Fidelis Insurance - Q2 2023
August 23, 2023
Transcript
Operator (participant)
Ladies and gentlemen, good morning, and welcome to the Fidelis Insurance Holdings second quarter and first half 2023 earnings conference call. As a reminder, this call is being recorded for replay purposes. Following the conclusion of formal remarks, the management will host a question-and-answer session, and instructions will be given at that time. Participants are asked to limit themselves to one question and one follow-up during the Q&A session. With that, I'd like to turn the call over to Gillian Benson, Group Head of Reporting. Ms. Benson, please go ahead.
Gillian Benson (Group Head of Reporting)
Good morning, and thank you for joining us to discuss Fidelis Insurance Holdings Limited 2023 second quarter earnings results. With me today are Dan Burrows, our CEO; Allan Sinclair, our CFO; Jonathan Strickle, our Chief Actuarial Officer; and Ian Houston, our Chief Underwriting Officer. We will start with prepared comments by Dan and Allan, then we will take your questions. Before we begin, I'd like to remind everyone that certain statements in our press release and discussed on this call do constitute forward-looking statements under federal securities laws within the meaning of the Private Securities Litigation Reform Act of 1995. We intend our forward-looking statements to be subject to the safe harbor created thereby. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties.
These risks and uncertainties are described in our IPO perspective, dated June 28, filed with the SEC on June 30th. Although we believe that the expectations reflected in the forward-looking statements have a reasonable basis when made, we can give no assurance that these expectations will prove to be achieved. Consequently, actual results may differ materially from those expressed or implied. For more information, including on the risks and other factors that may affect future performance, investors should also review the periodic reports that are filed by us with the SEC from time to time. Management will also make references to non-GAAP measures of financial performance.
The reconciliations to GAAP for each non-GAAP financial measure can be found in our current report on Form 8-K, furnished to the SEC yesterday, which contains our earnings press release and is available on our investor relations website at investors.fidelisinsurance.com and on the SEC's website. With that, I'll turn it over to Dan.
Dan Burrows (Group CEO)
Thank you, Gillian. Good morning, everyone. Let me begin by saying that I am delighted to be speaking with you today on our first earnings call, post-IPO, and to be updating you on our view of the market, the progress we've been making against our growth strategy, and how that, again, has translated into robust financial and operational performance. We very much look forward to engaging with our analysts, our shareholders, and the broader investment community going forward. We are pleased to have this opportunity to discuss our performance at the half-year stage, which we believe further reinforces the strength of the Fidelis business model.
Our structure is designed to deliver alpha underwriting returns through our exclusive partnership with the Fidelis MGU, which provides us with access to one of the most renowned underwriting teams in the business, led by Richard Brindle, with a long track record of outperformance that translates into strong top and bottom line results for our business. We are strongly positioned as a leading specialty and bespoke insurer, underwriting risk into an attractive marketplace with a portfolio of 84% specialty and bespoke insurance. This is based on half-year net written premium numbers. This is delivering attractive results, as evidenced by our first half-year performance. Compared to prior year, gross written premiums for the first half of the year increased 27% to $2.2 billion. The strong top-line growth has been coupled with compelling bottom-line profitability.
Our combined ratio improved year-on-year from 89 to 80.6% for the half year, and our half-year annualized operating ROAE is 18.2%. Now, this was achieved against a backdrop of heightened loss activity for the industry, which, per a recent report, saw reported global insured losses from natural disasters in excess of $50 billion for the first half-year, which is more than 40% above the 21st century mean. The market continues to be dedicated with a clear supply-demand imbalance, and we expect these whole market conditions to have duration, due in part to no new startups or notable inflow of significant new capital into the market, unlike in previous hard market cycles.
These market dynamics have presented opportunities for Fidelis, and we have grown our business, leveraging our scale and targeting opportunities across our portfolio, maintaining significant lead status across all underwriting pillars. To recap on our underwriting strategy, our business focuses on three core pillars of underwriting: specialty insurance, bespoke, and reinsurance. Our specialty pillar is focused on traditional specialty business lines such as Aviation, energy, space, marine, and Property, Direct, and Facultative. Our bespoke pillar is focused primarily on highly tailored and specialized products, often purchased to facilitate underlying transactions and offer our clients enhanced capital efficiencies. This pillar includes policies covering credit and political risk, political violence and terrorism, and transactional liabilities. In reinsurance, we have an actively managed property catastrophe reinsurance book-...
optimized in line with our house view of risk and concentrated on core client relationships at targeted attachment points, with the aim of managing exposure and volatility. Leveraging our experience and lead position across these pillars, we take a nimble and thoughtful approach to underwriting and risk and capital allocation, which allows us to respond quickly to a consistently evolving marketplace. We have delivered a strong track record of performance, capturing compelling underwriting and combined ratios, while maintaining a strong balance sheet and financial position. We believe our combination of management expertise and access to top underwriting talent positions us well to create value, not only in the current hard market, but across market cycles, with the goal of driving a consistent and compelling balance of risk and reward for our shareholders.
Touching on our performance across the 3 pillars, in our specialty pillar, we delivered gross written premium growth of 76% for the quarter and 63% for the half year. The growth was driven by marine, aviation, and property direct and facultative, where we were able to take advantage of the dislocated market to secure significant new lines and participate on accounts with favorable terms. We achieved a renewal price index, which is our measure of year-on-year rate increases, for the half year of 128% across the specialty portfolio, we would expect to see further increases in this metric in the second half of the year as premium weighting shifts towards the Property D&F book, where considerable pricing momentum continues. Our bespoke pillar continues to be a key focus and an area of differentiation.
