Skyward Specialty Insurance Group, Inc. (NASDAQ:SKWD) Q1 2023 Earnings Call Transcript

Skyward Specialty Insurance Group, Inc. (NASDAQ:SKWD) Q1 2023 Earnings Call Transcript May 5, 2024

Skyward Specialty Insurance Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to the First Quarter 2024 Skyward Specialty Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Natalie Schoolcraft, Head of Investor Relations. Please go ahead.

Natalie Schoolcraft: Thank you, Liz. Good morning, everyone, and welcome to our first quarter 2024 earnings conference call. Today, I’m joined by our Chairman and Chief Executive Officer; Andrew Robinson; and Chief Financial Officer, Mark Haushill. We’ll begin the call today with our prepared remarks and then we will open the line for questions. 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 risk factors may cause actual results to differ materially from those contained in our projections or forward-looking statements, these types of factors are discussed in our press release as well as in our 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, skywardinsurance.com under the Investors section. With that, I will turn the call over to Andrew. Andrew?

Andrew Robinson: Thank you, Natalie. Good morning, everyone, and thank you for joining us. We started 2024 strong, reporting Q1 adjusted operating income of $0.75 per diluted share. Gross written premiums grew 27%. Our continued strong growth is a direct reflection of our strategy to have a low diversified portfolio of underwriting divisions that allow us to allocate capital to those areas we believe offer the best opportunity for profitable growth and shareholder returns. I’ll remind our analysts and investors that growth during 2023 was not the byproduct of already new property cat. We see limited property cat opportunities that fit with our Rule of Niche strategy in which we aim to build defensible positions that allow us to deliver top quartile underwriting profitability across all market cycles.

Our combined ratio was 89.6%, and our annualized adjusted return on equity and tangible equity or 18.3% and 21.1% respectively, altogether, these metrics reflect the power of our Rule our Niche strategy and our outstanding execution across all in the underwriting divisions and the functions that support our underwriters. Operationally, rate retention and submission flow in the quarter continued to be strong, and we continue to find opportunities to profitably grow our business. I’ll talk more about these later in the call. With that, I’ll turn the call over to Mark to discuss our financial results in greater detail. Mark?

Mark Haushill: Thank you, Andrew. For the quarter, we reported net income of $36.8 million or $0.90 per diluted share compared to $15.6 million or $0.42 per diluted share for the same period a year ago. On an adjusted operating basis, we reported income [indiscernible] or $0.75 per diluted share compared to $15.5 million or $0.42 per diluted share for the same period a year ago. In the quarter, gross written premiums grew by approximately 27%, all of our underwriting divisions contributed to the growth in our captives, transactional E&S, surety, professional lines, global property and agriculture divisions were each up over 20%. Turning to our underwriting results. The first quarter combined ratio of 89.6% improved 0.6 points compared to the first quarter of 2023.

The 0.5 point improvement in the current accident year non-cat loss ratio to 60.6% was principally driven by a changing mix of business. During the quarter, catastrophe losses were minimal and accounted for less than 0.5 point on the combined ratio compared to the first quarter of 2023, which was impacted by 1.8 points of cat losses. Excluding the deferred benefit of the LPT, there was no net impact from prior year development. In Q1, as has been the case in the quarters leading up to being a public company and since going public, we increased our conservatism to an already strong loss reserve position. The expense ratio increased 1.3 points compared to the first quarter of 2023 and was in line with the full year 2023. We’ve talked in prior quarters regarding our business mix shift and investing in the business.

So this is in line with our expectations and target of a sub-30 expense ratio. Turning to our investment results. Net investment income was $18.3 million in the quarter, an increase of $13.7 million compared to the same period of 2023. During the quarter, you will note we changed how we disclose our investment portfolio and the net investment income results. We will speak to the portfolio in four categories; short-term investments in cash and cash equivalents, fixed income, equities and alternative and strategic investments. This change was driven by a couple of factors. Our desire to simplify how we talk about the portfolio more traditional presentation and in line with the industry and more reflective of our strategy and the underlying risk characteristics of the portfolio.

