Q3 2023 Skyward Specialty Insurance Group Inc Earnings Call
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Thank you for standing by and welcome to Skyward specialty Insurance's third quarter 2023 earnings Conference call.
At this time all participants are in a listen only mode. After the speaker presentation, there will be a question minutes per session.
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I would now like to hand, the call over to head of Investor Relations Natalie Schoolcraft. Please go ahead.
Thank you Latif and good morning, everyone and welcome to our third quarter 2023 earnings Conference call.
Today I am joined by our Chief Executive Officer, Andrew Robinson, and Chief Financial Officer, Mark Hustle.
Begin the call today with our prepared remarks, and then we will open the lines for question.
Our comments today may include forward looking statements, which by their nature involve a number of risk factors and uncertainties, which may affect.
As for 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 always in our 10-K 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 skyward insurance Dot com under the investors section.
Now I will turn the call over to <unk> CEO, Andrew Robinson Andrew.
Thank you Natalie.
Morning, everyone and thank you for joining us.
We had another exceptional quarter reporting 65 cents adjusted.
Adjusted operating income per diluted share and adjusted return on equity of 18, 9%.
Gross written premiums grew 32% in the quarter as we continue to benefit from broadly favorable market conditions.
And our outstanding execution.
54% of our writings in the quarter were excess and surplus and non admitted lines and 52% were short tail lines of business.
Our company's best ever combined ratio of 92% for the quarter included less than a point of cat losses, which continues to be at the low end of our peer group, even though over 25% of our business is property.
Our pure rate continued to be strong and above our loss cost inflation estimates and new business pricing.
<unk> in line with our in force book.
With our strong indications that the attractive underwriting margins, we are generating will continue.
Lastly, we continue to further strengthen an already strong balance sheet, maintaining a conservative reserve posture and deploying all investable assets into core fixed income while simultaneously rotating out of our higher risk asset classes.
Altogether, the execution of our ruler niche strategy is excellent and our aim to deliver top quartile financial returns is visible in our growth our underwriting profitability, our shareholder returns and our balance sheet strength with.
With that I'll turn the call over to Mark to discuss our financial results in greater detail Mark.
Thank you Andrew for.
For the quarter, we reported net income of $21 7 million or <unk> 50 per diluted share compared to a net loss of $2 4 million or <unk> 15 per diluted share for the same period a year ago on.
On an adjusted operating basis, we reported income of $25 million or <unk> 65 per diluted share compared to $10 7 million or <unk> 33 per diluted share for the same period a year ago.
In the quarter gross written premiums grew by approximately 32%.
Every underwriting division experienced double digit growth in the quarter and transactional E&S surety professional lines captives and industry solutions were each up over 20%.
Net written premiums grew by approximately 64% to $281 million in the quarter compared to $171 million in the third quarter of 2022.
Third quarter 2023, net premium retention was approximately 79% versus 63% in the third quarter 2022.
During the quarter, we rescinded a quota share reinsurance contract and recognized $50 5 million of net written premiums and $13 1 million of net earned premiums that had previously been ceded under the contract.
Through the first six months of the year.
Overall, the contract had an immaterial net impact net income adjusting for this transaction net net written and earned premiums were both strong and for the full year, we anticipate that our net retention will be slightly higher compared to 2022.
The third quarter combined ratio of 92 improved nine six points compared to the third quarter of 2022.
The 1.3 point improvement in the current accident year non cat loss ratio to 67% was principally driven by the changing mix of business. We had no prior accident year development in the quarter and we continue to maintain a conservative position with respect to our loss reserves.
During the quarter catastrophe losses were minimal and accounted for less than a point on the combined ratio compared to the third quarter of 2022, which was impacted by two eight points of cat losses from Hurricane.
Recall that in 2022, the combined ratio included five nine points from that had net impact of the loss portfolio transfer of reserve strengthening.
The expense ratio increased slightly compared to the third quarter of 2022, we continue to invest in the business and expect to hire a higher run rate in line with our target of a sub 30 expense ratio.
Higher acquisition costs were principally driven by the change in our business mix and the impact of canceling the quota share reinsurance contract.
This was offset by the improvement in the operating expense ratio due to higher earned premium.
Turning to our investment results net investment income was $13 1 million in the quarter, an increase of $7 1 million compared to the same period of 2022.
Consistent with our investment strategy to deploy all free cash flow to core fixed income in the third quarter, we put a $145 million to work at five 6%.