Driven by transactional activity, the contracts in this pillar tend to be more insulated against market cycles. However, we still saw evidence of pricing momentum with a half year renewal price index of 118%. The markets for our highly specialized products remain strong. There are high barriers to entry, and I would note that due to the timing and selection of contracts we underwrite, gross written premium bespoke can fluctuate in a single period, and from a seasonality perspective, it tends to be weighted towards the second half of the year. In our reinsurance pillar, as previously documented, we began optimizing our portfolio in late 2021 to reflect our proprietary view of risk and concerns over inadequate pricing and the capture of climate change and inflationary impacts.
We continue to refine our portfolio and believe we are well positioned to be opportunistic in our capital deployment, capturing improved rating while continuing to manage exposure and volatility. Half year renewal price index in the reinsurance pillar was 171%, reflecting the continuing market adjustment. Overall, we delivered another quarter of profitable growth, built on the excellent results we achieved in Q1. Our performance was driven by our scale, our lead positioning and relevance, execution from our dedicated teams, and the strength of our balance sheet. When taken all together, these competitive advantages enable us to manage our business for long-term profitable growth and create value for our shareholders. I'll now turn it over to Allan to walk through the financial results in more detail.
Allan Sinclair (Group CFO)
Thanks, Dan. I'd also like to welcome everyone to our first earnings call as a public company. I look forward to working with all of you as we execute on our strategy and communicate our progress to the investment community. Please note that while we began trading on the New York Stock Exchange on June 29th, the IPO and our primary capital raise of $100 million did not close until July 3rd. As such, the results I will be discussing are pre-IPO. The IPO will be reflected in our third quarter results. As Dan touched on, we had a strong second quarter performance, with net income of $84 million, equating to $0.76 per diluted common share. For the first six months of 2023, we had net income of $1.8 billion, or $16.39 per diluted common share.
As a reminder, in the first quarter, we recognized a net gain on distribution of Fidelis MGU of $1.6 billion. Excluding this one-time accounting gain, our net income for the first half of 2023 was $177 million. Regarding our return on equity metric, in the past, we've shared our operating ROE, which was calculated based on beginning of year shareholders' equity. We are now transitioning to an operating return on average equity, which better aligns with our peers' and investor expectations. For the second quarter of 2023, our operating return on average equity was 17.6% on an annualized basis, compared with 4% in the prior year period.
For the first half of 2023, our operating return on average equity was 18.2% on an annualized basis, compared with 4.8% on an annualized basis in the prior year period. Turning to our gross premiums written, we saw growth of 25% to $957 million in the quarter, and 27% to $2.2 billion for the first half of 2023. Looking at our gross premiums written by segment, the significant growth in our gross premiums written was primarily driven by our specialty segment, which grew 76% to $657 million in the quarter and 63% to $1.5 billion for the first half of 2023. The increases primarily relate to new business and improved pricing and terms and conditions.
The largest premium increases were in our Marine, Property D&F, and Aviation and Aerospace lines of business. In our bespoke segment, gross premiums written were $55 million and $206 million in the second quarter and half year of 2023, respectively, compared to $163 million and $298 million in the prior year periods. The movement was a result of the timing of new contracts and renewals. Gross premiums written in bespoke can fluctuate due to the timing and selection of the contracts we underwrite. In addition, and as Dan noted, from a seasonality perspective, we typically experience greater demand in the second half of the year, and therefore, we don't anticipate a change to full year premium.
In the reinsurance segment, gross premiums written remains fairly consistent at $245 million and $506 million in the quarter and half year, respectively, compared to $228 million and $520 million in the prior year periods. We 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 are predominantly a specialty and bespoke insurance business and have intentionally taken a cautious and opportunistic approach to deploying capital and reinsurance. We focus on top-tier cedants and risks that meet our required pricing hurdles.
When looking at net premiums on a consolidated basis, net premiums written increased by 35% to $615 million in a quarter, and increased by 36% to $1.3 billion for the half year of 2023. The increases were primarily driven by an increase in gross premiums written and a decision to retain more profitable business in this dislocated market. On a net premiums earned basis, our premium earned across all segments increased 27% to $429 million in the second quarter of 2023, and by 24% to $815 million for the half year of 2023. The growth was primarily driven by our decision to reallocate capital to our specialty lines of business from reinsurance during 2022, which earned through into the current year, particularly on Marine, Aviation and Aerospace, and Property D&F.
Our strong performance resulted in our combined ratio improving to 82% for the second quarter of 2023, from 90.5% in the prior year period, and to 80.6% for the half year, from 89% in the first half of 2022. This was primarily driven by a decrease in our loss ratio as a result of lower catastrophe and large losses for both the quarter and year-to-date periods, as well as lower attritional losses compared to the first half of 2022. When looking at our catastrophe and large losses for both the quarter and the half year, they were $64 million, which included losses related to the Sudan conflict, severe convective storms in the U.S., and from Cyclone Gabrielle in New Zealand. These events impacted our Aviation and Aerospace, Property D&F, and Property reinsurance lines of business.
This compares to $80 million and $144 million of catastrophe and large losses in the 2Q and H1 of 2022, which related primarily to the Ukraine conflict, European storms, and Australian floods. Moving on to our prior year reserve development, we had net favorable prior year development of $2.4 million and $4.5 million for the Q and H1 of 2023. This compares to net favorable development of $10.9 million and $15.5 million in the prior year periods. I'd like to take a moment here to touch briefly on our exposure to Russia's ongoing invasion of Ukraine, which has impacted multiple lines of business, including marine, aviation, political risk, trade credit, and war political violence.
Our reserve for losses and loss adjustment expenses, net of reinsurance, was $148 million at June 30th, 2023, compared to $146 million at March 31st, 2023. We believe we are well reserved based on our assessment of the current environment. Moving on to expenses. Including all our segments, policy acquisition expenses from third parties increased to $122 million or 28.5 points of the combined ratio for the quarter, from $83 million or 24.6 points of the combined ratio in the prior year period. For the first half of 2023, policy acquisition expenses from third parties increased to $227 million or 27.9 points of the combined ratio, from $151 million or 22.9 points of the combined ratio.
