Bowhead Specialty Q4 2024 Earnings Call Transcript

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February 25, 2025

There are 8 speakers on the call.

Operator

Hello, and welcome to Bowhead Specialty's four q twenty four earnings call. After the prepared remarks, we will hold a question and answer session. For those in the q and a room, please click the raised hand button found at the black bar at the bottom of your screen to join the question queue. Also, a reminder that this call is being recorded. If you have any objections, please disconnect at this time.

Operator

With that, I would like to turn the call over to Shirley Yap, Head of Investor Relations. Shirley, you may begin.

Speaker 1

Thanks, Danielle. Good morning, and welcome to Bowhead's fourth quarter twenty twenty four earnings conference call. I'm Shirley Yap, Bowhead's Chief Accounting Officer and Head of Investor Relations. Joining me today are Stephen Sills, our Chief Executive Officer and Brad Mulcahy, our Chief Financial Officer. Earlier this morning, we released our financial results for the fourth quarter of twenty twenty four.

Speaker 1

You can find our earnings release in the Investor Relations section of our website. Later in the week, our Form 10 ks will also be made available on our website. 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. Investors should not place undue reliance on any forward looking statement. These statements are made only as of the date of this call and are based on management's current expectations and beliefs.

Speaker 1

Forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements. You should review the risks and uncertainties fully described in our SEC filings. We expressly disclaim any duty to update any forward looking statement except as required by law. Additionally, we will be referencing certain non GAAP financial measures on this call. 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.

Speaker 1

With that, I'll turn the call over to Stephen. Stephen?

Speaker 2

Thank you, Shirley. Good morning, everyone, and thank you for joining us on our first year end earnings conference call as a public company. We appreciate your time and interest in Bowhead, and we're excited to share our strong results with you today. Before we begin, I wanted to take a moment to extend our sincere appreciation to our colleagues and brokers. Your support, dedication, and hard work played a crucial role in making 2024 such a successful year for Bowhead.

Speaker 2

Next, I'd like to take a step back and reflect on the milestone year we've had. Twenty twenty four was a transformational year for our company filled with achievements that have positioned us well for cross cycle profitability. We'll also provide insight into our expectations for 2025, which in short is consistent with our messaging throughout 2024. In May 2024, we successfully completed an upsized IPO marking a major milestone in our company's journey. Then on October 25, we successfully closed on a secondary public offering reflecting the strong demand for our company's stock.

Speaker 2

During our roadshow, we highlighted strategic priorities for achieving cross cycle profitability, which included profitability growing our existing lines of business opportunistically and strategically expanding into new products and markets maintaining our underwriting first culture across market cycles and leveraging expertise, technology, data, and analytics to drive underwriting performance. We're pleased to report that we successfully executed on all these priorities in 2024. First, we profitably grew premiums by 37% in 2024, exceeding our annual premium growth target of 20%. Of the $696,000,000 of premiums we wrote in 2024, '70 '6 percent was written on an excess and surplus lines or E and S basis. While we could have written substantially more business in all divisions in line with our underwriting first culture, we were highly selective with the risks that we brought into our portfolio.

Speaker 2

Because we began operations in November of twenty twenty, we were not impacted by legacy reserve issues affecting the broader industry. We also do not write property or natural catastrophe exposed risks as as well as stand alone commercial auto or fleet business areas where the industry has seen adverse developments from pre 2020 accident years. Instead we utilized our underwriting first culture to drive profitable growth. In our casualty division, where we're seeing favorable underwriting and pricing conditions in the excess casualty space, we increased premiums by 56% for the year through rate increases, improved terms and conditions, and bringing on new business, all while reducing our average limits. In both our healthcare liability and professional liability divisions, where market conditions are more nuanced and in certain areas challenging, we had double digit growth in the year while prioritizing underwriting profitability and optimizing our portfolio.

Speaker 2

In all divisions, we remain disciplined and dedicated to our underwriting first approach. We declined or allowed others to renew our accounts when the underlying numbers didn't meet our profitability targets. And during the fourth quarter as we've seen some carriers aggressively reaching for budget we maintained our disciplined underwriting approach and focused on profitable growth rather than just expanding on volume. In terms of our strategic expansions in 2024, we announced two new offerings. Late in the second quarter, we launched a new division called Bailene Specialty, a streamlined, tech enabled, low touch, flow underwriting operation that focuses on small, hard to place risks written 100% on a not admitted basis.

