Bowhead Specialty Holdings Inc (BOW) 2025 Q1 法說會逐字稿

Hello, and welcome to Bowhead Specialty's Q1 2025 earnings call. (Operator instructions) Also, as a reminder, this conference is being recorded. If you have any objections, please disconnect at this time.

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

Thanks, Abigail. Good morning, and welcome to Bowhead's first-quarter 2025 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 Mulcahey, our Chief Financial Officer.

Earlier this morning, we released our financial results for the first quarter of 2025. You can find our earnings release in the Investor Relations section of our website. Our Form 10-Q will be also available on our website later this evening.

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 statements, 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.

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

Thank you, Shirley. Good morning, everyone, and thank you for taking the time to join our call today. I'm pleased to report that Bowhead generated strong disciplined premium growth of over 26% in the first quarter compared to the same quarter in 2024, writing $175 million in premium. I'd like to highlight the term disciplined premium growth as I'm proud of the discipline our underwriters exhibited in both favorable and challenging market conditions that resulted in this growth.

Once again, our Casualty division drove the largest component of this growth with a 34% increase in premium, while our Healthcare Liability and Professional Liability divisions grew 10% and 3%, respectively. Additionally, Baleen generated $2.7 million of premiums during its third full quarter of operations, further perfecting our flow underwriting operation.

In Casualty, similar to previous quarters, the growth in premiums came mostly from our excess book, reflecting continued favorable underwriting and pricing conditions in the market. In addition to achieving double-digit rate increases, our underwriters continue to improve the profile of the portfolio by deploying lower average limits. Also, in our excess construction business, we continue to diversify away from writing one-off individual project policies to more practice policies, which have the benefit of being renewable.

In our healthcare liability division, we continue to grow the book responsibly with a concerned eye on emerging regulatory, crime and abuse risks within the sector. Our continued success has been due to our broker partners and insurers who value our health care expertise and analytics.

In our professional liability division, the first quarter of each year historically tends to be the smallest quarter with many markets chasing a small inventory of new business opportunities. Nevertheless, we continue to achieve disciplined premium growth in the small and middle market space, which is core to our cross-cycle profitability strategy.

Turning to Baleen. We generated $2.7 million in premiums during its third full quarter of operations, 131% sequential increase from Q4. The growth during the quarter was driven by the expansion in Baleen's distribution network.

While Baleen's premiums are small at this time compared to our craft underwriting operation, which has been operating for over four years, we're happy with the monthly consistent growth. We look forward to a meaningful ramp-up in premiums during the second half of the year, one year after launch.

Brad, over to you.

Thanks, Stephen. Bowhead is starting 2025 with an adjusted net income of $11.5 million or $0.34 per diluted share and adjusted return on average equity of 12.1% in the first quarter. Gross written premiums increased more than 26% to $175 million for the quarter. As Stephen mentioned, our premium growth came from each of our divisions, but with Casualty driving the growth and representing a larger proportion of our portfolio compared to Q1 last year.

During the quarter, we increased reserves for audit premiums that were billed and fully earned in Q1, but were associated with prior accident years. While this manifests as 0.4 points of prior accident year reserve increases, this development was not based on actual losses settling for more than reserves and did not represent an increase in estimated reserves on unresolved claims.

Additionally, changes to our portfolio mix as well as the cash payout of compensation to our internal claims team during the first quarter, also known as paid ULAE resulted in a 2.1 point increase in our current accident year loss ratio. The timing of these compensation payouts in Q1 results in a small level of seasonality between our loss and expense ratios that historically tends to normalize by the end of the year.

As a result of these items, our loss ratio for the quarter was 66.9%, an increase of 2.5 points from 64.4% for the full year ended 2024. We continue to expect our loss ratio to be in the mid-60% range for the full year. As a reminder, given Bowhead does not write any property risks, we did not experience any material direct losses from the recent California wildfires or any other natural catastrophes and do not expect to in future quarters.