The increase in our policy acquisition expense ratio reflects a change in business mix, primarily driven by the growth of our specialty segment. Our Fidelis MGU commissions were $53 million or 12.3 points of the combined ratio for the quarter, and $77 million or 9.4 points of the combined ratio for the first half of 2023. The MGU commission relates to ceding, portfolio management, and property commissions agreed as part of the framework agreement with Fidelis MGU, effective from January first, 2023. Our general and administrative expenses were $19 million, or 4.3 points of the combined ratio for the quarter, a decrease from $42 million, or 12.4 points of the combined ratio in the prior year period.
For the first half of the year, general and administrative expenses were $35 million, or 4.3 points of the combined ratio, a decrease from $77 million, or 11.7 points of the combined ratio. The decreases were primarily related to the reduced headcount following the consummation of the separation transactions. The combined Fidelis MGU commissions and general and administrative expense ratios are in line with our expectations as set out in the noted framework agreement and our operating model. Turning now to investments. Our strong results reflect net investment income of $27 million for the second quarter of 2023, compared with $7 million in the prior year period. For the first half of 2023, our net investment income was $48 million, compared with $13 million in the first half of 2022.
These increases were primarily due to increases in interest rates during 2022 and 2023, where the short duration nature of our portfolio means that we are reinvesting at higher rates. During the half year of 2023, we invested $1.3 billion in fixed maturity available-for-sale securities with an average investment yield of 5%. We remain conservatively positioned with 98.4% of our investment portfolio held in fixed maturity and short-term securities, with an average duration of 1.7 years at June 30, 2023. This asset strategy approximately matches our liability duration of 2 years and allows us to prioritize taking risk on the underwriting side of our balance sheet. Turning to our balance sheet and financial condition.
Our book value per diluted common share was $17.86 at June 30th, 2023, an increase of 10% from the adjusted book value per diluted common share following the separation transaction, which was completed on January 3rd, 2023. The increase was driven by net income and net unrealized gains reported in other comprehensive income. As of June 30, our common shares outstanding were 110,771,897, and on July 3rd, reflecting our primary capital raise in our IPO, our common shares outstanding were 117,914,754. For both periods, we had 960,870 unvested restricted share units.
Overall, we are well capitalized against our rating agency and regulatory requirements and are well positioned to continue investing and managing our capital with the goal of generating strong return on average equity for our investors. Given the current environment, our primary focus is on investing in the business and taking advantage of some of the pricing dynamics we are seeing in the hard market. This is exemplified by our raising of an additional $100 million in primary capital during the IPO. Longer term, our goal for our capital returns program is to balance ordinary payouts from operating net income and releases of excess capital with the need to take a prudent and efficient approach to capital sufficiency. To conclude, I'm very pleased with our financial performance in the second quarter and through the first half of the year.
I will now turn it back to Dan for additional remarks on our outlook for the market.
Dan Burrows (Group CEO)
Thanks, Allan. To echo these points, I'm very pleased with our positive momentum and results for the quarter and overall for the first half year of 2023. We have delivered an annualized ROAE for shareholders of 18.2%, and we are confident in our ability to deliver a long-term target ROE of 13%-15%, as consistent with our target communicated at IPO. Demand remains strong, and we continue to see opportunities amidst the challenging risk environment. We believe our exclusive access to Richard Brindle and the world-class underwriting team at the MGU, coupled with our deep risk management and capital application expertise, position us well for continued strong performance. Our agile and focused teams are tirelessly working to create value for our clients and shareholders while prudently pursuing the opportunities presented by the hard markets.
As we progress into the second half of the year, we are in a strong financial position and will take a balanced, prudent approach in deploying capital. We remain well positioned to benefit from the prevailing hard market conditions and have a strong pipeline of opportunity across our specialty and bespoke pillars. In specialty, we expect our Property D&F portfolio will continue to offer attractive opportunities to deploy capital, given the market constraints and ability to achieve differentiated pricing in terms and conditions. As a result, we anticipate that our gross premiums written will continue to increase in the third quarter of 2023 compared to the prior year quarter.
Going forward, we will remain disciplined against our long-term strategic priorities, which are as follows: firstly, to continue to be nimble and proactively manage our portfolio to drive growth with a compelling balance of risk and reward across our three underwriting pillars. Secondly, to focus on underwriting profitability through all market cycles and maintain diversified exposure in our business lines. Thirdly, prudently and proactively manage capital to generate superior risk-adjusted returns. Fourth, and finally, continue to operate from a position of financial strength that positions us as a provider of choice for policyholders and allows us to take advantage of large or sudden market pricing dislocations. Our ability to deliver in line with our long-term strategy is evidenced in our half-year results. Our structure has enabled us to leverage our expertise and take advantage of marketplace dynamics.
We are underwriting attractive business, we are driving increased profitability, we are generating compelling returns and growing our earnings, all while maintaining prudent capital levels and a strong balance sheet. Before handing over to Q&A, I'd also like to take a moment to touch on the recent wildfires in Hawaii. Our thoughts go out to the families and communities affected by this devastating tragedy. At this time, we're continuing to monitor our exposures closely, and we'll provide updates as appropriate. I'll turn it to the operator for your questions.
Operator (participant)
Thank you. Before we take your questions, I'd like to remind everyone to please limit yourself to one question and one follow-up. With that, our first question comes from Mike Carlin from JMP. Please go ahead.
Mike Carlin (Analyst)
Hey, thanks. Good morning. my, my first question, I was hoping-
Dan Burrows (Group CEO)
Good morning.
Mike Carlin (Analyst)
Hey, good morning. First question, I was hoping you could give us a little color on kind of how the property market has developed year to date. Specifically, you know, I'm interested in... You guys have done a good job of kind of staying away from attritional losses very, very purposely. Has anything changed in that kind of lower retention, more attritional part of the market as losses have continued to come through, that might make that more attractive for you going forward? Or do you still feel that it, it's just not the risk reward that you're looking for?