Speaker 2

While premiums we wrote in 2024 did not have a material impact on our bottom line in the year, we delivered the technology and offered two products in over 160 eligible classes most frequently requested by our broker partners. We're solving a problem for our broker partners that only a limited number of markets are technologically capable of delivering. In line with our underwriting first culture, we do not compete on price. Rather, the commitment we've made to our broker partners is to provide best in class service, coverage transparency, and the continued development of additional products and solutions in the years to come. We've delivered on our commitment to develop a flow underwriting operation and are excited about the momentum we've generated in the first seven months of Bailin's operations.

Speaker 2

In Q4, we also released the first of our three environmental liability products, diversifying our casualty division product offerings. With our disciplined approach to underwriting and our expanding craft and flow platforms, we believe we positioned ourselves well for sustainable and profitable growth across market cycles. Twenty twenty four was a busy but successful year. We achieved a 37% growth in our premiums, invested in the development of new products, and executed on our priorities, all while improving our expense ratio by 0.5 points. We also delivered an adjusted ROE of 15.2%, which included $131,000,000 of net proceeds from our upsized IPO, delivering attractive returns on capital to our investors.

Speaker 2

In 2024, we said what we were going to do and we achieved what we set out to do. We expect 2025 to be no different. As we move into 2025, our priorities for achieving cross cycle profitability remain unchanged. We expect to profitably grow our business around 20% in 2025, continue to build upon the momentum we've achieved with Valeen and apply the technology to other areas in our business, opportunistically and strategically expand into new products or markets and maintain our underwriting first culture in both our craft and flow underwriting operations. With that, I'll pass the call over to Brad to discuss our financial results.

Speaker 2

Brad?

Speaker 3

Thanks, Steven. O'Hare generated adjusted net income of $14,100,000 in the fourth quarter, up 143% year over year or $0.42 per diluted share. Adjusted return on average equity for the quarter was 15.3%, which included $131,000,000 of net proceeds from our upsized IPO in May 2024. Gross written premiums increased 26% to $185,000,000 for the quarter. We had premium growth from each of our divisions with Casually driving the increase at 43% year over year to to $106,000,000 for the quarter.

Speaker 3

The growth in casualty came mostly from our excess casualty book, where we continued to see rate increases across our renewal book and new business stemming from the continued collapsing of towers. In our Healthcare Liability division, premiums of $32,000,000 increased 9% year over year, driven by renewals with rate increases in certain lines and new business in others. In our Professional Liability division, despite a challenging market, we maintained underwriting discipline while increasing premiums 7% year over year to $46,000,000 which was primarily driven by our cyber liability portfolio. Valeen generated $1,200,000 of premium in the fourth quarter, which was a 175% growth from the modest premiums in the previous quarter. We're pleased with our initial results and expect the momentum to start ramping up in the second half of twenty twenty five, '1 year after launching Maylene.

Speaker 3

Due to the timing of our independent actuarial review in Q4 of each year, we consider our full year loss ratio a more meaningful metric than our Q4 loss ratio. For the full year, our 2024 loss ratio of 64.4% increased 1.4 points compared to the 63% loss ratio in 2023. The increase is primarily due to mixed changes in the portfolio, where our casualty division has a higher current accident year loss ratio and comprise a larger portion of our portfolio compared to 2023. Remember, since we've only been in operations for four years and write long tail lines, our actual loss experience is limited. Because of this, our annual independent actuarial review is primarily based on inputs from industry data.

Speaker 3

Our initial expected loss ratios are derived from a combination of internal pricing data and external benchmarks, while development patterns are mostly based on external benchmark patterns. We attempt to align all industry benchmarks to the nuances of our portfolio, including our limited commercial auto fleet exposure and lack of large national account exposures in casualty. Additionally, the development patterns we use take into account our excess position in particular lines, which generally results in different development patterns than primary positions. The most recent annual actuarial review in Q4 resulted in various adjustments, but most importantly, we had no prior accident year year we reallocated prior reserves by division to align more closely with the actuarially derived projected loss ratios and development patterns. These reallocations were primarily from professional liability in the twenty twenty one-twenty twenty two accident years over to casualty in the twenty twenty two-twenty twenty three years, with other divisions in years adjusted to a lesser extent, but the result on an aggregate net basis was no prior year development.

Speaker 3

More specifically in casualty, the $9,000,000 of net unfavorable development was driven by deteriorating loss trends in the industry benchmarks. While in professional lines, the offsetting $9,500,000 of net favorable development was driven by actual experience coming in lower than expected. Additionally, we adjusted some current accident year initial expected loss picks to align with actuarial estimates, including increasing some lines experiencing continued rate deterioration. In principle, these actions of recognizing potentially bad news quickly when we're made aware, while letting good news season results in a level of conservatism in our net reserves that should bode well for the future. In the end, our incurred but not reported reserves comprised 90.7% of our net loss reserves at the end of twenty twenty four.

