Skyward Specialty Insurance Group Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2024

There are 11 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Skyward Specialty Insurance Earnings Conference Call. At this time, all participants are in listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

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

Speaker 1

Thank you, Sean. Good morning, everyone, and welcome to our Q2 2024 earnings conference call. Today, I am joined by our Chairman and Chief Executive Officer, Andrew Robinson and Chief Financial Officer, Mark Paschall. We will begin the call today with our prepared remarks, and then we will open the lines for questions. Our comments today may include forward looking statements, which by their nature involve a number of risk factors and uncertainties, which may affect future financial performance.

Speaker 1

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 ks 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?

Speaker 2

Thank you, Natalie. Good morning, everyone, and thank you for joining us. With another great quarter reporting Q2 adjusted operating income of $0.80 per diluted share, which is our best in company history and nearly double the same quarter last year. Our underwriting income is up over 50% and our investment income is up over 150% from the prior year. This quarter marks the 6th consecutive quarter we delivered a sub-ninety two combined ratio and 18 plus percent growth.

Speaker 2

Our fully diluted book value per share was up 8.9% from the beginning of the year to 17 point and our annualized adjusted return on equity and tangible equity through 6 months were 19.6% 22.4% respectively. Altogether, these outstanding results are a testament to the high level of execution across our underwriting divisions and the functions that support our business. It's also a direct reflection of our Rule Our Niche strategy, including our intentional efforts to have a well diversified portfolio of underwriting divisions that enables us to deliver top quartile underwriting profitability across all market cycles. As you may have read last week, Skyward Specialty was upgraded by AM Best to an A rating. This is no small achievement given that the company had an A- with negative outlook when I joined in May of 2020.

Speaker 2

Incredible commitment, drive and execution of our 5 40 employees are the force behind this important achievement. I am confident that this will add to the momentum we have and will further fuel our winning in the marketplace. With that, I'll turn the call over to Mark to discuss our financial results in greater detail. Mark?

Speaker 3

Thank you, Andrew. For the quarter, we reported net income of $31,000,000 or $0.75 per diluted share compared to $19,500,000 or $0.51 per diluted share for the same period a year ago. On an adjusted operating basis, we reported income of 33,100,000

Speaker 2

dollars or $0.80 per diluted

Speaker 3

share compared to $16,000,000 or $0.42 per diluted share for the same period a year ago. In the quarter, gross written premiums grew by approximately 18% with our captives, transactional E and S and surety divisions and our global agriculture business within our global property and agriculture division, each contributing meaningfully to growth. Turning to our underwriting results, the 2nd quarter combined ratio of 90.7% improved 1.3 points compared to the Q2 of 2023. The current accident year non cat loss ratio of 60.7% was consistent with the prior year. During the quarter, catastrophe losses from convective storms only accounted for 1.2 points on the combined ratio compared to the Q2 of 2023, which was impacted by 3.5 points of cat losses.

Speaker 3

We maintain our guidance we previously provided for our full year cat loss expectations. The expense ratio increased 1 point compared to the Q2 of 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-thirty expense ratio. We're also getting leverage from increase in earned premiums.

Speaker 3

Turning to our investment results. Our strategy to de risk the portfolio continues to pay off with net investment income of $22,100,000 in the quarter, an increase of $13,600,000 compared to the same period of 2023. Consistent with our investment strategy to deploy all free cash flow to fixed income, in the Q2 we put $98,000,000 to work at 6.4%. The net investment income from our fixed income portfolio increased to 13,800,000 dollars from $7,900,000 in the prior year quarter, driven by improving portfolio yield and the significant increase in the invested asset base. Our embedded yield was 4.8% at June 30 versus 4.2% a year ago and 4.7% at March 31.