Also as a relatively new company, we are reliant on industry observed loss information in lieu of internal data when determining reserves, which is evidenced by our high ratio of IBNR as a percentage of total reserves at 89% for the end of the quarter.

Our expense ratio for Q1 was 30.4%, a decrease of 1 point compared to 31.4% for the full year ended 2024. The decrease was primarily driven by the temporary reduction in our operating expense ratio due to the paid ULAE item previously mentioned, partially offset by the increase in earned broker commissions due to changes in our portfolio mix as well as the reduction in earned ceding commissions stemming from our 2024 ceded reinsurance treaties.

As a reminder, since there's volatility in our quarterly expense ratio, we suggest that our investors view our expense ratio trends on an annual basis, which will likely be in the low 30s for the full year. Overall, the effect of the loss ratio and expense ratio contributed to a combined ratio of 97.3% for the quarter.

In terms of our investment portfolio, net investment income increased 64% year-over-year to $12.6 million in the quarter, primarily due to higher average balance of investments and higher yields on invested assets. Our investment portfolio had a book yield of 4.7% and a new money rate of 4.8% at the end of the quarter. The average credit quality of our investment portfolio remained at AA, and we extended our average duration from 2.2 years at the end of 2024 to 2.8 years at the end of this quarter.

Our effective tax rate for the first quarter was 21%, which is below our effective tax rate of 24.3% for the year-end 2024 as we expect to realize tax benefits in 2025 associated with the vesting of stock-based compensation that will drive our tax rate lower.

Additionally, weighted average shares outstanding and diluted weighted average shares outstanding are expected to increase in 2025 as we issue new awards and these older awards vest. Lastly, total equity was $391 million, giving us a diluted book value per share of $11.61 at the end of the quarter, an increase of 5% from year-end.

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

Thanks, Brad. I'd like to take a moment to reiterate Bowhead's strategic priorities for achieving cross-cycle profitability. These priorities remain consistent since the founding of our company in November of 2020, and we believe it's especially important to reaffirm them given the volatility and uncertainty in the current environment.

Since inception, our strategic priorities for achieving cross-cycle profitability included, Profitably growing our existing lines of business; opportunistically and strategically expanding our products and markets, maintaining our underwriting-first culture across market cycles and leveraging expertise, technology, data and analytics to drive underwriting performance.

In the development of our craft underwriting operation, we focused on profitable growing lines in the attractive excess and surplus lines market, starting with Professional Liability in 2020, followed shortly thereafter with strategic and opportunistic expansions into Casualty and Healthcare Liability.

We hired experienced underwriters who are proven leaders in their field, created a strong, disciplined and collaborative underwriting culture, implemented technology and utilize data and analytics to drive underwriting performance.

In May of 2024, we supplemented our craft underwriting solution with our flow business. which is a streamlined tech-enabled low-touch form of underwriting focused on small niche and hard-to-place risks. Further, we're now applying our Baleen technology to cost effectively underwrite small and middle market accounts, focusing initially on certain professional liability products.

With our craft and flow underwriting operations and the ability to apply Baleen technology to small and middle market accounts, we believe Bowhead is set up to generate consistent underwriting profits across our product offerings and through all market cycles.

Unlike other start-ups from 2020, where money was raised for hiring underwriters to just start writing business in a hard market, we have cautiously built a franchise that will serve our investors and employees across market cycles.

Turning to our specialty insurance industry. The uncertainty in the current environment seems to be creating a lot of confusion. On one hand, we're pleased to see fellow markets maintaining underwriting discipline like we are. But on the other hand, we're seeing no shortage of undisciplined or dare I say, foolishly reckless markets and underwriting behavior.

As an example, during the quarter, in one of our Professional Liability renewals, the insurer had a full tower loss. We sat in the middle excess layer. To our surprise, the rest of the tower offered a token rate reduction, while we were the only market pushing for a significant rate increase. Needless to say, we're proud of our team for standing their ground, and we're supportive of their decision to have our broker replace us at the reduced rates.