Speaker 3

As a reminder, since Bowhead does not write any property risks, we did not experience any material direct losses due to the California wildfires and do not expect to in future quarters. Additionally, we have limited commercial auto fleet exposure, avoid classes such as trucking, sports and leisure and primary habitational and avoid writing policies in unfavorable jurisdictions. Similar to the loss ratio, we consider our full year expense ratio a more meaningful metric to monitor the trending of our expense ratio due to the inherent volatility quarter to quarter. For the year, our 2024 expense ratio of 31.4% decreased 0.5 points compared to 31.9% in 2023. A 0.5 reduction was driven by a 0.9 decrease in our operating expense ratio, which is partially offset by a 0.5 increase in our net acquisition ratio.

Speaker 3

The 0.9 decrease in our operating expense ratio from 24% in 2023 to 23.1% in 2024 was due to the continued scaling of our business, where net earned premiums grew at a higher rate than our expenses, as well as general prudent management of our expenses. The 0.5 increase in our net acquisition ratio from 7.9% in 2023 to 8.4% in 2024 was driven by the increase in broker commissions and the reduction in ceding commission rates. The broker commission increase was due to a mix in changes in our portfolio where Casually has higher broker commissions compared to other divisions and comprised a larger proportion of our portfolio compared to 2023.

Speaker 4

Overall, the

Speaker 3

effect of our loss ratio and expense ratio contributed to a combined ratio of 95.8% for the year. Turning to our investment portfolio, pretax net investment income for the quarter increased 80% to $12,000,000 and more than doubled from $19,000,000 to $40,000,000 in the year, driven by an increase in our investment portfolio and higher investment yields. At the end of the year, our investment portfolio had a book yield of 4.6% and a new money rate of 4.9%. The average credit quality and duration of our investment portfolio remained at AA in two point two years. Our effective tax rate for the quarter was 25.2% and for the year was 24.3% in line with our expectations.

Speaker 3

As a note, our effective tax rate may vary due to state taxes and certain tax adjustments for permanent differences. Total equity was $370,000,000 given us a diluted book value per share of $11.03 for the year, an increase of 38% from the year end 2023 of $8 Turning to expectations for 2025, which as Stephen mentioned remain unchanged from what we communicated during the IPO and in 2024. We continue to expect a premium growth of around 20%, led by momentum in our Casualty division, supplemented by growth in our Baleen division and profitable growth within our Professional Liability and Healthcare Liability divisions. From a ceded perspective, although our main quota share and excess of loss treaties renew in May later this year, we've renewed our cyber quota share treaty effective 01/01/2025 at 60%, down from 64% in 2024 and increased our ceding commissions. As a note at each renewal, we consider various factors when determining our reinsurance coverage and may adjust our reinsurance program, including our retention.

Speaker 3

We expect our 2025 loss ratio to remain in the mid-60s range, but gradually change from 2024 as the book mix changes and earned premiums on older years roll off. Prior year reserves may change throughout the year due to audit premiums or allocation of loss adjustment expenses, but we'll maintain our conservative approach to evaluating reserves each quarter. Additionally, we expect our expense ratio to remain in the low 30% range for the full year of 2025 due to the continued scaling of our business while we continue to invest in our priorities for achieving cross cycle profitability. We expect our expense ratio in the first half of the year to be slightly higher than the second half due to payroll taxes associated with bonus payouts in the first quarter and the vesting of certain RSUs in the second quarter. Also, the increase in the ceding fee to American Family takes place in Q2 from 2% to 2.75%, which nets to about 2% of earned premium after expenses.

Speaker 3

Therefore, we believe our combined ratio will be in the mid-90s for the full year and return on equity to be in the mid teens. From a capital perspective, as we've communicated during our roadshows, the net proceeds we received from our upsized IPO was more than sufficient for 2024. As we've discussed, we have a great growth opportunity ahead of us in 2025 and we'll assess the appropriate source of funding to capture that opportunity. With that, we'll turn the call over for questions.

Operator

Thank you. As a reminder, if you would like to ask a question, please use the raise hand button found at the black bar at the bottom of your screen. Once it's your turn, you'll receive a message from the host allowing you to talk, and then you will hear your name called. Please accept and mute your audio and ask your question. I'll wait a moment to allow the queue to form.

Operator

Our first question is from Meyer Shields at Keith Buraton Woods. Please unmute your line and ask your question. Thank you.

