Fidelis Insurance Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 1, 2024

There are 10 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Fidelis Insurance Holdings 4th Quarter and Year End 2023 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.

Operator

Hunter, please go ahead.

Speaker 1

Good morning, and welcome to the Fidelis Insurance Group 4th quarter and full year 2023 earnings conference call. With me today are Dan Burrows, our CEO and Alan DeClair, our CFO. We are also joined by members of the Fidelis Insurance Group Management team, including Johnny Strickle, our Group Chief Actuary. Before we begin, I'd like to remind everyone that statements made during the call, including the question and answer section, may include forward looking statements. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties.

Speaker 1

These risks and uncertainties are described in our IPO perspective 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 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 with us with the SEC from time to time. Management will also make reference to certain non GAAP measures of financial performance.

Speaker 1

A reconciliation to U. S. GAAP for each non GAAP financial measure can be found in our current report on Form 6 ks furnished with the SEC yesterday, which contains our earnings press release and is available on our website, thedellusinsurance.com. And with that, I'll turn the call over to Dan.

Speaker 2

Thank you, Miranda. Good morning, everyone, and thank you for joining us today. 2023 was a milestone year for the Fidelis Insurance Group, and we couldn't be more pleased with our performance. In July, we completed our IPO and listed on the New York Stock Exchange, unlocking new opportunities and positioning us for long term industry leading results. What is particularly exciting is that throughout the year, we successfully executed on our objective of delivering consistently compelling returns, and there are a few key messages I want to emphasize today.

Speaker 2

Firstly, this continues to be the best market environment we've seen in 20 years. Against that backdrop, we took advantage of opportunities to grow our business in target markets and actively shaped our portfolio with strong gross premium written growth of 31.7% in the quarter and 18.6% for the year. Secondly, we maintained our track record of best in class underwriting performance with 1 of the best combined ratios in the industry at 81.4% for the quarter and 82.1% for the year. Thirdly, we delivered strong operating ROAE of 23.6% for the quarter and 18.8% for the full year. We also grew book value per share to $20.69 representing growth of 13.4 percent from the Q3.

Speaker 2

And finally, we are proactively sharing our success with shareholders through both our previously announced share repurchase program and yesterday's announcement of a regular quarterly dividend. Alan will dive deeper into our results for the quarter shortly, but as we reflect on this remarkable progress in 2023, we would like to begin today's call by highlighting how Fidelis Insurance Group has built a truly differentiated global specialty insurance platform, which we have also outlined in our updated investor presentation, which has been filed and is available on our website. 1st and foremost, our strategy is focused on leading the global specialty insurance industry in delivering consistently compelling returns through the cycle and creating value for our shareholders and all other stakeholders. For nearly a decade, we have established ourselves as a market leader, creating a strong, highly diversified and innovative portfolio focused on 3 segments specialty, bespoke and reinsurance. Our Specialty segment is focused on traditional specialty business where we take significant positions in the major lines, including property direct and facultative, marine and aviation and aerospace, leading approximately 90% of the deals participate in across the portfolio.

Speaker 2

This positioning also enables us to cross sell lines of business with both brokers and clients. Our aviation portfolio, where war and allied coverage capacity is scarce, is an example of how we execute this strategy. Our bespoke segment focuses primarily on highly tailored specialized products that facilitate underlying transactions, offering our clients enhanced capital efficiencies. By its nature, we'd order the deals we participate on within this segment. Our Reinsurance segment primarily focuses on a strategically selected property catastrophe book, optimized to reflect our view of risk.

Speaker 2

This allows us to manage our exposures and minimize volatility, especially as the industry continues to confront the realities of climate change and the rising incidence of secondary peril losses, both of which we have adjusted for in our modeling and risk selection process for a number of years. Furthermore, we leverage our leading position on approximately 80% of the deals we participate on, which allows us to secure differential rates, terms and conditions. As we look into 2024 and beyond across core lines, this remains the best market environment our seasoned team has seen in the last 20 years. With clear supply demand imbalances and no signs of new capital coming into the market in any meaningful way. These market dynamics have presented opportunities for us to accelerate growth, leveraging our scale, agility and deep relationships with brokers and clients.