Speaker 3

Income from our alternative and strategic investments portfolio increased to $3,600,000 from a loss of $3,200,000 in the prior year quarter due to an increase in their fair value of limited partnership investments. At June 30, this portfolio only comprised 8% of our overall investment portfolio compared to almost 11% at December 31. The redemption of the alternative assets previously classified as opportunistic fixed income is beginning to work its way through. At June 30, we had approximately $250,000,000 continue to be north of 5%. Lastly, we are finalizing a credit facility with the Federal Home Loan Bank and we are waiting final regulatory confirmation weeks, which we expect shortly.

Speaker 3

The facility will be used to pay down a portion of the revolver. We finished the quarter with a low 14% debt to capital financial leverage ratio. And given the new facility and our current leverage, we have a good deal more financing flexibility. Let me now turn the call back over to Andrew.

Speaker 2

Thank you, Mark. As Mark commented, our 18% growth this quarter was fueled by our captives, surety, E and S and our global agriculture unit within our Global Property and Agriculture division. This is noteworthy as we're intentionally seeking growth in high return areas that are less exposed to the P and C cycles. For us today, this includes A and H, surety, captives and agriculture, which accounted for 36% of our gross written premium this quarter. This aspect of portfolio management will increasingly be an area of focus in our drive to consistently deliver top quartile underwriting returns.

Speaker 2

And I expect that you'll hear more about this from us in the quarters ahead. Operationally, we had a strong quarter. Our 1.2 points of cats referenced earlier is outstanding in light of the considerable property portfolio we have across global property, transactional E and S and our industry solutions including our inland marine unit, which together are 26% of our portfolio. The quality of our property underwriting and aggregation management continues to produce a differential result. Turning to pricing.

Speaker 2

We delivered mid single digit pure rate and new business pricing consistent with our trailing 12 month in force pricing. The aggregate rate metric ticked down this quarter due to the large renewal book in global property where pricing softened considerably. Otherwise, pricing was broadly consistent with the Q1. I will remind you that in this quarter last year, we achieved our largest ever rate increase similarly driven by global property, which I had noted on the call. We've not seen a similar step down in property pricing for transactional E and S or inland marine.

Speaker 2

Pricing in most of our key markets is orderly, which should allow us to continue to deliver differential growth while maintaining strong underwriting margins going forward. Retention was in the mid-70s for the quarter, driven by business mix and our intentional actions in commercial auto, which in the quarter made up 12.8 percent of our gross written premium as compared to 16.6% in the prior year quarter. I will note that exposure for auto is down even further than the written premium metric given the considerable pricing increases we have achieved. Our decision to shrink auto is principally driven by the loss cost inflation backdrop. We simply believe that it is unwise to add exposure in a market that appears to now structurally have 10 plus percent loss cost inflation regardless of our ability to achieve above 10% rate increases.

Speaker 2

Lastly, we continue to see strong submission activity, which was up over 25% from the prior year quarter. Finally, I'd like to take a moment to talk about our team. In June, we were recognized as one of the best places to work by U. S. News and World Report, a testament to our commitment to creating a positive, inclusive and empowering workplace for our employees.

Speaker 2

This honor reflects the collective efforts and dedication of our entire team. It is a direct result of our focus on fostering a supportive work environment, prioritizing employee well-being and investing in professional development. This recognition reinforces our belief that we have created an environment that is a competitive advantage for attracting and retaining the best talent in the industry. I'd now like to turn the call back over to the operator to open up for Q and A. Operator?

Operator

Thank

Speaker 2

you.

Operator

Our first question comes from Matthew Carletti with Citizens JMP. Your line is now open.

Speaker 4

Thanks. Good

Speaker 2

morning. Good morning. Andrew, I was hoping you

Speaker 5

could maybe dig in a little bit more to your commentary about kind of where you grew this quarter and importantly kind of it being areas of the business that aren't necessarily linked to P and C cycles. I think I call it kind of a 36% of the business sort of number kind of where that stands today. How do you view that longer term? Do you have kind of a perfect mix that you're looking to get to? Or how do you think about that and the benefits that might bring to Skyward over multiple cycles?

