Q4 2022 Skyward Specialty Insurance Group Inc Earnings Call

March 1, 2023

More than speculation optimism about near term property pricing and clearly your property book as an overly cat exposed.

Wondering whether year to date, Andrew are you seeing any inflection in property pricing for your particular book.

Yes Mara thanks for the question.

So.

Our two biggest concentrations for property our global property.

And within our transactional E&S and within our global property.

We're we're certainly we're certainly seeing it but we're also since we principally right.

Primary layer and we've been sort of at the front.

I would describe it as the top of that the pricing on property where.

Some buyers are making decisions to keep the risk right self insure more et cetera.

There is really almost only so much you can go on price and it becomes terms and conditions, but we're certainly seeing that for sure and then on the transactional side. There is no question about it even though fires are principal apparel for that book of business.

I think it's manifesting itself for us in different ways.

Certainly.

Our distribution partners. The brokers are are under a lot of stress to place cat expose which for us on more technical risks and nurse to our benefit because they turned to us no.

That will give them a.

Thoughtful quote and.

And it gives us a little bit of pricing power. So we're seeing it on both sides.

And I feel very confident that that's going to run here for a bit for us.

Okay fantastic.

And then following up on the reinsurance.

Reinsurance discussing particularly the.

The whole account quota share.

In the aggregate should we expect meaningful change to the acquisition expense ratio in 2023 from the various reinsurance movement.

No.

And as I mentioned in my notes there.

The portfolio specifics auto liability coverages that we have are principally incept at 701 and as I mentioned, we've been evaluating that for some time, we acted on it in one one so so we're in sort of a six month period, where.

We have lower net retention, we're going to evaluate those portfolio specific items, when we get to 71, but no. We received excellent terms and I think quite honestly it reinforces much of what we shared with you and the investors.

During the IPO process around our unique approach to underwriting commercial auto liability our unique approach on claims.

That is visible in our results and is visible and the interest and reinsurers.

To support to support us on that line of business.

Okay Fantastic that's very helpful and one last question if I can I guess for Mark.

Hoping for an update on the corporate portfolio duration.

Right at four.

Okay.

Yes.

Unchanged is Walmart, we've been we have been able to.

To invest.

Above five and this past quarter without without stressing our duration on that on the core fixed income portfolio.

Okay.

Okay Fantastic that's great. Thank you very much thank you.

Thank you. Our next question comes from the line of Mark Hughes with Travis Your line is now open.

Okay. Thank you good morning, good morning, Mark.

Many.

So the guidance you can give us on the magnitude of the lower retained premium in the first half.

I think theres some seasonality to it and then you described.

Some adjustment related to the.

The new agreement for auto liability not going to impact the bottom line.

But.

What does it do in terms of the.

Our retention ratio over the next couple of quarters those two factors.

Yes.

Great question and thought it might be coming so far.

First I think just in terms of the first two quarters Mark talked to talk to this we have our large X ol ex ol treaties that set during the first two quarters and as Mark noted from an accounting perspective, the deposit premiums fully recognized in those quarters. That's really the principal driver on the item that I mentioned regard.

The whole account quota share again this was something that.

We because we are in the process of evaluating and negotiating us really over the last two quarters and even during the process I think which we last spoke to you leading up to the IPO.

We have not yet concluded it wasn't in our assumptions.

Nice thing about it is that the terms that we received on that whole account quota share.

Our attractive enough that effectively it's a net loss for us on.

The model inputs that we provided you for combined ratio.

So you should you should assume for all intents and purposes that.

The things that you assume during that period are still valid and then as we get to the second half of the year and we have some optionality on the portfolio specific auto liability reinsurance covers we're going to be evaluating that in the context of we've already got this whole account quota share in place.

And.

Im not going to say much more than that but that's the context in which we'll make an evaluation and certainly we'll update you as we get closer to that time.

And then you mentioned, you're continuing to hire at a pretty good pace can you give us a sense of.

What that looks like or has looked like over the last three months, what do you anticipate in terms of hiring when we think about 2020 for Ya.

So I have the data.

You'll hear a bunch of play page flipping if if.

If I try to get to that.

I would say that.

2022 was unquestionably a high watermark in 2021 was an important time, we certainly did a lot around aligning our talent around our strategy.

For 2000, 22022 was a high watermark for us in terms of adding.

Underwriters.

As we look forward to this year, we have we have a plan which is.

To grow our head count in underwriting by a couple of handfuls of sort of key people in key areas, which would be a slowdown for us.

But at the same time I also will tell you Mark we're very opportunistic right.

There's a lot of high quality people that we have been talking to for the two and a half years that I've been in the seat and.

If a person our team that we view as being the kind of top tier underwriting talent that we've been targeting that we have relationships with.

Our ready to come across we will adjust our plans.

