Release Date: August 06, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Skyward Specialty Insurance Group Inc (SKWD, Financial) reported Q2 adjusted operating income of $0.80 per diluted share, the best in company history and nearly double the same quarter last year.
- Underwriting income increased by over 50% and investment income rose by over 150% from the prior year.
- The company achieved a sub-92% combined ratio for the sixth consecutive quarter and 18% plus growth.
- Skyward Specialty Insurance Group Inc (SKWD) was upgraded by AM Best to an A rating, reflecting significant improvement from an A- with a negative outlook in 2020.
- The company was recognized as one of the best places to work by U.S. News & World Report, highlighting a positive and inclusive workplace environment.
Negative Points
- The expense ratio increased by 1 point compared to the second quarter of 2023, attributed to business mix shift and investments in the business.
- Catastrophe losses from convective storms accounted for 1.2 points on the combined ratio, although lower than the previous year's 3.5 points.
- The commercial auto segment saw a reduction in exposure due to concerns about structural loss cost inflation, impacting overall growth in this area.
- The Global Property division experienced a double-digit step down in written premium due to competitive and irrational market behavior.
- The alternative and strategic investments portfolio, although stabilizing, continues to run off and contribute less to overall investment income.
Q & A Highlights
Q: Andrew, I was hoping you could maybe dig in a little bit more to your commentary about kind of where you grew this quarter, and importantly, kind of being areas of the business that aren't necessarily linked to P&C cycles. I think I caught kind of a 36% of the business, sort of number, kind of where that stands today. How do you view that longer term? Do you have kind of a perfect mix that you're looking to get to, or how do you think about that and the benefits that might bring to Skyward over multiple cycles?
A: Yes, that's a great question, Matt. Thanks for that. Well, look, maybe I'll just back up and put a little context around this. So, in the four years that I've been with the company, we have seen, I would describe it as kind of explosive market cycles — microcycles in various lines of business, right. We saw public D&O go through the roof and then probably come down even faster than it went up. Early in my time, when I joined Skyward, we saw a big movement on high access. I remember a number of peers who were talking about mid-teens rate increases, and it's just because they had a very big, high access, large access portfolio. Similarly, we saw a cycle where cyber went way up, and now cyber is soft. You go through the list, property, same thing. And of course, we're in the P&C business, right, so we're never going to fully buttress ourselves to that. But it is our belief that the more that we can build a portfolio that is less susceptible to that, the more predictable we can be around not only our growth, but the quality of our earnings. And I just believe simply the durability of the outlook for our business. And while this quarter was 36%, it was really just a byproduct of a quarter that had a relatively large growth in agriculture, as an example, where I think what we're aiming at for our overall portfolio is more like a third over the course of a year. And today we're probably at around 25%. So we want to grow that while not limiting the growth, by the way, on sort of our other lines. It just means that this is an area where we'd expect to grow faster than the rest of our book of business. And by the way, I think that as you look at over the coming quarters, you'll hear some announcements from us about new lines that we'll be entering that they kind of fit into this portfolio.
Q: Great. That's very helpful. Thank you. One other, if I could kind of diving in a little bit to one of your other comments, your commentary around bringing exposure down on commercial auto, which makes a lot of sense in a market that structurally just has a loss cost issue. Can you maybe just give us a little bit of color or remind us kind of commercial auto is a broad category, and there's lots of different flavors of commercial auto, just kind of what kind of — I guess, what you have left on your book, kind of what that flavor of commercial auto might be. And as you bring that exposure down, are there particular areas of commercial auto that you're reducing emphasis of, or is it more of a broad bring down across the entire category?
A: Yes, also a great question. So thank you. Let me just back up here, because we've watched and listened to what others have said about this, and we've also observed, and I just have to say that this is not about profit. This is about durability. And if somebody believes that loss cost inflation today is 10% or 11% or 12% or whatever they might believe, but everybody believes that it's rising. Nobody's to say that two or three years from now that will have been underestimated, particularly given sort of the changing dynamic there. So I will just say to you that it is a very, and describe it as more uncertain. And we're aware that some of our peers, many of whom we respect, have a different view on this than us. But our view is really simple. It is not a question of profit, it's a question about durability. And then as it relates to where we see it, look, the bulk of our business for commercial auto is not kind of the fleets that would make up kind of a lighter end. It's medium to heavy, including intermodal trucking, which is kind of medium distance, not long haul, but generally medium to heavy vehicles. And that is the area that there is no question is the most susceptible to the loss cost inflation that we've seen in. And trucking is kind of the extreme end of that, heavy trucking. But I'm not sure that we really can distinguish between the inflation that we're seeing and kind of the medium part of the market versus the heavy part of the market. And so our disposition about this is kind of across the board.
Q: Thanks and good morning. Andrew, I want to continue on commercial auto, just to make sure we're covering it. It sounded like one of the reasons for the change in the net to gross was on commercial auto, which I guess means you're buying more reinsurance. Are ceding commissions there offsetting expenses? Like, how is that impacting the expense ratio?
A: No, maybe I didn't quite get the question, Meyer, but I think when we're talking about growth, we're actually talking about a very considerable reduction in units offset by a very considerable increase of price. But the net-net of which is a meaningful step down in written premium for auto. There's really been no change to our reinsurance structure for auto, no change in kind of the ceding commissions, nothing there that is noteworthy. So I don't know if that addresses your question. Maybe I didn't quite get it. So does that address your question?
Q: Okay, perfect. And last question, just because I'm not as familiar, is there any pricing of note in the agricultural component of global property and agriculture? I get the less cyclicality. I just don't know what's actually happening day to day in that market.
A: Well, for us, it's a global business, so we write all over the world. That's just the first thing to note, right. So the second thing is that this is only our second year of operation. We had relatively flat rate on the portion of our business that was renewals, but that was a relatively small portion of what came through, particularly in the first quarter. So it wasn't really noteworthy and didn't influence our metrics. As the book seasons over time, we will certainly be prepared to talk about that in the context of sort of what we're seeing on rate overall.
Q: Good morning. This is Dan on for Mike today. Just maybe one starting with the benign cat loss ratio, maybe a little bit lower than we would have thought relative to peers, especially given the Texas exposure there. Touched on it on the prepared remarks a little bit and attributed it to the lower severity in the press release, but just wondering if there's anything
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