Consistent with our investment strategy to deploy all free cash flow to fixed income in the first quarter, we put $98 million to work at 5.4%. The net investment income from our fixed income portfolio increased $5 million from $7.4 million in the prior quarter, driven by improving portfolio yield and the significant increase in the invested asset base. Our embedded yield was 4.7% at March 31 versus 4.0% a year ago and 4.6% at December 31. At March 31 we had approximately $298 million in short-term investments and our yield on short-term investments continue to be north of 5%. Lastly, April 1 is when we renew our property reinsurance programs, all these renewals were orderly and we are satisfied with the terms and structure of these programs.

We increased our property cat treaty net retention from $12 million to $15 million and the cover increased from $28 million to $36 million. We were able to improve the terms of the treaty while retaining the same model return period as the expiring treaty. With that, I will turn the call back over to Andrew for concluding remarks.

Andrew Robinson: Thank you, Mark. Operationally, we had another strong quarter. We continue to realize pure pricing increases in the high mid-single digits, which is above our estimated loss cost trends, our new business pricing was up again over our in-force book an indicator that new business profitability is attractive and should contribute to margin expansion, we also continue to see strong submission activity which was up over 30% from the prior year quarter. Retention dipped into the 70s driven by business mix shift towards lower retention divisions such as transactional E&S as well as some continued trending of our commercial auto portfolio, which in Q1 was 14.7% of our writings compared to 18.3% in the prior year quarter.

Let me turn to the competitive marketplace for a moment, from our vantage point it is most certainly an increasingly nuanced market for capturing profitable growth. But we continue to identify and invest in market segments that are attractive, and where execution of our strategy allows us to profitably grow and deliver attractive returns for our shareholders. In Q1, we launched a new media liability unit within special lines with a team of expert underwriting and claims professionals, each of whom has a distinctive standing and broker following in the marketplace. We remain confident in our ability to continue to attract the very best talent and arm those professionals with advanced technology and data analytics that has proven to be the winning formula for our success as our results in Q1 further reinforced and it’s visible in our results, whether it be the talent add this past year in surety or transactional AMS with the launch of global agriculture, or Inland Marine, our investments are clearly paying off for our shareholders.

Finally, we recently published our first ever annual people report, our people are the lifeblood of our success, and it is what makes Skyward truly unique. The report provides a wonderful view into our company, and we encourage our investors to visit our website to access this report or contact Natalie if you’d like to have a printed copy. I’d like to now turn the call back over to the operator to open it up for Q&A. Operator?

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Q&A Session

Operator: [Operator Instructions]. Our first question will come from the line of Mark Hughes with Truist Securities.

Mark Hughes: Yes, thank you. Good morning.

Andrew Robinson: Good morning, Mark.

Mark Hughes: Andrew, you mentioned 30% commission growth is very strong.

Andrew Robinson: Over 30%.

Mark Hughes: Over 30%, okay, even stronger. Anyway to break that out? I assume there’s underlying submission growth, your expanded underwriting capacity presumably is contributing to that. Any way to kind of break that out maybe compare it to what you have been seeing in the earlier quarters?

Andrew Robinson: Yes. If you’re asking for sort of same-store sales versus kind of like new capacity, we don’t share that. But let me just say this. There’s no question that, obviously, us bringing on talent that has the marketplace following inevitably leads to business following those. In some cases, the in-force books that those underwriters had in their prior roles. What I can tell you is that if you look across our businesses, by and large, same-store sales are up pretty materially. If you think about same-store sales, meaning our same underwriters and then growth is also a contribution of the underwriters we’ve had. And I think they’re an appropriate sort of balance. But we’re not going to go further than disclosing just — because what’s important here is, are we investing in a way that’s sensible for our business that’s driving profitable growth, and we’re seeing that data correspond.

Mark Hughes: Yes. To expand, when you say nuanced, I think you’ve touched on a lot of interesting points. What do you mean when you say nuanced though, if you could expand on that that would be great.

