Second Quarter 2024 Transcript

Contents

Table of Contents

FIDELIS INSURANCE HOLDINGS LIMITED FQ2 2024 EARNINGS CALL | AUG 15, 2024

Call Participants

EXECUTIVES

Allan Carl Decleir

Group CFO, Bermuda CEO &

Executive Director

Daniel Burrows

Group CEO & Executive Director

Jonathan Strickle

Group Chief Actuarial Officer

Miranda Hunter

Group Head of Investor Relations

ANALYSTS

Andrew E. Andersen

Jefferies LLC, Research Division

David Kenneth Motemaden

Evercore ISI Institutional Equities,

Research Division

Meyer Shields

Keefe, Bruyette, & Woods, Inc.,

Research Division

Michael Augustus Ward

Citigroup Inc., Research Division

Michael David Zaremski

BMO Capital Markets Equity

Research

Pablo Augusto Serrano Singzon

JPMorgan Chase & Co, Research

Division

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FIDELIS INSURANCE HOLDINGS LIMITED FQ2 2024 EARNINGS CALL | AUG 15, 2024

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Fidelis Insurance Holdings Second Quarter 2024 Earnings Conference Call. As a reminder, this call is being recorded for replay purposes. [Operator Instructions].

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

Miranda Hunter

Group Head of Investor Relations

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

Before we begin, I'd like to remind everyone that statements made during the call, including the question-and-answer 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. These risks and uncertainties are described in our most recent annual report on Form 20-F 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 assurances 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 periodic reports that are filed by us with the SEC from time to time.

Management will also make reference to certain non-GAAP measures of financial performance. The reconciliation to U.S. GAAP for each non-GAAP financial measure and our definition of RPI, which is our renewal pricing index, can be found in our current report on Form 6-K furnished to the SEC yesterday, which contains our earnings press release and is available on our website at fidelisinsurance.com.

With that, I'll tuthe call over to Dan.

Daniel Burrows

Group CEO & Executive Director

Thank you, Miranda. Good morning, everyone, and thank you for joining us. I will make a few comments before handing it over to Allan and Jonny to go through the quarter in more detail. The second quarter marks the 1-year anniversary of our listing as a public company. We are pleased to report a solid quarter during which we have successfully deployed capital into attractive underwriting opportunities and returned excess capital to our shareholders. Our position as a market leader focused on short-tail specialty

lines enables us to remain focused on delivering attractive growth and driving value creation for our shareholders.

In underwriting, we continue to see attractive opportunities driving excellent top line growth and we remain on track to achieve our 2024 full year premium targets broadly in line with the growth we saw last year. Mature hard market conditions persist with a strong rating environment across the portfolio. The market remains versatilized. And as a leader, we are able to achieve preferential rates, terms and conditions. We are committed to disciplined underwriting. And as we have spoken about before, one advantage of our business model is the ability to quickly respond to changing market conditions, and we remain focused on deploying our capital where we see the most attractive risk reward opportunities in underwriting and broader capital management.

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FIDELIS INSURANCE HOLDINGS LIMITED FQ2 2024 EARNINGS CALL | AUG 15, 2024

We increased gross premiums written by 24.7% in the second quarter with double-digit growth across all 3 of our segments. Positive pricing persisted across our portfolio with an overall RPI of 112% in the quarter. Following several years of compound rate increases, rate acceleration is beginning to slow in some areas, but market conditions remain at the best levels we have seen in recent history. In our Specialty segment, we continue to see opportunities for targeted growth at attractive returns with RPIs of 114%.

Looking at our key lines of business. Property Direct and Facultative continue to be a driver of growth with gross written premiums up 37.4%, driven by a high retention of existing clients and the new business. Rate and terms and conditions remain strong with Property Direct and Facultative RPIs of 117%. In marine, rates generally remained steady with RPIs of 104%. In our Aviation and Aerospace business, premiums were down as compared to prior year, predominantly driven by Aviation, where in general Aviation, certain deals did not meet our underwriting criteria and rating hurdles. Aviation & Aerospace remains a core line of business for us, and we will continue to evaluate opportunities while maintaining underwriting discipline. We recorded strong growth in our bespoke segment in the second quarter where we were able to convert a number of significant structured credit deals from our pipeline of opportunities. The structured credit market picked up in the quarter as banks and asset managers came into the market looking to utilize insurance for capital relief and credit enhancement.