Feel like we have we build sort of into our assumptions.

<unk>.

The underlying we're going to continue to invest and underwriters.

Part of how we think about sort of the run rate performance of our company and so I think even if those opportunities emerge beyond our expectations, we'll still probably manage it within the kind of inputs that we talked to you about leading up to the IPO.

And any way to characterize.

Folks we hired in 2022, presumably they're still ramping up.

Any way to say how meaningful that that.

Pat.

The debate.

Yes.

Mark mentioned in his remarks.

Yes.

For areas, where we saw over 35% growth in the first quarter.

And two of those areas surety and professional liability has been a particularly important focal point for us and those are experienced underwriter driven.

<unk>.

Divisions for us.

Captives as much more kind of an opportunity by opportunity.

Thing and in the other segment or the other underwriting division is our A&H division and we have been ramping up underwriting there, but also that's a big part of just our strategy, we've kind of been really turning the crank and our strategy and I think the teeth of that are really starting to grab and that's what you're seeing in the first quarter.

So the principal places are they earn through on professional and surety I think we will have a lot more to come there on that.

Yes.

Appreciate it thank you.

Thank you.

Our next question comes from the line of Tracy Dengue with Barclays. Your line is now open.

Hey, guys can you touch on whats driving double digit premium growth within professional lines in the fourth quarter. I know you guys are not in public D&O classes do you view as attractive on a risk adjusted basis.

Yeah. Thanks Tracy.

Great question.

We are principally focused on what is broadly falls into miscellaneous.

Probably worthwhile, saying.

What is it in there and then I can talk about some of the other pieces that are in there.

We're not writing as we're not writing law firms as an example.

We do have a small public D&O excess book we.

We basically drew a line in the sand coming into 2022 that we were not going to chase rates down we've been very technical in our underwriting and we basically believe that the rates that were achieved leading up to the end of 2021.

Necessary and we're going to back off.

That book wasn't huge but we've let have video because we couldn't renew at expiring rates plus so it's a pretty small part.

Our principal domain within within professional is miscellaneous, which is kind of like a catch all of everything other areas that are key points of focus for us that roll into that is what we do on an executive lines.

Not public so obviously private company, we've mentioned to you in the past a few of the classes. We focus on cannabis is a great example, we really do look for very kind of niche areas. Some distress classes, where we believe that we can drive the kind of kind of rate thats required.

Other areas are our health care professional which has been a sort of a key point I'll remind you that we announced I believe was either the end of the second quarter in the third quarter that we hired Sarah Lowe to lead that unit.

And.

We had a team that followed her and so obviously, that's coming through as well in some of the growth that youre seeing.

Got it.

So realize that you entered into a new whole account quota share for commercial auto. So on the flip side are there any lines of business, where we can anticipate last reinsurance utilization for the balance of the year.

Yeah.

Sure.

Well it might not be visible in the results.

Since you asked the question ill go into my to the one one renewals and.

And within professional.

Look we had a very what I view as a very positive renewal for us at one one and professional but.

But part of that was we elected to to keep more.

We buy in excess of loss cover and we kept a little bit more of that.

That was just a straight up risk.

Risk return tradeoff, where.

We are getting attractive terms across the board, but we felt like that additional retention was something that was better for us.

And so we.

We improved our terms on the on the part that we seeded but we also kept more.

So there is an area and I would expect as we go through the remainder of the year much of what we have running through the year other than our cat renewal is quite portfolio specific covers and as we come to those I'm sure you'll you'll if you ask a similar question in future calls, but we will give you an update.

We'll seek those same kinds of opportunities as we did here with professional at one one.

Got it thank you.

Thank you.

Thank you. Our next question comes from the line of Gregory Peters with Raymond James Your line is now open.

Good morning team Skyward.

Good morning, Gregg Hey, Greg.

So I guess.

The first question.

Just.

You talked about the reinsurance program.

One of the things Thats happened as you know there has been pressure on ceding commissions. So.

If I look at your expense ratio for the full year 'twenty two it's up from where it was in 'twenty, one and obviously things like surety have an influence there.

As you look forward.

How do we think about pressure on ceding commissions at the industry level and how do we think about your expense ratio for 23 versus <unk> 22.

So great question, Greg Thanks for that.

Ill.

Going to go back to something.

We have an opportunity to speak with you and others about leading up to the IPO, which is we.

We have two parts of our business that are very reinsurance intensive captives, which is part of the structure and our global property.

Underwriting division, which is structurally the way that we've built that and we just came through.

The global property quota share.

And I can just say to you expressly that.

The ceding commissions that we received were entirely consistent with our plan and the inputs that we gave you so.

Very good about that the cap. This piece, we don't have the same kind of marketplace.

Exposure there.

You would see.