Dan Burrows (Group CEO)
Yeah, I think the, the short answer, Mike, is I, I, you know, we don't see having now moved out of that attritional space, moving back into it under any circumstances. We're very comfortable about how we've positioned the portfolio. As you know, and as we've said many times, we've had a lot of concerns around the impact of climate change, claims and social inflation, and how that's captured in the model. Yeah, I think we've been able to move up and out of that attrition. We've optimized the portfolio, concentrating on core clients who outperform the market. I don't think we're gonna deviate from that strategy regardless of pricing.
Mike Carlin (Analyst)
Okay, great. Then just one quick numbers question, probably for Allan. You talked a bit about NII and, you know, the $27 million in the quarter. Sounds like that's pretty clean, just investing at higher rates. Is there anything in that number that is one-time in nature that we should, you know, take into consideration as we, you know, think about how it builds going forward?
Allan Sinclair (Group CFO)
Yeah. Thanks, Mike. No, there's nothing. It's pretty clean. Again, it's really that we've... As you recall, we kept our powder dry last year. We had $1 billion of cash at year-end. We've been investing that since about February this year. We've invested $1.3 billion with reinvestment rates around 5%. There's nothing unusual in there, and we're keeping to our duration targets. Again, that we're getting 5% in short duration portfolio, so we're comfortable with it, and then there's no. We've optimized how we look at our investment strategy, and we don't have any plans to change in the near future.
Mike Carlin (Analyst)
Great. Thank you for the color, and congrats on the quarter.
Dan Burrows (Group CEO)
Thank you.
Allan Sinclair (Group CFO)
Thanks, Mike.
Operator (participant)
Your next question comes from Tracy Benguigui from Barclays. Please go ahead.
Tracy Benguigui (Director and Head of Insurance Equity Research)
Thank you. You iterated your 13%-15% ROE target, though now you're on a ROAE basis. You're well north of that in the first half of the year. Is your 13%-15% target long term through cycles, or do you view your earnings performance in the first half of the year more of an anomaly?
Allan Sinclair (Group CFO)
Yeah, Tracy, thanks for that. As we stated in the roadshow and during the IPO process, we do view the 13%-15% target as a long-term return that we can achieve throughout the market. We believe with our conservative investment strategy, but along with, you know, the underwriting strategy we have and our outwards reinsurance purchasing, that we can manage through the cycle and achieve those returns with the best-in-class underwriting team at the Fidelis MGU. We view that as, as a long-term target throughout the cycle, especially now that we've pivoted away from the some of the reinsurance segment business that we've had previously had and moved more into the specialty and bespoke areas. We believe that target is achievable going forward.
Tracy Benguigui (Director and Head of Insurance Equity Research)
Okay, you talked about reinsurance. To be sure, it feels like your reinsurance premium growth was all rate driven, not exposure driven. You mentioned that reinsurance optimization efforts reflect your proprietary view of risk, and you have concerns about inadequate pricing, climate change, and inflation. I mean, you are growing Property D&F, so you're exposed to similar risks like climate change. Why is the primary side a better spot to be?
Dan Burrows (Group CEO)
Yeah, I think. Great question, Tracy. I think when we look, there certainly have been improvement on the reinsurance side. When we think about that RPI of 171 this year. That obviously denotes that there's been some marked improvement year on year. What we've seen in the Property D&F market is compound increases since 2019. It's probably the hardest market most of us have ever seen in our careers. The ability to take more of a pinprick approach to limit coverage, peril specific, to position yourself in a program, excess of certain secondary perils, for instance, is much more available. It's just being able to leverage the scale, our line size, and our leadership. We just think we get more bang for the buck in the Property D&F.
It's also easier to reinsure. There's a bigger universe of capital that, that will support that product line, as opposed to retrocession, which sits alongside the reinsurance treaty book.
Tracy Benguigui (Director and Head of Insurance Equity Research)
Okay. Thank you.
Operator (participant)
Your next question comes from Meyer Shields from KBW. Please go ahead.
Meyer Shields (Managing Director)
Thanks. Good morning. First question, with regard to the Russia-Ukraine reserves, was it just a $2 million change, or were there any paid losses in the quarter?
Dan Burrows (Group CEO)
Yeah, I think, you know, there's nothing in the first kind of half of this year that's led us to change how we view our exposure to Russia, Ukraine. What I'll do is ask Jonathan Strickle, who's our Chief Actuary at the insurance group, and he was the former head of reserving at Fidelis when the conflict started. He'll give you a bit more detail on our approach and methodology regarding the reserves and the losses during the conflict.
Jonathan Strickle (Group Chief Actuarial Officer)
Yeah. As you'll recall, our main exposure here is around the aviation portfolio. About a year ago, we established a framework for reserving for that. It gave consideration to all the various outcomes that could come as a result of this. You might recall there's two different policies at play, two different perils, and a lot of uncertainty around the amount of aircraft that could ultimately be subject to a claim. There's no real change on that over the year. What we do do is update it as new information becomes available. We tweak the assumptions that feed the framework. Over this quarter, there's been no material change to that at all. Any movement in the reserve is mostly due to FX, and its earnings coming through on some of the other much smaller exposures.
Meyer Shields (Managing Director)
Okay, fantastic. Switching gears, if I can. You talked about the portfolio duration, obviously being short. I understand that it's a little shorter than the liability duration. I'm wondering whether that's intentional, and/or subject to change?
Allan Sinclair (Group CFO)
Yeah, so what happened last year, Meyer, if you recall from our earlier discussions during the roadshow, was that during mid part of 2022, given the rapid increase in interest rates and the Fed's movements in terms of fighting inflation, we decided that any maturities in our portfolio in the latter half of the year, we would not reinvest. We wanted to sit it on the sidelines, so we parked it in cash. As a result, our duration during the course of 2022, fell from our target of around 2 to, like, 1.2 at the end of the year. We got more comfortable with where the Fed has had it and with, you know, the investment, reinvestment rates in the early part of this year.
