Skyward Specialty Insurance Group, Inc. (NASDAQ:SKWD) Q4 2023 Earnings Call Transcript

Skyward Specialty Insurance Group, Inc. (NASDAQ:SKWD) Q4 2023 Earnings Call Transcript February 21, 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 Skyward’s Specialty Insurance Group fourth quarter 2023 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 your speaker today, Natalie Schoolcraft, Head of Investor Relations. Please go ahead.

Natalie Schoolcraft: Thank you, Shannon. Good morning, everyone, and welcome to our fourth quarter 2023 earnings conference call. Today, I am 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 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. 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 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 closed out 2023 strong reporting adjusted operating income of $0.61 per diluted share. Gross written premiums grew 21% in the quarter and our combined ratio of 90.7% for the quarter included less than half a point of cat losses. While it was a quiet cat quarter for the industry, we continue to be at the low end of our peer group, even though over 25% of our business is property. Operationally, rate, retention and submission flow in the quarter continued to be strong. I will talk more about this later in the call. Altogether, the execution of our Rule Our Niche strategy continues to be excellent and our aim to deliver top quartile financial returns is visible in our growth, underwriting profitability, shareholder returns, and balance sheet strength. 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 $29.3 million or $0.74 per diluted share compared to $20.4 million or $0.63 per diluted share for the same period a year ago. On an adjusted operating basis, we reported net income of $24.3 million or $0.61 per diluted share compared to $11.6 million or $0.36 per diluted share for the same period a year ago. In the quarter, gross written premiums grew by approximately 21% and our transactional E&S, captives, industry solutions, and professional lines divisions each grew over 20%. Only global property and agriculture did not grow in the quarter, which is expected given the seasonality of this business. We continue to see excellent opportunities for this division in 2024.

Net written premiums grew by approximately 19% to $214 million in the quarter, compared to $180 million in the fourth quarter of 2022. Fourth quarter 2023 net premium retention was approximately 67% versus 68% in the fourth quarter 2022. Year to date, net premium retention was approximately 62% versus 59% a year ago. The fourth quarter is when we knew our — when we renew our professional workers’ compensation and excess reinsurance programs. All of these renewals were orderly, and we are satisfied with the terms and structures of these programs for 2024. Turning to our underwriting results. The fourth quarter combined ratio of 90.7% improved 1.7 points compared to the fourth quarter of 2022. A 2.3 point improvement in the current accident year non-cat loss ratio to 60.9% was principally driven by 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 fourth quarter of 2022, which was impacted by 1.2 points of cat losses from Winter Storm Elliot. Excluding the deferred benefit from the LPT, there was no net impact from prior year development. We continue to maintain a conservative position with respect to our loss reserves as our actuarial central estimate at the end of 2023 indicated that we are in a more redundant position than at the end of 2022. The expense ratio increased slightly compared to the fourth quarter of 2022. We’ve talked in prior quarters regarding our business mix shift and investing in the business, so this is in line with our expectations in a target of a sub-30 expense ratio.

Turning to our investment results. Net investment income was $14 million in the quarter, an increase of $8.7 million compared to the same period of 2022. Consistent with our investment strategy to deploy all free cash flow to core fixed income, in the fourth quarter, we put $118 million to work at 6.5%. The net investment income from our core fixed income portfolio almost doubled to $10.7 million from $5.9 million in the prior year quarter driven by an improving portfolio yield and a significant increase in the invested asset base. Our embedded yield was 4.5% at December 31, 2023, versus 3.7% a year ago. Our core fixed income portfolio is now over $1 billion, a $410 million increase from a year ago. Net investment income in the fourth quarter 2023 and 2022 were impacted by negative equity mark-to-market adjustments in our opportunistic fixed income portfolio.

Just a reminder that last quarter we provided a redemption notice on $42 million of the opportunistic fixed income portfolio. Given the actions that we’ve already taken and inclusive of that notice of the $172 million in the opportunistic fixed income portfolio at December 31, 68% was in redemption. We anticipate reinvesting the proceeds from this part of the portfolio into our core fixed income portfolio. At December 31, we had approximately $270 million in short-term and money market investments resulting from strong operating cash flow of over $335 million. During the quarter, our yield on short-term investments continued to be north of 5%. We will continue to deploy this liquidity into our core fixed income portfolio. During the quarter, we executed a successful upsized follow-on offering of 5 million shares of common stock Skyward sold 2.2 million and Westaim sold approximately 2.8 million, reducing their ownership to approximately 17%.

We continue to see strong interest from our existing and new shareholders, and we appreciate their support for our company and our strategy. In terms of how we look at 2024, we expect full year adjusted net income to grow over 30% to between $105 million and $110 million based on a combined ratio between 91% and 92% inclusive of 2 points to 2.5 points of cat. With that, I’ll turn the call back over to Andrew for concluding remarks.

Andrew Robinson: Thank you, Mark. Our fourth quarter results capped off what was truly a defining year for Skyward Specialty. Operationally, we had another great quarter as we grew double digits in seven of our underwriting divisions. We continue to realize pure pricing increases in the high single digits, which is above our estimated loss cost trends. Our new business pricing was up again over our in-force book and retention too remain strong in the low 80s. All our strong indicators of the attractive underwriting margins that we are generating should continue. We also continue to see strong submission activity, which is up over 34% from the prior year, the largest year-over-year increase we have ever achieved. Our full year results are also notable, particularly in the context that it will lead-up to our IPO.

During that period, we communicated core metrics and committed to building a company that consistently delivers top quartile performance. Our 2023 results demonstrated our progress towards this commitment. For the year, we delivered record growth of 28%, a combined ratio of 90.7% and adjusted operating income of $80.8 million, and we achieved a return on equity of 15.9% and grew fully diluted book value per share by 24% from $12.87 to $15.96. The year marked a significant underwriting achievement for us as we now have all eight of our underwriting divisions producing more than $100 million as compared to five at the end of 2022. Each division is now at a scale that can substantially contribute to the company’s earnings. The three divisions that reached $100 million this year were surety, transactional E&S, and professional liability.