Speaker 2

And as a lead underwriter in a verticalized market, this has created enhanced metrics and underwriting performance durability. Our underwriting strategy and structure is working exactly as intended, providing access to the best underwriters in the industry and ensuring a level of rigor and discipline around risk selection that is frankly unprecedented in our industry. Our in house underwriting team led by our Chief Underwriting Officer, Iain Houston, collaborates closely with FidelisNGU to actively shape our inwards and outwards portfolio, including engaging in the NGUs daily underwriting calls to directly participate in origination and risk selection as our portfolio is assembled. Our structure continues to deliver industry leading combined ratios. As I mentioned earlier, in 2023, we achieved an 82.1 percent combined ratio for the year, which represents an improvement of 9.8 points year over year.

Speaker 2

And we believe that the portfolio we have constructed is well positioned to continue delivering market leading combined ratios in the mid to high 80s through the cycle. In addition to our proven underwriting success, we continue to advance our operational and capital management capabilities. We maintain a strong, highly rated balance sheet with total capital of $3,000,000,000 We have released reserves every year since inception, demonstrating our consistent and robust approach to reserving. In addition, our focus is on short tail lines with carefully managed catastrophe exposure and no longer tail casualty business. This approach and our minimal exposure to social inflation risk reinforces our confidence that we can avoid meaningful reserve volatility moving forward.

Speaker 2

Further, we continue to strategically use reinsurance, including our 20% whole account quota share with Travelers that recently renewed for a 2nd year as a flexible and aligned source of capital. While our primary focus remains capitalizing on the attractive growth opportunities to deliver profitable returns, we will continue exploring ways to optimize our capital structure and create value for shareholders. Alan will share more information shortly on our strategic capital management priorities. Overall, our 4th quarter and full year performance reflects our scale, lead positioning, balance sheet strength and expert execution from our dedicated teams. Taken together, these competitive advantages position us to deliver sustainable long term profitable growth.

Speaker 2

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

Speaker 3

Thanks, Dan. And I'd also like to welcome everyone joining our Q4 earnings call. Additionally, I'd like to take a moment to wish Dan a very happy birthday. As Dan mentioned, we had a very strong 4th quarter with operating net income of $135,000,000 or $1.15 per diluted common share and an annualized operating return on average equity of 23.6%. For the year, we had operating net income of 399,000,000 dollars or $3.49 per diluted common share, which is an operating return on average equity of 18.8%.

Speaker 3

Our diluted book value per share at year end was $20.69 which represents growth of 27.4 percent from January 3, 2023, the date of the separation transactions. I will now discuss our Q4 of 2023 results and briefly touch on our full year results. Looking at our gross premiums written, we had strong top line growth of 32% in the quarter to $784,000,000 compared to the Q4 of 2022. The increase was broad based across all three segments. This was driven in large part by bespoke with growth of 59% with over $100,000,000 of new business, predominantly structured credit deals that came in at the end of the quarter, new business in the political risk book and some recurring deals.

Speaker 3

The Specialty segment grew by 14%, primarily driven by property D and F that benefited from the continued strong rating environment and new business. Our Reinsurance segment had immaterial activity in quarter 4 as is typical for that business. On a net premiums earned basis, we delivered an increase of 25% to $508,000,000 in the Q4 of 2023 consistent with our growth in gross premiums written. Our strong underwriting performance resulted in a combined ratio of 81.4% for the 4th quarter, which included a loss ratio of 37.3%. This loss ratio was comprised of attritional losses of 25.4%, catastrophe and large losses of 14.9% and favorable prior year development of 3%.

Speaker 3

The catastrophe and large losses for the Q4 were 76,000,000 dollars The most significant losses were the ViaSat-three satellite deployment failure as well as an increase in our estimate of the loss related to the Sudan conflict and other loss events in our property D and F line of business. We had net favorable prior year development of $15,000,000 for the quarter versus $4,000,000 in the prior year period of 2022. The favorable loss reserve development was primarily attributable to benign claims experience in our reinsurance and bespoke segments. Turning to expenses. Policy acquisition expenses from 3rd parties were 23.7 points of the combined ratio for the quarter compared to 29.7 points of the combined ratio in the prior year period.