Speaker 4

Great. Good morning. Thanks so much. I was hoping for a little more color in terms of comparing the fourth quarter accident year loss ratio to what Bowhead had produced through the first nine months, because we did see a bit of a dip down. And I'm wondering is that mix, is that reassessment of loss trends or is there something else going on?

Speaker 3

Yes. Hey, Meredith, this is Brad. That happens every year. That's why we kind of think of our full year loss ratio to be a better indicator of what we're really tracking. It's really a function of our review that we do in Q4 and just moving things around.

Speaker 3

So the mix obviously impacts it, but that's mostly the same thing happened in Q4 of twenty twenty three if you look at the comparable. So full year, we're I think that's the better line to look at. But obviously, no prior accident year development in that number. So the only two things that impacted from Q3 to Q4 would have been the current accident year and the mix change. So the mix we've been kind of saying lately or all year long, casualty just generally has a higher loss pick.

Speaker 3

So as that increases as a proportion of the whole, the loss ratio will go up. And then also the, in Q4, we did adjust our current accident year loss ratios a little bit, casually going up sorry, casually going down a little bit, PL going up, healthcare going up a little bit. So, a little bit of a change in current accident year there as well.

Speaker 4

Okay. Fantastic. And then I know I've asked this in the past, but I was hoping you could get an update on available underwriting talent in the marketplace now. I don't know how a number of competitors struggles with prior period reserves or current profitability. Does that have an impact on the people that you can recruit?

Speaker 3

Sorry, Mario, you said the question was on talent?

Speaker 4

Yes. In other words, obviously, part of the strategy is to expand into other product lines, which presumably requires more underwriting talents. I'm wondering how that compares to expectations, what's available in market now?

Speaker 2

Well, the first place that we're looking for talent is in the excess and primary casualty space. But the kind of talent we're looking for is hard to come by. We've hired a few people this past year. We've got a few more in the budget for this year. We've staffed up for the startup of the environmental business.

Speaker 2

And we're also staffing up, which we're not having trouble finding in the baleen space. But as you know, the baleen space is more technologically driven. And so that will be a lot more scalable with less people than the craft business that makes up most of what we're doing right now.

Speaker 4

Okay, perfect. Thank you so much.

Operator

Our next question comes from Scott Helaniak at RBC Capital Markets. Please unmute your line and ask your question.

Speaker 5

Yes, Good morning. First question I have was just on the healthcare liability, gross written premiums. They had decelerated a little bit. They were up double digits the past couple of quarters. And I was just wondering if there's anything in there, anything you can kind of point to on that.

Speaker 5

Was there any I think you referenced some competition. Was there was there any particular area that you saw some uptick in competition there and do you expect to see growth in that line for 2025?

Speaker 2

We do expect to see growth in that line in 2025. I think more people have been recognizing the problems of the past. I don't think we've seen the end of sexual abuse and molestation claims that have not only have the have the increase, but the settlement values have gone up substantially. And I think people are recognizing that and starting to have rates catch up with it. So we expect particularly in the hospital space, which is one of the components of our healthcare space, we expect that to grow very nicely in 'twenty five.

Speaker 5

Okay. That's helpful. And then just on excess casualty, that's been a line that saw significant rate increases, I'm sure, across your book and across the entire industry, and the growth has been really significant. And I'm just wondering what kind of opportunity you see in 2025 for that line? Do you still expect meaningfully high growth rates in that area?

Speaker 5

There's still a lot of dislocation and still a lot of areas where you see opportunity there? Or is that something where you've the growth rate you're seeing lately is not really sustainable? Just wondering if you can comment on that excess casualty part of casualty and kind of what you're seeing there?

Speaker 2

We think it is very sustainable. We think that I don't know how far out you want to go, but I think we've got a few more years of it, at least. I think all the talk about social inflation and nuclear verdicts is not fantasy. It's real. We don't write, as Brad mentioned, we don't write primary order, we don't write fleets, but of course we write contractors and contractors have trucks.

Speaker 2

But we've seen on some of the excess business that we write verdicts that are eye watering in what they're settling for. And I think the market overall is scrambling to catch up. So we think that there's more opportunity in terms of new business, but substantial opportunity in terms of increased rates on existing business.

Speaker 5

Okay, perfect. That's really helpful. Thanks a lot.

Speaker 2

Sure.

Operator

Thank you. In the meantime, our next question comes from Pablo Singzon at JPMorgan. Pablo, please ask your question. Thank

Speaker 6

you. Hi. Good morning. So first question, Brad. Just given the sequential decline in the loss ratio, from three q to four q, would it be fair to assume that the net impact of the loss exchange you went through was a positive?

Speaker 6

Just wanted to clarify that.

