Bowhead Specialty Holdings Inc.

Good day, ladies and gentlemen, and welcome to the Bowhead Specialty Second Quarter 2024 earnings call. Our host for today's call is Shirley Yapp, Chief Accounting Officer and Head of Investor Relations. At this time, all participants are in a listen-only mode. Later, we will conduct a -and-answer session. I would like to now turn the call over to your host. Ms. Yapp, you may begin.

Thanks, operator. Good morning and welcome to Bowhead Second Quarter 2024 earnings conference call. I'm Shirley Yapp, 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. Financial results for the second quarter of 2024 were released earlier this morning. You can find your earnings release in the Investor Relations section of 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. 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-GAP financial measures on this call. Reconciliations of these non-GAP financial measures to their respective, most directly comparable GAP measure can be found in the earnings release we issued this morning and in the Investor Relations section of our website. With that, I'll turn the call over to Stephen. Stephen?

Thank you, Shirley. And thanks again to our stockholders and analysts for joining us on our first earnings call as a public company. Before I get started, I'd like to take a moment to thank all of the BoHIT team members who helped us through our initial public offering. On May 23rd, we began our first day of trading on the New York Stock Exchange under the symbol BOW. We are very excited to begin this new chapter in the company's evolution. We found that BoHIT just under four years ago and are incredibly proud of the hard work our over 200 employees have contributed to the company's rapid success to date. For those who weren't able to join us on the roadshow, I wanted to reiterate who we are and highlight our key differentiators. We are a growing specialty insurance company operating substantially within the specialty excess and surplus lines market. About 80% of our premium is in the growing and profitable ENS market where being free of rate and form restrictions provides the flexibility to rapidly adjust to emerging market opportunities. For our company to be successful, underwriting must come first. From the top down, underwriting profitability is our north star. It is ever-present within our people and our culture. This strong in-house underwriting culture is complemented with a fully integrated and accountable value chain. Product development, actuarial, claims, legal, operations, IT, and our long-term distribution relationships must all work together seamlessly for us to be successful. This accountable value chain allows us to deliver our custom solutions to clients while consistently generating underwriting profits. Not only are we successful today, but we are designed to deliver differentiated profitability across market cycles, not just in hard markets. We've created primary and excess capabilities across our products as part of our cycle management strategy. Within the lines that we write today are highly experienced underwriters, our subject matter experts with a proven track record of generating underwriting profits. Underwriting authority has to be earned, even for experienced underwriters just joining our team. For each line, we spend considerable time discussing and agreeing on how risks should be evaluated, and we encourage close collaboration throughout the organization. We also have long-standing relationships with our select group of distribution partners, which is based on expertise, service, and mutual benefit. We believe that dealing with bowhead is a privilege, not a right. Furthermore, we have a highly experienced and entrepreneurial management team backed up by the depth of over 200 people across the country. We operate in a hybrid model that enables us to bring on the best people regardless of where they reside. This is my third time starting and running a publicly traded specialty insurance business, and this group is easily as good as any team I've been a part of. Critical to investors, we have a clean balance sheet with no reserves for max of the years prior to 2020 and no property cat exposures. We have no intangibles, no complicated LPTs, and a simple and conservative investment portfolio. Lastly, we have a track record of robust growth with attractive profitability and strong returns. I believe that we have supportive market conditions, and that our platform and balance sheet, including the capital we raised in our IPO, positions us well for continued profitable growth. With that introduction to bowhead, let me turn it over to Brad Volkehi, our CFO, to discuss the details of our quarter. Brad?