Speaker 3

As a reminder, our policy acquisition expense varies over time depending on our business mix and the amount in terms of our outwards reinsurance purchases that can vary from year to year. Our FidelisNGU commissions were 15.3 points of the combined ratio for the quarter, of which 3.8 points related to profit commissions payable due to the strong underwriting results in the quarter. Our general and administrative expenses were 5.1 points of the combined ratio for the quarter. The expense includes additional variable compensation as a result of our strong financial performance. Turning now to investments.

Speaker 3

Net investment income increased to $39,000,000 for the Q4 of 2023 compared with $17,000,000 in the prior year period. In 2023, we invested $2,100,000,000 in fixed maturity available for sale securities with an average investment yield of 5.1%. At December 31, 2023, the average rating of fixed income maturities in our investment portfolio was A plus with an average duration of 2 years. While our investment portfolio remains conservatively positioned, we have increased our allocation to high quality, longer duration bonds. Turning to our full year 2023 results.

Speaker 3

The operating highlights include operating net income of $399,000,000 resulting in an operating return on average equity of 18.8%. Gross premiums written increased by 18.6% to $3,600,000,000 This growth was primarily driven by our specialty segment with the largest premium increase in our property D and F line of business of approximately $300,000,000 We had a combined ratio of 82.1% versus 91.9% in 2022, primarily driven by lower catastrophe and large losses in 2023. And finally, net investment income was $120,000,000 compared with $41,000,000 last year. Turning to our capital strategy, we remain committed to maintaining a strong balance sheet and attractive financial profile. As I mentioned earlier, our book value per diluted common share grew to $20.69 at December 31, 2023.

Speaker 3

We ended the year with $3,000,000,000 in total capital, including our debt and preferred shares, demonstrating the strength of our balance sheet. On an additional positive note, a few weeks ago, A. M. Best revised their outlook from negative to stable and affirmed our financial strength rating of A. Key factors cited in support of this revision included the performance of the management team, the strength of our relationship with the MGU, our continuing operating profitability and our robust risk adjusted capitalization.

Speaker 3

We remain focused on proactively managing and allocating capital to maintain our financial strength, drive profitable underwriting and create value for our shareholders. In 2024, our strategic capital management priorities include: 1st, allocating capital back into the business and deploying capital into attractive underwriting opportunities 2nd, constantly reassessing our Outward Reinsurance Purchasing Program. We use reinsurance as a flexible and aligned source of capital. We recently renewed for a 2nd year our 20% whole account quota share with travelers. Also, at January 1, we secured consistent year on year capacity in our non proportional purchases and saw some improvement in pricing terms and conditions.

Speaker 3

Furthermore, we recently issued 2 new tranches of our Herbie Re catastrophe bond for $150,000,000 to cover earthquake and named storm events in the U. S. Finally, we will return capital to shareholders through a combination of share buybacks and dividends. On December 21, 2023, we announced that our Board approved the adoption of a repurchase program of up to $50,000,000 of our common shares. Through February 28, 2024, we have repurchased 243,871 common shares at a weighted average share price of $12.08 for a total of approximately $3,000,000 As mentioned by Dan, yesterday we took another step in our commitment to building value for our shareholders with the announcement that our board has approved the implementation of a regular quarterly dividend of $0.10 per common share or approximately $50,000,000 per year.

Speaker 3

This equates to a dividend yield of approximately 3% of current market capitalization. Finally, I would like to discuss income tax. In the Q4 of 2023, we established a net deferred tax benefit of $90,000,000 as a result of the transition provisions specified in the Bermuda Corporate Income Tax Act of 2023. This tax asset will be utilized beginning on January 1, 2025, the date of implementation of the Bermuda corporate income tax. For 2024, we currently expect an effective group tax rate of 14%, but the outcome will depend on the jurisdictions in which the profits are ultimately earned.

Speaker 3

To conclude, I'm very pleased with our outstanding financial performance in the Q4 and for the year and with our prospects for 2024 and beyond. I will now turn it back to Dan for additional remarks.

