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Greetings, and welcome to the Bowhead Specialty Holdings Third Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Ms. Shirley Yap, Chief Accounting Officer and Head of Investor Relations for Bowhead Specialty Holdings. Thank you.
You may begin.
Thanks, Melissa. Good morning, and welcome to Bowhead's Third Quarter 2024 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 third quarter of 2024. This follows the preliminary release of our third quarter results and secondary offering we announced on October 21. You can find these announcements in the Investor Relations section of 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 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 these 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, and good morning to everyone joining us on the call today. To organize my remarks, I'll begin with a brief overview of the strong premium growth we experienced during the third quarter. Next, I'll provide our views on the broader specialty insurance industry, identifying where Bowhead sees the greatest opportunities for profitable growth, then conclude with an update on our most recent growth initiatives.
To begin, Bowhead had another strong quarter of premium growth across each of our divisions in the third quarter. Gross written premiums grew by $48 million or 32% to $197 million compared to a year ago. Our Casualty division had a standout quarter. Premiums grew 42% compared to a year ago to over $120 million. This was primarily driven by our excess casualty book, where we continue to see favorable underwriting and pricing conditions. While the conditions in our healthcare liability and professional liability divisions were more nuanced in casualty, we experienced double-digit premium growth in both divisions while maintaining underwriting discipline.
Our Healthcare Liability division grew 29% to $31 million in the quarter, primarily driven by new business and rate increases in certain lines. Our professional liability division increased 13% to $45 million, driven by our cyber liability portfolio, where we saw new and increased limits being purchased in the market.
Overall, we're pleased with our third quarter production and the continual execution of our market cycle strategy. Turning to our views on the broader specialty insurance industry. We see mixed conditions by division, strong in casualty, mixed in health care and competitive in professional. The casualty market remained resilient in terms of pricing and terms and conditions. We see the strongest rates coming through in excess casualty, where the industry is continuing to drive rate on previous rate increases. As the market continues to react to older accident year losses, we're seeing limits continuing to decrease into the specialty and E&S market.
We believe these are favorable tailwinds for Bowhead and remains our view that these market conditions will continue for the foreseeable future. In health care, it's a mixed story. We're seeing favorable conditions in the hospital space, but increased competition in medical facilities and the continued softening of market conditions in healthcare management liability. In professional, excluding cyber liability, market conditions remain competitive as we're seeing what we believe is undisciplined behavior in the market.
New entrants and increased capacity from legacy markets that are trying to grow market share. While we don't expect these conditions to change in the near future, our team is maintaining underwriting discipline and finding opportunities to optimize our portfolio.
Finally, before I turn the call over to Brad to review the details of our financials, I wanted to provide an update on our recent growth initiatives. I'll start with Baleen, the streamlined, low-touch flow underwriting division we launched late in Q2, focusing on small, hard-to-place risks written 100% on a non-admitted basis. We're pleased with our initial results as we achieved what we initially set out to accomplish. Baleen can ingest the submission and issue a quote within minutes. Once a quote is accepted, policies are bound and issued within minutes. We started with 29 eligible contractor classes at the end of Q2. And by the end of Q3, we offered 89 eligible class codes in our contractors and owners, landlord and tenants or OL&T product lines. As of today, we continued our expansion and now offer over 150 eligible contractors and OL&T class codes. While this represents just under half of the addressable market, our expansion covers the most frequently requested class codes by our broker partners.
Pivoting back to our craft business, we announced in our last earnings call that we are in the process of expanding our casualty division to include environmental capabilities. To date, we've hired a team of 3 underwriters with over 60 years of combined experience writing complex environmental risks. On October 1, we released the first of our 3 initial environmental liability products, excess contractors, pollution, and professional liability. We plan to release the next 2 products, primary contractors pollution liability and site pollution liability next year.
While we don't expect 2024 premiums to be material from Baleen or environmental, with our disciplined approach to underwriting and our expanding craft and flow platforms, we believe we're well-positioned for sustainable and profitable growth across market cycles.
With that, I'll turn the call over to Brad to discuss our third quarter results.