Andrew Robinson: Well, all of us obviously take in the sort of various things that are being discussed around the marketplace just particularly at this time of year, right, during earnings reviews and so forth. And I think there’s — it’s almost like sort of very general views put out there about what’s happening in different parts of the market, what’s happening in casualty versus what’s happening in property. And I have to tell you that it is just very specific to a circumstance, right? So we have — I would describe it at least three, if not four, quite discrete points of focus in property, right? We have global property, inland marine, and then our transactional E&S, I would describe a portion of our book as sort of highly technical and a portion that’s closer to sort of general property.

And I can tell you that each of those four areas are behaving very differently. And so that’s what we mean by nuanced. At the same time, on the liability side, everybody is talking about like, well, casualty, could it be an attractive market because prices are moving and the price are moving because people are recognizing that loss cost inflation and maybe the starting point on the loss cost relative to price may not be as favorable as people think. Meanwhile, like when we think about our business, I’ll pick transactional E&S as an example, okay, in the last month, a carrier that was in LifeGuard services pulled out of the market, right? Well, of course, we write like ours in our E&S business. Well, suddenly, we’re seeing this like dramatic flow of Lifeguard services.

And instead of the market that pulled out that is a $7,500 minimum premium, we have a $30,000 minimum premium. Instead of the possibility of providing abuse emulsification and assault and battery, we have absolute exclusions on those things. And so their pull out allows us to then go pick the business the way that we want. And we see those opportunities happening all the time. But it’s not like that is an indicative sort of window into everything. It’s a very specific underwriting category by category, and it’s the kind of market that plays to great underwriters, which I believe we have. And so when I talk about nuanced, that’s what I mean. And I think it’s a market that the hell at more favorable to a company like us than many of the other guys that are out there.

Mark Hughes: I’ll ask the blunt simple question. They’re talking about casualty accelerating as a general matter? Do you see that in 2024?

Andrew Robinson: Yes. So what I’d say is when we look across our casualty occurrence, ex-workers’ comp, sort of all the various touch points, again, I don’t think there’s one overriding theme. But what I can tell you is that we definitely see prices moving. In our case, we took some actions here over the last couple of quarters to start to tighten terms in very specific areas and also to pull back limits, and we’ve been able to do that, we’re making sure that the retention is holding, but we think that we found the balance. So that feels like at least amongst the competitors that we see and the competitors in a lot of those cases. I consider to be very, very good competitors that they’re amongst the better, the best seem to be operating in a similar way.

So I think that’s promising. That said, look, I think hard marking casualty is all relative, right? I mean you have to believe that you’re in a technically strong starting point and then your price is in excess of loss cost trends. And I don’t think that’s uniform, right? I think there are places and there’s certainly plenty of opportunities that we see. I just — I gave you one earlier, but I don’t believe it’s a uniform market. And that is very much what I mean by nuanced. And I think, again, I think it’s a great market for the best underwriters.

Mark Hughes: Appreciate that detail. Thank you.

Operator: Our next question comes from the line of Paul Newsome with Piper Sandler.

Paul Newsome: Good morning.

Andrew Robinson: Good morning, Paul.

Paul Newsome: I was hoping to get a little bit more detail about investment income and just trying to get to some sort of run rate thought. There’s a lot of changes happening, obviously, with the new money moving around and moving a little bit of options in fixed income portfolio. So could you give some thoughts that kind of help us get a sense of where that maybe long-term trend will be — run rate will be once everything is done?

Andrew Robinson: Mark, let me see if I can translate that. You’re looking for a run rate of investment income in the future, assuming that we’ve received the flows from opportunistic. I just want to make sure I understand what you’re asking. Yes, that’s right. I mean assuming that you’ve got the flows out of the opportunistic plus kind of where is it — what’s going on, you may wait and what you’re putting into the traditional fund, it’s always been a challenge to kind of figure out where exactly the right midpoint/run rate is for investment income.

Mark Haushill: Well, I mean, it’s — the way I think about it is pretty simple. If you look at the invested asset base for core fixed income, you know what our embedded yield is. I think the yield — I don’t know what interest rates are going to do. We’ve been investing at over 5% for the better part of the year. And all of our cash flow will continue to go to fixed income. That’s where it’s going. Does that answer your question?