As we've said in the past, we've created an underwriting-first organization here at Bowhead, built to achieve sustainable and profitable growth across market cycles. The uncertainty and volatility in our current environment will not change our disciplined approach to underwriting or our focus on profitable growth.

Before we turn the call over for questions, I wanted to briefly touch on tariffs and the potential impact on the specialty insurance market in which we operate. If the tariffs were to persist, we could see a slowdown in the US E&S construction industry for a period of time.

However, with the excess casualty market making up for legacy losses that are still plaguing the industry and tariffs likely to increase costs, we don't expect anytime soon to see a reversal of compressed limits being offered nor do we expect to see a significant drop in pricing that would overturn the strong market we are seeing today.

From Bowhead's perspective, despite the macroeconomic uncertainty stemming from tariffs, as we've said in the past, we believe Bowhead is well positioned to profitably grow premiums by around 20% on an annual basis.

In the context of the $95 billion commercial E&S market, there's ample runway for continued expansion. Our submission volume continues to grow across all our divisions. We're investing in technology and implementing process enhancements to drive greater operational efficiency and the strategic mix of our craft and flow underwriting operation, combined with our ability to leverage Baleen's technology to cost effectively underwrite small and middle market accounts, enhances both our scalability and profitability.

Overall, with our disciplined approach to underwriting and our expanding craft and flow platforms, we believe we've positioned ourselves well for sustainable and profitable growth across market cycles.

With that, we'll turn the call over for questions,

(Operator instructions) Paul Newsome, PSC.

Good morning. Thanks for the call. I was hoping you might have some comments -- additional comments and color about the competitive environment. We've heard a lot this quarter about increased competition, specialty and in large account.

And obviously, it doesn't necessarily intersect directly with what you're doing or maybe it does. But maybe you could just kind of thought -- add some thoughts about how some of those industry comments we've heard may be intersecting with what you see in your business?

Sure. Thanks. First question -- or the first issue is how you would define specialty. And we do Casualty and Professional and Healthcare. And it's really different with each one of them.

Professional, we're seeing more competition, although there is some small shoots that are indicating that maybe things might start -- may be starting to stabilize. Casualty is still -- particularly excess casualty is still reorganizing, if you will, with compressing limits and creating opportunities.

We are not in the large company market. We don't write Fortune 100 type business. So I wouldn't be able to speak to that. That's predominantly, we believe, a retail market and in our casualty space, we do wholesale only.

That's great. So a different second question. Could you walk through the mechanics of the reserve development? I haven't seen something like this where you have an audit premium impact on reserves. And just maybe a little bit of detail as just exactly how that mechanically works through the accounting, so we have a better sense of what exactly happened. I know it's (multiple speakers)

Sure, Paul. Yes. Paul, this is Brad. Thanks for the question. We had mentioned last year that we were going to allow some prior year development for these audit premiums. They're mostly in our primary casualty book. And we started seeing them come through last year.

And previously, how we were handling it is the premium relates to a prior accident year by definition, and we would just kind of reallocate some IBNR in those prior accident years, or you could put some reserves into the current accident year for that audit premium. But again, it relates to a prior year.

So we just thought it should be noise. It shouldn't be large, but it's just good hygiene to let it increase the prior accident years, and ultimately should kind of close into zero as we scale. But for right now, just we're going to let that kind of flow through. We think it's more of a good hygiene thing and just a good practice to go in to be more conservative on our reserves.

So does that have also a small premium impact as well in the quarter in some way, in some place?

Yeah, exactly. Yes, there's premium on that. There's a mismatch though because you don't add -- don't have a premium to those prior accident years with some of the Schedule P and things like that. So there's a mismatch between where you put the premium and where you put the reserves.

But ultimately, if we had a claim on those policies, the claim would be in those prior accident years. So we want the reserves to be in those accident years irrespective of where the premium is booked.