The net investment income from our core fixed income portfolio almost doubled to $8 5 million from $4 7 million in the prior year quarter, driven by improving portfolio yield and a significant increase in the invested asset base.
Embedded yield was four 2% at September 30 versus three 3% a year ago.
Our core fixed income portfolio is now $875 million.
From $767 million at June 30, and a $300 million increase from a year ago.
Net investment income in the third quarter, 2023, and 2022 or impacted by negative Mark equity Mark to market adjustments in our opportunistic fixed income portfolio.
Despite the volatility we've experienced over the last year. The inception to date return for this portfolio is slightly north of 7%.
During the quarter, we provided a redemption notice on $42 million of the opportunistic fixed income portfolio.
Given the actions that we have already taken and inclusive of that notice of the $183 million in the opportunistic fixed income portfolio at September 30.
68% will be in redemption effective December 31, we anticipate reinvesting the proceeds from this part of the portfolio into our core fixed income portfolio.
At September 30, we had approximately 195 million short term and money market investments, resulting from strong operating cash flow of over $200 million.
During the quarter our yield on short term investments continued to be north of 5% and we will continue to deploy this liquidity into our core fixed income portfolio.
With that I'll turn the call over to Andrew for his concluding remarks.
Thank you Mark.
It's hard to believe that we're already in our fourth quarter reporting as a public company and once again, we had a truly outstanding quarter.
As has been discussed in prior quarters, the quality and diversity of our growth is notable in this regard our investors should understand that we'll continue our focus on building a well diversified portfolio of defensible positions with the aim to deliver top quartile underwriting returns in all parts of the market cycle and our metrics bear this out.
Operationally, we had another great quarter pricing in aggregate was in the mid teens, driven by a meaningfully higher rate than property with all of their lines consistent with the prior quarter.
We continue to realize pure pricing above loss cost trend and has been the case for many quarters, our new business pricing is in line with our in force book.
Retention to remain strong increasing into the low to mid eighties, and finally, we continue to see strong submission activity, which is up over 20% from the prior year.
While each division is delivering at or above our minimum target returns on capital. We continue to capitalize on the opportunities to grow both top line and margins and assure ensure we shape our portfolio to those areas that offer the best risk adjusted returns on capital.
As such with ongoing investments in new areas, new products, New Adjacencies teams and of course technology.
Our diversification and capital allocation strategy is working for example, the investments we've made in our transactional E&S surety and professional divisions continue to pay off through nine months. These divisions make up 25% of our portfolio versus 19% through nine months last year.
We've now reported as a public company for four quarters.
During our lead up to our IPO, we set out some core metrics for skyward, including low to mid teens Roe.
Low <unk> combined ratio and double digit growth.
We also set out expectations that we have derisked, our investment portfolio and we would reduce the physician ownership position of our largest shareholder Westin.
And the four quarters since we grow gross written premiums by 34% in each quarter as a public company growth has increased over the prior quarter.
Every single quarter, we delivered a sub 92 five combined ratio in every single quarter, we've delivered mid to upper teens roe's.
Our core fixed income portfolio now constitute 77% of our portfolio up from 54% at September 32022, and our opportunistic fixed income portfolio has been reduced from 19% to 13% during that same period.
And we will further derisk our portfolio as per the comments from Mark earlier.
Equally our loss reserve position is the strongest it has been in the company history.
Last name ownership is down from 44% to 28%, providing greater liquidity in our stock.
Moreover, we will continue to focus on delivering and exceeding the key metrics and objectives, we set out for our investors a year ago.
Lastly, I'd like to take a moment to talk about our team.
Recently, we were recognized as one of the best places to work by business Insurance magazine, which is a testament to our employee engagement across the organization.
It was an honor to be recognized publicly for what we've known all along we have created a winning and compassionate culture, a company, where the industry's best talent wants to work and thrive.
Im asked by investors all the time about what truly sets us apart and I genuinely believe it is our people and our culture. It is what makes us special.
By 500 colleagues get up every day and they live the skyward values not just for our company, but for their families and our communities I'm blessed to be the CEO of such an incredible organization and our outstanding performance through our four quarters reporting as a public company is a direct reflection of this team they are simply terrific.
I'd like to now turn the call back over to the operator to open it up for the Q It for Q&A operator.
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Our first question.
Comes from the line of.
Paul Newsome of Piper Sandler.
Good morning, Paul.
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<unk> phone lift your handset.
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Okay.