Paul Newsome: A little bit, I can take it offline, too, as well. Maybe back to the sort of competitive environment question. I think the concerns have been primarily the E&S is where the softening is but specialty is not necessarily yes. Maybe you could talk a little bit further about sort of what is really kind of true E&S that might be of a concern if at all? Or what could be is really not even in that box at all?

Andrew Robinson: I don’t know if I want to prop around the entire industry. We’ve said it before. I’ll say it again. What we write in the surplus lines market, I would consider to be true surplus lines. So I’ve heard some of the questions about what’s happening with the admitted care business [ph]. We don’t write the stuff that’s E&S light. That just isn’t us. We’re writing stuff that’s in the E&S market for a reason. Now certainly, if there’s less flow coming into the E&S market, then our part of the market becomes more competitive, right, because that’s where the surplus lines writers would look. And I also get all the same data that you guys get about the early views on the major states and so forth. But here are the facts, Paul.

We grew 43% in transactional in this quarter, and we grew 27% in professional lines. Those two areas are pure surplus lines areas. And so I would say that that’s a pretty good indicator that regardless of what’s happening in the market, I’ll just reinforce it. Our strategy is a very specific strategy, and we seem to be executing well and it seems to be paying off. Do I believe that 27% growth is just like last year’s 28% growth, is that a number you can sort of take to the bank? No, absolutely not. I mean let’s just — it just speaks to the excellent execution of our organization and our ability to sort of pick off opportunities like the example I gave earlier. But I would just tell you, I feel like we’re in a market where we can continue to win.

We can continue to grow the profitability and the shareholder returns, and we can continue to grow at a level that is meaningfully enough different than sort of the cross-section of the competitors that we’re competing with in the market. And I’ve highlighted for you in the past who those are, some of the pure-play specialty carriers plus the primary insurance or specialty arms of the larger sort of multiline Bermudans. And so I feel good about where we’re at, and I think the market is still conducive for us.

Paul Newsome: Okay, that’s great. So I appreciate the help as always

Operator: Our next question comes from the line of C. Gregory Peters with Raymond James.

Greg Peters: Good morning, everyone.

Andrew Robinson: Good morning, Greg.

Mark Haushill: Hi, Greg.

Greg Peters: So a lot of comments from you on market conditions. Your gross written premium is quite strong in the quarter. I want to go back to your comments about property and sort of integrate that with your discussion on reinsurance, the renewal and the increased retention. As we go through ’24, should we — how should we think about your growth in your property book as it relates to frequency and severity of cat losses? It seems like you haven’t had a lot of exposure to date. So I’m just curious if the profile is changing now.

Andrew Robinson: It’s a great question. Thanks, Greg. Let me just start and say something about the tree because I think it’s important. So last year, we had an attachment point of 12 when we moved that to $15 million. On a modeled basis, that’s a one and 10-year attachment point. So we effectively kept our same attachment point. Our exhaustion point, while we added $8 million of cover is in excess of the same sort of point, it’s in excess of a 1 in 250 event. And so well, that tells you that we’ve added some exposure from last year, which is no surprise because we grew property, right? Property has been 25%-plus of our book pretty consistently. And so as our book grows, property is growing. And so unsurprisingly, we’re adding exposure.

And we’re — all we’re doing is we’re keeping our cat cover roughly in line on a return period basis. And of course, that tower [ph] that we buy is relatively small to the size of our property portfolio. To your point, we write a well-diversified book of properties. So look, I don’t think anything is going to change in terms of frequency or severity of exposure to storms. I think you already saw that in the first quarter was there was a lot of convective activity again, a relatively light quarter for us. There’s still a lot of conductive activity going on. We’ll see how Q2 turns out. And then I think as we get into the hurricane season, look, a lot of that is just what paths things take and so forth. But I can say pretty confidently right now in Q1, that if we were to have a material event or a set of material events to the industry, I think that what we see in terms of our results would be very favorable on a relative basis in general.