Q2 2024 Earnings Summary
- Strong growth and profitability in the Bespoke segment: FIHL's Bespoke portfolio has produced very strong results over the last few years, and they expect it to continue delivering profitable returns going forward. The pipeline remains robust, and management is confident that it will produce very profitable business.
- Optimized investment portfolio increasing net investment income: FIHL has been actively rotating their investment portfolio by selling lower-yielding assets and reinvesting in higher-yielding longer-dated securities. They sold securities with an average yield of 1.7% and reinvested at an average yield of 5.2%. This strategic move is expected to enhance net investment income.
- Commitment to shareholder returns through share buybacks: FIHL has a strong capital position with surplus capital. They have completed a $50 million share repurchase program and announced a new authorization of $200 million. Management considers buying back shares at current valuations a "no-brainer," demonstrating their commitment to returning excess capital to shareholders.
- The company experienced significant losses from their intellectual property (IP) insurance business, contributing 8.2 points to the overall combined ratio in the quarter, and they have ceased underwriting this product due to difficulties in realizing the value of the collateral after defaults occurred. There remains some ongoing exposure with a handful of live policies that they continue to monitor, which could pose uncertainty for future losses.
- There is potential for a slowdown in growth within the Property Direct and Facultative (Property D&F) segment, as property pricing has started to decelerate. While the company believes they are still in a mature hardening market, any further slowing in property rates could adversely impact growth and profitability in this key segment.
- The Bespoke segment's deal flow is variable and can impact growth quarter to quarter. A question was raised whether the strong growth in the current quarter was due to deals being pulled forward from future quarters, which could adversely impact next quarter's growth. This variability introduces uncertainty in the company's growth trajectory.
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Intellectual Property Losses
Q: What's the remaining exposure to IP losses?
A: We have about one-third of our IP portfolio still outstanding, expected to run off naturally by 2027. We no longer write IP policies and haven't accepted any risks in 2024. The recent losses came from three policies, but future volatility should be limited due to the small number of remaining exposures. -
Growth in Property D&F
Q: Can you discuss growth prospects in Property D&F?
A: Property D&F continues to drive our growth, achieving 37% growth this quarter with positive RPIs. We're aiming for a year-end growth target of 20% or more. The market remains favorable, and our underwriting appetite is unchanged despite expectations of an active hurricane season. -
ROE Goals and Investment Income
Q: How are you progressing toward ROE goals?
A: Our year-to-date ROAE is 12%, and we remain confident in our long-term targets. Despite seasonality in earnings, particularly in reinsurance, our combined ratio stands just over 89% year-to-date. Enhanced investment income also supports our ROE objectives. -
Share Buybacks
Q: How fast can you execute the $200 million buyback?
A: With surplus capital and attractive share valuations, we consider share repurchases a priority. While we focus on reinvesting in the business, especially in Property D&F, we're comfortable with our capital position and plan to proceed with buybacks. -
Catastrophe Risk Management
Q: Has your approach to cat risk changed?
A: No, our approach remains the same. We apply our own view of risk, including over a 50% load to base cat models to account for climate change. We continuously adjust our outwards reinsurance to manage exposures, ensuring our overall cat exposure hasn't increased despite premium growth. -
Investment Portfolio Repositioning
Q: Are you extending asset duration for higher yields?
A: We've repositioned our portfolio over the last six months, selling lower-yielding assets at 1.7% and reinvesting at 5.2%. We continue to optimize our investments and may take further actions in Q3 and Q4, depending on market conditions. -
MGU Ceding Commission Ratio
Q: Why is the MGU ceding commission ratio higher?
A: The ratio is running in the mid-14% year-to-date, slightly higher due to profit commissions reflecting this quarter's underwriting results. Overall, we're comfortable with our commission guidance, and the partnership operations are functioning as intended. -
No Participation in Casualty Business
Q: Will you participate in new casualty products?
A: We're not participating in casualty at this time. We focus on matching the right capital to the right risk and currently prefer opportunities in other lines. -
Bespoke Net-to-Gross Premium Ratio
Q: Why is Bespoke's net-to-gross ratio lower?
A: The ratio varies based on the products written each quarter. For some products, we use more quota share reinsurance to support larger gross lines, enhancing pricing leverage and terms. -
Exposure to Recent Events
Q: Do you have exposure to recent hurricanes or plane crash?
A: Based on current assessments, we don't believe we have material exposure to the two recent hurricanes. We also have no exposure to the plane crash in Brazil.
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