, in line with the prior year period even as gross premiums increased, underscoring our emphasis on delivering profitable growth.

 

Our attritional loss ratio improved to 24.7% compared to 30.4% in the prior year period. This improvement is attributable to a lower level of losses across all 3 segments, consistent with the trends we discussed in the second quarter. Notably, the third quarter was particularly benign in terms of attritional losses compared to the prior year. Catastrophe loss activity in the third quarter was impacted by several events generating a catastrophe and large loss ratio of 14.4% or $92 million of losses in the quarter. Of this, Specialty accounted for $63 million, Bespoke $13 million, and Reinsurance $15 million. The most notable events were Hurricane Helene with losses of $34 million and European Storm Boris with losses of $24 million, which impacted both our specialty and reinsurance segments. 



We had net favorable prior year development of $10 million for the quarter versus $43 million in the prior year period. Of the $10 million for the quarter, Bespoke was $11 million and Reinsurance was $13 million, driven by benign attritional experience. Specialty experienced adverse prior year development of $14 million during the quarter, driven by increased estimates in our aviation and aerospace line of business in the context of ongoing Russia-Ukraine litigation in multiple jurisdictions, including the U.S., the U.K., and Ireland. This was partially offset by better-than-expected loss emergence in our property D&F line of business. 



Turning to expenses. Policy acquisition expenses from third parties were 31 points of the combined ratio for the quarter compared to 29.6 points in the prior year period. The increase is primarily driven by an increase in our specialty segment, which had higher variable commissions in the quarter. The Fidelis partnership commissions were 15.3 points of the combined ratio for the quarter, of which 2.1 points related to their variable accrued profit commissions. These commissions increased from 13.9 points in the prior year period, reflecting the full impact of earning these commissions since the agreement went into effect. 



And finally, our general and administrative expenses were 3.6 points of the combined ratio for the quarter, or $23 million compared to 4.3 points of the combined ratio in the prior year period, or $22 million. Our net investment income increased to $52 million for the third quarter of 2024 compared with $33 million in the prior year period, reflecting a higher yield fixed income portfolio and an increase in investable assets compared to the prior year period. We continued the selective rotation of the portfolio started in the first quarter of 2024 by selling a portion of the fixed-income portfolio and reinvesting the proceeds into longer-dated and higher-yielding securities.

 

Specifically, we sold $203 million of securities with an average book yield of 1%, resulting in a realized loss of $6 million. We reinvested $438 million from those proceeds, along with positive cash flows into securities with an average purchase yield of approximately 4.6%. At September 30, the average rating of fixed-income securities remains very high at AA- with a book yield of 4.9%. Duration is consistent with the second quarter at 2.7 years, which is an increase since year-end as a result of purchasing longer-dated securities. We continue to work towards optimizing our overall investment portfolio and look for opportunities to generate superior risk-adjusted investment returns. 



Building on Dan's comments regarding our ongoing focus on capital management, we continue to pursue value-accretive opportunities. Our first priority remains reinvesting in the business by deploying capital into attractive growth initiatives. Additionally, we continually seek to optimize our outward reinsurance purchasing. And when we have excess capital, we look to return it to shareholders through a combination of dividends and opportunistic share buybacks. 



On our last earnings call, it was mentioned that we had completed the previously announced $50 million share repurchase program. Additionally, we announced that our Board had approved a new program authorizing the purchase up to an aggregate of $200 million of common shares.



Year-to-date, we have repurchased 6.6 million common shares at an average price of $16.06. This is approximately 69% of our current diluted book value per share and that's highly accretive on both the book value and earnings per share basis to our shareholders. The total includes 3.25 million common shares that we repurchased from Platinum Ivy, a wholly-owned subsidiary of ADIA, who remains one of our long-standing shareholders through a privately negotiated transaction completed during the quarter. 



I will now turn it back to Dan for additional remarks, including thoughts on the market outlook.

[Daniel Burrows, executive]

Thank you, Allan. Looking ahead, we continue to see areas of opportunity across the market. Significant year-on-year pricing adjustments across multiple lines of business have led to one of the best-sustained rating environments we have seen in years. Although the acceleration of rates might not continue at the same pace, we remain focused on maintaining our discipline and utilizing our scale and positioning to seek out new opportunities. As we have mentioned, in a verticalized market, being a leader is a competitive advantage as it provides a first look at business opportunities and enables us to achieve better rates, terms, and conditions. 

