Q3 2024 Bowhead Specialty Holdings Inc Earnings Call
Greetings and welcome to the Bowhead specialty Holdings' third quarter 2024 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
This conference is being recorded.
Speaker Change: I would now like to turn the conference over to your host MS. Shirley Yep, Chief Accounting Officer, and head of Investor Relations for Bowhead Specialty holdings. Thank you you may begin.
Shirley Yep: Thanks, Melissa good morning, and welcome to Boneheads third quarter 2024 earnings Conference call.
I'm sure Yeah go head to Chief Accounting Officer, and head of Investor Relations.
Shirley Yep: Joining me today are Steven cells, our Chief Executive Officer, and Brad Mulcahy, our Chief Financial Officer.
Shirley Yep: Earlier. This morning, we released our financial results for the third quarter of 2020 for.
Shirley Yep: This follows the preliminary release of our third quarter results and secondary offering we announced on October 21st you can find these announcements in the Investor Relations section of our website.
Shirley Yep: Before we begin I'd like to remind everyone that this call contains forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Shirley Yep: Investors should not place undue reliance on any forward looking statement.
Shirley Yep: These statements are made only as of the date of this call and are based on management's current expectations and beliefs.
Shirley Yep: Forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements.
Shirley Yep: You should review these risks or uncertainties fully described in our SEC filings.
Shirley Yep: We expressly disclaim any duty to update any forward looking statement, except as required by law.
Shirley Yep: Additionally, we'll be referencing certain non-GAAP financial measures on this call.
Shirley Yep: Reconciliations of these non-GAAP financial measures to their respective most directly comparable GAAP measure can be found in the earnings release, we issued this morning and in the Investor Relations section of our website.
Shirley Yep: With that I'll turn the call over to Phoenix.
Shirley Yep: Lynn.
Phoenix Lynn: Thank you Shirley and good morning to everyone joining us on the call today.
Phoenix Lynn: To organize my remarks, I'll begin with a brief overview of the strong premium growth we experienced during the third quarter.
Shirley Yep: Next I'll provide our views on the border of specialty insurance industry identify where bowhead sees the greatest opportunities for profitable growth then conclude with an update on our most recent growth initiatives.
Shirley Yep: Again, <unk> had another strong quarter with premium growth across each of our divisions in the third quarter.
Shirley Yep: Gross written premiums grew by 48 million or 32% to 197 million compared to a year ago or casualty division had a standout quarter premiums grew 42% compared to a year ago to over $120 million. This was primarily driven.
Shirley Yep: Excess casualty book, where we continue to see favorable underwriting and pricing conditions.
Shirley Yep: While the conditions that our health care liability and professional liability division where more nuanced.
Shirley Yep: Casualty, we experienced double digit premium growth in both divisions, while maintaining underwriting discipline.
Shirley Yep: Health care liability Division grew 29% to 31 million in the quarter, primarily driven by new business and breed increases in certain lines.
Shirley Yep: Professional liability division increased 13% to $45 million driven by our cyber liability portfolio, where we saw new and increased limits being purchased in the market.
Shirley Yep: We're pleased with our third quarter production and the continual execution over a market cycle strategy.
Shirley Yep: Turning to our views on the quarter specialty insurance industry, we see mixed conditions by divisions schools in casualty mixed in health care and competitive and professional the casualty market remained resilient in terms of pricing and terms and conditions, we see the strongest fleets coming through in excess casualty.
Shirley Yep: Where the industry is continuing to drive weight on previous rate increases as the market continues to react to older accident year losses, we're seeing limits continuing to decrease in large limit towers and opportunities coming from increased movement into the specialty and E&S market.
Shirley Yep: We believe these are favorable tailwind for bowhead and it remains our view that these market conditions will continue for the foreseeable future.
Shirley Yep: In health care, it's a mixed story, we're seeing favorable conditions in the hospital space, but increased competition in medical facilities and the continued softening of market conditions and healthcare management liability and.
Shirley Yep: In professional excluding cyber liability market conditions remain competitive as we're seeing what we believe is disciplined behavior in the market.
Shirley Yep: New entrants and increased capacity from what to see markets that are trying to grow market share. While we don't expect these conditions can change in the near future. Our team is maintaining underwriting discipline and finding opportunities to optimize our portfolio.
Shirley Yep: Finally.