Speaker 2

Thanks, Alan. As you have heard, we have had a great deal of success in 2023, capitalizing on opportunities across attractive lines, achieving strong rate increases and firmly cementing our position as a leading global specialty insurer. We are entering 2024 with momentum and expect sustainable mature hard market conditions to persist across our portfolio. We remain disciplined and nimble in our approach, opportunistically responding to changing market dynamics to deliver underwriting profitability and compelling risk adjusted returns through the cycle. Let me give you some additional detail on how we are viewing the year ahead.

Speaker 2

In Specialty, we believed we are well positioned with a high quality mature portfolio and lead positioning in lines of business including property direct and facultative, marine and aviation and aerospace. The attractive pricing we saw in 2023 has carried over into the start of 2024 and we are positioned to take advantage of opportunities in the market. Based on Q1 transactions to date, we expect growth in 2024 to be broadly in line with what we saw last year, which evidences a mature hard market. We continue to see attractive opportunities in these lines, though we expect to prioritize our growth in the property, direct and facultative line in 2024, where we leverage our substantial capacity and relationships, which allows us to see risks before peers, facilitating better pricing, terms and additions and risk selection. In bespoke, the risks we underwrite yield strong returns.

Speaker 2

However, the premiums written do not follow a regular predictable schedule like the specialty and treaty books. Deal flow on this book can be difficult to predict as we saw in the second half of twenty twenty three, but as of today, we are 2 thirds of the way through the Q1. And I would note the pipeline of deals is currently tracking with prior year with a good mix of structured credit and political risk opportunities. And finally, in reinsurance, we are seeing increased demand with clients looking to buy more limit, both in the U. S.

Speaker 2

And Europe. Through our portfolio optimization, we are able to take advantage of this without compromising our view of risk. We write approximately onethree of our reinsurance book at oneone. And in 2024, we saw strong oneone renewals with our reinsurance team seeing RPIs of 118%. In total, we wrote $276,000,000 of reinsurance business at Oneone.

Speaker 2

This compares to premiums of $230,000,000 in 2023 for the same period. This 20% increase in premiums year on year was driven by strong retention rates with our core quality clients, where we were able to continue to increase rates and achieve differentiated terms. Across our broader portfolio, we are successfully underwriting attractive risks, driving increased profitability and generating compelling returns, all while maintaining prudent capital levels and a strong balance sheet. We are committed to creating value by delivering operating ROAE of 13% to 15% through the cycle. Given where the market is for 2024, we expect to again deliver returns above this long term target in the 14% to 16% range.

Speaker 2

In closing, we are pleased with the progress we've made in 2023 and confident in the outlook for our business. We have the team, portfolio and balance sheet needed to drive continued above market returns and create meaningful value for our shareholders. With that, I'll turn it back to the operator.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Before we take your questions, I'd like to kindly ask everyone to please limit your questions to one primary question along with a single follow-up. With that, our first question comes from the line of Matt Carletti with JMP. Please go ahead.

Operator

Your first question comes from Meyer Shields with KBW. Please go ahead.

Speaker 4

Great. Thanks so much. And thank you for all the detail in terms of expectations for 2024. One question I'm getting is, should you give us a sense of the catastrophe load that's embedded in the loss ratios?

Speaker 2

Yes. Thanks, Maja. Great question. And I think we've explained previously, we step back in 2021. We didn't think the models were adequately reflecting climate change and the impact of inflation.

Speaker 2

So we formed our own view of risk. When we look at how that differs from our peer group, we think the loads that we're putting in are roughly about 160%, and that would depend on geography and peril. But if you think that's how we kind of think about it, it's about that sort of benchmark.

Speaker 4

Okay. Perfect. And then this is probably a little bit detailed, but I was wondering given the sort of history of rushing in when there are pricing opportunities, I was hoping you could talk about the exposure Fidelis has to Middle East

Speaker 2

Marine? To pardon me?

Speaker 4

I'm sorry, Marine.

Speaker 2

Sorry, Mike. Okay. Well, I think firstly, I'd start by saying we, as a business, have no concentration or exposure in the region. We have no known reported losses of materiality, but there is obviously an opportunity in political violence and war policies. So we think specifically about Marine War Bridge.