 

Delving deeper into the dynamics within each of our underwriting segments. In Specialty, looking at the fourth quarter, attractive opportunities for growth remain, particularly in property direct, where rates remain attractive, client retention levels are high, and we continue to see increased demand. Certain sectors such as marine and aviation are experiencing some pressure as rates begin to moderate. However, we believe our line size, multiproduct leverage, flexible underwriting strategy and ability to cross-sell products provide us access to the best price and most compelling risks in each class. This enables us to find attractive opportunities while maintaining our underwriting integrity. 



In Bespoke, as we've discussed, given the custom and direct nature of this product line, we lead substantially all our deals. While the highly tailored profile of these policies results in variable deal flow, as we look to the fourth quarter and into 2025, our pipeline remains strong and is currently tracking with the previous year. In structured credit and political risk, in particular, we continue to see attractive opportunities from a risk-return perspective. We are actively pursuing these new opportunities while also pushing for higher allocations as we leverage our track record of support and strong relationships in the industry. 

 

Finally, in Reinsurance, market dynamics remain favorable, and we expect discipline to persist, especially in relation to prior year market corrections around attachment points, terms, and conditions. Certain regional loss-impacted accounts should see price adjustments, and we believe that recent weather catastrophes, including Helene and Milton, will reinforce market discipline. Based on events to date, our current view is that rates for 1/1 should be consistent with what we saw this time last year. We continue to optimize our reinsurance portfolio in line with our view of risk. 

 

The big event post-quarter end was, of course, Hurricane Milton, and we expect net losses from this storm to be manageable for our book, which reflects the targeted approach we have taken. At this point, we have a preliminary range of between $50 million to $100 million of pretax losses net of reinsurance. This is based on an industry range of $20 billion to $50 billion. Outward reinsurance remains a key part of our strategy. We spent significant time building long-term relationships with our reinsurance partners. This ensures their engagement across the breadth of our portfolio, which we see as a strength of our outward strategy. 

 

Looking ahead to 2025, our aim remains to maintain our core quota share relationships, and we are currently in the process of shaping our outward reinsurance program. This includes negotiations around catastrophe bond products and discussions on the Travelers quota share for 2025. Our objective remains to build an outlook program that provides robust portfolio protection. 



Overall, across our portfolio, we continue to pursue accretive opportunities for growth. As we work through our annual planning process for the Fidelis partnership, we are finding a number of opportunities to leverage new distribution channels and markets as well as opportunities to cross-sell products. For instance, we believe that our participation in Lloyd's Syndicate 3123 and the Brooks initiative, both will provide opportunities for growth with new clients and into new markets. 



To broaden and enhance our portfolio, we also continue to evaluate new opportunities to provide long-term capacity to best-in-class underwriters. To that end, we are excited to announce a new strategic partnership with Euclid Mortgage. Through this collaboration, Fidelis Insurance Group, alongside other reinsurers will provide capacity for Euclid Mortgage on a reinsurance basis. This partnership commencing on January 1, 2025, is estimated to produce approximately $35 million of gross premiums written in 2025. 

 

While the Fidelis partnership remains our cornerstone partner, this opportunity to support a new partner with proven expertise in an attractive line of business is a natural evolution as we continue our journey to diversify and strengthen our portfolio. Given the strong credentials of the U.K. mortgage team, we anticipate this partnership will contribute to our overarching goal of sustained growth and profitability. 



In conclusion, we are pleased with the momentum in our business. We continue to successfully execute on our strategy, optimizing our risk-adjusted returns and leveraging our scale and lead positioning to generate underwriting alpha. 



This is reflected in our strong third-quarter results. As we look ahead, we remain focused on continuing to deliver very strong performance and creating value for our shareholders. 



I'll now hand it back to the operator. We look forward to your questions.

[Operator]

[Operator instructions]. And with that, our first question comes from the line of Matt Carletti from Citizens JMP.

[Matthew Carletti, analyst]

Dan, I was hoping you could dig in a little bit on the adverse in the aviation business that you talked about in the opening comments. I guess 2 parts to the question. One is just what was the dollar amount of the adverse in aviation? I know the net, but kind of what the piece was there. And then secondly, I think in the past, you've described kind of a -- maybe I'm describing it wrong, but kind of a probabilistic model that you've built to kind of get you to how you set reserves for what is a pretty unique event. And just what changed, kind of what changed around the edges with kind of that process to get to a new number?