Thanks, Stephen. Bowhead generated adjusted net income of $12.5 million or $0.38 per diluted share with an adjusted return on average equity of 14.2% in the quarter. Gross written premiums accelerated more than 32% to $197 million for the quarter, which included $4 million of additional premium from an unusually large audit premium on one insured. We saw premium growth from each of our divisions with casualty growing the most and representing a larger portion of the book compared to last year.
Rate improvement, particularly in casualty, along with increased volume and production continues to contribute to the increase in our top line. We also disclosed Baleen premiums for the first time this year. While it's still early days, we're encouraged by our initial performance. Our loss ratio for the quarter of 64.5% increased 4.1 points from 60.4% year-over-year, but decreased 1 point from 65.5% in Q2. The year-over-year increase was driven by the updated loss ratios we've used since the fourth quarter of 2023.
The decrease from Q2 was primarily driven by mix changes in the portfolio and the net audit premium being fully earned and associated with older accident years that had lower loss pick assumptions. Similar to the prior quarter, we made no changes to our loss picks or prior year reserves in this quarter. And as of September 30, IBNR continued to represent a large portion of our net loss reserves at over 91%. As a reminder, given Bowhead does not write any property risks, we did not experience any material direct losses in the third quarter from the recent hurricane activities and do not expect to in future quarters.
Our expense ratio for the quarter of 29.9% decreased from a comparable of 32.3% in Q2 due to the prudent management of our operating expenses and the net audit premium being fully earned in the quarter. Since there's volatility in our quarterly expense ratio, we suggest that investors view our expense ratio over a longer time horizon. So far for the first 9 months of the year, our expense ratio of 31.9% is in line with our low 30s expense ratio expectations.
Overall, the effect of the loss ratio and the expense ratio contributed to a combined ratio of 94.4% for the quarter. Turning to our investment portfolio. Proceeds from the IPO were fully invested by the end of the quarter. Pretax net investment income more than doubled to $11.5 million in the current quarter, driven by the increase in our investment portfolio and higher investment yields. Specifically, our investment portfolio had a book yield and new money rate of 4.7% at the end of the quarter.
The average credit quality of our investment portfolio remains at AA and the average duration of the third quarter was around 2.2 years. The effective tax rate for the third quarter was 23.6%, in line with our expectations for the full year. And lastly, total equity was $365 million, giving us a diluted book value per share of $10.97 at the end of the quarter, an increase of 37% from year-end.
With that, we'll turn the call over for questions.
[Operator Instructions] Our first question comes from the line of Dean Criscitiello with KBW.
I wanted to start with the growth within Baleen. Can you -- you guys talked about in the press release being deliberate and measured with growth there? Can you sort of unpack that a bit? I was sort of curious of how like you expect to ramp up the premium Baleen and like what signs you really need to see to feel confident about leaning into growth there.
Sure. Thank you.
The first thing is when we got Baleen -- when we had the idea for Baleen and wanted to build it out, there's a couple of things that we need to do in sequence. The first thing is obviously to create the underwriting screens that we feel that we can write the business profitably. We've done that.
The second is to build the technology that will be able to deliver what brokers are looking for, which is be able to ingest a submission, quote it within minutes. And if they want to bind it, be able to bind it and issue a policy within minutes. That much we've done already, and we -- that works.
The next part is getting the brokers to support it and change their habits. Keep in mind that a lot of the competitors issue quotes or renewal quotes 90 days in advance. Those things sit in people's files. So for things that are like $10,000 premiums, expecting people are going to turn the world upside down to move a $10,000 piece of business, we think is a little unrealistic.
We've gotten very favorable reviews from our brokers. We've started to get a lot of submissions from our brokers. And we're confident that when we report on the fourth quarter that we'll have some good news and showing that we're making traction with Baleen.
Got it. And then my second one, the sequential loss ratio improvement of about 100 basis points, can you sort of try to unpack that as well? Is that just a change in the mix of business? Or is there anything else that we should read into there?
Yes. You're right. It's mostly a change in mix of business. We did highlight the audit premiums as well in our earnings release. We had a $4 million of premium booked in this quarter that related to older accident years. And so the loss picks on those older accident years were a little bit lower. So that also drove it down a little bit. But as we mentioned, there was no change to our loss picks. We didn't adjust our prior year reserves. So it's essentially the mix is all you have left that would drive the change.
