Q1 2023 Skyward Specialty Insurance Group Inc Earnings Call
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Good day, and thank you for standing by.
Welcome to the Sky word specialty insurance Group conference call. At this time, all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.
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Please be advised that today's conference is being recorded I would now like to hand, the conference over to Natalie Schoolwork head of Investor Relations. Please go ahead.
Thank you Amanda good morning, everyone and welcome to our first quarter 2023 earnings Conference call today, I am joined by our Chief Executive Officer, Andrew Robinson, and Chief Financial Officer, Mark Castle.
We will begin the call today with our prepared remarks, and then we will open the lines for <unk>.
Our comments today may include forward looking statements, which by their nature involve a number of risk factors and uncertainties, which may affect future financial performance.
Such risks 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 10-K that was previously filed with the Securities and Exchange Commission.
Angel schedules containing reconciliations of certain non-GAAP measures along with other supplemental financial information.
But it is part of our press release and available on our website Skyward insurance Dot com under the investors section now I will turn the call over to Xyrem CEO , Andrew Robinson Andrew.
Thank you Natalie.
Morning, everyone and thank you for joining us.
Q1 was another solid performance and we're pleased with our continuing strong financial and strategic momentum.
Specifically gross written premiums grew approximately 28% in the quarter Mark will talk more about premiums, but at a high level, we continue to benefit from broadly favorable market conditions and strong execution across our underwriting divisions.
Our adjusted combined ratio was 93% inclusive of cats, and adjusted operating income of $15 $5 million or <unk> 42 per diluted share.
Were minimally impacted by first quarter convective storms with cat losses of only one eight points on the combined ratio and well within our retention.
We continue to realize pure rate in the high single digits and that is above our loss cost inflation estimates.
We also continue to generate very strong cash flow from our operations in this last quarter, we invested our new money at five 3% all into our core fixed income portfolio.
We achieved an adjusted return on equity and tangible equity of 13, 3% and 16, 5% respectively for the quarter.
We believe that this result, together with our strong growth further reinforces the financial momentum we expect will continue in 2023.
Strategic investment in our business portfolio continues as evidenced by our recent inland Marine and global agriculture launches and we continue to add a plus talent and invest in technology to amplify the capabilities of our underwriters and claims professionals I'll talk more about this later.
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 $15 6 million compared to $16 3 million for the first quarter of 2022.
As Andrew noted.
Adjusted operating basis, we reported income of $15 5 million or <unk> 42 per diluted share compared to $19 8 million or <unk> 61 per diluted share for the same period a year ago.
In the quarter gross written premiums grew by 28%.
Every underwriting division grew in Q1 with notable performance in our transactional E&S global property in agriculture professional lines surety and captives divisions, each up over 20%.
Net written premiums grew approximately 49% to $202 million in the quarter compared to $135 million in the first quarter of 2022.
First quarter of 'twenty, two net written premium was impacted by the restructuring of a global property quota share reinsurance adjusting for this transaction and 22. The net written premium retention of 56, 1% in the first quarter of 'twenty three is consistent with the prior year quarter.
Now moving on the adjusted combined ratio of 93% includes an overall accident year non cat loss ratio and an improved expense ratio compared to the first quarter of 'twenty two.
Two four point improvement in the current accident year non cat loss ratio to 61, 1% was driven by the runoff of higher loss ratio exited business and the changing mix of business. We had no prior accident year development in the quarter.
During the quarter catastrophe losses were $3 2 million and accounted for one eight points on the combined ratio.
Catastrophe losses were primarily from wind hail and tornadoes in the south and Midwest compared to the first quarter of 'twenty, two which was not impacted by cat losses.
The expense ratio improved one point compared to the first quarter of 2022, driven by higher earned premium base and increased commission and fee income.
Investments in the business were lower than planned and we expect a higher run rate for the remainder of the year.
Partially offsetting the expense ratio improvement were slightly higher acquisition costs driven by the change in our business mix I just highlighted.