[Daniel Burrows, executive]

Thanks, Matt. Great question. When we think about these issues, it's quite a complex market event when we think about Russia and Ukraine in particular. So I'm going to pass it over to Alan and Johnny to talk about that in more detail.

[Allan Decleir, executive]

Yes. Thanks, Matt. As I mentioned in my prepared remarks, the adverse development in specialty was driven by increases in aviation and aerospace in the context of the Russia-Ukraine litigation in multiple jurisdictions in the U.S., U.K., and Ireland. This was offset by better-than-expected loss emergence in our property D&F line of business. Year-to-date, we have seen favorable development in our specialty portfolio of $35 million, and across our entire portfolio, we've seen favorable development of $146 million. There's been no change in our approach. We continue to employ a robust reserving methodology maintaining a consistent approach from quarter to quarter, and we don't change our philosophy based on a couple of quarters of lighter or heavier experience. Specific to Russia, Ukraine, again, our methodologies remain the same as in the past, and there's been no change in that process.

[Matthew Carletti, analyst]

Can you give the dollar -- the net of the pluses and minuses was $14 million adverse. Can you give at least in aviation, how much you added to reserves before the offsets from D&F and elsewhere?

[Allan Decleir, executive]

As you can appreciate, Matt, it's a complex event. We're not able to comment further in detail, and we don't disclose by line that level of detail.

[Matthew Carletti, analyst]

And then a follow-up, if I could, probably a good question for you, Dan. Earlier in the reporting season, at least one big peer kind of pointed the finger at the London market in terms of being very competitive. I didn't get that sense from your view of the world. You mentioned aviation, but beyond that. I'd be curious if you could just give your perspective. You guys obviously know London incredibly well and kind of what the market looks like and the competition level.

[Daniel Burrows, executive]

Really good question, actually, Matt. So I think as we said before, we take lead positions across the portfolio. We think that's very important to use the leverage that comes with that scale in terms of the capacity that you offer to your clients. So we don't all start in the same place as insurers and reinsurers. As a leader in a verticalized market, you do get preferential terms and conditions. So if you're putting a $1 million line out on a D&F program on a primary layer, you have a very different experience for some that has substantial capacity on the excess layers, specifically in D&F. 



So I think we are seeing a lot of opportunity in that direct property side. We've grown 35% in the quarter, we take a very disciplined approach. Anything that doesn't meet our kind of underwriting hurdles, we're not going to compromise the integrity, but when we think about the growth in the quarter and year-to-date, 25% is something we're very proud of, look at the combined ratio. So we do see a lot of opportunity out there, but I think it's about being nimble, it's about the service you deliver, it's about working harder, and it's about the leverage that comes from being a leader in the market. So just important to remember, we don't all start in the same place. And I'd also say that we do know London very well, but we are a global business.

[Operator]

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

[Meyer Shields, analyst]

Over the course of 2024, you've talked about, I guess, preferring the returns in property D&F compared to catastrophe reinsurance. And I'm wondering whether that still holds given what we're seeing in pricing for those 2 different lines.

[Daniel Burrows, executive]

Thanks, Meyer. Good to be back, and thanks for the question. So I think what we have seen -- we talked about D&F, the margin in D&F, we felt was superior. But what we have seen in Reinsurance over the last 12 months is a significant uptick in not only pricing, attachment points, coverage, terms and conditions. So you have in the UNCCL underwriting call daily, sometimes as many as 3 times a day, in real-time, we're able to compare and contrast. And what we have seen on the reinsurance side is many more opportunities that compare favorably that have appropriate margins that we can execute on. So that's why we've grown the business. And we've done that whilst only moderately increasing our exposures. 



So I think the 2 things complement each other very well and we have a very strong pink approach to our D&F portfolio. And again, I believe that we're able to leverage terms and conditions there. So I think it's about being nimble, we've seen a lot of opportunities. And as I said, we've been able to grow 36% year-to-date, but only modestly increasing exposures.

[Meyer Shields, analyst]

And then sort of switching gears, should we think of the loss ratio expectations for the Euclid relationship as similar to primary mortgage insurers or to the mortgage reinsurers at this point?

