Business Overview - Bowhead Specialty Holdings Inc. focuses on providing specialty Property and Casualty products, particularly in Casualty, Professional Liability, and Healthcare Liability risks[127]. - The company originated business on the paper of American Family Mutual Insurance Company, reinsuring 100% of the insurance business to its wholly-owned subsidiary, Bowhead Insurance Company, Inc.[129]. Premiums and Underwriting Performance - Gross written premiums are influenced by new business submissions, binding of new business, renewals, and average premium rates[130]. - Net written premiums are calculated as gross written premiums minus ceded written premiums, which are impacted by retention levels and policy limits[132]. - Net losses and loss adjustment expenses are affected by claims frequency, severity, and the mix of business written, as well as inflation in claims costs[135]. - Underwriting income is defined as income before income taxes excluding net investment income and certain expenses, providing insight into operational performance[149]. - Adjusted net income excludes the impact of net realized investment gains and non-operating expenses, offering a clearer view of profitability[150]. - The loss ratio, expressed as a percentage, is the ratio of net losses and loss adjustment expenses to net earned premiums, indicating underwriting efficiency[153]. - The combined ratio, which sums the loss ratio and expense ratio, is a key metric for assessing overall profitability in the insurance sector[153]. - The company aims to create superior returns for stockholders by generating consistent underwriting profits across all market cycles[128]. Financial Results - Gross written premiums increased by $48.1 million, or 32.3%, to $197.0 million for the three months ended September 30, 2024, compared to $148.9 million for the same period in 2023[156]. - Net written premiums rose by $29.0 million, or 29.2%, to $128.3 million for the three months ended September 30, 2024, from $99.3 million in the prior year[157]. - Net earned premiums increased by $34.3 million, or 48.4%, to $105.2 million for the three months ended September 30, 2024, compared to $70.9 million for the same period in 2023[158]. - The loss ratio was 64.5% for the three months ended September 30, 2024, an increase of 4.1 points from 60.4% in the same period of 2023[160]. - The expense ratio decreased to 29.9% for the three months ended September 30, 2024, from 31.0% in the prior year, a reduction of 1.1 points[161]. - The combined ratio was 94.4% for the three months ended September 30, 2024, compared to 91.4% for the same period in 2023, reflecting a 3.0 point increase[163]. - Return on equity decreased to 13.7% for the three months ended September 30, 2024, down from 24.8% in the same period of 2023, a decline of 11.1 points[165]. - Net investment income increased by $6.3 million to $11.5 million for the three months ended September 30, 2024, from $5.2 million in the prior year[166]. - Income tax expense was $3.7 million for the three months ended September 30, 2024, compared to $2.6 million for the same period in 2023[167]. - Adjusted net income for the three months ended September 30, 2024, was $12.5 million, reflecting a 42.0% increase from $8.8 million in the prior year[1]. - Gross written premiums increased by $149.6 million, or 41.4%, to $510.9 million for the nine months ended September 30, 2024, compared to $361.4 million for the same period in 2023[171]. - Net written premiums rose by $91.5 million, or 38.2%, to $331.2 million for the nine months ended September 30, 2024, from $239.7 million in 2023[172]. - Net earned premiums increased by $90.3 million, or 48.1%, to $278.2 million for the nine months ended September 30, 2024, compared to $187.9 million in 2023[173]. - The loss ratio was 65.1% for the nine months ended September 30, 2024, an increase of 4.6 points from 60.5% in 2023[175]. - The expense ratio decreased to 31.9% for the nine months ended September 30, 2024, from 32.2% in 2023, a reduction of 0.3 points[176]. - The combined ratio was 97.0% for the nine months ended September 30, 2024, compared to 92.7% for the same period in 2023, reflecting a 4.3 point increase[178]. - Return on equity decreased to 11.8% for the nine months ended September 30, 2024, down from 22.7% in 2023, a decline of 10.9 points[180]. - Net investment income increased by $15.3 million to $27.9 million for the nine months ended September 30, 2024, from $12.6 million in 2023[181]. Division Performance - The Casualty division accounted for 63.8% of gross written premiums in 2024, up from 56.3% in 2023, indicating a shift in business composition[171]. Tax and Income - Income tax expense for the nine months ended September 30, 2024, was $7.6 million, up from $6.0 million for the same period in 2023, with an effective tax rate of 23.7% compared to 23.0%[182]. - Underwriting income for the three months ended September 30, 2024, was $5.8 million, down from $6.2 million in 2023, with income before income taxes at $15.8 million compared to $11.3 million[186]. - Adjusted net income for the three months ended September 30, 2024, was $12.5 million, compared to $8.8 million in 2023, resulting in diluted adjusted earnings per share of $0.38 versus $0.37[195]. - Adjusted return on equity for the three months ended September 30, 2024, was 14.2%, down from 25.1% in 2023, with average equity at $352.4 million compared to $140.5 million[192]. - Adjusted net income for