Now turning to our investment results net investment income decreased $10 5 million to $4 6 million in the quarter compared to the same period of 2022.
The net investment income from our core fixed income portfolio more than doubled.
$6 3 million from $3 million in the prior year quarter, driven by an improving portfolio yield and a significant increase in the invested asset base.
Our core fixed income portfolio is now $673 million up from $607 million at December 31, 2022.
As Andrew noted, we continue to deploy cash flow to this portfolio given the attractive yield environment.
During the quarter, we invested about $38 million in the portfolio at five 3% without increasing duration.
For the quarter the average book yield on our core fixed income portfolio was three 7% compared to two 7%. This time last year.
The decrease in our net investment income in the quarter was generated by our opportunistic fixed income portfolio.
Both first quarter of 'twenty three in the first quarter of 'twenty, two were significantly impacted by equity mark to market adjustments.
During this past quarter, the marks were negative compared to a positive marks in the first quarter of 2022.
Despite the volatility we've experienced over the last two quarters. The inception to date return for this portfolio is approximately 8%.
This portion of our investment portfolio has decreased as we continue to deploy cash to our core fixed income portfolio.
I wanted to touch briefly on commercial real estate market in the regional banking as it relates to our investment portfolio exposure.
Exposure to the economically sensitive parts of commercial real estate, including office and retail is less than 3% of our total investments and when you do not have any concerns about this portion of our portfolio.
With respect to regional banking during the quarter, we recognized realized losses of $1 5 million net of tax related to U S.
SDB in signature Bank at March 31, 2023, we had minimal direct exposure.
At March 31, we had over $285 million in short term and money market investments, resulting from strong operating cash flow of over $100 million as well as the IPO proceeds.
During the quarter our yield on short term short term investments was slightly north of four 5%.
As we've discussed we will be deploying this liquidity into our core fixed income portfolio during.
During the quarter, we closed a new credit facility that provides us with capacity of up to $150 million.
Of which we drew $50 million to pay off our term loan the new facility gives us plenty of financial flexibility.
Our leverage ratio is currently 20% and provides us with sufficient significant debt capacity.
Lastly, regarding our may 1st property catastrophe renewals.
The renewal was orderly and consistent with our plan for 2023, and we're pleased with the price and the terms the new Treaty provides $28 million of cover in excess of a $12 million retention previously we had a $10 million retention.
The $12 million attachment point is actually lower on a modeled return periods than our expiring cover and the current cover is well in excess of a one and $2 50 year event.
That I will turn it over to Andrew for concluding remarks.
Thank you Mark.
From an underwriting profitability perspective, we had a very strong quarter.
And drawing a 28% is no small feat, particularly given our express focus on executing our ruler niche strategy.
We are meticulously building our business with a view towards long term durable positions and top quartile underwriting performance let.
Let me highlight two areas with very strong growth in Q1.
In transactional E&S, we grew over 100% this quarter.
This division has been built around a core team I've personally known for over 15 years, whose long term underwriting performance has been outstanding.
This division writes a true surplus lines general liability and property book of business that is reasonably short tail low frequency and monetize severity with typical policy size of 30 to $40000.
This is a part of the market where real understanding of exposures are acquired it's too large and complex for binding authority yet below the level that is subject to large price swings at the larger account part of the market can have.
Our property focus in this division is non cat coverage for which fire is the principal peril, we write primary only with 60% of the policies limit entirely contained within our cover.
The severe submission flow has been incredibly robust and it terms and conditions are extremely attractive.
Now more than ever with our distribution partners are stressed with cat exposed account placements they need real technical expertise and problem solving on a non technical E&S risks.
Our strong growth and substantial underwriting contribution this general Dis division generates comes without additional volatility to our business.
Turning to charity.
Our growth this past quarter was over 50%.
The background backbone of our growth is the outstanding talent, we have brought on all of whom bring a very strong market for following which in turn has allowed us to add seasoned and well understood books of business.
The talent has come to us because of our unique culture and desire to invest in this division or.