In sort of a guaranteed cost market.

Once you sort of weigh those two large sort of parts of our portfolio that are that are big quota share components.

I think for the remaining parts, we feel really good about about.

Our structures and where we have a seed.

Quota share basis, the seeds that were receiving it.

Do not expect as we look forward for for 2023 to see pressure run through our acquisition costs in our combined ratios.

In anything outside of the inputs that we gave you as part of the process leading up to the IPO.

Okay.

That's good color.

The other area that.

It's worth revisiting.

As we look at the components of net investment income for the fourth quarter and for the year.

You spoke.

Typically about the core fixed income and allocating all of the funds into that.

How do you how are you thinking about the cadence of the opportunistic fixed income for 'twenty three I feels like it may start off a little bit lower before there is some.

More normalization levels.

Any guidance you can help us with on that would be helpful.

For sure yes, great Great question Gregg.

Greg.

By the way, we do feel great about the.

The core fixed income environment, I mean, when when we're investing in new money.

Five pushing hot five five.

That feels pretty good.

<unk> are certainly our belief and hope is that also the loss cost inflation environment.

No.

Moderate a little bit so that when you kind of lock in on that that should be a net positive for us on the opportunistic fixed income as we as we provided to sort of to you and others leading up to the IPO.

We're not deploying capital into the opportunistic thing I'm in fact actually it is it will be.

Source in which.

Invested capital comes out and we will.

We will likely reinvest elsewhere.

Over time.

Look we feel great about it and I think Mark gave you the stats on what the yields for that portfolio were in in this past year, which was which is very attractive. The volatility is something we always talk about but it really comes down to in the end we hold in there to equities Juan Pablo.

One private.

We're well into the money on those unfortunately.

You do it you sort of go public and you are picking up the volatility.

The history that we are well into the money and we feel like those are those are two really good positions that over time the value is going to be crystallized.

Look we we saw a little bit of pressure on our marks in this past quarter as we provided to you as input leading up to the IPO. We expect that to continue into the first quarter and then our expectations are that we will see a more normalized run.

Run rate and the kind of positive returns.

That youll experience over the long term coming from that portion of our of our investment portfolio. We feel really good about it it's been a it's been a great performer for us.

And setting aside some of the volatility we're really pleased with it.

Got it makes.

Makes sense. Thank you.

Thank you.

Thank you. Our next question comes from the line of Paul Newsome with Piper Sandler Your line is now open.

Good morning, Thanks for the call.

Good morning, Paul.

No.

A little bit of it.

Different question, we've talked a lot about pricing but.

What about terms and conditions have we seen.

<unk>.

Yes.

Material and the terms and conditions in the various businesses.

Im, particularly interested in property.

And then the flip side I guess sort of as a follow up question on the.

The reinsurance side as well because I've heard rumblings and we certainly I certainly see this in the past where.

You see.

No changes in terms and conditions as the cycle moves along.

Well Paul Thanks for the question by the way.

A lot there so.

Im going to focus on property I would I would say to you that away from property for our <unk>.

Our business things are very stable.

On the property side I'll go back to we have two different sort of points of focus and within.

The property for our transactional E&S I mean, our underwriters theyre just.

Credibly skilled experienced folks whose fundamental philosophy is to under understand the underlying exposure and coverage grants are given we charge for those coverage brands right. I mean, it's like it's a very direct process.

Well.

I'd say to you that the ability for us to have greater we can charge more for those coverage grants absolutely. There is no question about it as a more favorable environment, but its also.

A fire exposed apparel on the global property side, there's no question about it that terms.

Terms and conditions are tightening tightening.

We're certainly leading the charge on that we'd see that amongst some of our competitors.

Two to our insureds to the extent that.

Particular cover is is really important obviously there is just a much greater ability to charge to provide that cover but theres. No question that there is a tightening.

On our.

On the reinsurance side.

Remind you that five one is our cat renewal, which is probably the place where you will see the changes in terms and conditions.

And I'm sure I'll be able to report out closer to the time.

What what that tells us but.

But we're very conscious of that.

As we are writing business now.

The things as well that we are hearing in the market, but I can't give you any direct experience because we haven't been through that and and all of our other <unk> such as the global property quota share there wasn't anything that for US was material in terms of the terms and conditions.

That would change how it is that we're approaching that business.

Great. That's helpful. I appreciate the help.

Thank you.

I would now like to turn the conference back over to Natalie Schoolcraft for closing remarks.

Thanks, everyone for your questions for participating in our conference call and for your continued interest in and support of hybrid specialty Im available after the call to answer any additional questions you may have.

Look forward to speaking with you again on our first quarter earnings call. Thank you and have a wonderful day.

This.

Today's conference call. Thank you for participating you may now disconnect.