And in just three years, we’ve grown these three businesses in aggregate from $44 million to $383 million, driven by significant investments in talent and technology. All three are generating outstanding returns and have added meaningfully to the diversification of our earnings. While each division is delivering at or above our minimum target returns on capital, we continue to capitalize on market opportunities to grow both top line and margins, and ensure that we shape our portfolio to those areas that offer the best risk-adjusted returns on capital. As such, we have ongoing investments in new underwriting areas, product adjacencies, teams, and of course, technology. As I reflect on the progress following what was a remarkable year for Skyward Specialty, I find myself energized and inspired by what we have accomplished in such a short period of time and also the possibilities for 2024 and beyond.

And of course, we remain laser focused on executing our Rule Our Niche strategy in our progression towards generating top quartile returns at all parts of the market cycle. Finally, I’d like to thank my 510 colleagues for their excellent performance in 2023 and their commitment and drive to achieving our shared goals for 2024. I’d now like to turn the call back over to the operator to open up for Q&A. Operator?

See also 15 Most Pro-American Countries in the World and 13 Best Booming Stocks to Buy Right Now.

Q&A Session

Operator: [Operator Instructions]. Our first question comes from the line of Matthew Carletti with Citizens JMP.

Matthew Carletti: Andrew, I was hoping I could kind of go 70,000 feet per second and if we rewind a year ago when you guys were out on the IPO roadshow, technology was a big theme about how you guys embrace it and use it to empower your underwriter’s claims, so on and so forth. And I was hoping you might be able to kind of fast-forward a year and what has changed there? We hear a lot about AI and things like that. Is that something you’re working on embracing? Just maybe a quick bring us up to speed just on how big a role that plays in your organization and how that might have changed over the past year?

Andrew Robinson: Yeah. Well, I think that probably — we’re moving at a very — I would say, very, very rapid pace, right? So a lot of stuff’s being done very quickly. And yeah, I would just say to you that nearly in every part of our business, next week we have our Board meeting and the first session is claims. And as part of our claims presentation, our data scientists are going to show how is it that we’ve been able to isolate on the claims that have the highest propensity for reserve developments so the managers can be watching those with greater intensity, separating out the 20% that account for the potential 80% of movement. And all that is kind of like the — just turning the crank on the intelligence that we’re trying to bring to the desktop of our — in this case, our claims professionals as well as in our underwriters.

And look, it’s not one single thing. A great example right now is that we’ve completely flipped within auto the notion of using telematics. If there’s a G-force event, we’re not waiting for a first notice of loss to come in, we’re outbound reaching out to the risk manager of the entity that had the street G-force event to determine whether there was an accident. And if so, then we can rapidly respond off the back of that. And that just fundamentally sort of turning things upside down. And so all those little angles, right, that I’m describing, these are just things that we — we’ve got a long list of things that we can be doing. We’re always trying to figure out what’s the stuff that we can really make an impact in our business. And it’s a big part of our DNA.

And those two examples, there’s equal number of examples on product, on underwriting, et cetera, et cetera.

Matthew Carletti: And then if I could just sneak another one in — question for Mark. Mark, you mentioned that at year end 68% of the $172 million of Westaim funds are in redemption. Can you help us through the time line of kind of how long that usually take? Is that kind of a quarter or 90-day process or going to take longer for those funds to kind of be redeemed and reinvested?

Mark Haushill: Sure, Matt. No, it won’t be a — it won’t be a quarter. I’m looking for about 30% of it to be redeemed in ’24, time will tell. But I think that’s what I’m looking for. 30%-ish in ’24 and the rest of it in ’25. We’ll let you know, but it will take a little bit of time.

Andrew Robinson: And Matt, these are just — what these are, we’re just letting the loans mature, right? So they were reasonably well laddered, but it’s not sort of 50-50, 50% in the first year, 50% in the second year. And the average duration was around two years, a little under two years.

Operator: Our next question comes from the line of Mark Hughes with Truist.

Mark Hughes: Mark, the guidance, the $105 million to $110 million, that’s coming off of the 2023 base, it is at $81 million. Am I saying that properly?

Mark Haushill: Yeah. Yeah, sir. You are.

Mark Hughes: Okay. And that seems like a pretty strong result. Anything you can say in terms of the contribution from net investment income and the top line as you think about that guidance?

Mark Haushill: Do you want to tell?

Andrew Robinson: Yeah, Mark. This is Andrew. I think we’ll leave it to you guys to put your models together, but with the guidance that Mark gave on combined ratio between 91%, 92%, the cat portion of that, you can — you know what our gross to net is. I would — I’ll just say to you that that should be pretty consistent and so you can work your way through it by just taking our written premium in 2023, put your own premium for 2024 and kind of fill in the blanks. I will say that our plans — if you’re asking specifically about growth, we don’t want to give guidance on growth. Our internal plans are for 15%. That’s what we’re planning for. That’s based on the market conditions that we see and the investments that we’ve made.

I would also say to you that it was our view, and we said this a number of times that a measure of us during a — at least a — what I would describe a functional market is that we should be able to double up the growth of our competitors. And again, our competitors are the guys who you can directly compare us against in sort of the — that we compete against in the sort of the public company specialty space. But it also includes the primary insurance divisions of the diversified Bermudian guys and a handful of others. And we’ve been consistently, at 20% growth, more than doubled up the growth of that cohort this year. And we believe that kind of 15% growth is in line with sort of doubling up the growth of that cohort next year. That’s our plans.