Our growth is born out of this team's creativity and solutions, but the principles that we bond and the distributors that we support view as distinctive and hugely valuable.
We invested in and implemented an entirely new surety platform in record time, enabling efficient growth and providing us with analytics. We believe are amongst the very best in the industry.
Today. This is a hugely valuable division generating excellent results.
While I highlight these two divisions I view our efforts in every division and every unit in the quality and distinctiveness of our underwriting claims team teams in the same way we continue to build a highly valuable specialty carrier for the long term and well time will tell I and our leadership team believe we are doing this the right way.
To amplify the points above as it relates to the current quarter. We again achieved a total average rate increase in the high single digits higher than our estimated loss cost inflation. We are not overweight in the lines that received huge rate increases over the last two to three years, such as public D&O excess habitation cyber and others.
Many of which needed those huge rate increases due to years of under pricing relative to loss cost inflation.
Similarly should not see the big downdraft as prices moderate.
Our discipline regarding pricing is evident in our new business as we now closing on nearly three years of driving new business pricing at or above the pricing of our in force book.
We believe that our new business contribution to our underwriting margins is at a level consistent with our renewal book.
Retention to remain steady in the high Seventy's again, an indication that we're striking the right balance on rate and retention.
Submission flow remains robust and was over was up over 25% as compared to the prior year.
Market conditions by and large remain orderly with pricing still attractive across most of the parts of the E&S in specialty specialty admitted markets, where we compete.
That said there is no question that social inflation is real and measurable, particularly as it relates to personal injury. We.
We are watching loss costs, very closely and managing our excess of exposure across our book.
We believe that an irrational market. This should be a continued impetus for pricing increases.
To wrap up Skywards position is strong and improving and will continue to invest in our business to further our trajectory towards top quartile performance.
With a strong first quarter and is a great start to the year.
I would now like to turn the call back over to the operator to open up for Q&A operator.
Great. Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Tracy from Barclays. Your line is open.
Good morning.
Andrew You mentioned that you think cure rate in the high single digit. If you included part of exposure that acts like rate what would pricing look like.
Tracy good morning by the way and thanks for the question.
So first thing I would tell you that exposure for us in the first quarter ticked up a couple a couple of points, which we were quite pleased to see.
Yes.
Lot of folks talk about the portion of exposure that acts like rate and we certainly have that in our business.
I would say that we try not to take credit for it it's hard to it's hard to isolate.
In general for Us it looks like it's probably about one additional point in the quarter, but again, it's really hard to isolate on that specific feature I think the higher the <unk>.
More important point about this quarter Tracy for US is that we saw it tick back up in exposure in the quarter, which of course is a really positive sign in general for our book of business.
It seems like we had a little bit of economic recovery running through our book in the first quarter and as you rightly note theres, probably some rate that that runs through as a byproduct of that.
Okay great.
Also answered per prior conversations I think you guys took a more cautious view that if property pricing increased meaningfully in shirts, which are to retain more can I just assume that did not happen and any kind of preview have on property.
Second quarter would be helpful.
Also a great question so no.
It did happen I think that.
I did say earlier on that.
I think in general we've been leading in certainly on the global property side.
I think we've been very strong in our pricing on our transactional E&S.
And we definitely saw on the global property side instances, where we really thought that are our clients. We're maxed out in terms of where they are willing to retain risk we saw some tick up.
Interestingly, if you look at global property, we Didnt add a huge amount of exposure into our book in Q1.
Much of the growth came through.
Underlying values.
So effectively exposure there, but a lot of it was just through price and we moved our attachment points up and so the net exposure to US was not that great. I think we're seeing some of that running through and transactional yes, but were definitely growing units and transactional E&S and we are seeing.
The higher retention points in a larger portion whether it be sub limits are co participations.
By our clients just simply because I think pricing is at a point, where they're having to make those tradeoffs.
Thanks.
Quarter, our U O.
Alright, Yes go ahead, you did ask that.
I missed that part I would say for <unk>.