The conference will begin shortly to raise and lower Johan during Q&A you can dial one one.

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Good day, and thank you for standing by.

Welcome to the Skyward specialty insurance fourth quarter 2022 earnings conference call.

At this time all participants are in a listen only mode.

The speaker's presentation, there will be a question and answer session.

To ask a question. During this session you will need to press star one on your telephone you will then hear an automated message advising your hand is raised to withdraw your question. Please press star one again.

Please be advised that today's conference is being recorded.

I would now like to hand, the conference over to your speaker today, Natalie Schoolcraft head of Investor Relations. Please go ahead.

Thank you Shannon good morning, everyone and welcome to our fourth quarter 2022 earnings Conference call.

I am joined by our Chief Executive Officer, Andrew Robinson, and Chief Financial Officer, Mark Hustle.

I'll begin the call today with our prepared remarks, and then we will open the lines for questions.

Our comments today may include forward looking statements, which by their nature involve a number of risks factors and uncertainties, which may affect future financial performance.

Such risk factors may cause actual results to differ materially from those contained in our projections or forward looking statements.

These types of factors are discussed in our press release as well as in our S. One that was previously filed with the Securities and Exchange Commission.

Financial schedules containing reconciliations of certain non-GAAP measures along with other supplemental financial information are included as part of our press release and available on our website I'd insurance Dot com under the investors section now I will turn the call over to CEO , Andrew Robinson Andrew.

Thank you Natalie.

Morning, everyone and thank you for joining us.

It has been a long road, but we're extremely happy to be speaking with you today on our first earnings conference call as a public company.

The <unk> team's dedication agility and innovation brought us to this point and we believe the results. We have achieved achieved so far are compelling.

We are proud that we were able to successfully execute our IPO in January the first in the U S market in 2023.

And we remain thankful for the support of our investors who share our vision and our excitement about the direction we are headed.

Our strong fourth quarter results reflect the continued momentum hitting on all levers that drive our business, including underwriting performance written premium growth and increased investment income.

Specifically gross written premiums for our continuing business grew over 21% in the quarter, surpassing $1 1 billion for the year.

Mark will talk more about premiums in a minute, but at a high level, we continue to benefit from broadly favorable marketing conditions and strong execution across our underwriting divisions.

Our adjusted combined ratio was 92, 8% inclusive of cats, and adjusted operating income of $11 6 million or <unk> 36 per diluted share is up 54% from the fourth quarter 2021.

Were minimally impacted by winter storm Elliot with cat losses of only one two points on the combined ratio and well within our retention.

We continue to realize pure rate in the high single digits and it is meaningfully above our loss cost inflation estimates.

We also continue to benefit from the cash position, we had entering the year and a strong cash flow from our operations.

In this last quarter, we invested our new money at over 5% all to our core fixed income portfolio.

We achieved an adjusted return on equity of 13, 8% for 2022, we believe that this result, together with our stronger.

<unk> growth further reinforces the financial momentum, we expect will continue in 2023.

With that I'll turn the call over to Mark to discuss our financial results in greater detail Mark.

Thank you Andrew.

For the quarter, we reported net income of $20 4 million compared to $1 3 million for the fourth quarter of 'twenty one.

As Andrew noted on an adjusted operating basis, we reported income of $11 6 million or <unk> 36 per diluted share compared to $7 $6 million or 23 per diluted share for the same period a year ago.

For the year, we reported net income of $39 4 million compared to $38 3 million for 2021.

On an adjusted operating basis, we reported income of $58 6 million or $1 79 per diluted share compared to $36 1 million or $1 11 per diluted share for the same period a year ago.

In the quarter gross written premiums grew by approximately 18% while gross written premiums for our continuing business increased approximately 21%.

Exited business amounted to less than $1 million in the quarter and related only to two audit premiums every underwriting division continued to deliver strong growth in Q4 with notable performance in our transactional E&S professional lines captives and surety divisions, each up over 35%.

Net written premium grew 27, 6% to $180 million in the quarter compared to $141 million in the fourth quarter of 'twenty one and.

Our net premium retention increased to 68% from 62, 9% in the fourth quarter of 'twenty one.

Primarily driven by professional lines surety and trust transactional E&S for which we have little or no quota share reinsurance.

As a reminder, we expect our net premium retention to be lower in the first two quarters and higher in the last two quarters of each year due to the accounting for our excess of loss reinsurance treaties.

We record the full amount of the expected ceded written premium in the quarter in which the excess of loss Treaty inset.

Moving on the adjusted combined ratio of 92, 8% includes lower levels of catastrophe losses, and an improved overall accident year non cat loss ratio compared to the fourth quarter of 'twenty one.

We had one two points of catastrophe losses from winter storm Elliot in the quarter and a 7.7 point improvement from the fourth quarter of 'twenty, one which was impacted by the tornadoes in the Midwest.