Speaker 2

Yes. That's a great question, Matt. Thanks for that. Well, look, maybe I'll just back up and put a little context around this. So in the 4 years that I've been with the company, we have seen, I would describe it as kind of explosive market cycle motor cycles in various lines of business, right?

Speaker 2

We saw public D and O go through the roof and then probably come down even faster than it went up. Early in my time when I joined Skyworks, we saw a big movement on high access. I remember a number of peers who were talking about like mid teens rate increases and it's just because they had a very big high access, large access portfolio. Similarly, you saw a cycle where cyber went way up and now cyber is soft. If you go through the list, property, same thing.

Speaker 2

And of course, we're in the PMC business, right? So we're never going to fully buttress ourselves to that. But it is our belief that the more that we can build a portfolio that is less susceptible to that, the more predictable we can be around not only our growth, but the quality of our earnings. And I just believe simply the durability of the outlook for our business. And while this quarter was 36%, it was really just a byproduct of a quarter that had a relatively large growth in agriculture as an example, where I think what we're aiming at for overall portfolio is more like a third over the course of a year.

Speaker 2

And today, we're probably at around 25%. So we want to grow that, while not limiting the growth by the way on sort of our other lines. It just means that this is an area where we expect to grow faster than the rest of our Boca business. And by the way, I think that as you look at over the coming quarters, you'll hear some announcements from us about new lines that we'll be entering that they kind of fit into this portfolio.

Speaker 5

Great. That's very helpful. Thank you. One other, if I could kind of dive in a little bit to one of your other comments, your commentary around bringing exposure down on commercial auto, which I think makes a lot of sense in a market that structurally just has a loss cost issue.

Speaker 2

Can you maybe just maybe give us

Speaker 5

a little bit of color or remind us kind of commercial auto is a broad category and there's lots of different flavors of commercial auto. Just kind of what kind of what I guess what you have left on your book kind of what that flavor of commercial auto might be? And as you bring that exposure down, are there particular areas of commercial auto that you're reducing emphasis of? Or is it more of a broad bring down across the entire category?

Speaker 2

Yes. Look, also a great question. So thank you. Let me just back up here because we've watched and listened to what others have said about this and we've also observed. And I just have to say that this is not about profit.

Speaker 2

This is about durability. And if somebody believes that loss cost inflation today is 10% and or 11% or 12% or whatever they might believe, but everybody believes that it's rising. Nobody is to say that 2 or 3 years from now that will have been underestimated, particularly given sort of the changing dynamic there. So I will just say to you that it is a very describe it as more uncertain and we're aware that some of our peers, many of whom we respect have a different view on this than us. But our view is really simple.

Speaker 2

It is not a question of profit. It's a question about durability. And then as it relates to where we see it, look, the bulk of our business for commercial auto is not kind of the fleets that would make up kind of a layer end. It's medium to heavy, including intermodal trucking, which is kind of medium distance, not in the long haul, but generally medium to heavy vehicles. And that is the area that there is no question is the most susceptible to the lost cost inflation that we've seen.

Speaker 2

And trucking is kind of the extreme end of that, heavy trucking. But I'm not sure that we really can distinguish between the inflation that we're seeing in kind of the medium part of the market versus the heavy part of the market. And so our disposition about this is kind of across the board.

Speaker 5

Great. Thanks, Andrew. Appreciate the insights.

Speaker 2

You're welcome.

Operator

One moment for our next question. And our next question comes from Meyer Shields with KBW.

Speaker 6

Thanks and good morning. Andrew, I want to continue on commercial auto just to make sure we're covering it. It sounded like one of the reasons for the change in the net to growth was on commercial auto that your which I guess means you're buying more reinsurance. Are ceding commissions there offsetting expenses like how is that impacting the expense ratio?