Shirley Yep: Before I turn the call over to Brad to review the details of our financials I wanted to provide an update on our recent growth initiatives I'll start with baleen. The streamlined low touch flow underwriting division, we launched late in Q2, focusing on small hard to place risks written 100%.
Shirley Yep: On a non admitted basis, we're pleased with our initial results as we achieved what we initially set out to accomplish believes it can ingest the submission and issue a quote within minutes. Once the court has accepted policies are bound in issue within minutes, we started with 29 eligible contract or class.
Shirley Yep: At the end of Q2 and by the end of Q3, we offered 89 eligible class codes, and our contractors and owners landlord and tenant or O L. M T product lines.
Shirley Yep: As of today, we continued our expansion and now offer over 150 eligible contracts or an O. L. M. P class codes well. This represents just under half of the addressable market. Our expansion covers the most frequently requested class codes by our broker partners.
Shirley Yep: Back to our craft business, we announced in our last earnings call look we're in the process of expanding our casualty division to include environmental capabilities to date, we've hired a team of three underwriters with over 60 years of combined experience writing complex environmental risks.
Shirley Yep: First we released the first of our three initial environmental liability products excess contractor's pollution and professional liability we plan to release. The next two products primary contractor's pollution liability and site pollution liability next year.
Shirley Yep: Well, we don't expect 'twenty 'twenty four premiums to be material from baleen or environmental with our disciplined approach to underwriting and our expanding crafton flow platforms. We believe we're well positioned for sustainable and profitable growth across market cycles with that.
Shirley Yep: I'll turn the call over to Brad to discuss our third quarter results.
Brad Mulcahy: Thanks Steven.
Speaker Change: Oh had generated adjusted net income of $12 $5 million or 38 cents per diluted share with an adjusted return on average equity of 14, 2% in the quarter.
Brad Mulcahy: Gross written premiums accelerated more than 32% to $197 million for the quarter, which included $4 million of additional premium from an unusually large audit premium on one ensured we saw premium growth from each of our divisions with casualty growing the most and representing a larger portion of the book compared to last year.
Shirley Yep: Rate improvement, particularly in casualty along with increased volume and production continues to contribute to the increase in our topline.
Shirley Yep: We also disclosed baleen premiums for the first time this year, while it's still early days, we are encouraged by our initial performance.
Shirley Yep: Our loss ratio for the quarter of 64.5% increased 4.1 points from 64% year over year, but decreased one point from 65, 5% in Q2.
Shirley Yep: The year over year increase was driven by the updated loss ratios we've used since the fourth quarter of 2023.
Shirley Yep: The decrease from Q2 was primarily driven by mixed changes in the portfolio and the net audit premium being fully earned and associated with older accident years that had lower loss pick assumption.
Shirley Yep: Similar to the prior quarter, we made no changes to our loss picks or prior year reserves in this quarter and as of September 30th IV and are continued to represent a large portion of our net loss reserves at over 91%.
Shirley Yep: As a reminder, given bowhead does not write any property risks, we did not experience any material direct losses in the third quarter from the recent hurricane activities and do not expect to you in future quarters.
Shirley Yep: Our expense ratio for the quarter of 29, 9% decrease from the comparable of 32, 3% in Q2 due to the prudent management of our operating expenses and the net audit premium being fully earned in the quarter.
Shirley Yep: Since there is volatility in our quarterly expense ratio, we suggest that investors knew our expense ratio over a longer time horizon.
Shirley Yep: So far for the first nine months of the year our expense ratio of 31, 9% is in line with our low thirties expense ratio expectations.
Shirley Yep: Overall, the effect of the loss ratio and the expense ratio contributed to a combined ratio of 94, 4% for the quarter.
Shirley Yep: Turning to our investment portfolio proceeds from the IPO were fully invested by the end of the quarter pre tax net investment income more than doubled to 11 and a half a million dollars in the current quarter driven by the increase in our investment portfolio and higher investment yields.
Shirley Yep: Specifically, our investment portfolio had a book yield and new money rate of four 7% at the end of the quarter.
Shirley Yep: The average credit quality of our investment portfolio remains at double a and the average duration of the third quarter was around 2.2 years.
Shirley Yep: The effective tax rate for the third quarter was 23, 6% in line with our expectations for the full year.
Shirley Yep: And lastly, total equity was $365 million, giving us a diluted book value per share of $10.97 at the end of the quarter, an increase of 37% from yearend.