Our next question comes from the line of <unk>.
Mark Hughes of choice Securities.
Yeah. Thanks, Good morning, good morning, Andrew Good morning.
Hey, Mark.
Congratulations on the quarter.
Andrew I'm not sure if you have given a breakout of growth by.
Eight division you certainly say Theyre all were up double digits could you talk about where you saw the fastest growth in <unk>.
Theres anything in there that was unusual any big pieces of business that might or might not recur.
Well I think probably the latter question.
Hi.
Thank you for the question I would say the latter question there isn't anything that's notable that occurred in this quarter that.
Feel sort of unique or or or outsized for this quarter.
As Mark mentioned every one of the divisions grew.
At double digit rates and we had a number that grew over 20% in.
Some of those have been consistent where we've had.
Very strong growth for some time, such as transactional E&S in surety.
<unk>.
<unk> up in this quarter for example in industry solutions, driven by our construction underwriting unit.
Were particularly strong this quarter, but I don't I don't think Theres anything thats notable thats jumping out.
Within every single.
Division, we feel like we have good opportunities there are some specific underwriting units, where we're we're not growing that that roll up into those divisions and that's just where we see the market not being kind of favorable backdrop that we're looking for but there is a big reason that we have the portfolio that we have so that we can.
We can press the accelerator in certain places.
But overall, yes.
I wouldn't I wouldn't highlight anything as being unusual or outstanding in this quarter.
I appreciate that how about commercial auto how do you how do you see that now.
Well commercial I'm going to look for the statistics here commercial auto again in this quarter continue to be a smaller portion of our portfolio I think I reported last quarter. It was 16% of our writings and I believe this quarter and correct me if I'm wrong, Mark I believe is around 17 or 18%.
Of our writings.
Continue to to take a conservative position with commercial auto again, largely as I've said in the past that isn't it isn't because we do not feel.
Confident in our ability to to to be a better risk collector, and a better pricer of risk and to be able to manage.
Exposure should there be a claim better than our competition.
But it is it is clearly from our vantage point the area where the.
The social inflation on bodily injury is most pronounced and so for some time, we have we've said look no matter how much we counted with rate, let's say, where we've been consistently up in sort of the double digit ish range for a long time there.
We're probably at that level, keeping up with loss cost inflation and that feels like a structural thing that that.
Would suggest to us that even if we believe we can make attractive returns on capital, it's probably something you don't want to lean hard into.
Very good thank you.
Thank you.
Thank you.
Our next question.
Comes from the line of Gregory Peters of Raymond James.
Good morning, everyone.
Greg Hi, Greg.
I guess.
I'd like to step back and.
Focus on the global property book for a second.
We're just not seeing the kind of catastrophe volatility in your book that we're seeing others experience.
You could give us some perspective on how that book has shaped up because there has been growth there and then.
I guess, when we think about how we should model this going forward.
Whats the right cap load over a course of the year to think about you, having some potential exposure to because clearly.
At least in Mike.
Put too much into it for the third quarter.
Yes so.
Thanks, Greg Great question, and first off you're right global property up this quarter right around 20% for the year up 39%. So obviously we've.
We've been seeing the market opportunity in property generally we've talked in prior calls about just our general disposition.
Well look I think that in practical terms, we said this over and over that we.
<unk> not sort of an intentional cat writer that includes tier one cat and even some of the.
Sort of more of the unmodified cat.
Severe convective storm and so forth, we absolutely have it in our book you cant ignore that that is a component.
I think we do two things really well across our book, but in particular in global property is that our spread of risk is something that we're paying attention to so that you know.
We really don't have aggregations.
Really anywhere.
A materiality realm.
Relative to our book if anything it would be.
Maybe we have.
Quake exposure that aggregates for us as a company.
More so than maybe a tier one north Atlantic Hurricane.
Exposure.
So that's one and the second thing is that our our underwriting leader there has done just a terrific job in ensuring that the coverages that were providing.
Attachment points the deductibles all of that combination of features reflects what we believe is the underlying exposure and I think it shows through in our results where we had.
Losses for example, last quarter had a lot to do with Cui.
Quite honestly in one instance, a tornado dropping down on top of the roof of a large property and that was a large loss.
But otherwise we've avoided things I think largely due to our underwriting and our and our our approached aggregation management.
In terms of expectations I think generally speaking will be will be re running again here looking at our full year portfolio, but.
<unk> generally run about 2% of premiums.