Brad Volkehi Thanks, Stephen. We ended the quarter with an adjusted net income of $7.9 million or $0.28 per diluted share, with an adjusted return on average equity of 11.7%. Gross written premiums accelerated more than 50% to a record of $175.5 million. We saw premium growth from each of our divisions, with casualty growing the most and representing a larger portion of the book compared to last year. Rate improvement, particularly in casualty, continues to contribute to the increase in our top line. The loss ratio for the quarter ended at 65.5%, an increase of 4.6 points from the prior year. I would like to highlight that in light of our high levels of IV&R, which was 92% of our net loss reserves at the end of this quarter, we've currently elected to utilize loss picks informed by industry data, rather than only using internal data from our limited operating history. These expected loss ratios are unchanged from Q1, and the movement in the aggregate loss ratio from last year reflects a shift in the mix of our business to a greater percentage of our book being in casualty, where industry loss ratios have deteriorated, as others have reported. During the quarter, we did not take down any reserves, nor did we experience any loss activity in excess of our own expectations. The expense ratio for the quarter ended at 33.8%, an increase of 1.9 points from the prior year. The acquisition expense ratio increased slightly by 0.3 points to .4% due to the change in product mix. The operating expense portion of the ratio increased 1.6 points to .4% due to our continued investment in the business, as well as certain one-time IPO-related costs, the largest being $1.3 million of stocks-based compensation related to management's profit interests. Excluding this one-time non-cash item, our expense ratio trend decreased since Q1 of 2024, from .6% to 32.3%, despite our continued investment in the startup of Beilin, which Stephen will discuss later. Overall, the effect of the loss ratio and expense ratio contributed to a combined ratio of .3% for the quarter. Before moving on from the underwriting results, during the quarter, net written premiums were impacted by the start of a new seated reinsurance treaty. This treaty allows Bowhead to cede a portion of its auto exposure within the SS casualty book. The premium retention impact of this treaty will vary each quarter as the underlying exposure varies, but for Q2, the impact was about a one-point reduction in retained premium. Now turning to our investment book, pre-tax net investment income more than doubled to 8.8 million in the current quarter. Our portfolio increased more than 30% since year end, which was influenced by an additional $131 million of net IPO proceeds. Excluding the IPO proceeds, which were not invested for the full quarter, the portfolio had a book yield of .6% while the new money rate was .5% at the end of the quarter. This combination of new money rate above the roll-off yields and an increasing asset base positions the company well for future investment income growth. In addition, credit quality of the portfolio remains at AA and duration increased from 1.9 years to 2.1 years in the second quarter, again excluding the impact of the IPO proceeds. The effective tax rate for the second quarter was 25.3%. We expect tax rates to be consistent with this range in the future. And lastly, our stockholders equity was $339.9 million and book value per share was $10.41 at the end of the quarter, an increase of 30% from year end. Good day Stephen, I'll turn it back to you for your thoughts on the

quarter. Thanks Brad. Let me provide my observations about the state of the market and the growth of each of our three divisions, casualty, healthcare, and professional liability. I'll also give a brief update on our growth initiative, Baylene, which is our streamlined underwriting platform for hard to place smaller dollar ENS policies. As Brad mentioned, on a consolidated basis, Bo head wrote $175 million of premium growth of over 50% compared to a year ago, which was driven by strength across each of our divisions. Looking at our book, the mission and core growth remains strong at levels in line with overall premium growth. We also quoted more business than last year, indicating that the submission growth is within our appetite. We note that while submissions are important, they are only one of several growth drivers at our disposal, in addition to rate, new business wins, and future operational efficiencies. By division, casualty was the lion's share of our premium growth, up over $50 million or close to 80% compared to a year ago. This growth was driven by the strong rate environment due to the disruptions in the marketplace dynamics from older accident years. We believe that these favorable tailwinds for Bo head will continue for the foreseeable future. Additionally, in Q3, we're expanding our casualty team to include environmental underwriting expertise, which we expect to offer in the fourth quarter. Our healthcare liability division grew by over 46%, driven by good rate and retention on renewals, plus strong new business. Our professional liability business, which includes cyber, grew by 7%. We continue to see pressure in the public DNO space. While the market is competitive, our public DNO book increased by 4% from last year. Overall, we continue to see a long runway for the favorable market we're experiencing. To be very clear, Bo head is not reaching for growth, but in the current environment, the growth dynamics are attractive, given the risk-adjusted returns we can generate. Lastly, before I open the call for questions, let me give a brief update on Beilin, a new division we launched late in the second quarter of 2024. Beilin focuses on small, -to-place risks, written 100% on a non-admitted basis. It is a streamlined, low-touch, flow underwriting operation that supplements the craft solutions we offer today. This is a business that we believe has significant growth potential, but with this being a low-touch, flow underwriting model, is one that we plan to execute gradually. In line with our deliberate, measured and limited rollout, Beilin premium for the second quarter of 2024 was minimal. While we don't expect Beilin to contribute meaningfully during 2024, we plan to report Beilin's first full quarter premium during our third quarter earnings call. With that, I'll conclude my remarks and turn the call over for questions.