We started reinvesting the cash that we had sat on the sidelines, along with new maturities during this year. As I mentioned in my opening remarks, we've invested already $1.3 billion in 2023 through June, getting a 5% yield. We are now ramping up back to that duration. Again, it was a conscious decision in 2022 to shorten it, given everything that was going on, but we do plan to work up to our liability duration of 2 as we progress through 2023. We do it on a measured basis. We didn't go all in right away, and we do expect that in the near term, we will be back up to that target duration of 2.
Meyer Shields (Managing Director)
Okay, fantastic. Thank you so much.
Allan Sinclair (Group CFO)
Thanks, Meyer.
Operator (participant)
Your next question comes from Michael Zaremski from BMO. Please go ahead.
Michael Zaremski (Managing Director and Senior Equity Research Analyst)
Hey, great, good morning. You know, I think you might have touched on this a bit, but on the pricing environment, I, you know, I, I, you know, it's, it's clear that you expect kind of hard market conditions to persist, but curious if you could put any kind of numbers on kind of the sequential change in pricing. I, I noticed in, in your release, there's a measure of RPI, which Fidelis, it says Fidelis uses to assess an approximate index of rate increases on a particular set of contracts. Wasn't sure if that's something you, you could share, how the RPI trended?
Allan Sinclair (Group CFO)
Yeah, I think we can, we can talk about what we, as we mentioned earlier, what we've seen half-year by pillar. We saw in our, you know, our bespoke pillar that we had a rate increase of 118%. Normally, that pillar would be insulated against market cycle, but by its nature, it's unique tailored product. We do have terror, political risk, and obviously, that's seen dislocation through the conflict. Specialty, we've seen an RPI at half-year of 128%. You know, if you think about specialty, certainly marine aviation and the property direct and facultative books have seen price increases compound year on year for the last 4 or 5 years. Then reinsurance, as I said, was 171.
What I would say, we see no, no evidence of the market softening. The insurance group, we attend the daily underwriting calls with the underwriting team at the MGU.
which gives us real-time insight into the rating environment across all our lines of business. We see those compound increases daily as the supply-demand imbalance continues. We're not going to predict the future, but at the moment, we still see, you know, material increases. We still see a supply-demand imbalance. We still see the secular issues that we've talked about for the last 3 or 4 years: climate change, deterioration in casualty, cost and social inflation, and geopolitical conflict as, as drivers of a hard market. We don't think anything's changed. Of course, importantly, there's no new capital of any significant center in the market. There have been no startups, which is, you know, very, very, unlike previous hard market cycles.
We only think capital will return with any scale once the industry can produce stable and consistent returns. Hopefully that gives you a little bit more color. We've seen good rate increases. We have a strong pipeline across all those pillars, but we don't see, you know, that, that imbalance between supply and demand changing at the moment.
Michael Zaremski (Managing Director and Senior Equity Research Analyst)
Got it. Okay. I'll, I'll dig in more on the RPI numbers and try to compare them to last quarter's. My, my follow-up's on, the, the Bespoke segment, excellent results. You know, there were, there was, again, a decent amount of, of reserve releases. Is, is it worth, you know, any color on those releases? And it says in... you know, the color says just lower loss experience than our assumptions. You know, is this, is this a segment where we're going to just have volatility in releases, or, you know, or do you, is this a segment where you just try to build in more cushion or just any color on, on that would be great? Thanks.
Allan Sinclair (Group CFO)
Well, I'll, I'll ask our Chief Actuary to, to take that one. Johnny?
Jonathan Strickle (Group Chief Actuarial Officer)
Yeah. PYD is one where it's easier to explain if it's adverse, because there's a couple of things to call out, and we can name them. The case on the Bespoke pillar, where it's favorable this year, really is just an absence of claims coming through. We've got more idea in our set side than I've released through the year, and nothing's really come against it. In terms of volatility and how to think about PYD in that pillar going forward, there's definitely a need to put some caution into the initial loss estimates for classes on the Bespoke pillar, and that's because they're one-off classes that one-off contracts that don't tend to have a good comparison. They require a specific pricing model. They just need more assumptions to get to that starting point.
I think if you build up something in a more complex way, by nature, you kind of end up adding a little margin on each little bit. We've seen that so far through Fidelis' history. I mean, Bespoke have consistent, favorable PYD for a number of years. We don't make any allowance for it in our numbers or, or in any forecasts we have internally. We just continue to monitor the products until we feel comfortable enough to start lowering those initial assumptions. I don't see that in, in the near-term future, because it's constantly evolving with the type of products we look at there.
Michael Zaremski (Managing Director and Senior Equity Research Analyst)
Thank you.
Operator (participant)
Your next question comes from Yaron Kinar from Jefferies. Please go ahead.
Yaron Kinar (Analyst)
Thank you. Good morning, everybody. My first question probably ties back to Tracy's question earlier, with ROEs, and, and I'm actually looking more at the combined ratio, which was running at just over 80% for the first half of the year. I think that compares to mid-80s or higher that you were expecting over the long run. I guess, again, similar to, to Tracy's question, is, is this a really driven by a hard market, and you'd expect that that ratio go up over time, or are there other elements that are, that are allowing you to achieve that 80, or, or a much better than expected or long-term expectation, combined ratio?
Allan Sinclair (Group CFO)
Yeah, it's Allan. Thanks, Yaron, for the question. It's, it's a great point. As you know, we focus on combined ratio. That is our key metric, along with ROE, when we look at our performance internally. You're right on our, our targets for combined ratio and how that flows through to ROE. Obviously, we've had a great quarter and a great half year. We'd love to have this combined ratio going forward. I think anyone would. I think that, you know, as we mentioned in the prepared remarks and, and in our filings, is that the absence of large losses and cats during 2023 has helped our loss ratio. Attritional losses are also running better than expected.