The $1 one point improvement in the current accident year non cat loss ratio was 63, 2% was primarily driven by changing of mix of business.

We had no prior accident year development in the quarter, while in the fourth quarter of 'twenty. One we had a 12 point increase in our loss ratio, resulting from the strengthening of reserves for business subject to the LPT.

The expense ratio was flat compared to the fourth quarter, a 21 year to date the expense ratio was up 181.

<unk> eight points compared to 21% driven by the addition, the addition of underwriting talent and the higher acquisition costs driven by changes in our mix of business.

While certain of our businesses come with higher acquisition costs, the incremental loss ratio improvement is a greater benefit to our overall combined ratio.

Now turning to our investment results net investment income increased 31% to $5 3 million in the quarter compared to the same period of 'twenty one.

For the year net investment income increased 50% to $36 9 million compared to 21.

Our investment portfolio had a net investment yield of three 4% for the year compared to two 7% a year ago.

The increased income in the quarter was principally generated from our core fixed income portfolio and for both the year, both core fixed income and our opportunistic fixed income contributed materially to the growth in net investment income.

The net investment income from our core fixed income portfolio benefited from the rising interest rates and a significant increase in the invested asset base.

As Andrew mentioned, we continue to deploy cash flow to this portfolio as the risk adjusted returns continue to be attractive during the quarter, we invested approximately $40 million in the portfolio at five 3%.

At $12 31, 'twenty two the book yield on the core fixed income portfolio was three 7% compared to two 5% at year end 'twenty one.

Given the current interest rate environment, all new money is currently being invested in the core fixed income.

The opportunistic fixed income portfolio was impacted by mark to market adjustments in the fourth quarter of 'twenty, two but year to date, the opportunistic fixed income portfolio yielded nine 2%.

Our net unrealized investment losses included in comprehensive income in 'twenty, two totaled $48 1 million net of taxes due to the increase in interest rates.

We hold our fixed maturities until maturity and we generally expect unrealized losses or gains to reverse in future periods as the bonds mature.

Our portfolio has an average rating of <unk> and there are no current impairments in the portfolio.

With that turn it over to Andrew for concluding remarks.

Thank you Mark before I summarize and reflect on our performance for Q4, and the full year and our outlook for 2023, Let me give you a brief update on the two first quarter items.

First regarding a material one one reinsurance renewals, specifically, our global property quota share or excess casualty quota share in our professional lines program.

The renewals were orderly and consistent with our plans for 2023, we're pleased with the terms and the quality and consistency of our reinsurance partners partners excuse me.

We also entered into a new whole account quota share for auto liability excluding captives. The nutrient accepted 123 and provides us optionality with respect to portfolio specific reinsurance. We currently have in place for auto liability.

As context, we have been evaluating this for some time in the attractive terms. We achieved is a testament to the quality performance outlook and interest by reinsurers to participate directly in our unique approach to underwriting and claims for commercial auto liability.

Our one one renewals do not change our pre IPO model inputs, we gave for combined ratio and net income, although we expect lower net retained premium for Q1 and Q2.

Secondly, as part of our successful IPO, we received net proceeds of $62 3 million.

As outlined during our road show. These proceeds will be used to support the continued growth of our business.

Turning back to our performance in 2022, and our outlook for 2023 as.

As I noted at the outset of the call market conditions remain favorable with pricing still strong across the parts of the E&S and specialty admitted markets, where we compete.

Skyward specialties position is strong and we continue to invest in our business to further improve our trajectory towards top quartile performance.

Operationally I'm pleased with our progress we achieved a total average rate increase in the high single digits higher than our estimated loss cost inflation in each division.

Submission flow remains robust growing mid teens over the prior year.

Our orderly one one reinsurance renewals in the context of an increasingly challenging environment for seatings validates the quality of our book.

We continued in the fourth quarter to attract a plus underwriting talent and who expanded its segments.

Segments of the market that are strategically important to our growth such as our recent announcements and inland marine and occupational accident.

More broadly we continue to build strong defensible positions with a competitive moat in a well diversified book of E&S and specialty admitted business that spanned numerous product lines and distribution channels.

This will serve us well as market conditions change in the quarters and years ahead.

We also remain steadfast in our focus on underserved niche markets, where we have a clear line of sight to top quartile underwriting performance driven by top tier underwriting and claims talent and utilizing advanced technology and data analytics to amplify the capabilities of our team.

Our engaged workforce and unique culture enables us to move fast and take advantage as market dislocation and disruption presents new opportunities.

In summary, we had another strong quarter and finished the year with real momentum. We're proud of what we accomplished and importantly, we achieved what we set out to do delivering double digit premium growth a low ninety's combined ratio and mid teens ROE we.