[Jonathan Strickle, executive]

Thanks, Meyer. John here. I'll take that one. I think it is different to primary mortgage players, but I would say that it's something that fits well within our bespoke portfolio as a whole. And as we've said on all opportunities that we look at outside of the Fidelis partnership, there's a high bar that's set, and we'd expect them to meet or beat where the Fidelis partnership is seeing similar types of business.

[Operator]

Your next question comes from the line of Lee Cooperman from Omega.

[Leon Cooperman, analyst]

Appreciate the results. I need a little bit of help. I'm not an expert in this business, but you guys seem very analytical, which is good. And I'm just curious how you stack up the relative attraction of stock repurchase versus writing more business. And as you track things now, what kind of top-line growth would you anticipate in 2025 versus 2024? Would you expect higher revenues, lower revenues? What magnitude of change?

[Daniel Burrows, executive]

Thanks, Leon. It's Dan here. Really interesting question. I think we look at it in a couple of ways. When we think about a strong capital position, firstly, we want to support underwriting growth, profitable underwriting growth. So we've just been through the planning process. I think during the course of the year, we've grown 25% and produced really good results. On top of that, when we think about capital management side, when we look at the book value and the share price, there's also an opportunity there. So this year, we've been able to grow the book 25%, but also give back something in the region of $141 million to shareholders through dividends and share buybacks. 

 

So I think looking forward on that side, marrying those 2 things together because you have a strong capital position, we'll continue to do that with excess capital that we have. I think it's too early to make predictions on growth for next year. What we would say is that when we look at some of the bigger parts of the portfolio we should be able to maintain our target ratio. So the combined ratio, that's mid-80s to high 80s and that kind of 13% to 15% in an elevated market, 14% to 16% ROE. So when we look at the sectors within the business, we do think the recent cat activity will give discipline to the market. So we expect terms and conditions to be consistent with what we saw this time last year. Sorry, we coined the phrase we're very much -- we're at the top of the mountain. There's plenty of oxygen. We're going to be up here for a long time. That's how we see the market. That's going to profitable growth, but also good capital management with excess capital.

[Leon Cooperman, analyst]

What would you deem your amount of excess capital is currently?

[Daniel Burrows, executive]

Yes, we don't disclose that publicly.

[Leon Cooperman, analyst]

Excuse me, I didn't hear that response.

[Daniel Burrows, executive]

Sorry, Lee, we don't actually disclose that publicly.

[Leon Cooperman, analyst]

But I guess it was in the area of a couple of hundred million, that's what you announced in terms of your buyback intentions. What I'm struggling with is, I think when I look at most companies, a company could earn 14% to 16% in equity or be selling at a premium to book value and not at a big discount to book value. Do you guys look at it the same way? Or am I looking at it incorrectly?

[Daniel Burrows, executive]

We look at it exactly the same way. We think the business is undervalued. We appreciate we have to deliver quarter-on-quarter of good performance, but we see an accretive opportunity managing capital by buying back shares with any excess capital that we've got. But first off, in a great market where there are very favorable terms and conditions, we want to grow profitably with our cornerstone partner.

[Operator]

Your next question comes from the line of Pablo Augusto Singzon from JPMorgan.

[Pablo Singzon, analyst]

So G&A this quarter was a little light, whether in terms of percentage of earned premium or in terms of growth over last year. Was there anything unusual about this quarter, whether seasonal factors or otherwise? And what is your outlook for this line item?

[Allan Decleir, executive]

Thanks for the question. No, I think that we bifurcated in early 2023. Our G&A has stabilized to a large extent. Nothing unusual this quarter. It's sort of the run rate, plus or minus some inflation going forward. But I think this is -- we're kind of at where we expect to be going forward.

[Pablo Singzon, analyst]

And then given the commentary in the earnings release about the timing of certain renewals being a negative this quarter on gross premiums written, are you implying a pickup in GPW going into 4Q '24?

[Allan Decleir, executive]

No, I don't think specifically that there's just some timing between Q2 and Q3, and there is some -- especially in our Bespoke segment, but also in our Specialty segment, there can be some lumpiness. So there's no real magic to what the premium will be each quarter. Some deals will be different quarters from last year.

[Daniel Burrows, executive]

Yes, it's Dan here. And some of this is very much seed-driven. But I think if you look at growth last quarter, think about 25% growth this quarter, then we're moving in the right direction.

[Operator]

Your next question comes from the line of Michael Zaremski from BMO Capital Markets.