Turning to our reinsurance segment. On the back of market corrections over the past few years, pricing levels remain healthy. Leveraging our lead positioning, we were once again able to achieve positive rate increases and attractive terms and conditions across our portfolio with an RPI of 107%. Growth in our North American property book was primarily driven by new business opportunities from nationwide accounts. In Florida, based on our view of the rating environment, we maintained our cautious stance and continue to take a targeted approach focusing on higher tier clients. Within our international property book, growth was driven by the April 1 Japanese renewals as we expanded our relationships. Pricing remains attractive in this market following several years of rate increases on the back of the typhoon impacted years of 2018 and 2019.

Across our entire underwriting portfolio, our combined ratio for the quarter was 92.7%. This is above prior quarters, primarily driven by a higher level of catastrophe and large losses in our Specialty segment and losses on intellectual property insurance within our bespoke segment. Intellectual property contributed

8.2 points to our overall combined ratio for the quarter. In response to the performance of the intellectual property business, we have ceased underwriting this product. This highlights the alignment in our approach to underwriting decisions with the Fidelis partnership as we act quickly to preserve underwriting integrity.

Active capital management remains a cornerstone of our strategy. And we are committed to reinvesting into the business while also opportunistically returning excess capital to shareholders through dividends and share repurchases. We believe buying back shares at the current price is a compelling use of our excess capital. We have completed our existing $50 million share repurchase program. And as announced last night, our Board of Directors has authorized a new share repurchase program of $200 million. Allan will expand on this in his remarks.

Finally, I want to discuss something more personal. I'm currently undergoing medical treatment as a result of a recent accident. I expect to complete this treatment soon, and I look forward to catching up with you in the near future. Allan and Jonny will now continue with our prepared remarks and then answer your questions.

Allan Carl Decleir

Group CFO, Bermuda CEO & Executive Director

Thanks, Dan. I speak for everyone when I say we wish you a speedy recovery. As Dan mentioned, we delivered a solid second quarter, 24.7% growth in gross payment revenue. Against the backdrop of heightened severe convective storms and losses on the intellectual property business, we generated operating net income of $63 million or $0.54 per diluted common share and an annualized operating retuon average equity of 10%. We continue to grow our book value per diluted common share, which now stands at $21.71.

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FIDELIS INSURANCE HOLDINGS LIMITED FQ2 2024 EARNINGS CALL | AUG 15, 2024

Expanding on Dan's initial comments around our focus on capital management, we continue to pursue value-accretive opportunities as stewards of investor capital. Our first priority is to reinvest in the business and deploy capital into attractive growth initiatives. However, to the extent we have excess capital, we will retuit to shareholders through dividends and opportunistic buybacks, including both open market purchases and privately negotiated transactions. We have completed our $50 million share buyback program that was announced in December and cumulatively repurchased approximately 3 million common shares at an average price per share of $16.83. This is approximately 78% of our current diluted book value per share, and that's highly accretive in both on book value and earnings per share basis to our shareholders.

In taking a closer look at our results for the quarter, I will touch on our investment performance before turning it over to Jonny, who will provide more details on our underwriting results. Our net investment income increased to $46 million for the second quarter of 2024 compared with $27.3 million in the prior year period. We continued the rotation of the portfolio started in the first quarter by selling a portion of the fixed income portfolio and reinvesting the proceeds into longer-dated and higher-yielding securities. Specifically, we sold $220.4 million of securities with an average book yield of 1.6%, resulting in a realized loss of $6.1 million. We reinvested the proceeds and secured it with an average purchase yield of approximately 5.2%, locking in the current higher interest rates for a number of years to come.

At June 30, the average rating of fixed income securities remains very high at AA- with a book yield of 4.7%. Duration has increased to 2.7 years as a result of purchasing longer maturity securities.

Now I'll tuit over to Jonny to cover our quarterly underwriting results in more detail.

Jonathan Strickle

Group Chief Actuarial Officer

Thank you, Allan, and good morning, everyone. Looking at our gross premiums written, we had an excellent top line growth compared to the same quarter last year, growing by 24.7% to $1.2 billion. This is consistent with our expectations for 2024 growth to be broadly in line with the approximate 20% growth we saw last year.