Speaker 2

No. Maybe I didn't quite get the question, Mair, but I think when we're talking about growth, we're actually talking about a very considerable reduction in units, offset by a very considerable increase of price, but the net net of which is a meaningful step down in written premium for auto. There's really been no change to our reinsurance structure for auto, no change in kind of the ceding commissions, nothing there that is noteworthy. So I don't know if that addresses your question, maybe I didn't quite get it. So does that address your question?

Speaker 6

Yes. No, it does. I just wanted to know whether there's any trend that we should worry about. It sounds like and I don't think this is the 10th, but it sounds like the shift towards less cyclical lines also means lines with shorter tails, I guess, as you move away from commercial auto, more agriculture and more surety. Does that impact the fixed income allocation at all in terms of duration?

Speaker 2

Well, look, I think at the macro sense, instead of just thinking about the one specific part of it that I referenced around trying to build more a larger position in lines that are less exposed to the P and C cycles. Today, about 56% of our liability portfolio is what we call short duration, less than 2 years of liabilities. That's been ticking up. I don't think it will go that much higher because even though you noted 3 areas that are generally shorter tail lines, another area that we hope to grow over time is more exposure to other areas of credit insurance, which will have a little bit longer tail. So I would say, by and large, we're probably going to stay in that 50% to 60% range being short tail liabilities.

Speaker 2

And we've pretty much been holding our duration on our investment portfolio consistent at around 4 years for the fixed income portion. And other than the fact that that's growing as a portion of our portfolio, it's very well laddered. We feel pretty good about that that's the right place for us to be.

Speaker 6

Okay. Perfect. And last question just because I'm not as familiar. Is there any pricing of note in the agricultural component of global property and agriculture? I get the less cyclicality.

Speaker 6

I just don't know what's actually happening day to day in that market.

Speaker 2

Well, for us, it's a global business. So we write all over the world. That's just the first thing to note, right? So the second thing is that this is only our 2nd year of operation. We had relatively flat rate on the portion of our business that was renewals, but that was a relatively small portion of what came through, particularly in the Q1.

Speaker 2

So it wasn't really noteworthy and didn't influence our metrics. As the book seasons over time, we will certainly be prepared to talk about that in the context of sort of what we're seeing on rate overall.

Speaker 6

All right. Fantastic. Thank you so much.

Speaker 2

Thank you.

Operator

And our next question comes from Michael Zaremski with BMO.

Speaker 2

Hi, Mike.

Speaker 7

Hi, good morning. Good morning. Dan on for Mike today. Good morning. Just maybe one starting with the benign cat loss ratio,

Speaker 2

maybe a

Speaker 7

little bit lower than we would have thought relative to peers, especially given the Texas exposure there. Touched on the prepared remarks a little bit and attributed it to the lower severity in the press release. But just wondering if there's anything we should be thinking about Skyward's cat exposure there?

Speaker 2

I think the thing that you should be thinking about is that we're better than others in the industry. That's what I think. I mean, I think our results just bear that out. 26% of our portfolio is property, yet which is a pretty sizable chunk and broadly in line with the commercial insurance market, yet we're consistently out delivering, which effectively means that our portfolio is by and large less traditional cat exposed. We've said it all along that the first parallel that we write is fire.

Speaker 2

It isn't cat. And so I think that the thing that we point to is that we have a high earning, short tail liability, book of business and low volatility. And we don't believe that it's appreciated enough by the investor community that that's the profile of that business. It's not to say that we're immune to cats because we're not. It just says on a relative basis, we certainly in our 6 quarters of being a public company have outperformed, and this is no different.

Speaker 7

Great. Made that clear. Then maybe just switching gears to social inflation. Maybe if you could just touch on tour de form progress year to date that we've seen in your key geographies, maybe particularly Louisiana where you guys have material exposure. And we've seen some headlines there that they're limiting third party litigation funding by foreign entities?

Speaker 2

Yes. By the way, that may be the case. I actually don't know that, that law has gone into effect. I think that the issue by the way in terms of the sourcing of funds that is easily circumvented. So I'm not like I don't believe that that alone is going to be something that that's going to have a material effect.