[Michael Zaremski, analyst]

First, if I could just start on the private share repurchase transaction? Can you provide any additional color on how that deal came about and whether the seller will sell more?



And then if just any of the shares repurchased in the quarter were done in the open market?

[Allan Decleir, executive]

As we mentioned in prior calls and again this quarter, we continue to evaluate opportunities to repurchase shares where it's accretive and value added to our shareholders. Platinum Ivy remains one of our long-standing shareholders, and we were pleased to reach a mutually beneficial transaction with them. We can't speculate on their motivations. From our perspective, we viewed it, as I said, as an accretive transaction. Our shares repurchased in the quarter were $4.3 million, of which $3.25 million were from ADIA. So there were some open market purchases as well.

[Michael Zaremski, analyst]

And then I'll just follow up on going back to Aviation and Aerospace a little bit. Just also on maybe this quarter's GBW there hurting because of the hurdles and underwriting criteria. Is that particularly related to Russia, Ukraine? Or is there anything else going on in that line that we should be thinking about?

[Jonathan Strickle, executive]

It's Johnny here. So no, that's not in relation to Russia, Ukraine. That's more just the general market dynamics in that line of business. In particular, at the start of the year, we had a view that we might see some rate increases in the aviation line of business from other events that have happened over recent periods. Some of that's not come through over the year. Therefore, some of those opportunities haven't hit the hurdles that we set and we haven't run the business.

[Daniel Burrows, executive]

I think it's important to stress that we are nimble. That's a real advantage of this business. And we are not going to compromise underwriting integrity just for growth. But certainly, there wasn't the new business within the aviation sector that the market was expecting earlier this year.

[Operator]

Your next question comes from the line of David Motemaden from Evercore.

[David Motemaden, analyst]

My question, I guess, first is just to Allan on the acquisition ratio. It looks like that was a bit higher. It looks like it was driven by the Specialty segment. I think you had mentioned some variable commissions. I was wondering if you could elaborate on that a little bit. And just wanted to know, has your view on the acquisition ratio changed going forward?

[Allan Decleir, executive]

Yes. Thanks, David. Yes, specialty drove the increase in policy acquisition costs this quarter. Excluding the commissions payable to the Feds partnership, there were $122 million or 32.9 points on the combined ratio in the quarter. This increase from prior quarters was driven due to higher variable commissions to the underlying cedent and underlying underwriting business there. So as you can appreciate there are profit commissions built into some of these contracts where the results are very profitable, there's a profit commission that goes back. So it really shows that loss ratios and acquisition ratios are linked here. As a result, there were higher variable commissions. I would think of them as a little bit lumpy, not as our ongoing run rate. 

 

We also have, as we noted, a significant change in our business written over the last year or 2 and more leaning more into specialty lines, certainly property gain lines of business. So that can affect our commission ratio.

[David Motemaden, analyst]

And so I guess for the total company, I guess we shouldn't be thinking about a 31% acquisition ratio going forward. But I guess, should we be looking at the first half of the year as sort of a decent run rate?

[Allan Decleir, executive]

That's exactly it, David. I would say the sort of the first 6 months, first 9-month rate of 28% to 29% is the right ratio in the Specialty segment and across the portfolio.

[David Motemaden, analyst]

Dan, I think you had mentioned just stable combined ratio expectations for next year. Should I also take that to mean the 14% to 16% ROE is also how you guys are thinking about 2025 as well?

[Daniel Burrows, executive]

Yes. I mean it's probably -- we still got 6 weeks of this year to go. So we'll definitely update on the Q4 call, but we're still very much focused on that return in that range. We don't see any reason to change it. So yes, I think that's how we would look at it. So pretty much in line with what you're saying.

[Operator]

Your next question comes from the line of Robert Cox from Goldman Sachs.

[Robert Cox, analyst]

Dan, it looks like pricing was able to stay roughly flattish quarter-over-quarter, while many of your peers were talking about significant property pricing decreasing, at least in the U.S. E&S market. So it seems like Fidelis is benefiting from the leadership position in many of these lines. But I'm curious if there are other nuances to be thinking about relative to the quarter and how you're able to achieve that or if it's that simple.