We certainly view, our fourth quarter and year end results as a strong demonstration of our strategy in action and that we are well positioned for continued success in 2023.

I'd like to now turn the call back over to the operator to open it up for Q&A operator.

Thank you.

Minor to ask a question. Please press star one on your telephone and wait for your name to be announced.

Your question. Please press star one again.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of Matthew <unk> with JMP Securities. Your line is now open.

Hey, Thanks, Good morning, Good morning, Matt Matt.

Andrew I was hoping to actually perfect segue kind of you talked a bit there about.

The strong pricing youre getting in excess of loss cost trend and I'd say at least certainly this quarter and recently I think fewer and few of your peers have kind of been able to talk about that it's been kind of a narrowing of the gap not a sustaining of the gap.

Can you just peel back the onion, a little bit on the why is it that you guys have had such with such success there.

Two if there's been any nuances to that as you've gone through the quarter in terms of your pricing re accelerating in certain areas or mark has been more just kind of steady across the months yes.

Yeah, So great Great question Matt.

What I commented on in the prepared remarks was.

We're still at high single digits and as I mentioned in the note.

Above our loss cost inflation.

Actually have seen our pricing come off a couple of ticks from the prior quarter. So it's not it's not as if.

We're not seeing a bit of change.

But.

We're still in a position where if our assumptions on loss cost inflation against.

Pure rate, we should still be adding underwriting margin right. It's still a nice delta, but it has come off a bit.

From where we were in the quarter before and the quarter before that where those two quarters are actually high watermarks for us. So so I'm not sure that we're seeing something that's entirely different but it is just a relativity. We feel really good about just sort of the fact that our rate is in a position where hopefully as our loss cost inflation assumptions Chris.

<unk>, we'll see that underwriting margin gain.

Great. That's really helpful color and then one other question if I could.

Mark You mentioned no no development on the reserves during the quarter, but was hoping you might be able to give a little bit more color just on some of the underlying trends you saw as you went through that year end reserve process.

That'd be great. Thank you.

You know, Matt at a high level.

<unk> trending in loss cost is in line with where we had thought it would be.

And as I mentioned, we didn't have any development in the year or in the quarter ex of the LPT. So I would just say the <unk> costs and our development has been is in line with what we thought it would be.

Great. Thank you very much for the color and congrats on a nice first quarter out of the box. Thanks, Matt.

Thank you. Our next question comes from the line of Meyer Shields with <unk>. Your line is now open.

Thanks, if I can follow up on Matts first question I guess I know, there's a lot of speculation broadly.

More than speculation optimism about near term property pricing and clearly your property book as an overly cat exposed.

Wondering whether year to date, Andrew are you seeing any inflection in property pricing for your particular book.

Yes Mara thanks for the question.

So.

Our two biggest concentrations for property our global property.

And within our transactional E&S and within our global property.

We're we're certainly we're certainly seeing it but we're also since we principally right.

Primary layer and we've been sort of at the probably that I would describe it as the top of that the pricing on property where.

Some buyers are making decisions to keep the risk right self insure more et cetera.

I think it's manifesting itself for us in different ways.

Certainly.

Our distribution partners and the brokers are are under a lot of stress to place cat exposed which for us on more technical risks and nurse to our benefit because they turned to us no.

That will give them.

Thoughtful quote and.

And it gives us a little bit of pricing power. So we're seeing it on both sides.

And I feel very confident that that's going to run here for a bit for us.

Okay fantastic.

And then following up on the <unk>.

Reinsurance discussing particularly the.

The whole account quota share.

In the aggregate should we expect meaningful change to the acquisition expense ratio in 2023 from the various reinsurance movement.

No.

And as I mentioned in my notes there.

During the IPO process around our unique approach to underwriting commercial auto liability our unique approach on claims.

That is visible in our results and is visible and the interest and reinsurers.

To support to support us on that line of business.

Okay Fantastic that's very helpful and one last question if I can I guess for Mark.

Hoping for an update on the corporate portfolio duration.

Right at four.

Okay.

It's unchanged as Walmart, we've been we have been able to.

To invest.

Well above five and this past quarter without without stressing our duration on that on the core fixed income portfolio.

Right.

Okay Fantastic that's great. Thank you very much thank you.

Thank you. Our next question comes from the line of Mark Hughes with Travis Your line is now open.

Okay. Thank you good morning, good morning, Mark.

Plenty.

Any guidance you can give us on the magnitude of the lower retained premium in the first half.

I think theres some seasonality to it and then you described.

Some adjustment related to the.

The new agreement for auto liability not going to impact the bottom line.

But what does it do in terms of.

Retention ratio.

Over the next couple of quarters those two factors.

Yes.