If you would like to ask a question this time, please press star then the number one on your telephone keypad and you will be placed in the queue in the order received. Please be prepared to ask your question when prompted. Once again, if you have a question, please press star then the number one on your telephone keypad now. One moment while we compile the Q&A roster. Your first question comes from Meyer Shields with KBW. Your line is open.

Great. Fantastic. I wanted to start by asking about distribution and I guess the pace of additional agency appointments over the course of the quarter.

Thank you. I think we need to look at it by different lines of business. We're kind of in 16 different lines even though there's three divisions. So the number that are being increased, let's say in casualty, is considerably smaller than what we might find in private commercial business. So it really varies. But each time we open somebody, we're looking for commitments that they're going to support us versus just having access to us.

Okay. That's helpful. You talked a little bit about the pricing pressure in some components of professional lines. I was wondering whether or how much that's impacting the relative loss ratio between professional lines and casualty?

I'm not sure I'd follow between when you say between professional lines and casualty. We're seeing when we look back at what we've seen on professional lines, we think that's developing very favorably. We certainly have going back to our early years open litigation. I think there's been a history of 40, 50 percent dismissal on security class actions. So there's still things that are open, but we're very comfortable with that. Casualty, the biggest concern has been the auto business. Keep in mind we don't write auto on a primary basis, on a primary casualty, on the X set. It is covered within those policies. And as was mentioned earlier, we've bought an auto carve out, which we think will lower the volatility from auto claims. No,

I understand that. When we look at the loss ratio, I think the increase year over year is predominantly because there's more casualty in the book. And casualty equals a higher loss ratio than professional lines. And I'm wondering whether the change in pricing in professional lines and the change in pricing in casualty, how that's moderating the delta of the loss ratio between those two segments.

The loss ratio has been going up, not that we're booking more on a case basis, but because of the mix using the formula we've been using with the advice of outside independent actuaries, because of the relative flatness in the professional book versus the large growth in the casualty book, I think we're showing higher loss ratios because of that mix.

Okay, fantastic. Thank you very much.

Your next question comes from Matt Carletti with Citizens. Your line is open.

Thanks. Good morning. Steven, I was hoping you could dig into the casualty growth a little bit on some of the underlying lines. Are there a small handful of areas of the business that are really driving the growth, or is it pretty broad-based across all the different products you offer in that segment?

We've started to move away from, and certainly not, or at least in terms of the mix. The mix has become more than just construction. It was at the beginning, there was a lot of heavy project business, construction business. We've added substantially to the team of casualty underwriters, and that's led to an increase in the number of the amount of casualty outside of construction that's growing. We've recently, in the last month or two, we've added several very high-ranking casualty underwriters to the organization, which we believe will be a plus in terms of the followings that they have that will attract more business to us.

Great. Then another one, if I could, is smaller business, but the cyber business. Have you seen anything following the CrowdStrike incident, not thinking about the law side of it? I think we have our hands around that, but more so just reaction in the market, whether it be from an underwriting perspective or from a demand perspective from potential buyers?

We think there is more demand, and I think we're comfortable with what we're seeing in terms of what's been reported to us with claims and like that, but I do think the industry is starting to evaluate more the potential of catastrophe losses. I think as what's been reported in the insurance press, I think it's very manageable the way this claims. People are talking about a billion and a half, two billion dollars, but what would have happened if all these people's computers were turned into bricks? And how that would have affected the industry? I think everybody's trying to get their arms around how that's going to be evaluated in the future. Keep in mind that overwhelmingly, large part of our cyber book is on the excess side, and it's relatively high level excess on larger accounts. So we're comfortable in the way we're seeing, but we are going to see, I'm pretty sure we're going to see an uptick in demand for the coverage.

Great. Thank you very much for the insights. Appreciate it.

Your next question comes from Pablo Sington with JP Morgan. Your line is open.

Hi, good morning. Some insurers have been adding reserves to post 2020 accident years. Are you surprised by the trend and did you see those short movements in the industry data when you did your review in late 23?