For us we feel we feel good about the growth in the second quarter are consistent with the first quarter. The units dropped down for us in terms of like the available market in the second half of the year. So even if the growth did continue in the second half of the year the sort of the contribution to our overall growth as a company would be lower.
The second half of the year I also.
Just generally think that.
As we've talked about we're not a cat writer, but certainly in our global property book, we pickup cat exposure you have more of that in the first half of the year. The second half of the year tends to be more technical risk which is.
<unk>.
Slightly different a.
Part of the market in terms of like the competitiveness and so forth. So.
I would summarize your question to answer your question is we feel.
Probably a bit more confident in the growth profile in the first half of the year. The second quarter, continuing what we saw in the first and probably down a little bit in the second half of the year, but that's not to say that we won't still see strong growth in the second half of the year.
Thank you.
Thank you.
Okay.
Our next question comes from Matt <unk> from JMP.
Hey, Thanks, good morning.
Matt.
Maybe I'll just follow on <unk> question, there and kind of zoom out from from global property to looking at kind of all the underwriting divisions.
28% growth is fantastic and I think better than we expected to start the year, how should we think about kind of thinking forward throughout the year, where you really see some opportunities and where you might.
Yes.
Our caution, but maybe maybe there are things in the first quarter that just kind of you took a swing out because they were there and maybe we can't plan on them being there going forward.
Yes, good morning, Matt and thanks for thanks for the question.
Look I would start off by answering your question is.
We're pretty darn focused on the quality of our growth.
I will say that.
As it relates to us.
The way that we grow the way, we think about our business is pretty darn disciplined we're not we're not necessarily an opportunistic writer, it's not to say that there is not some opportunistic Reits are first quarter there were but.
I would not sort of til what happened in the first quarter as it being driven by a bunch of opportunistic right. I think we made a number of great investments in our business.
<unk> heard from us in terms of the talent that we brought in areas like professional liability our transactional E&S, our surety and you can see the growth in those in those areas coming through so.
Our efforts are being rewarded we're doing things the right way.
That said look if youre trying to build a durable high quality.
Book of business and you hit a 28% growth in the first quarter.
Pretty darn outstanding.
That is it's hard to keep that up over the course of a full year, it's not to say that we couldn't I think we feel that the second quarter will be a strong second quarter. We can see that already I do think that the second half of the year, we're going to have strong growth, whether it's something that is north of 20 like it was in the first half of the year.
That's not necessarily what we're planning for.
And quite honestly, if we achieve it that would be fantastic, but we won't we won't put a lot of opportunistic business into our into our book we're trying to build this for the long term I think the quality of our growth is something that I would just highlight to you that.
<unk> is a key focus for us.
And hopefully as we look out two or three years from now much of the business that we put on to the books sticks to our ribs, because it was put onto our books the right way under the right terms and conditions.
They are looking to a company like us to give or give them a good solution.
I am hopeful that time will bear out that what I'm describing to you is actually the sort of the characteristic of the growth that we're putting on here in 2023.
That's really helpful. Thank you.
And then just one other I guess just back to the.
Just hoping we could dig a little deeper on kind of the pricing commentary being ahead of loss cost broadly as you think through the various different.
Underwriting divisions are there certain areas that that.
You really like how it's looking maybe you see inflation moderating or loss cost behaving better pricing. So there are there other areas that you might feel that youre a little more cautious that you maybe are cautious on the loss cost front, our pricing needs to accelerate just trying to get a feel for kind of what a more green lights for you guys in other areas, where you might.
Be exercising a little more caution or discipline.
Yes, well look I think that.
I am concerned about.
As we all are with social in place around personal personal injury right. I mean, it's just a just a topic that we think is.
It's a watch out topic.
I think we message to you and others in the first quarter that you did if we did a whole account quota share on auto not.
Not because we don't like what we're doing in auto but because we are we are exposed to a macro trend that we are watching that we think that the right thing to do is keep doing what we're doing.
But.
But but protect ourselves so I would just say personal injury.
