Q4 2023 Earnings Summary
- Fidelis Insurance Group expects to maintain strong Specialty segment growth in 2024, projecting gross premiums written (GPW) growth of approximately 40%, similar to 2023 levels.
- The company anticipates higher operating return on average equity (ROAE) of 14% to 16% in 2024, exceeding their long-term target of 13%-15%, reflecting expectations of increased profitability and growth.
- Management believes the stock price does not reflect the company's strong performance, including a market-leading combined ratio of just over 82%, suggesting potential undervaluation and upside as investors become more familiar with their successful structure and outperformance.
- The unusual corporate structure involving a Managing General Underwriter (MGU) may deter potential acquirers and cause investor skepticism, potentially suppressing the stock price.
- There is a concern that rate increases may not be as high in 2024 as in 2023 in lines like Property Direct and Facultative, which could limit premium growth and affect the company's ability to sustain its 30%-plus Specialty growth.
- The company has excess capital but is only slowly executing share buybacks, having utilized only $3 million out of a $50 million plan, which may indicate potential capital management issues and a reluctance to return capital to shareholders.
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2024 Earnings Outlook
Q: Will earnings increase in 2024?
A: The company expects to earn more in 2024, raising their ROE target to 14%–16%, up from their long-term goal of 13%–15%, citing positive market movement and anticipated growth. -
Capital Allocation Strategy
Q: Will you buy back stock or invest in growth?
A: The company plans to primarily invest in underwriting opportunities with outstanding returns, deploying capital back into the business. They have a $50 million share buyback plan, of which $3 million has been utilized, and they plan to fully utilize it before considering a new program. -
Specialty Growth Expectations
Q: Will Specialty grow 40% in 2024?
A: Yes, they project Specialty growth in gross written premium of 40% in 2024, mirroring the growth achieved in 2023. They see potential to expand existing lines, particularly in Marine, Aviation and Aerospace, and Property D&F. -
Tax Rate Guidance
Q: Explain the 14% tax rate for 2024.
A: The expected tax rate for 2024 is approximately 14%, depending on where profits arise. In 2023, the tax rate was lower due to profits in low-tax jurisdictions like Bermuda. They are considering the impact of Bermuda's new 15% Corporate Tax Act, which may affect future tax rates. -
Acquisition Prospects
Q: Does your structure deter potential buyers?
A: Management acknowledges that the unique structure may require more investor education but emphasizes it has resulted in their strong performance, including a market-leading combined ratio of 82.1%. They plan to spend more time with investors to increase comfort with the structure. -
Reinsurance Retention Ratio
Q: Will net/gross written premium ratio change in 2024?
A: They expect the retention ratio in 2024 to be broadly similar to 2023, as their outwards reinsurance program remains consistent. Retentions and quota shares are in place, and they are pleased with how the program worked last year. -
Alignment with MGU
Q: Did you reject any MGU business?
A: They have a very aligned approach with the MGU and share a similar view of risk. Occasionally, they discuss certain lines like primary D&F or casualty, where they may not have appetite, but overall, they are pleased with the portfolio. -
IP Finance Line Update
Q: What's the update on the IP finance line?
A: There has been no movement in losses in the IP finance portfolio. As it's a new line of business, they have adjusted assumptions and pricing, resulting in fewer deals hitting hurdle rates than planned, but believe this cautious approach is appropriate. Notably, they have no exposure to Vesttoo. -
Catastrophe Load in Loss Ratio
Q: What's the catastrophe load in loss ratio?
A: The catastrophe loads are roughly 160%, varying by geography and peril. In 2021, they formed their own view of risk to better reflect climate change and inflation impacts. -
Middle East Marine Exposure
Q: Do you have exposure to Middle East Marine?
A: They have no concentration of exposure in the Middle East and no known material losses. There are opportunities in political violence and war policies, specifically in marine war and breach, which they are taking advantage of, though not to the same degree as post-Ukraine. -
Property D&F Rate Increases
Q: Will Property D&F rates increase less in 2024?
A: They are still seeing positive rate movement in Property D&F and expect to grow with positive price movement in 2024. As a lead market, they obtain better terms and conditions by structuring deals and seeing them before peers. -
Bespoke Growth Outlook
Q: Why is Bespoke growth expected to be flat in 2024?
A: Bespoke deal flow is less predictable, and while they have a robust pipeline, deals must hit risk-adjusted returns. They expect the portfolio to be similar to 2023, with heavier weighting in the second half of the year. -
Specialty Expense Ratio
Q: Why was the Specialty expense ratio low?
A: The lower policy acquisition ratio in Specialty this quarter is due to business mix within that line. -
Structured Credit Product Growth
Q: Discuss structured credit product growth.
A: In Q4, they wrote $102 million of new business, including structured credit, which consists of regulatory capital relief transactions with major European banks on asset-backed portfolios. These deals typically occur at year-end as institutions seek capital relief. -
Shifting Exposures
Q: Will 2024 exposures differ from 2023?
A: They expect the portfolio in 2024 to look very similar to 2023, with gross written premium split as 62% Specialty, 20% Bespoke, and 18% Reinsurance. They always evaluate new opportunities but see positive movement in all lines.
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