And then if you look back and you look at our historical performance.
And adjust for where it is that that we've grown the book and so forth.
Just taking like a 10 year average on that it tends to tie about 2% of premiums as well and so.
Suggest to you that before sort of getting into it.
Any kind of guidance for next year and so forth that has consistently been a reference point I think in general or was that it was the kind of number that we talked about coming into 2023, and I don't really see a great deal on our book that would suggest that thats changed greatly. Despite the fact that we've had some some good growth in global property.
Hi.
Excellent. Thanks, thanks for the detail.
Another question just another business Sherry.
I think earlier in the third quarter, you announced sort of a rebranding of your <unk>.
<unk> care solutions business.
I have two questions on that first of all.
Inside sort of the accident and health business. It feels like there's been increased market attention and medical stop loss.
Other announcements around the industry. So I guess I was wondering if you could provide an update on how your medical stop loss business is developing and the competitive forces and then secondly, and that health care solutions announcement, it kind of sounded like you were going to start getting into actually medical malpractice.
Two so maybe you could comment on where.
You see the strategic debate.
Direction of healthcare solutions business going.
Yes for sure. So let me just just.
You May you may have.
Have this in your sort of your framework.
Greg, but just for clarity our healthcare solutions is.
The professional liability component of our business, so that that rolls into our professional division.
And just to address that first yes. In fact, you are correct that one of the things that we did.
Last quarter's formalize that we are writing.
A sub segment of practitioners now I will tell you.
In no uncertain terms, we are a true E&S market right. So we are not do not think for a moment that we are competing against.
I guess, what used to be referred to probably not appropriately anymore of the bedpan Mutuals. We're not we're not writing kind of your mainline docks and so forth. We are writing very specific I would describe it as non standard situations. We're also picking up a lot of <unk>.
Professional exposure.
At facilities, where.
If you will is ancillary exposure.
And that fits very well with with sort of our thinking of where we can over earned in the category.
Oftentimes in serving those markets Theyre very short limits, which we tend to like.
And they also tend to be in areas, where the statute of limitations and the claims made features make our discovery of the loss rather short so.
So we feel very good about that.
That that is just a direct byproduct of kind of that we are really in E&S. The true E&S writer certainly in our professional lines.
To your question on medical stop loss look we agree I think that.
I think that that is a big market that is growing at a very attractive rate and I think that it serves us very well.
I'll remind you that our principal focus is on smaller employers.
Smaller employers tend to be far more.
<unk> focused on medical cost management, sometimes we are catching these employers as they are coming out of the guaranteed cost market into its self insured market, which is a particular area that we are very good at capturing those opportunities in underwriting those risks when they do that.
But I'll just say to you that we're not doing is we're not writing these very large groups and so as a byproduct of that all of our capabilities. Our intellectual property. Our focus as an organization is really towards that smaller employer market and I think that our distributors wood.
Say that we've done things that are that are very distinctive relative to their ability to serve that market and we certainly believe in terms of loss cost management.
Have the ability to to stay in front of things like medical cost inflation and so forth that that then.
Make the sort of the results of that business, particularly attractive for us.
Yes, thanks for helping set straight the geography of those businesses for me.
I guess the final question I had for you is just on.
I think you mentioned the quota share contract that you canceled can you just walk us through the strategy behind that and what Youre thinking that's my last question.
Yes, well.
I'll go back I'll point back to the first quarter actually talk directly about this in our.
Actually I'm sorry, it was our fourth quarter earnings call that was in March.
And I noted that we had a.
Foreshadowed that we had taken up a quota share.
Contract for auto liability.
And I noted as well that our net retentions for next couple of quarters would be a little bit lower.
And.
And the thinking behind it was really simple I'll just go back we have been.
Talking about.
The bodily injury inflation here for well since we've been a public company.
And we also have talked about the multifaceted approach that we've taken towards any kind of auto writings.
Where we have robust bodily injury exposure and that is through our underwriting platforms, which we which of course was a key feature of what we spoke about during our IPO skydrive.
It is definitely through our our quick strike.
Response on on claims where we're able to get control of the claim early.
I've actively talked about what we've done in terms of just remixing, our portfolio, meaning a smaller portion of auto as a percentage of our portfolio and then the last part of that was hey, we are we are always evaluating if there is an opportunity to make a thoughtful purchase of.
<unk>.
And we did.
And that was what we took up in.
Earlier in the year and that in fact is the contract that that Mark spoke about that reversed out here in this quarter.
