Skyward Specialty Insurance Group, Inc. Q3 FY2023 Earnings Call

Thank you for joining us for Skyward Specialty Insurance's Third Quarter 2023 Earnings Conference Call. I will now turn the call over to our Head of Investor Relations, Natalie Schoolcraft. Please proceed.

Thank you, Latif. Good morning, everyone, and welcome to our third quarter 2023 earnings conference call. Today, I am joined by our Chief Executive Officer, Andrew Robinson; and Chief Financial Officer, Mark Haushill. We will begin the call today with our prepared remarks and then we will open the lines for questions. Our comments today may include forward-looking statements, which by their nature involve a number of risk factors and uncertainties that may affect future financial performance. Such risk factors may cause actual results to differ materially from those contained in our projections or forward-looking statements. These types of factors are discussed in our press release as well as in our 10-K that was previously filed with the Securities and Exchange Commission. Financial schedules containing reconciliations of certain non-GAAP measures, along with other supplemental financial information, are included as part of our press release and available on our website, skywardinsurance.com under the Investors section. Now I will turn the call over to Skyward's CEO, Andrew Robinson. Andrew?

Thank you, Natalie. Good morning, everyone, and thank you for joining us. We had another exceptional quarter, reporting $0.65 adjusted operating income per diluted share and adjusted return on equity of 18.9%. Gross written premiums grew 32% in the quarter as we continue to benefit from broadly favorable market conditions and our outstanding execution. 54% of our writings in the quarter were in excess in surplus and non-amended lines and 52% were short tail lines of business. Our company's best-ever combined ratio of 90.2% for the quarter included less than 1 point of cat losses, which continues to be at the low end of our peer group, even though over 25% of our business is property. Our pure rate continued to be strong and above our loss cost inflation estimates and new business pricing remains in line with our in-force book. Both are strong indications that the attractive underwriting margins we are generating will continue. Lastly, we continue to further strengthen an already strong balance sheet, maintaining a conservative reserve posture and deploying all investable assets into core fixed income while simultaneously rotating out of our higher-risk asset classes. Altogether, the execution of our ruler need strategy is excellent and our aim to deliver top quartile financial returns is visible in our growth, our underwriting profitability, our shareholder returns, and our balance sheet strength. With that, I'll turn the call over to Mark to discuss our financial results in greater detail. Mark?

Thank you, Andrew. For the quarter, we reported net income of $21.7 million or $0.50 per diluted share compared to a net loss of $2.4 million or $0.15 per diluted share for the same period a year ago. On an adjusted operating basis, we reported income of $25 million or $0.65 per diluted share compared to $10.7 million or $0.33 per diluted share for the same period a year ago. In the quarter, gross written premiums grew by approximately 32%. Every underwriting division experienced double-digit growth in the quarter, and Transactional E&S, Surety, Professional Lines, Captives, and Industry Solutions were each up over 20%. Net written premiums grew by approximately 64% to $281 million in the quarter compared to $171 million in the third quarter of 2022. Third quarter 2023 net premium retention was approximately 79% versus 63% in the third quarter 2022. During the quarter, we rescinded a quota share reinsurance contract and recognized $50.5 million of net written premiums and $13.1 million of net earned premiums that had previously been ceded under the contract through the first 6 months of the year. Overall, the contract had an immaterial net impact on net income. Adjusting for this transaction, net written and earned premiums were both strong, and for the full year, we anticipate that our net retention will be slightly higher compared to 2022. The third quarter combined ratio of 90.2% improved 9.6 points compared to the third quarter of 2022. The 1.3 point improvement in the current accident year non-cat loss ratio to 60.7% was principally driven by the changing mix of business. We had no prior accident year development in the quarter, and we continue to maintain a conservative position with respect to our loss reserves. During the quarter, catastrophe losses were minimal and accounted for less than 1 point on the combined ratio compared to the third quarter of 2022, which was impacted by 2.8 points of cat losses from Hurricane Ian. Recall that in 2022, the combined ratio included 5.9 points from the net impact of the loss portfolio transfer reserve strengthening. The expense ratio increased slightly compared to the third quarter of 2022. We continue to invest in the business and expect a higher run rate in line with our target of a sub-30 expense ratio. Higher acquisition costs were principally driven by the change in our business mix and the impact of canceling the quota share reinsurance contract. This was offset by the improvement in the operating expense ratio due to higher earned premium. Turning to our investment results, net investment income was $13.1 million in the quarter, an increase of $7.1 million compared to the same period of 2022. Consistent with our investment strategy to deploy all free cash flow to core fixed income, in the third quarter, we put $145 million to work at 5.6%. The net investment income from our core fixed income portfolio almost doubled to $8.5 million from $4.7 million in the prior year quarter, driven by improving portfolio yield and a significant increase in the invested asset base. Our embedded yield was 4.2% at September 30 versus 3.3% a year ago. Our core fixed income portfolio is now $875 million, up from $767 million at June 30 and a $300 million increase from a year ago. Net investment income in the third quarter 2023 and 2022 were impacted by negative equity mark-to-market adjustments in our opportunistic fixed income portfolio. Despite the volatility we have experienced over the last year, the inception-to-date return for this portfolio is slightly north of 7%. During the quarter, we provided a redemption notice on $42 million of the opportunistic fixed income portfolio. Given the actions that we have already taken and inclusive of that notice of the $183 million in the opportunistic fixed income portfolio at September 30, 68% will be in redemption effective December 31. We anticipate reinvesting the proceeds from this part of the portfolio into our core fixed income portfolio. At September 30, we had approximately $195 million in short-term and money market investments resulting from strong operating cash flow of over $200 million. During the quarter, our yield on short-term investments continued to be above 5%, and we will continue to deploy this liquidity into our core fixed income portfolio. With that, I'll turn the call over to Andrew for his concluding remarks.

