Bowhead Specialty Holdings - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered strong growth and improving profitability: GWP +32.4% to $232.4M, net income $12.3M ($0.36 GAAP EPS), adjusted net income $12.8M ($0.37 adj. EPS), and combined ratio improved sequentially to 96.8% (Q1’25: 97.3%).
• Versus S&P Global consensus, adjusted EPS modestly beat ($0.37 vs $0.358*), while total revenue was slightly below ($133.3M vs $134.7M*)—a small mixed print driven by portfolio mix and modest loss ratio uptick YoY, partly offset by lower operating expense ratio.
• Expense ratio fell 320 bps YoY to 30.6% on scale benefits; management indicated confidence in breaking below 30% expense ratio run-rate “next quarter,” despite headwinds from a higher AmFam fee (2.00% → 2.75% effective late May).
• Reinsurance renewals improved protection (quota share 25%→26%; XoL 60.1%→65%; commissions unchanged), and net investment income rose 56% YoY to $13.7M (book yield 4.7%, new money 4.8%)—both supportive of forward earnings power.

What Went Well and What Went Wrong

What Went Well

• Broad-based growth: GWP +32.4% to $232.4M, with double-digit increases across all “craft” divisions; Casualty +31.9% to $150.7M; Healthcare +39.0% to $23.5M; Professional Liability +23.3% to $54.8M; Baleen Specialty reached $3.4M.
• Operating leverage: Expense ratio fell to 30.6% (from 33.8% YoY) on scaling and disciplined cost control, driving sequential combined ratio improvement to 96.8% (from 97.3% in Q1).
• Investment income tailwind: Net investment income +55.8% YoY to $13.7M; investment portfolio book yield 4.7% and new money rate 4.8%, AA average rating, 2.8-year duration—supporting sustainable earnings accretion.

Selected quotes:

• “Underwriting matters… net income for the quarter soared by 123% compared to the same period last year.” — CEO Stephen Sills (press release).
• “We’re right on the cusp of breaking 30% [expense ratio]… confident we’re gonna get below 30 in the next quarter.” — CEO/CFO (call).
• “Ceding commissions in our May 1 renewals remained unchanged from 2024.” — CFO (call).

What Went Wrong

• Loss ratio drift: Loss ratio rose 70 bps YoY to 66.2% (current AY +60 bps on mix shift to higher-loss Casualty; +10 bps from audit premiums assigned to prior AYs).
• Acquisition cost headwind: Net acquisition ratio pressure from higher earned broker commissions (mix) and lower earned ceding commissions; AmFam fee increased to 2.75% (from 2.00%) effective late May—expected to trickle through earnings.
• Market pockets of pressure: Professional Liability (financial institutions) remains most challenging due to excess capacity; large-account Cyber remains competitive; E&S construction project activity decelerating amid tariffs, immigration, and rate uncertainty.

Transcript

Speaker 4

Hello and welcome to Bowhead Specialty's Q2 2025 earnings call. After the prepared remarks, we will hold a question and answer session. For those in the Q&A room, please click the raise hand button found on the black bar at the bottom of your screen to join the question queue. 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, Chief Accounting Officer and Head of Investor Relations. Shirley, you may begin.

Thanks, Stephen. Good morning and welcome to Bowhead Specialty Holdings Inc.'s second quarter 2025 earnings conference call. I'm Shirley Yap, Bowhead Specialty Holdings Inc.'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 second quarter of 2025. You can find our earnings release in the Investor Relations section of our website. Our Form 10-Q will also be 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 belief.

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-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?

Speaker 7

Thank you, Shirley. Good morning, everyone, and thank you for taking the time to join our call today. I'm pleased to share that Bowhead once again delivered outstanding results across the board in Q2. Gross written premiums increased 32%, while adjusted net income increased 62%, and diluted adjusted earnings per share increased 32%. These results demonstrate what we have consistently communicated since the establishment of our company, that underwriting matters. From the top down, underwriting profitability is our North Star. Starting with GWP, Bowhead generated a record $232 million in premiums during the quarter. This equates to 32% year-over-year growth. We're pleased that this was driven by double-digit growth across all of our craft underwriting divisions. Once again, our casualty division comprised the largest portion of our premium growth, with a 32% increase to $151 million.