Great question and thought it might be coming so first I think just in terms of the first two quarters Mark talked to talk to this we have our large X ol ex ol treaties that set during the first two quarters and as Mark noted from an accounting perspective, the deposit premiums fully recognized in those quarters.

That's really the principal driver on the item that I mentioned regarding the whole account quota share again this was something that.

We because we are in the process of evaluating and negotiating us really over the last two quarters and even during the process I think which we last spoke to you leading up to the IPO.

We have not yet concluded it wasn't in our assumptions.

The nice thing about it is that the terms that we received on that whole account quota share.

Our attractive enough that effectively it's a net wash for us on.

The model inputs that we provided you for combined ratio.

So you should you should assume for all intents and purposes that.

And.

Im not going to say much more than that but that's the context in which we'll make an evaluation and certainly we'll update you as we get closer to that time.

Okay.

And then you mentioned, you're continuing to hire at a pretty good pace can you give us a sense of.

What that looks like or has looked like over the last three months, what do you anticipate in terms of hiring when we think about 2020 for Ya.

So I have the data.

But you'll hear a bunch of play page flipping if if.

If I try to get to that.

I would say that.

2022 was unquestionably a high watermark $2 21 was an important time, we certainly did a lot around aligning our talent around our strategy.

For 2000, 22022 was a high watermark for us in terms of adding.

Underwriting.

As we look forward to this year.

We have a plan which is.

To grow our head count in underwriting by a couple of handfuls of sort of key people in key areas, which would be a slowdown for us.

But at the same time I also will tell you Mark we're very opportunistic right.

There's a lot of high quality people that we have been talking to for the two and a half years that I've been in the seat and.

If a person our team that we view as being the kind of top tier underwriting talent that we've been targeting that we have relationships with.

Our ready to come across we will adjust our plans I feel like we have we build sort of into our assumptions.

<unk>.

The underlying we're going to continue to invest and underwriters.

And any way to characterize it.

Folks we hired in 2022, presumably they're still ramping up.

Any way to say how meaningful that.

Pat.

The debate.

Yes.

Mark mentioned in his remarks.

<unk>.

For areas, where we saw over 35% growth in the first quarter.

And two of those areas surety and professional liability has been a particularly important focal point for us and those are experienced underwriter driven.

<unk>.

Divisions for us.

Captives as much more kind of an opportunity by opportunity.

So the principal places are they earn through on professional and surety of I think we will have a lot more to come there on that.

Appreciate it thank you.

Thank you.

Our next question comes from the line of Tracy Dengue with Barclays. Your line is now open.

Yes, Thanks Tracy.

Great question, we are principally focused on what is broadly falls into miscellaneous it's.

It's probably worthwhile, saying what isn't in there and then I can talk about some of the other pieces that are in there.

Well, we're not writing as we're not writing law firms as an example.

Do have a small public D&O excess book.

Yes.

That book wasn't huge but we've let have video because we couldn't renew at expiring rates plus so it's a pretty small part.

And our principal domain within within professional is miscellaneous, which is kind of like a catch all of everything.

Other areas that are key points of focus for us that roll into that is what we do on an executive lines. That's not public. So obviously private company. We've mentioned to you in the past a few of the classes. We focus on cannabis is a great example, we really do look for very kind of niche areas some distress classes where.

We believe that we can drive the kind of kind of rate thats required.

And in other areas or our health care professional which has been a sort of a key point I'll remind you that.

We announced I believe was either the end of the second quarter in the third quarter that we hired Sarah Lowe to lead that unit.

And we.

We had a team that followed her and so obviously, that's coming through as well in some of the growth that youre seeing.

Got it.

Yeah.

Yes.

It might not be visible in the results.

Since you asked the question ill go into my to the one one renewals.

And within professional.

Look we we had a very what I view as a very positive renewal for us at one one and professional.

Part of that was we elected to to keep more.

We buy in excess of loss cover and we kept a little bit more of that.

Just a straight up.

Risk return tradeoff, where.

We are getting attractive terms across the board, but we felt like that additional retention was something that was better for us.

So we improved our terms on the on the part that we seeded but we also kept more.

And so there is an area and I would expect as we go through the remainder of the year much of what we have running through the year other than our cat renewal is quite portfolio specific covers and as we come to those I'm sure you'll you'll if you ask a similar question in future calls, but we will give you an update we will seek those same kinds of opportunities as we.

We did year with professional at one one.

Got it thank you.

Thank you.

Thank you. Our next question comes from the line of Gregory Peters with Raymond James Your line is now open.

Good morning team Skyward.

Good morning, Gregg Hey, Greg.

So I guess.

The first question.

Just.

You talked about the reinsurance program one.

One of the things Thats happened as you know is there has been pressure on ceding commissions. So.

If I look at your expense ratio for the full year 'twenty two it's up from where it was in 'twenty, one and obviously things like surety have an influence there.