Speaker 2

So we have seen some opportunities, but not to the same degree as what we saw post Ukraine. So we're taking advantage of that. But I'd say we don't really have a concentration of exposure in the Middle East.

Speaker 4

Okay, fantastic. Thank you.

Operator

Your next question comes from Matt Carletti with JMP. Please go ahead.

Speaker 5

Thanks. Good morning. Hopefully you guys can hear me now.

Speaker 2

Good morning, Matt.

Speaker 5

Good morning. Happy birthday, Dan. I'm sure there's nothing you'd rather

Speaker 2

be doing than our question. Thanks, Matt.

Speaker 6

No, no. This is what

Speaker 2

I wanted to spoil my birthday.

Speaker 5

Look, you gave a lot of great color on expectations by segment for the year. I guess if I could just ask you a high level question of you guys have always been very agile in reacting to market conditions, recent history kind of pulling back on property and reinsurance, putting that capital to work through insurance means to get the same exposure. Is there anything like that taking place in the market that we should think of as kind of shifting exposures? Or do you expect at least at this juncture 2024 to kind of look a lot like 2023?

Speaker 2

I we've built a lead position across the three pillars of our business. I think if you break down the gross written premium, it's 62% specialty, 20% bespoke and 18% reinsurance. I would expect that to be very similar for 2024. We always evaluate new opportunities. And when they hit those risk adjusted returns, then we execute.

Speaker 2

But I think we see very positive movement in all lines of business. I would expect the portfolio to look very similar as to it in 'twenty three.

Speaker 5

Okay, great. And then just a second question, if I could, probably for Alan. I noticed the expense ratio, policy acquisition ratio in specialty was quite low this quarter. Is that just mix of business aligned being written in the quarter? Or is there anything to note there that we should think about going forward?

Speaker 2

Yes. Good question, Matt. And Dan, again, it really is, as you say, it's all about business mix and that line of business.

Speaker 3

Great. Thanks a lot.

Speaker 5

Thank you. Appreciate it.

Operator

Your next question comes from Andrew Anderson with Jefferies. Please go ahead.

Speaker 7

Hey, good morning. Maybe going back to the growth commentary and I think I heard you say within bespoke, tracking with the prior year for 2024. I guess I'm trying to think about 4Q is very strong and that is a seasonally higher quarter with perhaps a different business mix, but end of the year strong. So kind of why are we thinking about maybe flattish growth in 2024 for this segment?

Speaker 2

Yes. That's actually a great question. Dan again here. I mean, obviously, I'll remind everyone, bespoke is a really profitable line. And as you say, the deal flow is a lot less predictable than our other pillars, specialty and reinsurance, which have nominated renewal seasons throughout the year.

Speaker 2

So what we really wanted to do today is give you a bit more color around the dynamic within the quarter. So that gives you a better sense of direction because we know it's hard to model. So that's what we say we're tracking with Q1 in terms of momentum. We do have a very robust pipeline. Again, that's what we saw in the back end of 'twenty three, deals that have come back, some new business that hit those benchmarks, and we're able to execute on them.

Speaker 2

So we've got a very strong pipeline, but they've got to hit those risk adjusted returns. So that's why we're really looking to follow the similar pattern where the second half of the year will be heavier. But as we stand out, we're bang on line with where we want to be and where we were last year.

Speaker 7

Okay. Thank you. And then I guess on the other side of that, it sounds like the specialty opportunity is perhaps a lot better than where we were thinking it would be for 2024 and growth in that segment could be upwards of 30% plus. Kind of how did the environment change throughout the second half of the year? And does it sound like there's better opportunity within I guess broadly within specialty across all the sub segments?

Speaker 2

Yes. I think we see potential to expand existing lines, and that could be geographically as well. I think we're looking at other regions. Obviously, the BRIC economies are expanding, so that creates opportunity. But we're a top three market in those lines of business.

Speaker 2

So we see plenty of opportunity. We're seeing deals for peer groups to be able to structure and benefit from differential pricing in terms. So yes, again, just very positive movement for Specialty and there's 3 core lines. I would say, if you think about Specialty Marine, Aviation and Aerospace and then Property D and F, Property, Direct and Facultation is where we will focus most of the growth in 2024.