This growth in casualty was primarily driven by our excess casualty book, where despite signs of increased competition, for now, we're continuing to see favorable underwriting and pricing conditions. We also experienced modest premium growth in our primary construction project book, where we're able to deploy low $1 million or $2 million limits with favorable pricing terms and conditions. In our professional liability division, premiums increased 23% to $55 million for the quarter. Although we continued to experience challenging underwriting conditions, we found profitable growth opportunities in all departments, with commercial public D&O driving more than half of our growth. In last quarter's call, we mentioned that we had started to see shoots of market stabilization. This quarter, the positive developments continued. We capitalized on some new opportunities and retained a large proportion of our renewals at or near expiring rates.

In the second quarter, premiums in our healthcare liability division increased 39% to $24 million. The growth came from all departments. As we mentioned last quarter, we continue to grow the book responsibly. Where underlying numbers don't meet our profitability targets, we've continued to decline or let other carriers renew our accounts. During the quarter, Baleen generated $3.4 million in premiums during its fourth full quarter of operations. While still a small contributor to Bowhead's overall premiums, we're achieving steady month-over-month growth and are continuing to expand our flow underwriting operation to support our cross-cycle strategy. Before discussing our views on the E&S market we operate in, I'll turn the call over to Brad to discuss our strong Q2 results in more detail.

Speaker 4

Thanks, Stephen. Bowhead generated an adjusted net income of $12.8 million, or $0.37 per diluted share, and an adjusted return on average equity of 12.8% for the second quarter of 2025. Gross written premiums increased more than 32% to a record $232 million for the quarter. As Stephen mentioned, we achieved double-digit growth in each of our craft underwriting divisions, with casualty continuing to drive the growth, and Baleen generating $3.4 million in premiums in the quarter. Turning to our loss ratio, there are several elements that affect our loss ratios. First, as a reminder, since we're a relatively new company writing long tail lines with a short loss history, when setting our loss reserves, we're heavily reliant on industry-observed loss information over our own internal data.

This reliance is reflected in our high ratio of IBNR as a percentage of total reserves, which was 87.5% at the end of the quarter. Second, product mix affects our industry-reliant loss ratio because casualty products naturally have higher current accident-year loss ratio assumptions compared to our other products. Since our casualty division comprises an ever-larger proportion of our net earned premium, our industry-reliant loss ratio has been trending higher. This has had the effect of increasing our current accident-year loss ratio by 0.6 points, from 65.5% in Q2 of last year to 66.1% this quarter. Next, seasonality also has an effect on our loss ratio. During the first quarter, when incentive compensation is paid to our internal claims team, also known as paid ULAE, our loss ratio tends to be higher before historically normalizing after the first quarter.

This had the effect of decreasing our loss ratio by 0.7 points, from 66.9% in Q1 of this year to 66.2% this quarter. Lastly, as we mentioned in the previous quarter, the 0.1 point year-over-year change in our prior accident-year loss ratio is simply due to loss ratios being applied to audit premiums that were billed and fully earned in the quarter, but related to prior accident years. This is not based on actual losses settling for more than reserves and does not represent an increase in estimated reserves on unresolved claims. We are simply putting loss reserves into the appropriate accident year when the premiums are booked. As a result, our loss ratio for the quarter was 66.2%, a 0.7 point increase from 65.5% year-over-year. Our expense ratio for the quarter was 30.6%, a decrease of 3.2 points compared to 33.8% year-over-year.

The decrease was driven by the reduction in our operating expense ratio from the continued scaling of our business, as well as the prudent management of our expenses. There's also an increase in our other insurance-related income, which consists of minimal policy fees and insurance-related services that contributed to the reduction in our expense ratio from last year. These improvements were partially offset by an increase in our net acquisition ratio, driven by portfolio mix and, to a lesser extent, a reduction in our seeding commissions. In terms of our net acquisition ratio, in late May, on the one-year anniversary from our IPO, the fee we paid to American Family Insurance increased from 2% to 2.75%.