As you look forward.

How do we think about pressure on ceding commissions at the industry level and how do we think about your expense ratio for 23 versus <unk> 22.

So great question, Greg Thanks for that.

Ill.

Going to go back to something.

We have an opportunity to speak with you and others about leading up to the IPO, which is.

We have two parts of our business that are very reinsurance intensive captives, which is part of the structure and our global property.

Underwriting division, which is structurally the way that we've built that and we just came through.

The global property quota share.

And I can just say to you expressly that.

The ceding commissions that we received were entirely consistent with our plan and the inputs that we gave you. So feel very good about that the cap. This piece, we don't have the same kind of marketplace.

Exposure there.

You would see.

In sort of a guaranteed cost market and once you sort of weigh those two large certain parts of our portfolio that are that are big quota share components.

Sure.

I think for the remaining parts, we feel really good about about.

Our structures and where we have a seed.

Quota share basis, the seeds that were receiving it.

Do not expect as we look forward for for 2023 to see pressure run through our acquisition costs in our combined ratios.

In anything.

Side of the inputs that we gave you as part of the process leading up to the IPO.

Okay.

That's good color.

The other area that.

It's worth just revisiting.

As we look at the components of net investment income for the fourth quarter and for the year.

You spoke.

Typically about the core fixed income and allocating all of the funds into that.

How do you how are you thinking about the cadence of the opportunistic fixed income for 'twenty three I feels like it may start off a little bit lower before there is some.

More normalization levels.

Any guidance you can help us with on that would be helpful.

For sure yes, great Great question Gregg.

Greg.

By the way, we do feel great about the.

The core fixed income environment, I mean, when when we're investing in new money.

Five pushing hot five five.

That feels pretty good.

Our our certainly our belief and hope is that also the loss cost inflation environment.

We're not deploying capital into the opportunistic mixing them in fact actually it is it will be.

Source in which.

Invested capital comes out and we will likely reinvest elsewhere.

Over time.

Look we feel great about it and I think Mark Mark gave you the stats on what the yields for that portfolio were in in this past year, which was which is very attractive. The volatility is something we always talk about but it really comes down to in the end we hold in there to equities one public.

One private.

We're well into the money on those unfortunately.

You do it you sort of go public and you are picking up the volatility without the history that we are well into the money and we feel like those are those are two really good positions that overtime the value is going to be crystallized.

Run rate and the kind of positive returns.

That youll experience over the long term coming from that portion of our of our investment portfolio. We feel really good about it it's been a it's been a great performer for us.

Setting aside some of the volatility we're really pleased with it.

Got it makes.

Makes sense. Thank you.

Thank you.

Thank you. Our next question comes from the line of Paul Newsome with Piper Sandler Your line is now open.

Good morning, Thanks for the call.

Good morning, Paul.

Maybe a little bit.

Different question, we've talked a lot about pricing, but what about terms and conditions have we seen any change.

Material and the terms and conditions in the various businesses.

Particularly interested in property.

And then the flip side I guess sort of as a follow up question on the <unk>.

On the insurance side as well because I've heard rumblings and we certainly I certainly see this in the past where.

Do you see.

No changes in terms and conditions as the cycle moves along.

Well Paul Thanks for the question by the way.

A lot there so.

Im going to focus on property right.

I would say to you that away from property for R.

Our business things are very stable.

On the property side I'll go back to we have two different sort of points of focus and within.

The property for our transactional E&S.

Our underwriters Theyre just.

Well I'd say to you that the ability for us to have greater we can charge more for those coverage grants absolutely. There is no question about it as a more favorable environment, but its also.

Principally a fire exposed barrels on the global property side. There's no question about it that terms and conditions are tightening tightening.

We're certainly leading the charge on that we'd see that amongst some of our competitors.

Two to our insureds to the extent that.

A particular cover is is really important obviously there is just a much greater ability to charge to provide that cover but theres. No question that there is a tightening.

On our on the reinsurance side I'll remind you that five one is our cat renewal, which is probably the place where you would know Steve the changes in terms and conditions.

And I'm sure I'll be able to report out closer to the time.

What what that tells us but.

We're very conscious of that as we are writing business now.

The things as well that we are hearing in the market, but I can't give you any direct experience because we haven't been through that and in all of our other <unk> such as the global property quota share there wasn't anything that for US was material in terms of the terms and conditions.

That would change how it is that we're approaching that business.

Okay.

Great. That's helpful. I appreciate the help.

Thank you.

I would now like to turn the conference back over to Natalie Schoolcraft for closing remarks.

I look forward to speaking with you again on our first quarter earnings call. Thank you and have a wonderful day.

Yeah.

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

Q4 2022 Skyward Specialty Insurance Group Inc Earnings Call

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