Starting with our insurance business, we delivered specialty growth of 15.1% or [ $99.2 ] million, primarily driven by new business and increased rates in our Property and Property D&F lines of business which saw an increase of 37.4% or $138.3 million as we continue to convert on opportunities in the market. This was partially offset by aviation, where certain deals did not meet our underwriting criteria and rating hurdles.

The Bespoke segment grew $35.9 million versus prior year, driven by new structured credit business in our Credit and Political Risk Line. Given the highly tailored nature of this portfolio, premiums did not follow a regular predictable schedule and deal flow can be variable. Our Reinsurance segment also reported excellent top line results grown by $100.9 million versus prior year, driven by rate increases as well

as new business. Net premiums earned was $501.1 million, an increase of 16.8% versus the second quarter of 2023. As noted in prior quarters, within our Reinsurance segment, our property catastrophe premiums are not earned on a straight-line basis and are weighted towards the second half of the year. Our combined ratio was 92.7% for the second quarter, and our year-to-date combined ratio is 89.3%. As a reminder, our target is mid- to high 80s across the cycle.

Our loss ratio was 44.4% for the second quarter, which is composed of attritional losses, catastrophe and large losses as well as prior year development. Attritional loss activity was within our expectations. We saw an attritional loss ratio of 21.9% compared to 17.6% in the prior year period. Noting that the second quarter of 2023 was a particularly benign quarter in terms of attritional losses. Catastrophe loss activity in the second quarter was impacted by a series of events, generating a catastrophe and large loss ratio of 36.2% or $181.2 million of losses in the quarter. Of that $181.2 million for the quarter, Specialty accounted for $119.5 million, Bespoke $59.6 million and Reinsurance $2.1 million.

Catastrophe and large losses within Specialty were primarily driven by PTS losses in Property D&F, the largest of which was the catastrophic tornadoes in Oklahoma and surrounding states. Within Bespoke, we

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FIDELIS INSURANCE HOLDINGS LIMITED FQ2 2024 EARNINGS CALL | AUG 15, 2024

recognized additional claims of $53.0 million relating to intellectual property, which adversely impacted our consolidated loss ratio by 10 points and our consolidated combined ratio by 8 points. We had net favorable prior year development of $68.6 million for the quarter versus $2.4 million in the prior year period. Of the $68.6 million for the quarter, Specialty was $14.1 million, Bespoke was $42.8 and Reinsurance was $11.7 million, primarily driven by benign attritional experience in the specialty and reinsurance and favorable claim settlements within the bespoke pillar.

Taking a high level overview of our overall underwriting results for the quarter, there are a few important items to highlight. First, we have a short-tail book of business that does not include casualty. Second, while we track our loss performance on a quarterly basis, we think it's equally important and more informative to manage it over the duration of our short-tail book. This approach quickly provides us insights into the underlying performance of the portfolio and supports our ability to make informed underwriting decisions. Finally, given the structure of our book, we find the combined ratio is the most valuable metric.

We don't overly focus on the individual components, including attritional broken up from catastrophe and large losses or prior year development broken out from current year experience. This quarter perfectly illustrates why we evaluate our book in this manner. While there were movements in individual loss components including an uptick in favorable prior year development and higher catastrophe and large losses, there were no changes to our overall long-term loss expectations.

Turning to expenses, policy acquisition expenses from third parties were 28.4 points of the combined ratio for the quarter, in line with the prior year period. The Fidelis partnership commissions were 15 points of the combined ratio for the quarter, of which 0.3 points related to the variable accrued profit commissions. Total commissions increased from 12.3 points in the prior year period reflecting the full impact of owning these commissions since the agreement went into effect. And finally, our general and administrative expenses were 4.9 points of the combined ratio for the quarter, compared to 4.3 points of the combined ratio in the prior year period. The increase was driven primarily by employment losses relating to an increased head count to support the growth of the business.

I will now tuit back to Allan for additional remarks.

Allan Carl Decleir

Group CFO, Bermuda CEO & Executive Director

Thank you, Jonny. Now I'd like to talk about the insurance and reinsurance market outlook. We are seeing market participants collectively continue to demonstrate a disciplined approach, and we have not observed any new meaningful capacity from the market. We anticipate the mature hard market conditions for the rest of the year, especially for leaders within this verticalized market.

Now looking at the dynamics within each of our underwriting segments, we continue to expect growth across our specialty book to be driven by Property Direct and Facultative. This market remains dislocated, rates remain attractive retention levels are high and new business opportunities continue to present themselves.