Speaker 2

I think just generally disclosure is a good thing. It will certainly raise the awareness. But the fact of the matter is that I think that there's a lot of talk, there's some action, there's currently action happening in Congress, which is terrific. But and you feel like that there's more momentum here, but I am suspicious. The plaintiff bar in the litigation financing industry are incredibly well organized.

Speaker 2

And until we see like a kind of change that not only just limits disclosure, but put some boundaries around what's reasonable and practical and starts to provide very real examples where damages start to look like they have in the past adjusted for inflation, until we start to see some signs of that, I'm skeptical.

Speaker 7

Great. Thanks.

Operator

And our next question comes from Greg Peters with Raymond James.

Speaker 8

Yes. Hey, good morning. This is Good morning, Greg. I just sit on for Greg.

Speaker 2

Good morning.

Speaker 8

Yes. Just given the growth in the professional lines division over the last year, I'm curious if you could comment on what you're seeing there as far as additional opportunities and maybe if you could take a moment to clarify what type of exposures you're focused on in that market?

Speaker 2

Yes, sure. Our growth drivers in professional have been miscellaneous professional and our healthcare professional. We write medical facilities, various miscellaneous classes on the healthcare side, and those have been the 2 principal drivers. What I would say is that the sort of the buoyancy that drove a lot of the growth on the miscellaneous piece, which we are more mature on, we've been in the business for a while, was actually an outflow of a lot of brokers who are overwhelmed during sort of the difficult period on cyber. And so we saw very heavy flow to us because we are rapid to respond, good technical team, can understand this sort of the unique exposures that sort of make up the miscellaneous class.

Speaker 2

And today, I think it's a more competitive environment simply because it's a segment that is profitable and our book is very profitable. So that slowed down a bit. On the flip side, we're certainly getting our sort of feet underneath ourselves on the healthcare professional side. And that's been an important growth engine. We've added a lot of great talent into that and we've expanded our appetite a little bit.

Speaker 2

And I find that market to be, as I described in with a relatively with a relatively broad appetite and the ability to sort of look at exposures and assess them on an individual basis and price that risk that we can pick off business that we feel really good about and margins that we think are super attractive. And that's been a principal driver. In that book, in our professional book, we have a D and O book. It's principally private, very small amounts of public. I've talked about some of the segments that we focus on there so that we get away from kind of the mainline sort of competition there.

Speaker 2

I noted in the past areas like cannabis and distressed homeowners, Web3 kinds of exposure. We're really one of only 2 writers in that market. Another piece of our professional is architects and engineers and we do some small amounts of financial institutions in a very focused way. And that pretty much rounds up the business. And so but the growth drivers have been the 2 that I spoke about.

Speaker 2

And in the other areas, we're picking off business as we see the opportunity, but haven't really been the

Speaker 8

investment income with the increase in income from the alternative and strategic investments. I know you've reduced allocation there, waiting there. And so just hoping you can help frame how we should think about the results from that portfolio moving forward?

Speaker 3

Hey, it's Mark. What I would say is, it stabilized a little bit during the quarter, but we have seen volatility in the past. It's hard to judge how that will play out. I would say we just take it a quarter at a time. It's running off and it's running off in the fashion that we expected it to.

Speaker 3

And it's just becoming smaller, if that answers your question.

Speaker 8

Okay. Thanks for the answers.

Speaker 9

Sure.

Operator

And our next question comes from Michael Phillips with Oppenheimer and Company.

Speaker 10

Hi, good morning. It's Roland on for Mike. Wanted to start with the global property and ag growth. So you called out the ag piece as growing pretty significantly year over year. Are you able to give us what the sort property component of that unit was and just discuss your thoughts there?

Speaker 10

Are there geographies you're shrinking? Is anything there would be helpful.