We've moved up in programs, especially in the reinsurance pillar, and I think that has helped us, helped our attritional loss ratio, as well as our cats. In our specialty pillar, we, again, as Dan mentioned, we can pinprick more the, the risks we like, and geographically, as well as the types of risks we're involved. We would never, you know, suggest that the current or half year combined ratio is something that is achievable in the long run. We do believe that the, the percentages you gave earlier are probably achievable throughout the cycle, though. A lot of it is rate driven as well. It's not just the losses, it is in terms of the earn, the premium. Our, you know, the supply-demand imbalance is still out there, so we're still getting great rate.
We think through the cycle, certainly the percentages on the combined ratio that you mentioned are achievable, and right now we are certainly riding-- have great tailwinds, and our combined ratio is even better than those great combined ratios.
Dan Burrows (Group CEO)
Yeah, I think, you know, working with the MGU that have, you know, a track record on our performance and with our capital management throughout the cycle, we're well, well-positioned to produce, you know.
... peer leading performance on combined ratio and returns. You know, I think that, that's our job here, is to manage the capital through the cycle. We're certainly having a very strong underwriting team to work with. Best in market is really helping that process.
Yaron Kinar (Analyst)
Thanks. That's a very comprehensive answer. Then maybe shifting a little bit in to another area. We saw some headlines not regarding Fidelis and the industry with Vesttoo and letters of credit and whatnot. Do you have any exposure, whether to Vesttoo directly or to collateralized reinsurers with LOCs, maybe specifically in the bespoke book?
Dan Burrows (Group CEO)
We did not have a trading relationship with Vesttoo, so we have no direct exposure. We have, over the, over our history, bought collateralized products with tried and trusted partners. We've been through loss scenarios with them, so we feel confident. We're always evolving how we analyze, review, check to make sure the process is robust. To answer your question, we have no exposure to Vesttoo.
Yaron Kinar (Analyst)
Okay. What about letters of credit? Do you have exposure to collateralized reinsurers with those letters of credit?
Allan Sinclair (Group CFO)
It's Allan. Thanks, Yaron. Generally, we stick to highly rated reinsurers, and we, we go through a very thorough security committee process with each and every purchase of reinsurance. There are the odd contracts, though, where we do have collateral, often in trusts. You think of our Herbie Re bonds. There are a few letters of credit, but very immaterial to our overall portfolio. Again, we focus on working with partners that have high ratings, are in the market. We work with them long term, so very minimal exposure to any letters of credit.
Yaron Kinar (Analyst)
Perfect. Thank you very much.
Operator (participant)
Your next question comes from Mike Ward from Citi. Please go ahead.
Mike Ward (Analyst)
Thanks, guys. Good morning. In the press release, Mr. Brindle mentioned new opportunities and products and distribution, arising from the new structure. Just wondering if you could maybe expand on that a bit?
Ian Houston (Group and UK Chief Underwriting Officer)
Yeah, I can do that, Mike. It's Ian Houston here. Yeah, we, we have a, we have a very solid pipeline of new opportunities. We're, we're just actually getting to the stage of bringing a new buy or sell on board in September, in the aviation segment. That's just one that's, that's happening at the moment, and we, and we have a pipeline of, of several others. We're always interested in looking at evolving market conditions and, and seeing where we can fit in, and actively grow the work with the MGU, actively growing and diversifying the Fidelis portfolio, and, and we'll continue to do that.
Dan Burrows (Group CEO)
Yeah, I think Fidelis has obviously built a reputation for innovation through the bespoke pillar. You know, we, we have a number of contract frustration ventures that we hope to bind during the second half of the year. We're also seeing a resurgence of interest in political risk, with a strong deal flow there. I think, you know, with our bespoke pillar especially, we're very much on track to meet the goals for the year. We had a, a couple of contracts that moved from Q2, and we'll hopefully bind in Q3, with some substantial premium. Very much on track in terms of innovation, pipeline, both for bespoke and specialty.
Mike Ward (Analyst)
Awesome. Thanks, guys. Then maybe, a longer-term question. Just curious if you could elaborate on the plans for potential capital return.
Allan Sinclair (Group CFO)
Yeah, obviously, we just raised capital as part of the IPO, so we raised $100 million of capital, and we are. You know, we're deploying capital where we think we can get best returns for our insurers or for our stakeholders, including our investors. So right now, we believe with, given the dislocation in the market, that deploying it in the insurance and reinsurance space is the best thing to do. We will obviously, as we move forward into our planning process for 2024, we are going to consider our capital plans in terms of dividend strategy and, you know, how much capital we're gonna deploy in underwriting, how we're gonna look at our risk dollars that we allocate to investments.
We, we believe we are well capitalized against our rating agency and regulatory requirements, and we, we see no constraints on that pers- from that perspective. In the longer term, our goal is to implement a, a dividend strategy, which will be based on ordinary payments from operating income, and then we will, obviously release excess capital as needed and when we see that the, the time is appropriate in the form of special dividends and buyback, share buybacks. While it is still early, we are-- you know, as I mentioned, we're in the process of looking at 2024 and beyond. We will work with our Fidelis MGU to see where we can deploy capital and where we think it's best, in, in the underwriting cycle.
We'll communicate with you transparently when we start implementing a potential dividend strategy or any other capital returns to shareholders.
Mike Ward (Analyst)
Great. Thank you, guys.
Operator (participant)
Your next question comes from Brian Meredith from UBS. Please go ahead.
Brian Meredith (Managing Director and Senior Equity Research Analyst)
Yeah, thanks. Two quick questions here for you. The first one: Any exposure to the Hawaiian wildfires?