The impact on our Q2 net acquisition ratio was minimal, but we expect the increased fee to trickle into our net acquisition ratio the rest of the year as premiums affected by the increase are earned. From an expense ratio perspective, we expect the increased fee we paid to American Family Insurance to be offset by the continued scaling of our business and the prudent management of our expenses. Overall, the loss ratio and expense ratio contributed to a combined ratio of 96.8% for the quarter. Turning to our investment portfolio, net investment income increased 56% year-over-year to $13.7 million for the quarter, primarily due to a 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 our average duration was 2.8 years at the end of the quarter. Lastly, total equity was $408 million, giving us a diluted book value per share of $12.04 at the end of the quarter, an increase of 9% from year-end. Before turning the call back to Stephen, I wanted to provide an update on our May 1st seeded reinsurance renewals, which apply to all of our departments except for our cyber liability products. Our cyber liability products are covered by our 60% quota share treaty, which renews January 1st. Overall, we increased our quota share treaty from 25% to 26%, and our excess of loss treaty increased from 60.1% to 65%. Seeding commissions in our May 1st renewals remained unchanged from 2024. With that, I'll turn the call back over to Stephen.

Speaker 7

Thanks, Brad. In terms of the E&S market we operate in, let's start with casualty. Within the excess casualty segment, we continue to see overall discipline in limit deployment and rates. However, consistent with trends communicated by other carriers, we've seen a modest uptick in competition, which is in line with the expectations of an underwriting cycle. In terms of MGAs, while they are present, their influence in the areas we operate in is minimal at this time. We often see them participating in the upper end of towers where brokers struggle to fill capacity. Despite the uptick in competition, with excess casualty markets still making up for legacy losses, we don't expect to see limits going back up or an across-the-board price drop anytime soon.

New business opportunities for excess towers being reshuffled for price, limit reductions, or changing appetites from incumbents still far outweigh instances of unreasonably competitive renewals. In the E&S construction project sector, we're starting to see a deceleration of new construction projects. Tariffs are creating uncertainty around building material costs, stricter immigration policies are resulting in uncertainty around the availability and costs of labor, and the interest rate environment remains uncertain. In professional, with the exception of public D&O, we're continuing to see challenging market conditions, particularly in financial institutions and large cyber liability accounts. In public D&O, as we mentioned, we started seeing signs of market stabilization. Legacy markets started to push back on broker requests for rate decreases, and brokers began telling clients to anticipate flat or rising rates. With Markel exiting the segment, we're also seeing more turnover on programs, creating potential opportunities.

While there are limited shoots of small improvements, we remain disciplined in our underwriting. The financial institution space continues to be the most challenging, driven by an overabundance of capacity. In cyber liability, market conditions and the large account space remain competitive. We're seeing new limit opportunities on large accounts, but they're being taken up by new broker facilities. Ahead of these conditions, we've leveraged our technology to cost-effectively underwrite small and middle market accounts. Turning to healthcare liability, this remains a competitive landscape with pockets of positive developments. For example, in hospitals, we're seeing rate increases, but the industry is still working through coverage terms and conditions around emerging regulatory, crime, and abuse risks within the sector. Likewise, in senior care, we're seeing some strong rate on renewals due to industry claim activities, but competition still remains strong.

Overall, with our disciplined approach to underwriting and our expanding craft and flow platforms, Bowhead is a franchise being built for enduring success and cross-cycle profitability. With that, we'll turn the call over for questions.

Speaker 5

Thank you. If you'd like to ask a question, please click the raised hand button found on the black bar at the bottom of your screen. When it's your turn, you'll receive a message from the host allowing you to talk, then you'll hear your name called. Please accept, unmute your audio, and ask your question. As a reminder, we are allowing analysts one question and a relevant follow-up. We'll wait one moment to allow a queue to form. We'll take our first question from Mayor Shields with Keith Brewerton Woods. Please unmute your line and go ahead.

Great, thank you so much and good morning. Stephen, I was hoping you could comment on how fungible the significant capacity that you described as available for financial institutions is for other professional liability products. Does that tend to leak out or is it restricted to that particular segment?

Speaker 7

At this time, it seems to be that particular segment. In past years, financial institutions have been generally the hardest of the markets because of the risk of contagion. We're kind of surprised, but there are losses in the business and people haven't pulled back, and it just seems to be the worst of the various classes within the D&O world, at least at this time.