Particularly excess exposure, we might not have that excess exposure the excess exposure might be written over us, but then exposes our primary $1 million of limit I will give you just as one example, well first of all I'd say I feel really good about about most areas right now, but if you look at our first quarter ratings for example.
We wrote as as a percentage of our gross written premiums auto was.
Was it about 18%.
Know that last year as a percentage of our portfolio as it was at 22 or 23%. So that just shows you that we're being a bit more cautious on the gross we're certainly being more cautious on the net by having that protection.
But we still feel like there are great opportunities out there. They are just they are just.
Yes, just macro concerns that we see and then you combine that with instances of what I, particularly describe as a select number of <unk>.
<unk> is out there a lot of front end solutions that are just they just don't don't operate as if they are recognizing the same things that we're recognizing in so.
Those are the instances, where it will be a little bit more cautious, but when I look across what we have in our medical stop loss A&H business, what's happening and our our professional liability lines, which are broad across across allied healthcare professional even what we see on the private company management liability.
Certainly what we see.
In property all of those are areas, where we feel very good about.
Our confidence in the loss cost environment, and where we are with our technical pricing and where we are with additional rate that we're adding quarter on quarter.
That's very helpful color. Thank you for the answers and congrats on a nice start to there.
Thanks, Matt.
Thank you.
Please hold while we queue up our next question.
Okay.
And our next question.
Okay.
Please bear with us for one moment.
Okay.
Okay.
Okay.
Please bear with us, we're having a bit of a technical difficulty that we're just troubleshooting.
Unfortunately, the management team hears talent is insurance and not entertainment. So we have we have nothing we can do to bridge the time.
Right now.
Yes.
Great.
<unk>.
Okay. Our next question comes from Mayor She'll turn it K B W.
Good morning, there how are you.
Hi, this is actually Derek on Premier.
Derek.
Good morning.
So for my first question is on the operating expense ratio, which came in a lot lower than we had expected and I know you had called out premium leverage and lower investments kind of impacting that is there anything else unusual in there that lowered the expense ratio and as your investments can accelerate throughout the year, how should we think about the expense ratio.
Throughout the year.
Yes, so great question by the way there are three principal components that that drove a lower expense ratio in this quarter. One as you rightly mentioned it was just simply we had more in premium running through giving us a bit more leverage.
The second real notable thing is that we have in our expense ratio as you know we.
We run.
Some fees into effectively as a contra expense in our expense ratio and that was up a little bit in the first quarter. There are some seasonality and some benefits.
Probably will not repeat and then the third was we had expectations for investments that have been delayed about a quarter.
And so some of those investments.
We had planned for running in just just didn't run in which.
Which is great on one hand, but we do see most of those investments as being directly related to the profitable growth in our business right. So.
Simultaneously well its benefits one period. It also probably delays a tad bit of the growth that otherwise we would expect at a later point, but those were the three principal contributors.
Okay. That's really helpful. And then my second question is going back to global property.
Obviously property pricing is probably well in excess of loss trends and you said you didn't add much exposures in the first quarter can you just help us think about the maximum exposures youre willing to take on for global property, maybe as a percentage of the business or premiums.
Given your focus on kind of eliminate underwriting volatility.
Yeah.
Listen I don't I think that that.
We are not there is theres not a practical governor on what what those guys what our team in global property rights right. So.
They see and have familiarity with the bulk of the accounts that are sort of in the addressable market.
As you May remember, we write circa 100 accounts right. So that's practically what we're writing.
And certainly we're going to add some accounts, but there is no governor it's really just whether we are satisfied with.
The quality of the right for us and look.
Understand that Theres, a good deal of talk amongst our industry about how a lot of people are going.
Heavy on underwriting property and we certainly are seeing.
Tremendous opportunity there and we're taking advantage of it but.
It doesn't necessarily mean that that youre still going to tour right or is one of my colleague says if you did a cross section of the profitability of the property industry entered in totality not just maybe the cat reinsurers today.