Dan Burrows (Group CEO)
Yeah, thanks. The, the, as, as we mentioned earlier, the assessment's ongoing, and we're continuing to closely monitor our exposure. At the moment, like most people, we're trying to get our arms around the situation, so we're not ready to provide a figure at this time. We will provide an update, when we've got more data at an appropriate time.
Brian Meredith (Managing Director and Senior Equity Research Analyst)
Great, thanks. Second question, I'm just curious, what impact, if any, would some of the proposed changes to the Bermuda tax rate have on y'all's tax rate?
Allan Sinclair (Group CFO)
Yeah, I'll tackle that one, Brian. Thank you. Obviously, we, we're a Bermuda company. We're incorporated here. It's, it's too early to comment really on the tax proposal that Bermuda has. We continue to engage with our trade group, the Association of Bermuda Insurers and Reinsurers, as well as, as well as with the Bermuda government. We are working with our advisors to, to look at the implications of it, and we'll continue to work with them through the proposal process. Obviously, we've worked with our advisors historically as well, because Pillar Two came out in the UK and Europe a couple of years ago. We've been in the background. We have been working on our tax strategy. Fidelis is pleased to be in Bermuda. We have a productive work environment here.
The regulatory capital and human resource pool here is very strong in Bermuda. We'll continue to evaluate the tax proposal as it develops. We'll communicate with you on any plans or changes in the future. We'll certainly embed it in our planning process for 2024, 2025 and beyond as we go through. It's really, it's too early to comment on any impacts at this point in time.
Brian Meredith (Managing Director and Senior Equity Research Analyst)
Makes sense. Thank you.
Operator (participant)
Your next question comes from Pablo Singzon from JP Morgan. Please go ahead.
Pablo Singzon (VP in Equity Research)
Hi, good morning. I, I just wanted to follow up on the combined ratio discussion. You know, MGU fees were higher than we had thought this quarter, but I think they're still below their run rate levels, right? So if we start with this quarter as a base, I think they were about 9% of net written premiums. W- where do you think that ratio ultimately settles, and what offsets and other components of the combined ratio do you see as MGU fees fully ramp up?
Allan Sinclair (Group CFO)
Yeah, I'll take that one, Pablo. Thanks for the question. As you know, we look at combined ratio overall. We have a best-in-class underwriting platform with the Fidelis MGU and best-in-class underwriters there. We believe our first half performance is a clear demonstration of our motto with them, and our alignment of interest in the performance of the MGU reflects that. The MGU expenses of $77 million in the first half are within the range we expected, and the agreement is operating as intended. We may see some variation in fees from quarter to quarter, given the fee structure. A reminder on how the fee structure works, there's two primary components. There's a ceding commission, and then there's a property commission, and we believe the way they operate, they reflect the alignment of interest between the two parties.
We had a very good first half underwriting result, 80% combined ratio. As a result, there is a property commission payable to the MGU, hence why the percentage may be a little higher than you would see in a quarter when there are no property commissions. Ultimately, we believe our combined ratio represents the best measure of performance on this front. Our performance here is among the best in the industry. We're comfortable with the fee structure. We believe it align interests. In terms of run rate, it can fluctuate from quarter to quarter, and we'll certainly be transparent in the calculations on both how the ceding commission works and how the property commission works going forward.
Pablo Singzon (VP in Equity Research)
Okay, thanks. Then, Dan, I just wanted to follow up on your Hawaii comments. You know, I'm not looking for specific numbers, and I know Hawaii is not a large insurance market, but I think it is viewed by some insurers as a diversifier to their global property portfolio, partly because of a scenic exposure to hurricane risk. Is there anything unique about your exposure there? You know, for instance, are your attachment points lower than other geographies? Are you more exposed to the local companies? You know, as you think about your net limits, are you-
Dan Burrows (Group CEO)
Hello?
Pablo Singzon (VP in Equity Research)
Yeah. As you think about net limits, are you more exposed to commercial property or homeowners in Hawaii? Thanks.
Dan Burrows (Group CEO)
Yeah, no, as I said, it's just too early. We're still waiting for data points to come through. We do, we do write reinsurance and property direct, so property direct will be more commercial-based. All I can say is we do buy significant reinsurance to protect that, that particular territory, but, you know, we're still working through the loss numbers, so I don't think it's appropriate to comment any further.
Pablo Singzon (VP in Equity Research)
Okay, thank you.
Operator (participant)
Your next question comes from Meyer Shields from KBW. Please go ahead.
Meyer Shields (Managing Director)
Thanks. I just wanted to follow up quickly to see if there's any equivalent to the RPI on the loss side or whether you can comment on generally what loss trends look like in the specialty segment for you?
Jonathan Strickle (Group Chief Actuarial Officer)
Yeah, so I'll take that. We can... It's sort of, we do consider the loss trend when we're looking at the RPI measure as well. When we build it into the planning process, we'll consider additional trends that we want to put on top. For example, if we think the inflation environment's changed materially from the point of pricing, we'll factor that in as well. So what that means is you can't let the RPI trend go straight down to the loss rate trend. You do have to make other allowances, but we'll take those into consideration for the 2024 planning process, which we're going through now. Okay, fantastic. Thank you.
Operator (participant)
Your next question comes from Tracy Benguigui from Barclays. Please go ahead.
Tracy Benguigui (Director and Head of Insurance Equity Research)
Thank you. Just real quick, going back to the 13%-15% ROAE target. I'm going to take a shot at this. Are you comfortable sharing a near-term ROAE target, given where we are in the cycle?
Allan Sinclair (Group CFO)
Yeah, again, great question, Tracy. Obviously, we're in a hard market. It's, you know, hardest market we've seen in many years. As we head into Q3, which is, you know, is a heavy cat season, even though we don't write a lot of reinsurance anymore, it's really difficult to say the short, short-term target. We're, we're really focused on through the cycle. Hard market, soft market, whatever, we believe that our target of 13%-15%, as we said during the IPO, is achievable. We're not real comfortable in, in updating or giving guidance on the short term.
