Participants

Shirley Yap; Chief Accounting Officer and Head of Investor Relations; Bowhead Specialty Holdings Inc

Stephen Sills; Chief Executive Officer; Bowhead Specialty

Brad Mulcahy; Chief Financial Officer; Bowhead Specialty Holdings Inc

Meyer Shields; Analyst; Keefe, Bruyette & Woods, Inc.

Scott Heleniak; Analyst; RBC Capital Markets

Pablo Singzon; Analyst; J.P. Morgan

Matthew Carletti; Analyst; JMP Securities

Presentation

Operator

Hello and welcome to Bowhead Specialties 4Q 24 earnings call. After the prepared remarks, we will hold a question and answer session. (Operator Instructions).
With that, I would like to turn the call over to Shirley Yap, head of investor relations. Shirley, you may begin.

Shirley Yap

Thanks, Danielle. Good morning and welcome to Bowhead's 4th quarter 2024 earnings conference call. I'm Shirley Yap, Bowhead's Chief Accounting Officer and head of investor relations.
Joining me today are Steven Sills, our Chief Executive Officer, and Brad Mulcahy, our Chief Financial Officer.
Earlier this morning, we released our financial results for the 4th quarter of 2024.
You can find our earnings release in the investor relations section of our website.
Later in the week, our Form 10k 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 1,995.
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 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 Sills

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.
Next, I'd like to take a step back and reflect on the milestone year we've had. 2024 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 25th, we successfully closed on a secondary public offering reflecting the strong demand for our company's stock.
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 million are premiums we wrote in 2024, 76% was written on an excess in surplus lines or ENS 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.
Because we began operations in November of 2020, we were not impacted by legacy reserve issues affecting the broader industry. We also do not write property or natural catastrophe exposed risks, as well as standalone commercial auto or fleet business, areas where the industry has seen adverse developments from pre 2020 accident years. Instead, we utilize our underwriting first culture to drive profitable growth.
In our casualty division, where we're seeing favourable 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 health care 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.
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 4th 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 Baleen Specialty, a streamlined, tech-enabled, low touch flow underwriting operation that focuses on small, hard to place risks written 100% on a non-admitted basis.
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 1st 7 months of Baleen's operations.
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.
In 2024, was a busy but successful year. We achieved the 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 million of net proceeds from our upsized IPO delivering attractive returns on capital to our investors.
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 Baleen 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. Brad?

Brad Mulcahy

Thanks, Stephen. we ended generated adjusted net income of $14.1 million 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 million of net proceeds from our upsized IPO in May 2024.
Gross written premiums increased 26% to $185 million for the quarter.
We had premium growth from each of our divisions with casually driving the increase at 43% year over year to $106 million for the quarter. 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 million increased 9% year over year, driven by renewals with rate increases in certain lines and new business and others.
In our professional liability division, despite a challenging market, we maintained underwriting discipline while increasing premiums 7% year over year to $46 million which is primarily driven by our cyber liability portfolio.
Baleen generated $1.2 million 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 2025, 1 year after launching Bailey. 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 63.0% 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 comprised a larger portion of our portfolio compared to 2023.
Remember, since we've only been in operations for 4 years and right 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.
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 and 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 development in our aggregate net losses for 2024.
As you will see in our 10K in statutory reports once filed, 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 21,22 accident years over to casualty in the 22, 23 years, with other divisions in years adjusted to a lesser extent, but the result on an aggregate net basis was no prior year development.
More specifically, in casually, the $9 million of net unfavourable development was driven by deteriorating loss trends in the industry benchmarks. While in professional lines, the offsetting $9.5 million 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 2024. As a reminder, since Bowhead does not write any property risks, we did not experience any material direct losses due to the California wildfires.
We 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 unfavourable 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. The half point reduction was driven by a 0.9% decrease in our operating expense ratio, which is partially offset by a half point increase in our net acquisition ratio.
The 0.9% decrease in our operating expense ratio from 24.0% 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 half point 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 seating 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.
Overall, the effect of our loss ratio and expense ratio contributed to a combined ratio of 95.8% for the year.
Turning to our investment portfolio, pre-tax net investment income for the quarter increased 80% to $12 million and more than doubled from $19 million to $40 million 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 2.2 years.
Our effective tax rate for the quarter was 25.2%, and for the year was 24.3% in line with our expectations. As a note, our effective tax rate may vary due to state taxes and certain tax adjustments for permanent differences.
Total equity was $370 million giving us a diluted book value per share of $11.03 for the year, an increase of 38% from the year in 2023 of $8.
Turning to expectations for 2025, which, as Stephen mentioned, remained 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 seated 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 January 1st, 2025 at 60%, down from 64% in 2024, and increased our seating 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.
We expect our 2025 loss ratio to remain in the mid-sixties range, but gradually change from 2024 as the book mix changes and earn premiums on older year roll off.
Prior year reserves may change throughout the year due to audit premiums or allocation of loss adjustment expenses, but will 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 1st quarter, and the vesting of certain RSUs in the 2nd quarter.
Also, the increase in the seating fee to American family takes place in Q2, from 2% to 2.75%, which nets to about 2% of earned premium after expenses.
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 receive from our upsized IPO is 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.