Yeah, hi Pablo. This is Brad. Thanks for the question. I think we were initially surprised by that, but as we looked at it more, most of that's happening on the primary side. We're in the surplus line side, so we don't see that happening here. We're able to react quicker with rates than some of those other carriers have that were in the earlier markets. I don't think we really see that over here on our side. The industry data, when we talk about using industry data in our reserves, it's data that informs our own data. We have some of our own limited history and we just complement it with that industry data. What we see is cut as specifically as we can to our books and just kind of complements what we see. We're happy with our reserves and the experience that we're seeing as we mentioned.

Yeah, I think our mix is different from what you're seeing in the group that's adding to reserves. The mix of type of business, keep in mind, as Brad said, we're more excess than primary. Our limits are much smaller than what's typically been put out in the past. Remember a lot of the opportunity that's coming to us is people going down from $25 million capacity and the rates that they got on that. Then also, as Brad said, the surplus lines versus admitted. We also don't write auto per se, commercial auto, commercial trucking. Obviously, as I said before, we pick up some of it and we write excess casualty, but we're not writing primary trucking risk or even excess pure trucking risk.

Yep. Thanks, Stephen. That makes sense. Then just second and last for me, maybe this is better for Brad. I think at the end of the quarter, you had $180 million cash on the balance sheet. How much of that do you expect to reinvest into fixed income assets over time and at what pace? Thank you.

Yeah, thanks, Paul. I think what you're seeing is the IPO proceeds that we mentioned we got those in late May. Obviously, it takes a while to invest $130 million in the bond market during the summer. We always have a little bit of cash laying around. We have some pretty big bills to pay our reinsurers in particular, but most of that is in process for being invested. I think Q3, you'll see a better run rate without

that IPO noise in our cash versus investment split.

Sorry, just a bonus. How much cash do you think you need to run the company at? On a run rate basis, how much cash do you hold at the hold? Thanks.

How much cash do we need to run as opposed to what we said at the holding company? Is that the question?

Yeah, sorry. I should have phrased it better. Not clearly cash is in an excess position on a go-forward basis. You mentioned that you need to hold some amount of cash. What is that amount of cash you need to hold at a go-forward basis?

Thank you. It really varies every quarter. What we do is we basically invest everything that we don't need, and that number changes every month. We do it twice a month, actually. I wish I could give you a solid number, but it really truly changes every quarter.

Got it. Thank you.

Your next question comes from Scott Aleniak with RBC Capital. Your line is open.

Yeah. Good morning. Thanks. Just wanted to follow up just on the last question just about capital levels. Is there a premium to surplus level ratio that you're targeting over time? Also, how are you thinking about use of debt? Anything that you can share on that? I'm not talking about next quarter. I'm just talking about longer term over the next year or two.

I think if you look at our premium to surplus ratio in Q2, it's obviously going to be a little bit high because we have the excess, the upside IPO in there. I would look more towards our Q1 number or our prior full year number to get a run rate for that. The other question on the debt, you'll notice we did execute a revolving credit facility in Q2 that gives us the opportunity to add debt. We think the business, the next time we need capital, that might be a route to go just to have a little bit better returns on the business to add some debt. I think we're a little away from that.

Yeah. Okay. That's helpful. Then anything you can share on just what you're seeing on rate versus loss cost trend across the book? I don't know if you can share by segment or anything like that. If there was any major change versus Q1, I know casualty rates have been picking up pretty much across the industry. If there's any color you can share on any different areas, the rate versus loss trend?

Yeah. We're seeing, it varies as you suggest by division. Casualty, we're seeing the strongest rate change followed by the healthcare business and then by the professional lines business. As was mentioned earlier, we use industry picks, but we're not seeing a change in business in terms of loss trends from what we've originally expected.

Okay. Is it taking up by much in the casualty areas? Q2 versus Q1, is it a few points or is it more than that?

We would say yes, that it is kicking up a lot. Okay.

All right. Appreciate the answers. Yep. Sure. Okay.

At this time, there are no further questions in queue. I'd like to turn the call back over to our presenters for any further remarks.

Okay. Thank you, Morgan. I'd like to thank everyone for joining us on our first earnings call as a public company, including BoHED's team members that made this all possible. We're very excited about the opportunity ahead of us and look forward to executing on our strategy. Our differentiated underwriting model puts us in a position to generate strong growth at attractive returns within the large and underserved E&S market. Thanks again, and we'll talk to you along the way.

This concludes the BoHED specialty second quarter 2024 earnings call. Thank you for attending and have a wonderful rest of your day.