Okay. So bear with me and I apologize for this. But if you didn't have the mismatch, if you push it all through, say, the current year, it would all -- it would basically show up as a margin neutral impact. Is that right, in my mind? Am I getting that in my head right, if you didn't have the mismatch?

Correct. Yeah. If we just forced it into the current accident year, it would be fine until we had a claim, and then we have a claim in the prior year and the reserves in the current year.

Got it. Thank you for your patience. I appreciate it.

Matthew Carletti, Citizens Bank.

Hey, thanks. Good morning. Stephen, I was hoping you could maybe just dive into Baleen a little bit more now that you've had several quarters of rollout. Just a little more, I guess, qualitative rather than quantitative just on how the rollout has gone, kind of what maybe has surprised you good, bad or otherwise?

Sure. Thanks. The most important thing for getting Baleen up and running is to get the technology to work. We needed to be able to respond to a submission and be able to issue a bindable quote or even issue a policy in a matter of minutes. We've gotten that technology to work.

Number two is to get the brokers to feed the business. And we believe that compared to some of the competition, we have a very viable product in several different ways. We believe that we're more transparent in the way that we do the business.

What's probably been the hardest thing to prevent it from growing faster than it has. And once again, we're pleased with the way it's scaling, but even going faster is that when you're dealing with $5,000 or $6,000 premiums, the question is how much brokers are prepared to market the business or given the small size, do they just simply roll it over.

So we've been opening up a lot of brokers. It's been uneven in terms of brokers that have supported it. Some have been all in, if you will. Some we need to keep visiting and visiting to get it to grow. But we're confident that we're getting there.

And the way we budgeted this for the year, we showed it growing a lot larger in the second half of the year. And we're still confident that we're going to get that done in the second half of the year. So we're very pleased with the way it's rolling out. And I think you'll see the results in future quarters.

Okay. Great. And then a quick numbers question, if I could, probably for Brad. Brad, you've mentioned in your comments the tax rate was lower at 21% in Q1, and part of it relates to kind of anticipated benefits from stock awards. Is that 21% a good bogey of where you think for the year? Or is that just kind of a starting point and we should think a little higher?

I would say that's in the lower range of where we should be. The big variable is going to be how our stock price changes and how that impacts those awards. So fingers crossed, the stock goes up, that could be beneficial. But that's -- it's hard for us really to determine that internally, but we're kind of thinking that it's on the low range right now.

Okay, that makes sense. Thank you, appreciate it.

Meyer Shields, KBW.

Great, thanks. I also have a mechanics question for Brad. I was hoping you could talk us through the seasonality of the ULAE impact that you discussed adding 2.1 points this quarter.

Yeah. Thanks for the question. Just to clarify what happens there. It happened last quarter too. When we pay our internal bonuses on Q1, we pay all of our employees, and that's sitting in our expense ratio as it should.

For the claims team, we actually reallocate all of their costs into our loss ratio. That's pretty standard, our internal claims team. We do that every quarter. But in Q1, because we have this blip of the payments for their bonuses, it actually shows a larger transfer from our expense ratio to our loss ratio.

I think similar to what we're talking about with the audit premiums as we scale, these kinds of things kind of just become smaller noise, and it's not a big issue. But I think at this -- at the scale that we're at right now, it's something we just wanted to point out that added a little bit of seasonality to both ratios.

So going forward, and I know things are going to change, but if you had the same quarterly results without this, should we just move 2.1 points from the loss ratio to the expense ratio?

No, thank you. The 2.1 points is a combination of that compensation payment and just mix change that we have kind of every quarter. So I did not pay the claims team that much in compensation. So thanks for letting me clarify that. It's a portion of that, but obviously, I don't want to give the exact amount of how much we're paying people.

Okay. No, that's helpful, thank you. The second question, just more broadly, Stephen, you talked about obviously relying on external information given Bowhead's age. Do you from that perspective, are you seeing any change in loss trends in either direction?

In other direction, have do you made?

In either direction, in other words, worsening or lightening up loss trends?