Question and Answer Session

Operator

Mayer Shields at Keefe, Bruyette & Woods.

Meyer Shields

Great, good morning. Thanks so much. I was hoping for a little more colour in terms of comparing the 4th quarter accident or loss ratio to what Bowhead had produced through the 1st 9 months, because we did see a bit of a dip down, and I'm wondering, is that mix, is that a reassessment of loss trends, or is there something else going on?

Brad Mulcahy

Yes Mayer, 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, it's really a function of our, review that we do in Q4 and just moving things around, so the mix obviously impacts it, but that's mostly the same thing happened in Q4 of 2023 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, 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 ratio is a little bit 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 here there as well.

Meyer Shields

Okay, fantastic. And then I know I've asked this in the past, but I was hoping to 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?

Stephen Sills

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

Meyer Shields

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 the market now.

Stephen Sills

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 start up of the environmental business. And, we're also staffing up, which we're not having trouble finding in the baleen space, but as 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.

Meyer Shields

Okay, perfect. Thank you so much.

Operator

Scott Heleniak, RBC Capital Markets.

Scott Heleniak

Yes, good morning. First question I had was just on the, healthcare liability, grosser premiums that 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 was already, I think you referenced some competition, was that, was there any particular area that you saw some uptick in competition there and you expect to see growth in that line, for 2025?

Stephen Sills

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 they increased, 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 25.

Scott Heleniak

Okay, that's helpful. And then just on access casualty, that's been a, line that saw significant rate increases, I'm sure across your book and across the entire industry and that the growth has been really significant and I'm just wondering what kind of opportunity you see in 2025.
For that line is do you still expect You meaningfully high growth rates in that area and 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 access casualty part of casually and, kind of what you're seeing there.

Stephen Sills

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, 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, a substantial opportunity in terms of increased rates on existing business.

Scott Heleniak

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

Operator

Pablo Singzon at JPMorgan.

Pablo Singzon

Hi, good morning. So first question, Brad, just given the sequential decline in the loss ratio, from 3 to 4, would it be fair to assume that the net impact of the loss exchange you went through was a positive? Just wanted to clarify that.

Brad Mulcahy

Yes, that would be a that would be a good assumption.

Pablo Singzon

Okay. And then the follow up just on the loss ratios, I, you, 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 the 64.4% baseline?

Brad Mulcahy

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'll just, it'll, impact 2025, unfavourably if you want to call it, directionally, but I think the mix issue will be there, but it'll be more of those older lost years rolling off.

Pablo Singzon

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, right? So, don't have full visibility on what's going to happen in the seeding commissions, but it sounds like the acquisition rate should go up. Do you expect most of that increase to be offset by, just, expense leverage on the GNA side?

Brad Mulcahy

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 a half a point, and I think we can manage that through just the way the business is scaling and the projections that we that we see.

Pablo Singzon

Got it I understood Thank you.

Operator

Matt Carletti at JMP Securities
Thank you.

Matthew Carletti

Hi thanks. Good morning. Yes, 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, a 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. I don't know if those were the segments you were talking about, but a little more colour would be great. Thank you.

Stephen Sills

Sure. The professional business is made up of, public DNO, private DNO, the, ENO 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, hundreds of millions of dollars of limits, as we've talked about in the past, towers have collapsed in terms of People not writing $25 million, they write, tranches of 5s and 10s. We've found, MGAs going out there and just getting really aggressive and 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, when you're writing excess of $300 million it's somewhat fungible capacity that somebody wants to write it at $5000 a million dollars and somebody else wants to write it at $4,000 a million, it probably doesn't make much of a difference if you're going to have a claim up at that level where it's a lot more stable, we believe is down below the companies that write the primary and 1st and 2nd excess policies.
We're not as because we were relatively late, starting up at the end of 2020, 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 business is 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, it just gotten too competitive and is just not worth the effort.
We go out there, we get enough submissions to work on, but 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. We think we can grow in the 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 health care space, as I said before, I think the hospital business will show nice growth. Miscellaneous is very competitive at the present miscellaneous medical 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, we think there's some good growth opportunities and also healthcare management liability. We see some growth opportunities.

Matthew Carletti

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 Stephen Sills, CEO for closing remarks.

Stephen Sills

Thank you, operator. To wrap up, Bowhead had delivered another strong quarter to and 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 Bowhead, 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.