Our next question comes from the line of Scott Heleniak with RBC Capital Markets.
Just I wanted to touch first on the casualty, the strong growth there again. And I know you mentioned excess casualty, you called that out. Is there any other classes or any other areas where you're seeing strong growth there? Or is it mostly excess casualty? Just anything you can kind of share there, what's going on?
Sure. It's mostly excess casualty. The primary is nowhere near as hard as the excess is. And so we're not seeing the kind of growth in that area that we see in the excess casualty.
Okay. That's helpful. And then just on the professional liability, I just wanted to touch on some of the commentary you made about market conditions, competitors, some undisciplined observations you're seeing out there, and increased capacity. Is that in the area, the small and middle market areas specifically that you're playing in? And is the growth that you're seeing in that line, I know it was lower than the other categories, but you're still seeing growth. Is that -- so is that mainly cyber? Or are you still seeing growth opportunities in certain areas of professional liability or D&O that you can share?
Sure. A couple of things. We operate in virtually all areas of the D&O, private, some not-for-profit, small publicly traded, and large publicly traded businesses. We don't do much in large publicly traded primary because the ability on a lot of these companies, they require their primary carrier to be able to issue policies in different languages in different countries, and we don't have those capabilities.
Likewise, frequently, the first excess on those -- on those policies, they want somebody that could drop down and be primary. But above there is where we see a lot of our bread and butter business. But it's also sliced by wherever we see the best opportunity, the best rate for the exposure that we're being asked to take on. We're seeing competition in all areas, small private business. as well as large public. Some of the stuff in the past years has been -- you've seen in a lot of reports that premiums are dropping, rates are dropping. Part of that was due to a lot of SPACs, de-SPACs and IPOs when you were getting beyond the dates of strict liability. You saw the prices being reduced.
We think in certain cases, they were being reduced more than they should. We've seen cases where companies have had claims and getting substantial reductions on the renewal premium. So we're continually looking at towers, looking the best place for us to play or not play at all and withdraw from the field on a particular account. The biggest -- and the last part of your question on the growth in professional, cyber is part of our professional portfolio, and that's where most of the growth is coming from.
Our next question comes from the line of Pablo Singzon with JPMorgan.
Brad, you had mentioned that your new money yield was right on top of the book yield at the end of the quarter, right? So if you freeze the interest rate environment for a moment, right, which I recognize is a big ask, do you think there's room to increase or optimize your yields from here, whether by adding duration, adding credit risk, or maybe even different asset classes?
Yes, sure. Thanks, Pablo. Yes, there's -- I think we're on the lower -- at 2.2 years duration, we're actually on the lower side of our duration target of 2 to 3 years. So that's one lever that we could pull. We haven't pulled that yet. But as we monitor the markets and opportunities on the portfolio, that's definitely something we can pull. I would also add that your point about the new money yield being the same as the actual yield on the portfolio. I think that was more of just a fact of the snapshot of our portfolio at the end at September 30.
There has been -- since then, obviously, yields have changed a little bit, and those -- there's more of a gap there now where our new money yields are a little bit higher. So I think even without changing duration that drastically, there's still some opportunity there. Of course, that changes almost daily in this environment. So we're not going to make any drastic moves here.
We're really comfortable where we are on the duration risk, and we're happy with the yields we have, but something we monitor all the time, and we'll make changes if we think it's appropriate. There's more yield that we can actually get by changing duration and we still have that comfort where we are.
Got it. That makes sense. And then my follow-up, what percentage of your invested assets is floating rate assets?
Sorry, can you say that one more time, Pablo?
Just the percentage of the investment portfolio that's in floating rate assets.
I don't have that with me. Can we get that back? I don't know if we even have that detail in the queue, though. I know most of our portfolio, it's very basic corporates, treasuries. We do have some floating rate, but it's got to be pretty small. Sorry, I don't have that right off the bat.
Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Sills for any final comments.
Thank you, operator. We delivered another strong quarter in Q3, and I'd like to thank our employees for their continued dedication and hard work. To everyone else joining us on the call today, we appreciate your support and look forward to speaking to you along the way. Thank you.
Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.