I really don't think theres much more to it if we're if we have a commission ceding commission on offer that we believe.
Is a fair trade of taking out volatility and not reducing our underwriting income.
In a in a material way then we will take that up and and that's what we did in that instance, but in fact, we reversed that out in this quarter.
Got it thanks for the detail.
Yeah My pleasure thanks for the questions.
Thank you.
Our next question.
Comes from the line of Meyer Shields of K B W.
Yes.
Great. Thanks, Good morning, all good morning Amir.
So a couple of sort of a basic question first in terms of capital adequacy given both the phenomenal gross written premium growth on the contract decision how should we think about that just in terms of the ability to capture all the growth that you are.
<unk>.
Hey, merits Mark how are you.
Im going ahead yet.
Pretty good look the way the way we look at capital we've talked about this before with with the revolver and the capacity we have under the rollover, we've got flexibility there in terms of.
In terms of alternative versus equity capital and the way we look at the equity capital is we'll do we'll do what's right by by shareholders.
Granted growing at the rate that we are that would imply that we would need some capital but back when we did the IPO. We had planned on growing so I would say I would say to you right now we're really comfortable where we are with <unk>.
With our capital position frankly due to the flexibility that we've got.
Yes, Matt I would just I would highlight a couple of things for you.
As probably most are aware, we have put on positive outlook by a M best.
Only a couple of months ago, that's a clear statement that they feel that our our our capital is isn't a good position and supporting our growth.
As Mark said, we want to do.
As if we do need capital use all the available levers that we have.
Our financial leverage is low.
But if we see an opportunity to come to market.
And we believe that it would be appropriate for us to raise equity capital under those circumstances that meet some criteria that we set out for ourselves we would do that.
But right now I think we're in a pretty good position with our capital.
Okay excellent that's very helpful.
A number of.
Specialty.
So, let's talk about accelerating casualty rate increases.
Rob Lee and Thats sort of on a sequential basis I was wondering if you could talk about what youre seeing in your casualty lines.
By the way that's the second question you asked that you called rather basic both are both great questions by the way so well. Thank you. Thank you for that.
Hi.
The industry is a funny place theres like this.
There is kind of like this maelstrom of.
Echo chamber stuff like in the last few days I've taken the article is coming from the IPC and send it out to our senior leadership team.
Sure.
Everybody is saying and it has a way of sort of.
Creating an echo chamber in our industry.
What I would say to you is this.
Just backing up we have seen very orderly.
Right in our book for some time, so setting aside property, which we've talked about which has given us those great headline numbers that we that we've shared with you about sort of our overall rate.
Everything else has been kind of ticking along consistently and taking long consistently is above our view of loss cost trend.
Which is a very good place to be.
We'll say that.
There is there sort of a convergence of two things going on here one is the apparent sort of realization that.
Older years, or sometimes referred to as a soft market years are developing worse than people have thought which which of course resets oftentimes what the starting point is and then you layer on top of that what we believe to be true.
Is there a social inflation in our part of our business, we see it in bodily injury, we don't see it we're not exposed to big nuclear verdicts are things like that as a big driver of what we've seen is like this cascading down to what happens when a person who is injured who very quickly gets in the hands of a plaintiff attorney.
How that develops and.
And I think that.
Yes.
Evan Greenberg says it best which is you never want to get behind on that stuff right at the moment you get behind that stuff, it's really hard to get caught up.
I feel like we've done a good job of staying in front of it and and in that regard I feel very good about our book, but make no mistake about it the industry should be well served to stay in front of it and unlike.
What I believe I saw for example in the Med Mal tort reform.
In sort of the early two thousands.
This is so diverse and so widespread and some of it is being fostered by.
Bye bye.
What's happening with litigation financing.
I don't think that Theres, a quick structural change I think that this is our the quick change those to this sort of structural situation. I think this is going to play out on a state by state basis over a long period of time and so yes, it would be wise to continue to.
To keep rate had a loss trend and if you are one of those companies who fell behind you better catch up because it will hurt pretty badly if you have fallen behind I'd like to think that we are not one of those one of those companies and we protected ourselves.
Certainly through the policy or 17.
The loss portfolio transfer transaction that we set out around the time I joined.
Great that was very helpful and I promise. This one is basically because I may have missed it I was just looking for the new money yield currently.
We put money to work at five six and the.
We put money to work at 5556 is that what Youre asking yes, yes.