Okay, that's helpful. More broadly, I was hoping for an update on what you're seeing, or I guess either in Bowhead Specialty Holdings Inc.'s book or more broadly in terms of social inflation, specifically on professional liability insurance, where presumably you don't have the physical injuries that are such a major component of current social inflation.

Sure. We're seeing it much more on the casualty side. Claims that once settled for $2 million to $3 million could go at $10 million. We also think part of the problem is, and it's also, you know, we've talked about the opportunity that was created by people cutting back from $25 million to $5 million layers, which created opportunities for markets like us, you know, going back several years to be able to fill in those holes and get a foothold in the market. The downside of what's happening there sometimes is that when a carrier has $5 million and they get pressure from markets up above to settle claims, companies are being more willing to just throw their $5 million on the table and walk away from the claim, leaving it for the responsibility of the rest of the tower.

That, I think, has also led to the rise in some of these claim settlements.

Great, thank you so much.

Thank you.

Speaker 5

Our next question comes from Paul Newsome with Piper Sandler. Please unmute your line and go ahead.

Good morning. I was hoping you could give me a little bit more thoughts and guidance on how we should think about the investment income outlook and specifically, as your mix shifts, how we should think about the reserve mix. You've got a long tail line of business, you've got rapid growth. I'm not certain exactly how I should put the numbers together when I'm thinking about how the underlying cash flows will grow, whether or not they sort of accelerate here because of the long tail or if it's consistent with overall investment size of the business growth. Any thoughts you have there would be really helpful.

Speaker 6

Sure. Hey, Paul, this is Brad. I can talk on that one. I think it's reasonable, like you said, long tail lines, investment income should continue to grow due to increased balances being invested. If I look back, there is a little seasonality in Q1. I think if you did the math on our Q, there'd be about $60 million of cash that went into the investment portfolio as free cash. That's probably the low end because we have our bonus payments that are paid in cash in Q1. You'll see in Q2, I think that number's about $80 million. That's maybe, you know, sort of the higher end or as we continue to grow, we will end up paying more claims, which would probably be the one variable in the future that would increase.

Again, as premiums increase, long tail lines, I think, you know, if you think about adding another, you know, somewhere between $60 and $90 million to the portfolio each quarter, 5% or so new money rate, I think that's kind of how we're looking at it.

Do you have any thoughts about whether or not you're really big new material increase in the portfolio, or should it be rate, or is it all just about the size of the portfolio as well?

I can't control the rates. I can control the size and how we grow it. That's kind of what we focus on. I think it'll mostly come from that. Who knows where rates will go? Your guess is probably better than mine, honestly.

Very disappointed you can't control the rates. I'm just kidding.

Yeah.

I appreciate the help.

Speaker 5

Our next question comes from Matt Colletti with Citizens Capital. Please unmute your line and go ahead.

Hey, good morning. I want to ask a question on Baleen. We can obviously see the numbers coming through, but I was hoping maybe, Stephen, you could give us a little bit of a qualitative rather than quantitative update on just how that's going and your outlook.

Speaker 7

Sure. Very positive on the outlook. The numbers are not what we would have expected at this point in time, but the most important thing is that technology's been developed. It works. We're able to ingest the submissions, come up with quotes, bind, issue policies with very little human intervention. As far as I'm concerned, we're in a great position to be scaling the business. We believe that our quote ratio and our hit ratio on those quotes is appropriate for what it is that we're seeing. The thing that we're in the midst of doing, which will cause the business to scale more, is getting more submissions, getting people on $5,000 or $6,000 premium accounts to send them to an alternative market. We see that coming along. I think you and everybody will be pleased with what they see going forward on this business.

We're very pleased where we are today, and we think it's on a good path.

Great. Thank you. Appreciate it.

Sure.

Speaker 5

Our next question comes from Sid Shaw with Morgan Stanley. Please unmute your line and go ahead.

Hey, this is Sid on for Bob. Good morning. First question on the expense ratio. As we kind of think about you guys continuing to scale longer term and continuing to invest in technology for Baleen, what should we think about like a good kind of run rate going forward over the next year or so?