We see pockets of places that are not good. We were happy to see the change in the laws in Georgia because we thought it was a pretty untenable proposition there where when you got a policy limit demand, you really had a gun to your head of you either had to agree to it or there was maybe a very much of a possibility of extra contractual obligations.

There's been some concern about some of the suggested changes that are going to take place in Florida. It remains to be seen whether the governor there will sign the legislation. But we do see an upward trend in claims, but we believe that the renewals and the way we're writing our business will exceed the trends that we're seeing.

Okay. Fantastic. And then just one follow-up, if I can. When you see something like the legislation in Georgia, is there an accompanying uptick in competition for risks in the state?

We're pretty much taking a wait-and-see attitude. I mean we've seen in a lot of states in the past. It passes one year and then it goes away in the next year. So intuitively, you would suggest that, that would be the case. But I think there are people that might be tiptoeing back in, but we're not intending of going in a whole hog as if it's a whole new world.

Okay, fantastic. Thank you so much.

Pablo Singzon, JPMorgan.

Hi, good morning. Thanks for taking my question. So first off for Stephen, I just wanted to follow up on your comments about broker receptivity with respect to Baleen. Can you talk a little bit more about what Bowhead is doing to open up broker markets further and perhaps some commentary on the types of wholesale brokers where you're seeing more success or less success?

What we're doing to open it up, you said?

Correct. To improve receptivity, I guess.

Sure. Well, the -- it's a lot of shoe leather, if you will, involved in opening people up. As I've mentioned before, this is a wholesale-only product. Frequently, it's what falls out of binding authority business. And so we've gone around to people who have binding authority business who handle the small business.

And we open them up to send it into us. We have the ability of reading the submissions. And as I said before, being able to process it and issue a bindable quote within a matter of minutes. And -- but it's still when the competition sends a renewal quote, and it's easier just to send out a renewal quote rather than send it to another market and do policy comparisons and things like that.

Sometimes brokers just renew it with the incumbent market. But we are growing the business. We're continuing to grow the business. And as I said, I'm confident you're going to see a lot bigger growth in the second half of this year as we're able to explain more hand-to-hand combat that why it's superior to switch to our product. Did that answer your question?

Second question -- Yes, it is, Stephen. And then second question, just moving to another topic. The 20% annual premium growth comment in the press release and what you mentioned in your remarks, is that a comment for this year or perhaps more medium term?

I'm just trying to square that comment versus the growth you put up right this quarter, which is 26%. I'm not sure if you're implying slower growth through the balance of '25 or if not, maybe in future years.

Yeah. Thanks. It's something we struggle with internally really. We're trying to give you guys some sort of a direction of where we think the business can go. And it's the same direction we're using internally as 20% just seems comfortable for where we're scaled at right now.

I will tell you, I've not adjusted my -- our internal full year number. We still haven't adjusted that despite Q1 being higher than 20%. We think it is -- if it's there, we'll do it. our focus is always on profitable growth, obviously. I would say also, there's nothing that makes me think we couldn't continue the Q1 growth.

But we do have Q3 and Q4, the comparables are going to be tough. So we're a little bit cautious. But again, nothing that I see that says that it's going away, but 20% is just more of a -- give you guys some kind of direction of what we're thinking longer term -- medium to long term.

We haven't seen anything in the Casualty space that indicates that old time incumbent markets have fixed their books completely, and there's still adjustments in terms of cutting back limits and getting prices up to a more reasonable level.

And of course, we didn't -- we only opened up our doors for casualty in January of '21. So we don't have the remediation problems. We don't have the cutback and limit problems that the others have had, but we're still able to operate in that environment.

Thanks for those answers. And maybe I'll sneak in one more for Brad. Brad, on the 4Q call, you had talked about the ceding fee paid to AmFam stepping up, right, I think from 200 bps to 275 bps in the second quarter, which I think you said nets to about 2% of earned premiums after expenses.

So I guess just holding all else equal and obviously, not all else is equal, right? But if you just think about the sequential pattern here of the acquisition ratio, how much incremental combined ratio points will that jump represent, right? And then will the step-up impact be fully reflected in 2Q? Thank you.