Shirley Yep: With that I will turn the call over for questions.
Speaker Change: Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question Kim.
Shirley Yep: You May press star two if you'd like to remove your question from Mccann for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star.
Shirley Yep: To allow for as many questions as possible, we ask that you each keep to one question and one follow up thank you.
Shirley Yep: Our first question comes from the line of Deane Crusher, Tallow, which can't be W. Please proceed with your question.
Deane Crusher: Hey, Thanks for taking my question I wanted to start with the growth in Dalian.
Deane Crusher: Can you guys you guys talked about in the past or at least they are being deliberate and measured growth. There can you sort of unpack that a bit I was sort of curious how like you.
Shirley Yep: Do you expect to ramp up the premium Dalian and like what time do you really need to see to feel confident about leaning in to go out there.
Speaker Change: Sure. Thank you.
Shirley Yep:
Shirley Yep: Yeah.
Speaker Change: The first thing is you know when we got pay lien when we had the idea for baleen and wanted to build it out there's a couple of things that we need to do in sequence. The first thing is obviously create the underwriting screens that we feel that we can write the business profitably we've.
Speaker Change: We've done that the second is to build the technology that we'll be able to deliver what brokers are looking for which is be able to ingest.
Speaker Change: And just to submission quoted.
Speaker Change: Within within minutes and if they want to bind it be able to oh bind and issue a policy within minutes.
Shirley Yep: Much we've done already.
Shirley Yep: And that.
Shirley Yep: That works.
Shirley Yep: Export is getting the brokers to support it and change their habits keep in mind that a lot of our competitors issue quotes or renewal quotes 90 days in advance those things sit in People's files. So for things that are like $10000 premiums expecting people are going to turn the world upside down to move.
Shirley Yep: The 10000 dollar piece of business, we think is a little unrealistic week, we've gotten very favorable reviews from our brokers. We've started to get a lot of submissions from our brokers and we're confident that when we report on the fourth quarter that.
Shirley Yep: We'll have some good news in showing net debt, we're making traction with daily.
Speaker Change: Got it thank you for that and then my second one.
Speaker Change: The sequential loss ratio improvement of about 100 basis points.
Speaker Change: Can you sort of unpack that as well or is that just by changing the mix of business or is there anything else.
Speaker Change: That we can read into that.
Speaker Change: Yeah.
Speaker Change: You are right, it's mostly change in mix of business, we did highlight the audit premiums as well in our earnings release.
Speaker Change: We had a.
Speaker Change: $4 million or premium booked in this quarter that.
Shirley Yep: Related to older accident years, and so the loss picks on those older accident years were a little bit lower so that also drove it down a little bit, but as we mentioned.
Shirley Yep: There was no change to our loss picks we didn't adjust our prior year reserves.
Shirley Yep: Essentially the mix at all you have left that would drive the change.
Speaker Change: Got it thank you.
Shirley Yep: Thank you.
Speaker Change: Our next question comes from the line of Scott <unk> with RBC capital markets. Please proceed with your question.
Speaker Change: Yeah. Thanks, just wanted to touch first on the casualty to the strong growth there again and I know you mentioned excess casually you called that out is there any other classes or any other areas.
Speaker Change: Are you seeing strong growth there or is it is it mostly excess casually just any anything you can kind of share there what's going on.
Speaker Change: Sure, it's mostly excess casualty the primary is nowhere near as hard as he excesses and so we're not seeing the kind of growth in that area that we see in the excess casualty.
Speaker Change: Okay.
Speaker Change: That's helpful. And then just on the professional liability you just wanted to touch on some of the.
Speaker Change: The commentary you made about.
Speaker Change: Market condition or market conditions competitors, yeah. Some.
Speaker Change: And discipline.
Speaker Change: The observations, you're seeing out there and increase capacity.
Speaker Change: Is that in any area of the small and middle market areas, specifically they did that you're playing in and is is the growth that you're seeing in that line I know it was slower than the other categories, where you're still seeing growth is that so does that mean, mainly cyber are you are you still seeing growth opportunities in certain areas.
Shirley Yep: Professional liability or D&O that you can share.
Speaker Change: Sure a couple of things we operate in virtually all areas of the D&O private.
Speaker Change: Some not for profit small publicly traded and large publicly traded business.
Shirley Yep: We don't we.