Speaker 6

Hey, Sid, this is Brad. I could take that one. I think you've seen it trend down, and I would say it's trending down. We're really happy with where it is now. We're right on the cusp of breaking 30%, and I think that would be fantastic if we could get into a glide path below 30%. We do acknowledge, I think, you know, we've got headwinds with our fee that we pay to American Family Insurance going up in the future. The acquisition ratio component of that is probably the one that, you know, where you'll see that come through. Our brokerage commissions as a percentage of our net earned premiums have actually stayed relatively flat, but we do have some headwinds on that acquisition ratio with the American Family Insurance fee. Seeding commissions, as everybody knows, haven't been great. There are some headwinds there as well.

I think we're happy with, if you look at the glide path where it's heading, and we'll continue to keep pressing as much as we can to get it below 30%.

Speaker 7

Yeah, I'm confident we're going to get below 30% in the next quarter. We'll get a run rate to nail that.

Okay, awesome. That's super helpful. When I think about your three craft segments, where do you guys think of as the strongest growth opportunities over the next year or so, just given all the kind of market environment you're seeing?

In terms of absolute dollars, I think you'd have to say it's the casualty business. In terms of percentage, it would be Baleen because it's starting from a small level, and we think that's going to grow nicely. You know, casualty, as you've seen over the last several quarters, has continued to grow. We believe it's the largest market, and it's an area that we've been adding talent to grow, and we think it's going to continue to grow very nicely.

Okay, awesome. Really appreciate the color.

Speaker 5

Our last question comes from Pablo Stinson with J.P. Morgan. Please go ahead.

Hi, thank you. First question for Brad. Just given that we're now in the second half of the year, can you please remind us of the timing of Bowhead's annual assumption review, and if you could comment on how experiences far in 2025 are squaring against the assumptions you put in last year?

Speaker 6

Yeah, thanks, Pablo. I'll maybe revisit what happened last year and how we look at it this year as well. We do an annual review of our reserves with our external actuary in Q4. Each quarter, we look internally and always reserve the right to make whatever changes we deem necessary. For the past year and a half, Q4 has been the year when we actually change loss picks. Right now, we've got, I think, about 17 individual reserving segments that have individual loss picks for each year. That's why we say when the loss ratio changes, it's a mixed change as the premium related to those 17 reserving segments moves around. You will see the loss ratio move each quarter. In Q4, we'll get updated industry information from our third-party actuaries, which, as I mentioned, kind of drives most of our loss picks because of our limited history.

At that stage, we will determine how we absorb those into our loss ratio. Last year, I think you saw we did end up lowering the loss ratio because our rate was just so much higher than loss trends. TBD, what that looks like in Q4 this year, there are reserves. Even if the third-party actuary comes along with lower loss picks, we may still keep higher ones if we think that's prudent or not. That'll be a sort of a Q4 decision. Up until then, it's mostly mixed, or as I said, if we see anything that midway through the year we want to change, we could do that as well.

Thanks, Brad. A second question on the, it's a follow-up to the investment portfolio questions that we've had in the call. I think your new money yield is only 10 bps above the portfolio yield, at least based on what you disclosed, right? 4.8% versus 4.7%. The question is, do you see any opportunities to boost the new money yield here, or would it be more reasonable to expect the portfolio yield to converge to 4.8%, assuming no change in the overall interest rate environment.

Yeah, I mean, we're looking at it every month and looking for opportunities in different sectors that have the best spread. We're constantly looking for additional yield. I think what you're seeing in the compression of the new money versus the portfolio yield is just the success of doing that. In the past year or so, we've really repositioned the portfolio into, for us, a longer duration compared to where we'd been in the past and into those spread sectors that we're seeing the best yields. Time will tell where rates go, but we're really comfortable where it is now. I would love to see it get above 5%, but not something that we're going to get fancy with or exotic with to go after to chase yield. I wish I had a better answer for you, but that's kind of where we are in the investment portfolio.

That's helpful. Thank you.

Speaker 5

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

Speaker 7

Thank you. Bowhead delivered another quarter of impressive results. Thank you to our Bowhead team members for your continued dedication, and thank you to our shareholders for your continued support. Speak to you along the way. Thank you.

Speaker 5

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