It's questionable where the profitability stand. So we still are aiming to pick and choose our shots were not limiting that team.
We have obviously, a very conservative posture as it relates to cat you can just see that by the.
The size of our Cat program and our attachment points.
And so.
If the market continues we will continue to grow there, but I don't see us, adding a monstrous amount of exposure.
Changing the profile of our business, but that's not because we're constraining them. That's just that's just the way that we're operating.
Okay, great. Thank you very much.
It's Craig.
Thank you. Our next question comes from Gregory Peters from Raymond James.
Good morning, Greg how are you.
Good morning, everyone.
So Andrew I was listening to your comments.
Around the reinsurance you said the new program renewed.
<unk> 8 million extra 12, correct. So.
Let's let's sort of look at that 12, how are you thinking about given the growth that youre doing in transactional E&S in global property, how do you think about <unk> and in the context of the fact that we're hitting summer weather in the third and fourth quarter Hurricanes. How do you think about what types of things would have to happen for you actually.
To hit our retention a full retention in a given quarter, just because of all the changing and moving pieces.
Yes.
So it's a great question.
Sort of unpacking, our cat program too much that it is.
$12 million retention for us is about a one in 10 year return period. When you consider all perils alright. So it's a it's a pretty I'd say, it's a pretty conservative.
Pretty conservative attachment point.
I'll just I'll I can reflect on is.
My experience in how the book of business has been shaped.
And the thing I will remind you is that we didn't touch it last year.
<unk> was a pretty big event, certainly for others, they touch their cat programs.
The only event that.
That hit Us and I'm trying to remember into Louisiana.
Couple of years back.
Where we touched the bottom of our program.
That was very unique right and that it was our intent storm that came into one location and we barely touched the bottom of our program in our program at a far lower attachment point So for me.
What that tells me is that we've been tested with a lot of things here winter freeze is a lot of convective storms certainly hurricanes.
All throughout the Gulf on both sides and and yet we've had very minimal impact and certainly wouldn't be something that would it would it would hit a $12 million attachment today. So it's really hard to identify I will tell you that when we think about our exposure, we think about the frequency of severity or multiple cat <unk>.
<unk>.
And without unpacking. It we do have some cover that drops down on second or third event that is lower than that $12 million attachment point, because we are trying to protect ourselves against that second and third event and that's part of the construct that I think is unique to how we approached it.
The cat cover and I would add more point you to that if there is a series of events.
And maybe on the second or third where our cover drops down that.
That there may be an attachment.
That makes sense, especially the dropdown on the second and third.
Can I pivot.
You talked about the results on the opportunistic fixed income.
You briefly address some of the exposures.
Whether it's the banks et cetera. So I guess two questions. Just as you think about the opportunistic fixed income for the balance of the year. It seems like considering where the market is there can be some headwinds just wondering if you have a perspective on that and then if I look at your balance sheet.
And and there is in the asset section you have mortgage loans listed.
And at cost at the year end.
<unk> two is just over 51 million and then I look at the fair value at March 31st dropdown of $42 million. I know you said you talked a little bit about your commercial exposure of real estate, but.
Can you walk us through what's going on inside the mortgage loan bucket too.
<unk>.
Okay, well that was a lot Gregg thanks.
The way the way I look at the opportunistic I think it's worth framing first that the returns inception to date on the portfolio have been strong at right about 8%.
We like we like the portfolio.
The anomaly that we that we deal with is the volatility due to due to the accounting and the structure in which we invest.
Let me add two more points to your to your question.
I think it's worth emphasizing that in light of the current yield environment, where we are today and where we have been.
For the better part of a year all of our new money is going to core fixed income and that portion of the portfolio is now meaning the opportunistic is less than 15% of of the total portfolio. When you talk about the different buckets. I think you are referring to the commercial mortgage loan.
<unk>.
Frankly, the decrease there is we got paid.
On one of our loans. So that's the reason it's down.
Does that help.
That does I'm not sure I've got clarity on how to model this going forward and not the mortgage loan piece the opportunistic fixed income piece, but.