In Marine, our established position as a leader, enables us to take a cross-portfolio approach. Large marine construction continues to present attractive opportunities for growth. This is driven by the continued need for significant capacity to accommodate the volume of new builds. In Marine War, our underwriters continue to leverage their capacity with hull acceptances to improve our overall pricing. Dan already mentioned the competitive dynamics truly affecting Aviation and Aerospace, we will continue to apply our underwriting discipline to opportunities presented.

Turning to Bespoke. The custom and direct nature of the business continues to allow us to lead on substantially all of our deals. Deal flow in this book can vary quarter-to-quarter given the highly tailored one-off nature of these policies. But looking ahead to the second half of the year, our pipeline remains robust and is currently tracking with the prior year.

Finally, in Reinsurance, the market remained attractive at July 1 with a continuation of trends seen through out key renewal dates in 2024. We continue to take advantage of opportunities focusing on

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FIDELIS INSURANCE HOLDINGS LIMITED FQ2 2024 EARNINGS CALL | AUG 15, 2024

optimizing our reinsurance portfolio in line with our view of risk. Utilizing outwards reinsurance supports our underwriting approach of taking lead positions. It allows us to achieve differentiated pricing and terms and conditions, while at the same time, managing our overall risk.

During July renewals, we further optimized our outwards reinsurance purchasing. And has what is widely forecasted to be an active win season, we purchased additional targeted coverage to further manage our natural catastrophe exposures in our reinsurance and property D&F portfolios. Overall, across our portfolio, we continue to pursue opportunities for growth through new origination channels. As an example, in the second quarter, the Fidelis partnership opened their office in Abu Dhabi offering a strong platform to directly access Middle Eastebusiness going forward. And on July 1, we entered Lloyd's through our participation in variable quota share with the Fidelis partnership Syndicate 3123. This vehicle provides access to an enhanced ratings platform, global licensing and Lloyd's online business. It is a great example of identifying new ventures and providing flexibility to allocate the right risk to the right capital. As we evaluate opportunities to deploy our capital effectively, we are considering a number of attractive new underwriting opportunities.

As we have said before, the bar for any new partnership opportunity is extremely high, given the historical underwriting returns generated by the Fidelis partnership.

In closing, we delivered solid results across the underwriting portfolio and continue to improve our investment returns. During the quarter and through the first half of the year, we have continued to optimize our risk-adjusted returns. We achieved this by strategically allocating capital to areas of our underwriting portfolio where we see the best opportunities. We have moved quickly and decisively in response to market trends, leading into accretive opportunities in Property D&F business and selectively within our Reinsurance segment, while maintaining discipline in line where rates don't meet our retuthresholds.

We remain confident in the outlook for our business and our ability to deliver full year premium growth in line with prior year and operating ROAE in the 14% to 16% range for the year.

With our diversified portfolio of short-tail specialty risks, we remain well positioned to deliver combined ratios in the mid- to high 80s throughout the cycle. And with our new $200 million share repurchase program, we are committed to returning excess capital to our shareholders.

With that, I'll tuit back to the operator, and we look forward to your questions.

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FIDELIS INSURANCE HOLDINGS LIMITED FQ2 2024 EARNINGS CALL | AUG 15, 2024

Question and Answer

Operator

[Operator Instructions]. Our first question will be from Mike Zaremski at BMO.

Michael David Zaremski

BMO Capital Markets Equity Research

Also wishing Dan a good recovery, a successful recovery.

First question, I just heard you kind of reaffirm the ROE goals for the year. I guess if we're looking at the year-to-date ROE and kind of, I guess, what the expected seasonality in 3Q kind of being the lowest ROE quarter of the year, given the catastrophe load. Do you feel that maybe the consensus is under appreciating maybe more retro you purchased or just the shape of your profitability in the second half of the year? Or is anything you'd like to kind of help us think through.

Allan Carl Decleir

Group CFO, Bermuda CEO & Executive Director

Mike. It's Allan here. Yes, great question. And as you know, while we monitor our business on a quarterly basis, we think it's equally as important and more informative to manage it over the duration of our short- term portfolio. Over this time, we have obviously been pleased with our underwriting performance and our ROAE. And as you point out, the year-to-date ROAE is 12%. And definitely in the second half of the year, as you've hinted at, there's some seasonality in our earnings patterns, especially in our reinsurance segment where we -- it's back ended in the second half of the year. I think on the further note, our investment income, we continue to enhance and optimize that portfolio, and you see that with the results this quarter versus prior quarters and last year. So given our investment income, our ROAE to date and our combined ratio year-to-date of just over 89%, we are confident in our long-term targets as well as our current year targets.