Speaker 2

Yes. On the LV Direct, we saw a double digit step down in a written premium in Global Property in this quarter as compared to last year. Now last year was, I would describe as the absolute peak of the market. There's probably some bits of the market that were sort of at the opportunistic end for us. But I'll be honest with you, in most of our business, we have a pretty rational and competitive backdrop.

Speaker 2

This is one place where we saw some pretty darn irrational behavior. A lot of that coming from Lloyd's, but not only from Lloyd's. And this is very large stuff, right? So it attracts the attention of folks who are basically looking to put capital to work and try to write some big ticket items. We're just not going to follow the market down.

Speaker 2

We're a very significant line taker in the primary layer and there aren't too many folks that are like us. So we're very important to our insurers, but the fact of the matter is, it was just a quite honestly, it was pretty ugly behavior out there and we just let some business go. And you saw that division was pretty much flat versus the prior year. That difference was picked up by tremendous growth that we saw in ag, which we're really pleased about.

Speaker 10

That's very helpful. And then is that driving what is causing the net premium retention to rise significantly year over year? Or is that part of the runoff of the LPT? Or what's is there a way to think about the full year net retention on premiums?

Speaker 2

I would only say about our full year net retention is at the beginning of the year in our guidance, we pointed you to the 2023 net retentions, which I believe are right around 62 ish percent give or take a bit. And we explained that those are good planning assumptions for this year. And really nothing's changed around that. There are some movements by the way where we've changed some renewal dates on particular programs to put ourselves in windows that we felt better about. But by and large, I think it still remains a good planning assumption.

Speaker 2

Not really much has changed. And I want to over read the sort of the quarterly gross to net or any of that. I just I think that the macro assumption at the beginning of the year was the right assumption.

Speaker 10

Okay. Thank you. And if I could sneak one more in, you guys have hired a number of teams in the past 2 years. You talked about the growth investment sort of pushing up the expense ratio a bit. When you bring the team in, how long does it take for them to reach scale?

Speaker 10

And is there a timeline you expect sort of the expense ratio to normalize for the growth you've been investing in?

Speaker 2

Yes. It's a really great question. The answer, unsurprisingly, is it depends. It's very interesting. 1 of our executives describes what we do as a big venture capital like we hold back investments in our planning at the beginning of the year and then we ask our businesses to compete for it.

Speaker 2

There are certain areas that we consider to be very strategic. We will be making an announcement around one of those here in the weeks ahead, which is an area that we've been focused on for a long time. And it's so strategic though that what we see is that the payback might be longer, but the margins in that business are very durable and very defensible. And so we like it and so that the payback sort of the length of the payback being a little bit longer is acceptable. But by and large, we're generally seeing that our underwriters are more than paying for themselves within 12 to 18 months.

Speaker 2

And the exceptions to that might be in particular classes of business or it just simply takes a longer time to build, but we want to enter that class because we consider it to be very strategic.

Speaker 10

Is the market for talent becoming significantly more competitive?

Speaker 2

I think the market for talent has been very, very, very competitive principally because we are a specialty carrier. There is a dearth of talent that are really sort of in the specialty classes. But that said, we point to the fact that last year, our voluntary attrition was what we believe is at or near industry low of 7%. We're not running far off that again this year. And our ability to attract like really, really great talent speaks for itself, right?

Speaker 2

I mean, just last week's announcement of adding what we consider to be a just an absolutely astoundingly good technical leader for life sciences launch and similarly an incredible technician who's leading our transactional E and S property portfolio. Like that's and you look at their backgrounds, you look at the companies that these people are coming from, these are great companies and these are impressive people. And so I would just say to you, regardless of what's happened in the market, we are clearly winning the talent war. There's no question about that.

Speaker 10

Thank you for your answers and let me sneak an extra one in there.

Speaker 2

Thank you.

Operator

Our next question comes from Yaron Kinar with Jefferies.

Speaker 4

Hi, guys. Good morning. This is Charlie on for Yaron.

Speaker 2

Hey, Charlie. Good morning.