Speaker 8

Thank you.

Operator

Your next question comes from Lee Cooperman with Omega Family Office. Please go ahead.

Speaker 6

Thank you. Good morning and happy birthday, Dan. I have a few questions. One is on capital adequacy. I'm looking at your income statement, your balance sheet, it seems that we have more capital than we need.

Speaker 6

And I'm just curious, what is your view of your capital adequacy? And would you rather write more business in this environment or buyback your stock, which is more attractive use of your capital?

Speaker 2

Good morning, Liam, and thanks for the birthday message. We're in a strong position. We've had a great performance, and we've got a very strong balance sheet. But what I'll do is I'll pass over to Alan to let him talk a little bit further about capital management in 2024.

Speaker 3

Yes. Hi, good morning, everyone. Thanks, Dan and Lee. Yes, currently, as I said in my prepared remarks that our primary focus is investing back in the business with outstanding returns, deploying capital into underwriting opportunities and opportunistically taking advantage of some of the pricing dynamics. We believe that this deployment will deliver strong returns for our investors.

Speaker 3

As I mentioned, we also always look at our outwards reinsurance program when we look at our capital. There are opportunities there to look at whether we want to retain more risk or less risk given what we see in the market. But as you mentioned, right now share buybacks are certainly the best way to return value back to shareholders. We have the $50,000,000 plan that's out there that we put in place in December. We've utilized only $3,000,000 of it, but we do plan to fully utilize that plan going forward.

Speaker 3

Once that plan is utilized, we will certainly assess the share price at that point in time and decide whether we should implement a new share buyback program.

Speaker 6

Okay. 2nd question is a follow-up. We sell at a very attractive price relative to our competition. There's an unusual structure to discourage potential buyers from bidding for us. This was seen to me you've built a hell of a company selling at a ridiculously low multiple.

Speaker 6

And I'm just curious whether our relationship with MGU makes it highly unlikely that anybody would try to buy us.

Speaker 2

Yes. Thanks, Lee. It's Dan here. It's a great question. So obviously, when we look at the share price, we don't feel it's reflecting or aligned to our performance.

Speaker 2

We've got one of the market leading combined ratios for the year, just over 82%. I think what it shows to us is we need to spend more time with investors getting them more comfortable with the structure because it is the structure that has resulted in this great outperformance. Let's not be let's be clear about that when we're very proud of it. Our relationship with the MGU has worked exactly as it intended, and we have delivered outstanding results. So we have to be a little patient, but we're certainly dedicating more and more time to that investor engagement they get more comfortable with the structure.

Speaker 6

I'm not an insurance expert, but I'm just curious, when you take all the pushes and pulls, do you expect to earn more money in 2024 than you earn in 2023? I'm not asking you for specific forecast, but directionally, we expect to have improved results in 2024 versus the outstanding results in 2023.

Speaker 2

Yes. I think our long term ROE target throughout the market is through the cycle, this 13% to 15%. But I think at this particular moment, we can up that a little bit and we'd expect to earn a bit more. So we're going more in the range of 14% to 16%. But we are seeing positive movement as well, and we expect to grow.

Speaker 2

So we'd factor that in into those comments.

Speaker 6

Good luck and happy birthday once again. Thank you.

Speaker 2

Yes, really appreciate it. Thanks very much.

Operator

Your next question comes from Pablo Singzon with JPMorgan. Please go ahead.

Speaker 8

Hi, good morning. Dan, first of all, I hear you no signs of new capacity entering the market, but we've been hearing that insurance lines, property D and F, for example. Seems like price increases in 2024, there's a chance that they could be not of the same magnitude as in 2023. Do you think that's an actual

Speaker 3

Sorry, sorry. Sorry, that's a really bad line. We couldn't

Speaker 2

we can't really hear the question. It's breaking up.

Speaker 8

Is this better, Dan?

Speaker 2

Yes, that's much better. Thank you. Yes. Thanks.