the nine months ended September 30, 2024, was $28.6 million, compared to $20.4 million in 2023, with income before income taxes at $32.3 million versus $26.3 million[190]. - Diluted adjusted earnings per share for the nine months ended September 30, 2024, was $1.01, up from $0.85 in 2023, with adjusted net income of $28.6 million compared to $20.4 million[196]. Cash and Investments - The maximum dividend that the insurance subsidiary, BICI, could pay without regulatory approval was $2.9 million as of December 31, 2023[200]. - The company may receive cash through various sources, including drawing on a facility entered into on April 22, 2024, and capital contributions[198]. - As of September 30, 2024, the holding company had $131.9 million in cash and investments, indicating sufficient liquidity for the next 12 months[201]. - For the nine months ended September 30, 2024, net cash provided by operating activities was $232.9 million, an increase from $174.9 million in the same period of 2023[206]. - Net cash used in investing activities for the nine months ended September 30, 2024, was $324.7 million, primarily due to the purchase of fixed maturity securities totaling $458.4 million[207]. - Total mezzanine equity and stockholders' equity increased to $364.8 million as of September 30, 2024, compared to $192.1 million as of December 31, 2023, driven by net proceeds from the IPO and net income generated[220]. - The investment portfolio as of September 30, 2024, included $891.3 million in fixed maturity securities, with a book yield of 4.7% and a market yield of 4.7%[225]. - The company did not declare any dividends during the three or nine months ended September 30, 2024[221]. - The company had no borrowings outstanding under the revolving credit facility as of September 30, 2024[203]. - The majority of the investment portfolio was comprised of fixed maturity securities classified as available for sale, with unrealized gains recognized in accumulated other comprehensive loss[225]. Reinsurance and Reserves - As of September 30, 2024, the company’s reinsurance treaties included a quota share treaty where 25.0% of the exposure is ceded to reinsurers[214]. - As of December 31, 2023, total investments amounted to $577,843,000, with fixed maturity securities representing 98.4% of the total[228]. - The fair value of fixed maturity securities as of December 31, 2023, was $554,624,000, with AAA-rated securities accounting for 18.3% and AA-rated securities for 61.0%[229]. - The total reserves for unpaid losses and loss adjustment expenses as of September 30, 2024, were $679,568,000, with IBNR representing 90.7% of the total[241]. - Restricted assets increased significantly to $555,315,000 as of September 30, 2024, compared to $286,520,000 as of December 31, 2023[233]. - The company maintains a reserve for losses and loss adjustment expenses based on individual case valuations and statistical analyses, reflecting significant judgment in estimates[236]. - The estimated fair value of fixed maturity securities due in one year or less was $133,341,000, representing 15.0% of the total fair value as of September 30, 2024[231]. - The company’s total fixed maturity securities as of September 30, 2024, were valued at $891,252,000, with a significant portion in AAA and AA ratings[231]. - The company’s reserves for unpaid losses and loss adjustment expenses are subject to variability based on litigation trends and regulatory changes[246]. - The fair value of corporate fixed maturity securities was $109,192,000, accounting for 19.4% of total fixed maturity securities as of December 31, 2023[228]. - The company regularly reviews and adjusts its reserve estimates based on new information and experience, which may lead to significant variations from initial estimates[247]. - Casualty underwriting division reported net reserves for unpaid losses and loss adjustment expenses of $265,704, which is 7.5% higher than the previous amount of $285,632[249]. - Professional liability reserves decreased to $116,322 from $125,046, reflecting a pre-tax income impact of $(8,724)[249]. - Healthcare liability reserves decreased to $74,844 from $80,458, resulting in a pre-tax income impact of $(5,613)[249]. - As of September 30, 2024, the company believes 100% of its reinsurance recoverables are collectible, with no material provision for current expected credit losses recorded[254]. Investment Risk Management - The fair value of fixed maturity securities, short-term investments, and cash equivalents was $947.0 million as of September 30, 2024, up from $567.3 million as of December 31, 2023[263]. - The company’s fixed maturity portfolio has an average rating of "AA," with approximately 92.4% rated "A" or better as of September 30, 2024[266]. - Interest rate risk is managed by investing in securities with varied maturity dates and aligning the duration of the investment portfolio with the duration of reserves[262]. - A 200 basis point increase in interest rates would decrease the estimated fair value of fixed maturity securities by $41,480, representing a 4.4% decline[264]. - The company has exposure to credit risk as a holder of fixed maturity securities, primarily investing in high credit quality issuers[266]. - Reinsurance contracts are selected from reinsurers rated "A" (Excellent) or better, with 100% of reinsurance recoverables as of September 30, 2024, derived from such reinsurers[267].
Bowhead Specialty Holdings Inc.(BOW) - 2024 Q3 - Quarterly Report