Embedded yield at the end of the quarter was about 42 there.
So yes, we feel we feel good we're making progress there.
And feel good about our investment portfolio is I think both Mark and I commented in our prepared remarks.
Fantastic. Thank you so much thank you.
Thank you.
Okay.
Our next question.
Comes from the line of Paul.
<unk> Newson.
Piper Sandler.
Paul Please make sure your line is muted speaker phone lift your handset.
Okay.
We will move to the next question.
Our next question.
Comes from the line of Tracy been query.
Barclays.
Good morning Tracy.
Good morning.
Just a quick clarification on the quota share reinsurance contract that you rescinded.
I remember the fourth quarter earnings call you talked about a whole account quota share for commercial auto with the second.
One one we're not 12 months and was it another contract you were talking about.
That one.
That's the one we rescinded was what I referenced.
In the March March earnings call.
Okay, but we're not 12 months and so was it a shorter tenure.
So that policy.
Oh, no sorry, I want to make sure we understand your question to what happened in this quarter is we had rescinded the contract and effectively unwound. The first two quarters. So the premium that was ceded came.
Came back to us and we retain that as net.
Okay.
Also had a question on the new money yield.
When youre redeploying the 60% of the 183 million opportunistic fixed income redemptions at year end.
How would that I think you said a two five maybe two how would that compare to the yields on for Ricky.
So the yield Tracy the yield on the opportunistic fixed income inception to date has been slightly north of seven as you know it is it has bounced around a little bit recently.
What I would say to you is where we are in the current fixed income.
We'll take our five and a half.
And that's what we're going to be putting the money there.
The opportunistic has done fine, but we just would rather put our money into the core fixed income, which we've been doing for the last year and a half yes, Tracy I would also just.
Sorry to go back when we talked about the opportunistic fixed income.
Talk about that the target returns there were sort of in the.
The 8% ish range.
And of course, we entered into that.
At a time that was different than the yield environment that we're in now.
To be honest just in terms of just straight up the risk return trade off.
We'd rather be in core fixed income.
The opportunity to do something that's a little more sort of core plus which.
Might be at the bottom end of Av.
Of of high quality.
The investment assets with a bit more yield.
And I think there are things that we can do that are consistent with derisking, our portfolio and importantly, taking some of the volatility out of our our NII line item that has been showing up here over the course of.
Over the last few quarters.
Great and when do you think the remaining 42%.
We will be redeemed.
The remaining 32%, we actually like what's left and so it's a particular portfolio that we like.
And so our intent will be to hold on to that that has.
And our view lower volatility a.
A bit more yield to it.
And we like it as part of our overall mix.
Yeah, Tracy Hey, it's mark.
The commercial mortgage loan piece of the opportunistic that Andrew was talking about.
And we will we will continue with that and as a reminder, in that portfolio is not.
What we would characterize as the economically disposed parts of real estate it tends to be more industrial in nature.
In areas that we tend to like.
Can you grow it or just maintain maintain.
Just maintain it so it will it will shrink as a portion of our overall portfolio because we're committed.
In this environment to put our free cash flow towards our core and core plus kinds of strategies.
Great. Thank you.
Yeah.
Thank you.
Our next question.
Comes from the line.
The car Lady of JMP Securities.
Thanks, Good morning, Hey, Matt and Matt.
Andrew you made a comment in the opening remarks about.
We believe our reserves are the strongest in company history I was hoping you could just expand on that a little bit if that's if it's how actual versus expected. They are unfolding or if you've kind of as you go along you see kind of your position versus kind of actual midpoint expanding or just any color you can give would be helpful.
Yes, so I'd say a number of things. So first I mean, just to talk about history right.
Further we get away from the history solved referenced in this case LPT.
18, 19 year after after the LPT policy years.
We get a better and better view, so we have more confidence right. So thats one feature.
So that informs our thinking.
The second is.
I would just point you towards our pace right.
As a measure we we believe that we have maintained at let's call. It the same margin.
Throughout so every cycle that we've gone through we've maintained the same margin. So when we look back at our reserve position.
Going back.
Let's say this time last year and the year before and the year before our margin is the same yet.
That we get further and further away from some of those legacy years.
One hand, the second is that that margin position remains the same yet our reserve base is growing right. So there is just kind of a law of large numbers here playing out.
And it's those combination of things if you looked at if you looked at our distance from those years you look at just the margin position that we have been very consistent.
The reserve base gets larger and larger and then you look at our paid patterns I think that that.