Tracy Benguigui (Director and Head of Insurance Equity Research)
Got it. Just really quick back to the discussion on the new Bermuda tax rate proposal. I thought I saw in one of your SEC disclosures that you had pre-existing exemption until 2035. Is that the case?
Allan Sinclair (Group CFO)
Our Bermuda operating subsidiary, Fidelis Bermuda, does indeed have the 2035 certificate. I think pretty much everyone in the industry applies for that. Certainly, that is. No, we're going to work with the Bermuda Government on this. This is a, you know, with our trade association and with the Government that does exist. We technically are exempt in the Bermuda operating subsidiary until then. However, there are other factors why we may decide to not follow through with that, and we'll see as this develops, you know, the tax credits we can get, some other offsets that we're looking at with the Government. Again, we love working here. We love the Bermuda base for our company. So while we technically do have that certificate, I think we'll work very cooperatively with the Bermuda Government.
Tracy Benguigui (Director and Head of Insurance Equity Research)
Many others have asked about the Maui wildfires. You're still assessing, but is there anything you could share on Hilary or California quake?
Allan Sinclair (Group CFO)
Yeah, it's Allan. Obviously, no, it's too early to call, especially on California. The quake and the storm that went through has obviously happened this week, so there's nothing that we can really point to at this point.
Tracy Benguigui (Director and Head of Insurance Equity Research)
Okay. Some of your London-based competitors are establishing U.S. E&S carriers. I believe it's to improve distribution efficiency. I'm sure you're taking notice. Is that a strategy you would also want to replicate?
Allan Sinclair (Group CFO)
No, I think, you know, we, we get great access effectively to that E&S market through our D&F underwriting. We get very strong support in Bermuda from Bermuda brokers and U.S. brokers, in London from the London and continental brokers. You know, that, that is our distribution path. That is our strategy.
Tracy Benguigui (Director and Head of Insurance Equity Research)
Got it. Thank you.
Operator (participant)
Your next question.
Allan Sinclair (Group CFO)
We're just coming out close, so may-maybe we could, go to, to Leon Cooperman. Maybe take that question.
Yep.
Dan Burrows (Group CEO)
Please. Leon?
Operator (participant)
Yeah. Next question is from Lee Cooperman from Omega Family Office. Please go ahead.
Leon Cooperman (Chairman and CEO)
Thanks. I think you really addressed most of the questions. I'm just wondering whether you're sandbagging things. You know, your investment portfolio is well situated, and we're having a rising rate environment, and you're in a very hard market. I'm wondering whether your 13%-15% normalized ROE is too low. You know, a-as the world gets used to more climate change issues, you would seem to me the risk in your business is greater, and maybe you should be shooting for a higher ROE over a cycle. Second, since we're tied to a follow-up question, what is your guys' view of your stock price versus your book value versus your normalized earnings?
Allan Sinclair (Group CFO)
Hi, Lee. Thanks. It's Allan. I'll, I'll address both questions. Obviously, as a newly public company and with changes in our portfolio and our pivot from reinsurance to specialty, we have looked hard, very hard at our target ROE through the cycle. As I mentioned on earlier calls, it's not just a short-term target, it is through the cycle. I think that we believe that target is achievable with less volatility than some of our peers who may take on a little more risk on the, on the cap front. Yeah, the sandbagging term certainly is, it's something that, that has been mentioned. We don't think that that's how we think about it in the long term.
We think that, you know, hard markets, soft markets, the transition to those markets, that 13%-15% return on equity is, is an achievable amount, and, and we're, we're sticking to that, you know, as, as we reported during the IPO roadshow.
Dan Burrows (Group CEO)
I think, yeah, and I think I'll just add to that, you know, 1 or 2 good quarters don't make the year. I think, you know, we're going to be very cautious around that. As we move into Q3, you know, hopefully, we'll have more evidence of exactly performance, and we can think about it from there.
In terms of our share price, you know, our, our shares were issued less than 2 months ago. Obviously, we did a lot of work, a lot of investor relations, met with a lot of people. Worked with our sell-side analysts, many of whom are on the call today, who are a great bunch, following us. Obviously, we would, we would like to increase that price, we think that producing best-in-class underwriting results, working with the best-in-class underwriting team at the Fidelis MGU, producing results like we have this quarter, proving that the model works, proving that management is good at managing capital as well as the investment portfolio. We believe the share price will get where it needs to be and where it should be going forward.
Leon Cooperman (Chairman and CEO)
Yeah. Who would you list as your comparables? Who in the public arena would be comparable to you?
Dan Burrows (Group CEO)
We did a lot of extensive outreach on this during our test waters and roadshow process over the last year and a half. We list our 11 peer group in our prospectus. It's a mix of specialty writers in the US, some Bermuda peers, and a few London folks. It's a broad-based. We don't believe there are any peers exactly, that are identical to us. Again, that's why we picked a broad base of 11 peers that we measure ourselves against in terms of return metrics and performance metrics, and they're listed in our prospectus.
Leon Cooperman (Chairman and CEO)
Thank you.
Dan Burrows (Group CEO)
Okay, thank you. We are now out of time, thank you for all of your questions. Thank you for your patience and attendance today. I'd just like to close out with a few comments. Thank you again for joining us today. In closing, we have built on our strong first quarter performance with an excellent second quarter that demonstrated the value of our market lead positioning, our business model, and a structure that allows for strong execution across all aspects of our strategy alongside the MGU. Looking ahead, we believe we have a unique and diverse portfolio mix with scale across our three business pillars. A differentiated underwriting position that has well to take advantage of the opportunities we see in the markets today, as well as to navigate across market cycles.
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. Again, thank you very much for your time today, and have a great day. Thank you.
Operator (participant)
This concludes today's conference call. Thank you for joining, and you may now disconnect your lines. Thank you.