[Daniel Burrows, executive]

I think it's a number of things. That leadership position we talked about, and it really does make a difference. But I think cross-selling across product lines is also really important, leveraging with the client and the broker, Service is really important, just being available, which I know sounds like a very obvious thing, but trust me, it's not necessarily true of everybody and just working harder. So I know they sound like throw-away lines, but it is true. I don't think anyone who works harder than the Fidelis partnership in sourcing new business. So we are the beneficiary of that, and we look to them as our cornerstone partners to continue to deliver. But yes, I think it's a mixture of those things, but it starts with being a leader and the ability to kind of cross-sell also gives you much greater leverage.

[Robert Cox, analyst]

And then on the net investment income, I just had a follow-up. It looks like the yield is still improving pretty well. It seems like you made some good trade-offs in the quarter and continue to reinvest at higher rates.



I was just curious if you could talk about sort of the puts and takes to the NII trajectory from here and if there's still room to extend duration.

[Allan Decleir, executive]

Thanks for the question. As I said in my prepared remarks, we're always looking to optimize our overall investment portfolio. But yes, we're very pleased with what we've done this year. And again, specifically in the quarter, we decided to sell and realize a loss some of the securities that we purchased back in 2020, 2021 when yields were 1%. Yields are jumping around a little bit, given the Fed intervention, but we still managed to purchase new securities this quarter at 4.6% -- and we have 4.9% average book yield right now. We think that's the glide path going forward. We've extended duration a little bit as well to get to where we need to be in terms of investment income, but we think we're pleased with where we are. We're going to maintain a high-quality book, but we'll continue to optimize our portfolio where needed.

[Operator]

[Operator instructions] Your next question comes from the line of Yaron Kinar from Jefferies.

[Yaron Kinar, analyst]

I think maybe we've discussed this in the past, but could you guys provide either quantitative or qualitative discussion around the relationship between large and attritional losses and how you view them differently?

[Jonathan Strickle, executive]

We don't really view them differently, to be honest. We look at the overall combined ratio as the key metric to judge the profitability of business within the portfolio. If I start from there and work back, then the first thing that we don't really distinguish between is loss ratio and acquisition costs. And that's because if you look at something like the bespoke segment, it runs at a lower loss ratio but has a higher acquisition cost due to the extra expense in sourcing some of that business. in comparison to, say, specialty, which has got a bit of a lower acquisition cost on much of the business in there, but a slightly higher loss ratio. 



Then breaking it back a step to loss ratio, we show it so you guys have got the information here, but I don't really draw much of a distinction between attritional and large and cat losses. The reason for that is if you have a couple of losses that are just over your threshold, that can make the attritional look particularly good because its two largest losses have moved over to a different bucket, and it can make the large look particularly poor for a single individual quarter. So we take a much more holistic view of the overall position and don't look too much into granularity beyond that.

[Yaron Kinar, analyst]

I guess maybe how should we think about that in the context of your commentary during the prepared remarks about more benign attritional activity year-over-year?

[Jonathan Strickle, executive]

Yes. I think that's still true. There is a benign attritional activity over the year when we compare to where we were last year, but it's also impacted by a couple of losses this year going just over the threshold and therefore, going into the large cat bucket. So those have been, say, a couple of million dollars less, then the attritional would look slightly higher year-to-date, for example. So it's true. There is a benign experience over the period, but I keep in mind that the attritional can look artificially too low or too high in any one quarter if those medium events just creep over or under.

[Operator]

Your last question comes from the line of Lee Cooperman from Omega.

[Leon Cooperman, analyst]

Just a question. The fully diluted share count at the end of the quarter, not the average, but the actual share count.

[Allan Decleir, executive]

And as in the financial statements we published at the last evening, we have a share count of $111,726,363.

[Leon Cooperman, analyst]

So as I listen to this conversation, we have to make a judgment about the quality of your decision-making regarding the relative attraction of writing new business versus buying back stock. But I would just say that your stock is totally mispriced in my opinion. If you could do 14% to 16% return on equity, you deserve to sell at a premium to book value. So I would encourage you to buy back as much stock as you can, particularly if you can get to a discount to the market. But thank you for your performance.

[Operator]

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

[Daniel Burrows, executive]

Thank you, everyone, for joining us today. We truly appreciate your interest in the company, and we are pleased with our results this quarter and the strategic initiatives that position us well for continued success. Our unwavering commitment to delivering value to our shareholders remains at the forefront of our operations. And if there are any follow-up questions, we are here to take your calls. We appreciate your ongoing support. I'll now pass it over to the operator to end the call. Everyone, please enjoy the rest of your day.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.