That sort of three element that debt.
Along with all of the things that actuarial does around emergence that that really gives us confidence.
Okay, Great and then just one other if I can you also talked a bit about making ongoing investments in the business.
Adding teams for example.
The kind of the it looks like a little bigger AD in the surety space.
And what you kind of categorize as a strategic move.
Caught my eye during the quarter I was hoping you could just expand on that a little bit what you are looking to do there yes. Thank you for that.
Sure and he keeps showing up for us I think that.
We have we have an.
An amazing group of leaders.
And surety or how does that.
That division, our head of commercial our head of contracts.
You saw we recently brought up Scott Bailey.
So effectively run our field organization.
What's happened, Matt and surety specifically is that.
We have become the place where the best surety guys wanted to go to it's just that simple and so we have our we've had our active outbound recruiting to fill out geographic regions.
Recent hire.
Texas is a great example of that.
Senior personnel build out that part of the market for us.
But we've equally now had inbounds from folks and charity, it's not like surety people move around a lot.
They're they're pretty sort of.
I'd say in the in the <unk>.
Spectrum of being disciplined in any decisions that they make their kind of out there on the extreme of discipline.
What I would say to you is is that that was a big announcement. There are seven seven people. We added it's not the only place where we're adding talent you just go back over the last few quarters.
We are just we're having great success in so many different places.
It just happens to be that that one seems to show up quarter after quarter after quarter and that's very intentional from our perspective, we love that business. We think that we can continue to grow it and.
And have it be really sensible for us in terms of the type of diversification our ability to be able to get leverage out of our capital all things that are good from share for our shareholders not to mentioned that if you run the business well the returns are just excellent.
Great. Thank you very much for the color and congrats on the results. Thank you.
Thank you.
Our next question.
Comes from the line of Mike Zaremski of BMO.
Okay.
Hey, good morning.
Good morning, Mike.
Good morning first question on the other.
Other operating and general expense line.
Got it.
I guess and also the acquisition cost ratio so other operating expense.
It looks like momentum.
Picking up in terms of the.
A year over year decreases.
Which is kind of being partially offset by the higher acquisition costs as you move into the business mix shifts does this.
Is this like the.
That should continue at these.
These levels or anything you want to call out.
So Mike let me see if I can unpack it for you.
The acquisition expense ratio as we've talked about four.
For a while now.
Has ticked up slightly as we have moved the business mix.
So that upward trend is not unexpected.
The reversal of the quota share did impact the acquisition expense ratio a little bit in the quarter with respect to other operating expenses, but I would tell you is the leverage we're getting from the from the earned premium.
Is is reducing the operating expense does that answer your question.
Yes.
Quota shares that had a.
Positive impact on it or a negative.
It depends on which part you are looking at but it would it would increase the acquisition expense ratio, but lower the operating expense ratio because of the earned premium benefit.
Okay.
Got it.
I think we're going to go with that.
Lastly, just a quick follow up on that.
The catastrophe loss commentary from earlier in the call and obviously your results were excellent and not trying to nitpick. It all just trying to see if we can get any more color.
<unk>.
On the.
On your low catastrophe losses, because it feels like when we look at the industry wide <unk> catastrophe loss data it was above historical average, but it's been.
I guess, we've seen uniquely a lot of companies. Some companies have just shown results that have been catastrophe loss is much higher than expected and some very benign year in the benign camp. So.
We're.
Was anything unique about catastrophes this quarter in the U S where they were just really more geographic.
Geographically concentrated or is this kind of.
You think kind of a normal <unk> for you guys right.
When there isn't a earthquake or hurricane yes.
It's a very good question Mike.
Look I think.
Where are you seeing companies because obviously we follow.
All of our peers and in companies that we don't directly compete against.
To understand how others results are playing out.
Mike just my my editorial commentary is that you see high concentrations of cat losses in companies that have because of their business concentrations.
Concentrations of their business, particularly in the Midwest Upper Midwest, where there's been a.
A pretty heavy dose of a severe convective storms in the last quarter that said, even amongst our peers.
We pointed to you on multiple occasions include not only the sort of.
I would describe as a pure play specialties, but.
The the primary insurance, particularly the specialty primary insurance divisions.
The larger companies that Bermuda ins and so forth.
Even against that group our numbers were exceptionally low.
And I think that most companies at a minimum are picking up some.
<unk>.
What has been a.
Pretty heavy severe convective storm.
No.