Yeah. Remember that we earned that expense just like any other commission expense. So it will be gradual as it starts to -- as we start to see it this quarter, goes into effect about a month maybe in Q2 at the anniversary of the IPO.

So yeah, that's I would call that a headwind right now for our expense ratio that it won't be a cliff, but it will slowly impact the business as we go forward and likely offset some of the tailwinds that we have like just the general scaling of the business that you would expect to see on the expense ratio. So that's kind of our view on the low 30s number for what we're expecting on the expense ratio.

Okay, thank you for your answers.

Bob Jian Huang, Morgan Stanley.

Hi, good morning. So first question is maybe on growth. You touched on this a decent amount. About the 20% premium growth, is it fair to assume that vast majority of this should come from the Casualty business for one.

But also after Casualty, what should be the order of magnitude of growth for other lines? Is it going to be Baleen as the next driver of growth? Or is it more Professional Liability or Healthcare? Just kind of curious if there's a way to think about that.

Sure. On absolute number size, certainly Casualty, it's the largest and is growing, as we've said, more than the others. Percentage-wise, yes, it will be Baleen because Baleen is starting from such a small base. After that, we'll probably see Healthcare and then Professional.

As I mentioned, there is a possibility that some of the stuff in some of the Professional business maybe has started to bottom out and may be start to grow. But at the current time, in absolute dollar-wise, we see it as Casualty, Healthcare, Professional, Baleen. Percentage-wise, it will be Baleen, Casualty, Healthcare and Professional.

Great. That's very helpful, thank you for that. Maybe my second question is on expense ratio. And this is something you guys talked about too. So maybe just expanding on this a little bit. You talked about expense ratio coming down due to scaling and you also spoke to various other aspects of it.

As you think about continuing to invest in Baleen and then also continue to build out and maintain the technology spending, longer term, like what would be a good way to think about your expense ratio as one, you're growing the business; but also two, kind of have to maintain the momentum you're having on the technology side. Like what would be the balance of efficiency versus internal investments?

Yeah. Good question, Bob, because it's -- when you're in a business that's growing this fast, there's a danger that you're not investing enough in the business. And so that's kind of what we look at when we look at our expense ratio. It's not so much keeping it down, but is it at the right level? Are we investing enough?

When we look at technology, in particular, we have some internal metrics of how much of our premium we should be spending on technology. And even that is more of a guidepost where if there's a good reason to have some technology in there that we would need, we should spend it.

I would say the -- I've heard people suggest that because we don't have legacy mainframes and things like that, we should be spending less on technology than other companies. But the reality is it's still expensive, some of these systems.

And there's always something new out there that the underwriters want to see in the new toy that's out there that we got to manage that within our expenses. But I would say, outside of staff costs, that's our biggest administrative expense is technology.

And we're always looking for a cost/benefit analysis when we invest in something that we do see the efficiencies that we will see it. And if not, we got to cut it loose because that is -- that's the whole purpose of investing in technology.

I mean there's two parts, obviously. One is, are we able to replace a manual function by having it done automatically like with Baleen to be able to read something without it being manually entered. And the other is how does it help us make better underwriting decisions, being able to find out information from other than the source of the submission.

And then there's the combination of both of those in that if we're able to present the underwriters with information at their fingertips rather than have them go searching for it, we believe it will help them go through more submissions to find the best ones and then make a better underwriting decision when they finally prepare the quote.

Got it. No, that's really helpful. Thank you.

That concludes the question-and-answer portion of today's call. I will now hand the call back to Stephen Sills, CEO, for closing remarks.

Thank you. Bowhead delivered another strong quarter to start the new year. I want to once again thank the entire Bowhead team and our stockholders for your continued support. We look forward to another year of profitable growth and the continued execution of our cross-cycle strategy. Thanks, and we'll speak to you along the way.

Thank you for joining today's session. The call has now concluded.