Speaker 4

Hi. Yes, congrats on the quarter. Thank you. I have a question for you guys on reserves. If you guys could just provide a little bit of color on maybe longer tailed reserves, particularly for accident years 2020 and more recent?

Speaker 3

Sure. Hey, it's Mark. So in terms of the 2020 through 2022, we saw some isolated pockets of emergence in other liability occurrence. But when I say that, I think it's you need to take that in the context of our philosophy and what we do here. First, we're not going to move around each and every quarter.

Speaker 3

We look at our reserves ground up at the end of the year, but the movement was small. And I feel great about our loss picks, which I think is where you're going. I would also remind you that how we've been conservative since 2020. We have intentionally been very conservative on our loss picks. We have not taken full credit for rate increases.

Speaker 3

So honestly, I feel great about where we are in 2020 through 2022. We did see a little bit of emergence and we're watching.

Speaker 4

Okay, great. Thanks for the color. And then on the A. M. Best upgrade, could you just provide some context on how you think that's going to impact maybe growth from here?

Speaker 2

Well, I don't think we would it's a great question, by the way. I don't think we would assign a specific kind of value of growth. What I can tell you is, it's very interesting how these things happen. SUS got the upgrade. I was given a small number of examples in our professional lines cutting across e and o, d and o and in a healthcare professional where we had lost an account or 2 and ratings was part of that.

Speaker 2

And by the way, as soon as we got the upgrade, I had an example of us being included in a submission because of our rating. And I think the way I would describe it is, in my experience, as the market gets a little more competitive, it's always been my experience that if you don't have an A rating, the jump ball goes to the team with the A rating. And now we have the A rating and I feel really great about that. If nothing else, I can just tell you that the energy level around our organization on the back of that, which is already at a very high level, has just kicked up another notch. And so if I were to assign anything to it, I would assign the energy that our underwriters have to use that and get out and win some more is something that I can almost point to as being quite palpable.

Speaker 2

But I wouldn't say, hey, as a result of this, our growth outlook changes. I just feel, I feel though over time, it will be one of the things that proves to be a really important part of our sustainability as a business.

Speaker 4

Okay, great. And then one more if I could. I know you guys spent some time talking about the difference in the severe convective storm losses relative to the prior year quarter. I think last year you guys called out a couple of large losses in the South. Obviously, the industry had a very high number of SCS related activity and significant losses this quarter as well.

Speaker 4

How much of the improvement year over year in the cat load would you say you attribute to just the geographic difference in where SCS occurred versus where you guys Yes.

Speaker 2

I mean, that one's a pretty straightforward one. I'd say none. I mean last year, a tornado touched down on top of a factory that was a very large exposure and we took a big loss and that was a big part of it. And this year, we didn't have one of those. It was literally that simple.

Speaker 2

I think our largest loss in this quarter was $7,000,000 And last year, if I remember correctly, we had one very large loss and we had a second one that was above $1,000,000 And so this is just when it comes to convective storm, the truth is there is being good, which I think we are, we're good at aggregation management, we're good at underwriting, we protect ourselves the right way in terms of coverage forms, price, etcetera. We're good at aggregation management, but a lot of it has to do with just being lucky, right? Because you can be the best underwriter, but if you've got the factory that tornado touches down on the roof of, well, guess what, that just is what it is. And that's what happened last year.

Speaker 4

Got it. Well, thanks for the questions you guys.

Speaker 2

Appreciate it.

Operator

And our next question comes from Mark Hughes with Truist Securities.

Speaker 9

Yes. Thank you. Hey, Andrew. Hey, Mark.

Speaker 2

Good morning, Mark.

Speaker 9

You've talked about the growth in these non cyclical areas, captives for 1. What has been driving that? And is that momentum going to continue again in that captives market?

Speaker 2

Look, it's a great question. So here's the data I would point you to. Long before the sort of hard market started to be a call a hard market back sort of around 2020, maybe a little bit earlier than that. If you take a look at the growth in captives, even during the soft market period, it was pretty darn astounding. And I think there's a bunch of reasons for that.