Speaker 3

Yes. That would be a good assumption.

Speaker 6

Okay. And then a follow-up just on loss ratios. I think you suggested that using the 2024 loss ratio as a starting point would be a good baseline. So the question is just given the projected mix change here, right, where casualty will probably grow faster than other lines, How fast do you foresee the loss ratio increasing from this 64.4% baseline?

Speaker 3

Yes. I think in 2025, it's going to be less of a mix change issue and more of a roll off of those older years. Our older years have a lower loss pick. And so I think as those roll off, it will just it will impact 2025 unfavorably, if you want to call it directionally. But I think the mix issue will be there, but it will be more of those older loss years rolling off.

Speaker 6

Okay. And I'll just try to sneak one more in. On the expense ratio, you talked about the fronting fee having, I think, a two point impact on the combined rate. So, don't have full visibility on what's going to happen in the ceding commissions, but it sounds like the acquisition ratio should go up. Do you expect most of that increase to be offset by just expense leverage on the G and A side?

Speaker 3

Yes, I would expect that. I think the just to be clear, the fronting fee going up to the 2% change, we've got about a 1.5% number currently. So the actual incremental change is 0.5. And I think we can manage that through just the way the business is scaling and the projections that we see.

Speaker 6

Got you. Okay. I missed it. Thank you.

Operator

Our next question comes from Matt Carletti at Citizens JPN. Please unmute and ask your question. Thank you.

Speaker 7

Thanks. Good morning. You talked a bit about casualty and how excess casualty is really driving nice growth there. Could you talk a little bit about professional liability and healthcare, you know, little bit slower growth in the quarter, just kind of your outlook there. And Stephen, I know you mentioned some companies may be trying to hit budget late in the year.

Speaker 7

I don't know if those were the segments you were talking about, but a little more color would be great. Thank you.

Speaker 5

Sure.

Speaker 2

The professional business is made up of public D and O, private D and O, E and O business as well as cyber. Cyber, we're seeing really nice growth. It's been a very successful line for us to enter. The large publicly traded risks is that which is under the most pressure. There are people that buy, you know, hundreds of millions of dollars of limits.

Speaker 2

As we've talked about in the past, towers have collapsed in terms of people not writing 25,000,000. They write, you know, tranches of fives and tens. We've found, MGAs going out there and just getting really aggressive in doing things that we think are very imprudent. And it has less of an impact for the buyer, higher the further up the tower you go. We've said for a long time that, you know, when you're writing excess of $300,000,000 it's somewhat fungible capacity that somebody wants to write it at 5,000 million and somebody else wants to write it at 4,000 million.

Speaker 2

It probably doesn't make much of a difference if you're gonna have a claim up at that level. Where it's a lot more stable, we believe, is is down below the companies that write the primary and first and second excess policies. We're not as because we were relatively late, you know, starting up at the end of twenty twenty, we don't have a lot of that down low business. So when you go further up the tower, a lot of the places where we built our businesses plugging in where people created gaps in years past. But we just think that a lot of the business that we have, which has been higher up, has just gotten too competitive and is just not worth the worth the effort.

Speaker 2

You know, we go out there, we get enough submissions to work on, but it's just not it's just not worth it to put in a low price per million, in the hope that nothing's going to be in a giant tower loss. And as we've said before, hope is not a strategy. So we've let a lot of that business go. And so the large public stuff has been flat. We think we can grow in the private business.

Speaker 2

We think we can grow in the very, very small publicly traded business and certainly believe we can grow in the cyber business. The cyber business, of course, we've been mostly on the larger accounts. But using our technology, you're going to be seeing us more in the smaller risks where we think we can generate some good profitable growth. In the healthcare space, As I said before, I think the hospital business will show nice growth. Miscellaneous is very competitive at the present miscellaneous medical.

Speaker 2

At the present time, we're seeing people do a lot of things that we're uncertain about. Senior care, we think there's some opportunities. Also managed care, E and O, we think there's some good growth opportunities. And also healthcare management liability, We see some growth opportunities.

Speaker 7

Great. Very helpful. Appreciate it.

Operator

Thank you. There are no further questions. And so that concludes the question and answer portion of today's call. I would now like to hand the call back over to Steven Sills, CEO, for closing remarks.

Speaker 2

Thank you, operator. To wrap up, Boe had delivered another strong quarter to end an exciting year. Before we go, I wanted to say thank you again to our colleagues and brokers for making 2024 such a successful year. This is just the beginning for Bohead, and I couldn't be more excited for what I expect to be a company that is capable of cross cycle profitability. Thanks for the support and we look forward to speaking to you along the way.

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