Speaker 8

Okay. Yes. Sorry about that. I'll speak louder. So I was just saying, hear you on no signs of new capacity entering the market, but we've been hearing that in certain lines, property D and R for example, price increases in 2024 are unlikely to be of the same magnitude as in 2023.

Speaker 8

Do you think that's an accurate commentary about the market? And therefore, will most of your let's call it 30% plus specialty growth in 2024 come from exposure?

Speaker 2

No, no, no. We're still seeing positive rate movement in that line of business. Yes, we've had compounding increases over the last 4 or 5 years, and we are very much in a mature hard market. So we still see plenty of opportunity to grow with positive price movement year over year in 2024. We are a lead market.

Speaker 2

It's a verticalized market. So you have to factor that in that price makers get better terms than price takers. So we're seeing the deals for other people, restructuring them. A lot of them are private layers or private arrangements. So we get much better terms and conditions.

Speaker 2

And it's not all about premium. Terms, conditions, coverage, that's an important proportion of any RPI when we look at that and model it.

Speaker 8

Okay. And then for Alan, just on taxes. I guess this is a 2 for 1, but they're short. One was just hoping for more color in the 14% tax rate for 2024. I think you were running in the high single digits of 23.

Speaker 8

And then for this quarter specifically, it seems like the tax rate ex D days was lower than normal as well. Thank you.

Speaker 3

Yes. Thanks, Pablo. You picked up some of the some tax numbers here very appropriately. Yes, 2023, to answer that question first is, our profits for 2023 were mainly in jurisdictions with a lower tax rate. So, Bermuda, for example, rather than in the UK or Ireland where the tax rate is higher, hence, our decrease in our expected tax rate for 2023.

Speaker 3

For 2024, as I said in my prepared remarks, we're expecting a tax rate of approximately 14%. But again, that will depend greatly on where the profits arise. Again, we are diversified across jurisdictions as well as lines of business. Looking beyond that becomes a little more complicated. As you know, the Bermuda Corporate Tax Act was just enacted at the end of 2023.

Speaker 3

It's at a 15% baseline tax rate. However, there are many transition and other credits that would be provided against that. We know the transition adjustment, which we booked in the quarter for $90,000,000 However, all the other items that are going to play into that rate are not yet concluded upon by the Bermuda tax authorities. They're going to be rolled out through 2024 and we'll know more about those. So as we think about 2025, we think it will be broadly in line in terms of the tax rate with 2024.

Speaker 3

However, again, it's to be determined based on things that happen in the upcoming year.

Speaker 8

Okay. Thank you.

Operator

Your next question comes from Mike Ward with Citi. Please go ahead.

Speaker 9

Thanks guys. Good morning. I was just wondering if you could maybe expand on the structured credit product growth in the quarter And any update on the IP finance line in terms of risk or growth?

Speaker 2

Yes. Thanks, Mike. Dan here. I'll take those questions. So firstly, when we look at Q4, we wrote about $102,000,000 of new business and that was predominantly through the aircraft leasing, sort of the AFIC deal, which is contract frustration, then some structured credit and some mortgage.

Speaker 2

And structured credit really is regularly regulatory capital relief transactions with some of the major European banks on their asset backed portfolio. So if they get to the end of the year, they could be rolling up those portfolios and insurance can step in and kind of give them some regulatory capital relief. And that's the sort of product that we're looking at. So that's really traditionally why those deals happen towards the end of the year as institutions roll up the portfolio and looking to buy out some capital relief, solvency relief, regulatory capital, that sort of thing. And then moving on to IP, it's a really good question.

Speaker 2

I think what we can say, there's been no movement in the losses to our portfolio. It's a new line of business. And certainly, we've ensured a feedback loop from our claims data into the underwriting process. And we're not afraid to change our assumptions and change pricing accordingly. So that's just resulted in fewer deals sitting on a hurdle rate than originally planned.

Speaker 2

And we believe this is the right approach with any new line of business. And I'd just like to underline again, we don't have any exposure to Vesto unlike others in this space.

Speaker 9

Got it. That's helpful. And then maybe just kind of high level question. Just curious if you could discuss any business that you might have rejected from the MGU in the quarter? And then I guess after the split, like I'm curious if there's been business that maybe the MGU wanted, but you didn't, so they looked elsewhere.