I guess given the market.
Caution is probably the best course of action.
Yes and.
We'll take it offline and I can get into the different components of the portfolio.
When we file the Q youll get some more clarity on the different pieces, if that helps but I would add I would add Greg one important item and I think Mark mentioned this in his prepared remarks, which is.
For us it's important as we have an important for us to convey to you that.
We don't just sort of look at superficially what.
What are the allocations, we are understanding the underlying exposures and.
There is very little exposure to.
Two.
Office.
Buildings and real estate.
Retail.
And so if you if you want to just think about this in terms of.
In terms of sort of the economically sensitive.
Really like what we have with like the quality of what we have and also just the sort of the nature of our C. MBS.
Which are these are not long dated these are not long dated loads and in most cases. They are very short loans they tend to be bridged loans.
So you can you can sort of see them with I think probably with a little bit more confidence and clarity, which we do.
Makes sense good point, thanks for the answers thank.
Thanks, Greg.
Okay.
Thank you.
Please go ahead with us while we queue up the next speaker.
Okay.
Our next question comes from Paul Newsome from Piper Sandler.
Morning, Paul.
Good morning, congratulations on the quarter. Thank you. Thank you.
To revisit.
Growth in the.
First quarter being.
Being kind of a bold plan B global plan does that have any implications score as we think prospectively.
The combined ratio and maybe the allocation between loss and.
The expense ratio I think of properties.
Generally a lower combined ratio surety tends to have a higher expense ratio.
Is it enough of a change with the <unk>.
Unexpected growth that we could see something materially change in the <unk>.
The composition of the combined ratio.
Great by the way it's great question.
Think that our general view is we have to wait a couple of quarters before we call that right because written premium.
There is a mechanical thing going on here I've written premium skewed as you rightly noted touring Christopher one.
Excuse me sorry about sorry about that Paul So I was just saying that was there was somewhere in the background that was not us.
The written premium definitely skewed towards.
Some of those divisions that you rightly note or more.
There are there their contribution on loss ratio is better that said, it's on a written basis, it's taken a while to earn through and we'd want to see the trend continue for a couple a couple of quarters before we start to declare victory in terms of what this might mean on our loss ratio I think put differently.
The inputs that we provided to you and to others pre IPO around where we were really thought our our X cat accident year would be.
It still stands it's our working assumption and if anything changes as the earn through that comes through it's a chance for us to be a little bit more conservative than the conservative this that we already have.
Around where it is that we're setting our accident years, but it will take some time I think we'd like to see two or three quarters of continued kind of development.
Of the portfolio towards those those other other parts of our business those divisions to be able to start to see that and assume that we want to let that flow through on accident year.
Great.
Maybe a shift to a longer term question.
I know you folks are always looking to build new products and new divisions.
Any update on that.
As we go into 2023.
Obviously wouldn't affect this year that much but certainly has moved back to you.
Hugh.
Yes, its more business online.
It's a great. It's a great question.
I certainly wouldn't say that that we're pausing because that's not the right way to describe it but I will say is that.
We.
I say this and I kind of repeat it which is that we become a magnet for the best talent in our industry. There is no question about it and.
When I'm done today ill be interviewing a fantastic candidate for one of our divisions.
And we have lots of opportunities.
That are really about adding to what we already have in place.
One area I am hopeful that youll see us make even a more concerted effort to grow and develop as in captives.
We have some perspective, there about how we can take that to another level.
And so with the addition of of inland Marine and AG in the first quarter. We added some lines are late last year, particularly in <unk>.
We think that we have a lot here that we can grow into and probably add talent around what's already in place that said ordinarily I would give you sort of a heads up on one or two things that we're working on I think theyre, probably earlier in development to sort of declare that here a couple of things that you should be looking for from us.
Thank you very much choice I appreciate the help.
Thank you.
Okay.
Okay.
Operator.
Thank you.
And our final question comes from Mark you from <unk> Securities.
Mark.
Good morning, Mark how are you.