Speaker 2

I just generally believe that there is a class of companies out there who want to be directly invested in their cost of risk and they have a focus on risk management. And I believe that obviously information, technology is playing an important role in companies that have an ambition to directly participate in their cost of risk and take greater control. That clearly has accelerated during the hard market, right? I mean as price has gone up, the sort of the attractiveness of, in our case, we're talking about group captive solutions, just goes up and up and up. And it has been the case and it continues.

Speaker 2

And I think that set of data that I just shared with you is between soft market and hard market is an intractable trend. So we like that. And in that regard, we find that certainly the participants that go into group captives, they're ultimately being priced based on really their true loss experience. And it is generally less cyclical and less exposed to kind of what's changing in the external market. And I believe that we've done quite a bit to position ourselves really well against that.

Speaker 2

I'll highlight for you 2 areas, Mark, as an example. 1 was, I guess, probably about 2 years ago when we shared with you that within one of our key classes within construction, crane and rigging, that we created a captive that effectively sits side by side with our guaranteed cost solution. That's proven to be a really smart move. And another was our partnership with a technology company called Understory Weather in addressing the automotive dealer segment. And that is another one where we've made great inroads with tremendous knowledge and experience in that class, but we created a captive around that based on a really unique approach.

Speaker 2

And those are the kind of things that I think we're getting a reputation for that's positioning us really well as we're looking to grow this part of the market.

Speaker 9

And refresh me, if you write $100 worth of business in a captive, what's going to be the bottom line contribution?

Speaker 2

Yes. So a way that I would describe it to you is that roughly the premium that goes to what a group captive participant retains in terms of risk will be, let's call it 80% of the first $1,000,000 of limit and the premium associated with that. And so the 20%, let's say it's a $650,000,000 excess of 3.50 or 500 excess of 500 that might be worth $0.20 on the dollar of the total premium. And then depending on the specific program, it may be that the captive participants do or do not participate in the excess. And in the cases it doesn't they don't participate in the excess, it goes into our corporate excess treaties and we participate as if we were writing the first dollar on a guaranteed cost basis.

Speaker 9

Appreciate that. And then the Accident and Health business also kind of a similar profile. How do you control volatility there?

Speaker 2

Is that

Speaker 9

just your experience historically, is that more or less volatile than your overall book?

Speaker 2

We so our A and H and medical stop loss business effectively, we are writing a specific and aggregate excess cover. That's effectively what we write. We actually buy an excess cover as well, so that our actual loss corridor is effectively capped. And so and we've done that every year since I've been with this company as a matter of process. And so the reality is that the range or volatility that we might see in that business is rather low.

Speaker 9

Yes, understood. And then a final question. The transactional E and S, real strong growth, what are the standout lines of business there that are driving that?

Speaker 2

GL and property. And I mean, I just think we I would put our team in what we do, right? Our average premium size is a little under $50,000 I would put this team against any team in the industry. They're just they're terrific. They have a great following.

Speaker 2

They're the folks that are truly take the time to understand exposure, craft coverage and they're technically just off the charts. And so if I want to assign kind of our success there, our success is tied to a team that is incredibly well respected and followed by our key distribution partners. And we're adding folks and the people who are coming in are every bit as good as the people that are already in place. And I think the backdrop there is terrific. And while Mark commented on some of the occurrence liability kind of pockets of trends that we saw, one place that we are just seeing absolutely outstanding results and emergence is inside of our transactional E and S on the GL side.

Operator

And this concludes the question and answer session. I would now like to turn it back to Natalie Schoolcraft for closing remarks.

Speaker 1

Thanks, everyone, for your questions, for participating in our conference call and for your continued interest in and support of Chiro 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 Q3 earnings call. Thank you, and have a wonderful day.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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Earnings Conference Call
Skyward Specialty Insurance Group Q2 2024
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