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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