Michael David Zaremski

BMO Capital Markets Equity Research

Okay. Got it. Yes, okay. It feels like the investment income component is something that might be underappreciated. Okay. So for my follow-up, since I'll only ask one follow-up and get back in the queue. I'm feeling a lot of people will ask about the IP losses. So I'm just curious, the MGU ceding commission ratio, it's running mid-14syear-to-date. That is kind of materially higher, maybe 100 basis points or more higher than what we had modeled out maybe 6-plus months ago. What's -- and any color you can add on kind of what's going on there?

Allan Carl Decleir

Group CFO, Bermuda CEO & Executive Director

Yes, it's Allan again, Mike. The ceding commission that we pay the Fidelis partnership is several components, as you know, it's a ceding commission on net premium written and earned as well as a profit commission. As you can see this quarter, with the underwriting results being slightly worse than in prior quarters, these -- the prop commission is reflective of that. Overall, we're still comfortable with the overall commission guidance we've given, and we think that it's working exactly as we intended that the partnership commissions as well as their day-to-day operations are working exactly as intended.

Operator

Next question will be from Michael Ward at BITM (sic) [ Citi ] .

Michael Augustus Ward

Citigroup Inc., Research Division

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FIDELIS INSURANCE HOLDINGS LIMITED FQ2 2024 EARNINGS CALL | AUG 15, 2024

I'm at Citi. I just had a question, expanding on the IP. I was curious if you guys could maybe quantify the remaining exposure to the stock that you do have?

Jonathan Strickle

Group Chief Actuarial Officer

Sure. It's Jonny here. I'll take that one. I'll start off by giving some context with the IP portfolio overall, and then I'll come to that specific question. So our IP portfolio consisted of a small number of policies, which we've written over the last few years. As we mentioned in the prepared remarks, we no longer write it, and we haven't accepted any risks in 2024.

To give some background on what happened on it, we had a great number of defaults that we priced for, and we had more difficulty in realizing the value of the collateral after those defaults occurred than we had anticipated. It is worth noting that not all the policies that we've written have resulted in a claim.

Some of the books now run off or alternatively has been resolved without any loss to us either through a restructure or some other transaction that takes us off risk. Now we have a handful of live policies outstanding, and we monitor those on an ongoing basis. We're obviously comfortable with where we reserved to this quarter, but we do continue to monitor those policies going forward.

Michael Augustus Ward

Citigroup Inc., Research Division

Okay. Are you able to sort of speak to, I guess, the percentage of the loans that you -- where you've guaranteed the collateral is -- how far are you through the portfolio in terms of establishing reserves, I guess.

Jonathan Strickle

Group Chief Actuarial Officer

There's probably around 1/3 of the portfolio still outstanding, I would say. But to give some context, in the last week or so, we've resolved 1 of the exposures. So one came through was still on risk. There was a transaction underlying here, and we've been able to come off risk on that one. So like I said, it's just a handful remaining.

Michael Augustus Ward

Citigroup Inc., Research Division

Okay. That's helpful. And maybe just a non-IP question. Curious if you could speak to the runway for the favorable growth environment and growth in D&F specifically, given we've seen property pricing kind of slow down?

Allan Carl Decleir

Group CFO, Bermuda CEO & Executive Director

Yes, it's Allan. I'll take that call. We believe we're still in a mature hardening market and the commissions persist. The market has generally been very disciplined, and we're pleased with that. And as I mentioned in my prepared remarks, there's been no new meaningful supply of capacity. One thing that we differentiate ourselves on in this market is it's a verticalized market and needs to get from their leverage and their scale that we get different and preferential pricing in terms of conditions. And we think that's an important feature of our business model versus others. We've had positive RPI across our portfolio. on the back of many years of compound increases. And as we've mentioned previously, we don't write any casualty.

We're comfortable with the duration with the market. Things can change quickly, as you know, in our industry, especially during wind season, but we're very pleased with the growth we're achieving, 25% growth in Q2, and we see no reason why that growth target that we have for the year of 20% or more will not be achieved.

Operator

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