Speaker 9

Just kind of trying to think about the relationship so far.

Speaker 2

Yes. I think that we have a very aligned approach and share a very similar view of risk. So fundamentally, the portfolio we're very pleased with. But yes, we've had discussions around certain mines. It could be a primary D and F where we don't really have appetite for attrition.

Speaker 2

We helped work with them on our construction portfolio where our Chief Underwriting Officer and myself have experience of that. So that was more kind of shaping risk. We're neither partier currently that interested in writing lines like casualty. So yes, there are deals occasionally. We discuss in more detail, and they may not be within our appetite.

Speaker 2

But I wouldn't disclose any more than that. Thank you.

Operator

Your next question comes from Meyer Shields with KBW. Please go ahead.

Speaker 4

Thanks. First, I feel bad for not wishing Dan happy birthday. But more importantly, with all the puts and takes on reinsurance, should the 2024 ratio of net to gross written premium go up or down compared to 2023, do you think?

Speaker 3

Yes, I'll take that. Meyer, thanks. It's Alan here. No, I mean, as I mentioned in my prepared remarks, a lot of reinsurance on our reinsurance portfolio has been purchased already. So we believe that our outreach program is pretty similar to how it was last year in terms of retention.

Speaker 3

We're pleased with how the program worked last year. And so as Dan mentioned, we wrote 1 third of our reinsurance book at Jan 1. Our outwards reinsurance program has been partially placed in our quota shares. A lot of those are in place. So we would expect generally the same retention in 2024 to 2023 broadly.

Speaker 3

Although, of course, we do have the renewals in Japan in April and then in the U. S. Market in middle of the year.

Speaker 5

Perfect. Thanks so much.

Operator

Your next question comes from Pablo Singzon with JPMorgan. Please go ahead. Ahead. Hello.

Speaker 8

Can you hear me?

Speaker 2

Yes. Hi. Hi, Pablo.

Speaker 8

Okay. Yes. Hi. So the first one, just for Alan, has the entire book renewed into the commission arrangement with Fidelis MGU at this point? In other words, is a 15% MGU expense ratio of the run rate that's in call for 24?

Speaker 3

Yes. Thanks, Pablo. That's a great question. Our strategy and structure was designed to work in the long term with the MGU. Again, it's a long term binder agreement and it's worked with some of the best underwriters in the industry.

Speaker 3

And it's worked as intended and we produced a fabulous 82.1% combined ratio for 2023. And we believe that the portfolio as a whole is well positioned going forward through the cycle to produce a combined ratio in the mid to high 80s through the cycle. We work closely and collaborate closely with the MGU on all aspects of our inwards and outwards portfolio. In 2023, we were we had outstanding underwriting performance and as a result the profit commission to the AMG was higher than in a normal year in in 13% to 15% ROE a year. So broadly speaking, yes, the fees to the MGU will be similar going forward.

Speaker 3

It is pretty much baked into our returns or is baked into our returns. It will be slightly less if we only meet have slightly lower returns, obviously. But I think it will be broadly in line with this year going forward.

Speaker 8

Okay. Thanks. And then second and last for Dan, I just wanted to confirm when you say growth in specialty will be broadly in line with 2023, we're talking about the 40% GPW growth this year, right? So to serve your expectation for 'twenty four? Just wanted to make sure that's clear.

Speaker 2

Yes. That's what we would be projecting to 2024. That's correct, Pavel.

Speaker 4

Okay. Thank you.

Operator

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

Speaker 2

Well, thank you, and thanks for joining today's call. Like to say we're very confident in our current position and excited about the prospects of 2024, and we look forward to sharing our continued progress with you in future earnings calls. It's a special day today not only because it's my birthday. And in closing, I would like to extend heartfelt thanks to all our colleagues and partners for their exceptional performance throughout the year, especially today on Employee Appreciation Day. It's important to acknowledge the hard work, dedication and unwavering commitment of the team at Firdaus Insurance Group.

Speaker 2

So I thank them all. So thanks, and have a great day.

Operator

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

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Earnings Conference Call
Fidelis Insurance Q4 2023
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