Good Andrew Good hope, you're well also and good morning, Mark how are you on the.
On the commercial auto have you started to see have you seen.
Deterioration or the.
Maybe not in your performance, but in some of the key.
Claims frequency severity I think you've described how you are taking steps to protect yourself from that is that something that.
Youre starting to see is visible in the book of business.
Yes so.
Maybe just a macro step back right. So as you as you know that.
We really have.
We really have sort of three core components within our commercial auto.
Portfolio, one is our specialty transportation, which is principally intermodal trucking.
We often have talked to you and others about the unique things that we do particularly using technology. There that we believe allows us to do something vastly different than the industry on our underwriting and our claims.
We have <unk>.
Closure through our captives, which of course is directly shared with the cabinet participants and as you're also aware we have one specific program, where where we are.
Our material owner in the business and those are three points of focus.
What I'd say to you is that yes frequency, obviously unsurprisingly, we got a we got a benefit during the Covid period Thats no surprise to not unique to our book.
Let's just say that it's kind of oriented back towards expected levels on the severity side.
Going back to the comments earlier severe.
Severity is definitely up.
Can measure we can see it we can actually point to.
<unk> features and social inflation.
The good news is that we have and continue to be pricing ahead of our loss cost inflation by the way our loss cost inflation on our auto book.
Is is right around nine or 10% right. So it's a pretty high number.
I think our just our general view in the macro sense is that that kind of backdrop is not conducive to two sort of long term durability of a line of business or its something has to change.
Part of the issue here is that.
There are examples of <unk>.
Fronted solutions with <unk> that I, just I view as.
It's just simply irresponsible.
Don't seem to understand.
The features of exposure loss cost inflation and it's.
Our sense is that's fine it's a matter of time before.
Those entities that reinsurers will learn that that that that doesn't work.
And if we find that it's a opportunity for us too.
Lean into that we will right now we like our portfolio, we are sort of being very smart.
Selectively offensive.
But as I mentioned from my remarks earlier in terms of the overall proportion obviously more defensive than we are relative to other parts of our business and we think that that's appropriate.
I would not I would not throw a caution or anything around our book of business, we still feel very good about it we're doing the right things.
It's just some of the macro context that they just simply can't be ignored.
Yeah understood I appreciate all the detail and.
I think you've touched on this but is surety do you think surety grows faster same pace, a little more slowly than the overall topline this year.
Well I'm, probably going to watch our general counsel cringe with my response rate, but we this year will probably cross or will be circa if the market doesn't change of $100 million surety business.
That is a material size surety business.
It is a it is a terrific business, we're very proud of it but obviously growing becomes more difficult as you're sort of lapping yourself on growth year on year on year.
The thing that has been distinctive for us that that I think gives us confidence is our ability to attract just amazing talent and when that talent comes across to us.
It has been the case to put to this to this point that the business that that has been the business that they've served has followed them right. So we are we are sort of growing in ways that are that feels a bit almost like book roll issue. If you will without it being book roll. It's just it's just the business follows those.
Those those great underwriters and we seem to be able to attract.
Really outstanding underwriters that we know that the books of business that we know and we like.
And if that continues we can maintain the growth.
But it gets harder obviously as you get larger you get to the kind of size organization that we are today and.
And by the way at that size.
But you are moving into one of the top <unk>.
In the country and in our part of the market when a small handful of folks who really serve sort of are part of the market. So.
My answer to you is it can be both it could be that by its very nature, it's going be more difficult. If we continue to attract great talent that we've been able to attract we can continue at the kind of growth that we've seen to date.
Very good thank you.
Thank you.
Thank you I would now like to turn it over to Natalie for closing remarks.
Thanks, everyone for your questions for participating in our conference call and for your continued interest in and support of pirate specialty.
I'm available after the call to answer any additional questions. You may have we look forward to speaking with you again on our second quarter earnings call. Thank you and have a wonderful day.
Yes.
Okay.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Now come out of this only happened or not this is not going to happen.
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Okay.
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