Quarter.
And I just will tell you I can just go back to this I think we're we're really good in terms of our aggregation management.
And then within that we are really good in terms of.
Or sort of where we put our retentions and so forth and in that fair. It out this quarter and I will just say to you that we've showed these this data consistently leading up to the IPO certainly been true during the IPO.
We had an elevated cat quarter last quarter, we were still considerably better than our peer group and so we feel that this is a feature where property will be a material part of our portfolio I believe its about 26% yet you should see us outperform.
And take the volatility that often others see in their quarterly results out of our results. We will have we will always have some cat for sure, but it's not the kind of cap that that should ruin a quarter.
Okay.
So that's helpful. Good results. Thank you.
Thank you.
Yes.
Thank you.
Our next question comes from the line.
C Gregory Peters of Raymond James.
Thanks for letting me get in with a follow up question or two.
I guess in the <unk>.
Context of your results. This year can you remind us of the renewal waterfall of your various reinsurance.
Programs in place.
I know, it's a little early but it's November.
Have you had any.
Sneak peaks on how pricing for your reinsurance seeding commissions for reinsurance next year Mike.
Mike trend.
Greg This is Andrew.
And thanks for that question.
First thing I would remind you is that the bulk of our property renewals, which includes our cat.
Our per risk our global property quota share with two different per risk I believe are all for one.
So it's far too early in that and that's probably the most material.
One the second probably most material is one one which includes our our excess quota share.
And in a handful of other.
Related treaties, but but the excess quota share probably being the most.
Significant and I don't really have anything to report I know that our team actually today is at PCI and meeting with with reinsurers we've been out.
Early with our reinsurance renewal, but I really don't I don't I don't really know if there is enough to say that is worth commenting on at this time, well I don't have enough to say that take comment on this time.
We'll be happy to sort of update.
Everyone at.
At the next earnings call.
Right.
And then.
One of the businesses that you highlight in your slide deck.
<unk> Global property is also in agriculture business.
That seems to have come up in a couple of other earnings reports.
And so I'm just curious if you can comment on your business and how it is performing year to date.
For yes, so well let me just let me say that I've been following that as well.
Particularly to very large.
Participants in.
In the in the large government program and.
So first off only about 15% of our book.
As the <unk> exposure.
Think that.
The references generally been towards.
This being a slightly worse year than average.
No.
We don't disagree with that point of view, but for that portion of our portfolio.
We will actually probably generate.
Better return than the industry on average for that portion, but it's not material enough in our in the Grand scheme of things that book of business today is circa $30 million and probably about 15% of that is is exposed to that and quite honestly I think that it's that 15% as small as it is shaping up to.
Great.
This return for us.
And that's just simply because we had some we had some.
Excess of loss in there that we will end up performing well side by side with the quota share. So it gives us probably a better result.
Got it thanks for the detail.
Thank you.
Please standby.
Next question.
Comes from the line of.
Tracy been query of Barclays.
Hey, Thanks for taking me back.
I had a question on the expense ratio I get it there's been a business mix change a quarter maybe.
Some of that had to deal with the per share contract that you assume that but going forward how should we think about the proportion.
The acquisition acquisition ratio and operating expense ratio this quarter it looks pretty similar.
<unk>.
Do you think that will revert back to Martin <unk>.
As in prior quarters.
I think this quarter is is how you should look at it Tracy with with the reversal et cetera. I think Q3 is more on the way you should look at it.
Okay. So like a higher policy acquisition ACO run rate, yes, yes. Thank.
Thank you Amy leverage happening Opex. Okay. Thank you, yes, I mean, the one comment the one comment I would have Tracy is it's kind of intuitive right. So if you take a look at our highest growth businesses things like transactional E&S surety and so forth surety is the highest commission line of business and the industry are transactional E&S as you as you.
Certainly no as wholesale distributors. So you have a higher commission rate.
And what's happened is that many of the wholesale driven parts of our business have been growing disproportionately.
See that running through in our acquisition expense.
Appreciate the color on the business mix.
Thank you thanks Casey.
Thank you.
I would now like to turn the call back over to Natalie Schoolcraft for closing remarks Madam.
Thanks, everyone for your questions for participating in our conference call and for your continued interest and support of Skywave capacity I am available after the call to answer any additional questions. You may have we look forward to speaking with you again on our fourth quarter earnings call. Thank you and have a wonderful day.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Okay.
Okay.
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Thanks.
Okay.
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Yes.