Shirley Yep: We don't do much in large publicly treated primary because.
Shirley Yep: The ability of a lot of these companies are they they.
Shirley Yep: They they require their primary carrier to be able to issue policies in different languages and different countries and we don't have those capabilities are likewise frequently the first ex us on those company on those policies. They want somebody that could drop down to be primary but above the areas, where we see a lot of our bread and butter.
Shirley Yep: Under business, but its also slice by wherever we see the desktop opportunity the best rate for the exposure that we are that we're being asked to take on were seeing competition in all areas small private business.
Shirley Yep: As well as large public some of this stuff in the past years has been you've seen that a lot of reports that premiums are dropping rates were dropping part of that was due to a lot of spacs deep T. Specs in Ipos. When you were getting beyond the dates of strict liability.
Shirley Yep: You saw the prices being reduced we think in certain cases, they were being reduced more than they should we've seen cases, where companies have had claims and getting substantial reductions on the renewal premium. So we're continually looking at towers looking the best place.
Shirley Yep: For us to play or or not play at all and withdraw from the field on a particular account the biggest and the last part of your question on the growth in professional cyber is part of our professional portfolio and that's where most of the growth is coming from.
Speaker Change: Great appreciate the answers thanks.
Shirley Yep: Okay.
Speaker Change: Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question queue. Please press star one on your telephone keypad. Our next question comes from the line of Pablo <unk> with Jpmorgan. Please proceed with your question.
Pablo: Hi, good morning.
Pablo: Brad you had mentioned that.
Shirley Yep: Yield was right at the top of the book yield.
Shirley Yep: Alright, so if you're if you freeze it.
Shirley Yep: Tricky environment for a moment right.
Shirley Yep: Hi.
Shirley Yep: Do you think theres room to increase.
Shirley Yep: Optimize your yields from here.
Shirley Yep: Duration.
Shirley Yep: Or maybe you don't need a different.
Shirley Yep: Different asset classes.
Shirley Yep: Yeah sure. Thanks Pablo.
Shirley Yep: Yeah, I think we're on the lower right.
Shirley Yep: Two two years duration, we are actually on the lower side of our duration target of two to three years. So.
Shirley Yep: That's one lever that we could pull while we haven't pulled back yet, but you know.
Shirley Yep: As we monitor the markets and opportunities on the portfolio and that's definitely something we can Paul.
Speaker Change: I would also add to that.
Shirley Yep: Your point about the new money yield being the same as the as the actual yield on the portfolio I think that was more just a factor of the snapshot of our portfolio at the end at September 30th There has been since then obviously yoga changed a little bit and those theres more of a gap there now where are new money yields are.
Shirley Yep: Bit higher so I think even without.
Shirley Yep: Change in duration that drastically theres still some opportunity there.
Shirley Yep: Of course that changes almost daily in this environment. So we're not going to make any drastic drastic moves here, we're really comfortable where we are on the duration risk and we're happy with the yields we have but it's something we monitor all the time and we will may.
Shirley Yep: Changes if we if we think it's appropriate to that.
Shirley Yep: No more yield that we can actually get by change in duration and they still have that comfort where we are.
Speaker Change: Got it that makes sense and then my follow up.
Speaker Change: What percentage of your.
Speaker Change: Invested assets are great assets. Thank you.
Speaker Change: Sorry could you say that one more time level.
Speaker Change: Just as a percentage of the investment portfolio, that's been floating rate assets.
Speaker Change: I don't have that with me, we can get that back to I don't know if you even have that detail in the queue, though.
Shirley Yep: I know most of our portfolio, it's very basic corporate.
Shirley Yep: Treasuries, we do have some.
Shirley Yep: Floating rate, but it's got to be pretty small.
Speaker Change: Sorry, I don't have that right after that okay.
Speaker Change: Thanks, Matt.
Speaker Change: Okay.
Speaker Change: Thank you, ladies and gentlemen that concludes our question and answer session I'll turn the floor back to Mr. <unk> for any final comments.
Speaker Change: Thank you operator, we delivered another strong quarter in Q3 and I'd like to thank our employees for their continued dedication and hard work to everyone else joining us on the call today. We appreciate your support and look forward to speaking to you along the way. Thank you.
Speaker Change: Okay.
Speaker Change: Thank you. This concludes today's conference call you may disconnect. Your lines at this time. Thank you for your participation.