Thank you, Mark. It's hard to believe that we're already in our fourth quarter reporting as a public company. We had another outstanding quarter. The quality and diversity of our growth continue to impress. Our focus remains on building a well-diversified portfolio of solid positions to deliver top-tier underwriting returns throughout all market cycles, and our metrics reflect that. Operationally, we performed well again this quarter. Overall pricing was in the mid-teens, primarily driven by significantly higher rates in property, consistent with the previous quarter across all lines. We continue to achieve pricing above the loss cost trend, and our new business pricing matches our existing book. Retention remains strong, increasing into the low to mid-80s. We also continue to see robust submission activity, which is up over 20% from last year. Each division is meeting or exceeding our minimum target returns on capital, allowing us to take advantage of growth opportunities in both top line and margins while shaping our portfolio toward areas that yield the best risk-adjusted returns on capital. Therefore, we are making ongoing investments in new areas, products, teams, and technology. Our diversification and capital allocation strategy is effective. For instance, the investments in our Transactional E&S, Surety, and Professional divisions are yielding positive results. Over the past nine months, these divisions now represent 25% of our portfolio, up from 19% last year. We have completed four quarters of reporting as a public company. Leading up to our IPO, we established key metrics for Skyward, such as low to mid-teens ROE, low 90s combined ratio, and double-digit growth. We also aimed to derisk our investment portfolio and reduce the ownership stake of our largest shareholder. In the four quarters since our IPO, we have increased gross written premiums by 34%, with each quarter showing growth over the previous one. Every quarter has produced a combined ratio below 92.5% and mid- to upper-teens ROEs. Our core fixed income portfolio now makes up 77% of our total portfolio, up from 54% a year ago, while our opportunistic fixed income portfolio decreased from 19% to 13% during the same period. We will continue to reduce risk in our portfolio, as Mark mentioned earlier. Our loss reserve position is the strongest in the company's history. Westin’s ownership has decreased from 44% to 28%, enhancing liquidity in our stock. We remain committed to exceeding the key metrics and objectives that we set for our investors a year ago. Lastly, I want to mention our team. We were recently recognized as one of the best places to work by Business Insurance magazine, which speaks to our employee engagement. It’s an honor to be acknowledged for fostering a winning and compassionate culture where top talent wants to work and flourish. Investors often ask me what differentiates us, and I truly believe it's our people and culture that make us unique. My 500 colleagues embody the Skyward values every day, not just for our company but for their families and communities. I feel fortunate to lead such an incredible organization, and our exceptional performance over the past four quarters as a public company reflects the hard work of this outstanding team. They are remarkable. Now, I'll turn the call back to the operator to open it up for Q&A. Operator?

Our first question comes from Paul Newsome of Piper Sandler. We'll go to our next question. The next question is from Mark Hughes of Truist Securities.

Congratulations on the quarter. Andrew, I'm not sure if you have given a breakout of growth by the 8 divisions, but you certainly say they all were up double-digits. Could you talk about where you saw the fastest growth? And if there's anything in there that was unusual, any big pieces of business that might or might not recur?

Thank you for the question. To address the latter part of your inquiry, there wasn't anything particularly noteworthy that took place this quarter that stands out as unique or exceptional. As Mark pointed out, all divisions experienced double-digit growth, with several exceeding 20%. Some areas, like Transactional E&S and Surety, have shown consistent strong growth over time, while others, such as Industry Solutions, saw significant performance this quarter thanks to our construction underwriting unit. However, I wouldn't point to anything specific that seems remarkable. Each division presents solid opportunities, although there are a few underwriting units within those divisions that are not experiencing growth, primarily due to less favorable market conditions. The diversity of our portfolio allows us to focus on strengthening certain areas, but in general, I wouldn't highlight anything unusual or extraordinary for this quarter.

Appreciate that. How about commercial auto? How do you see that now?

Commercial auto continues to represent a smaller segment of our portfolio this quarter, accounting for approximately 17% or 18% of our writings, up from 16% last quarter. We maintain a cautious stance on commercial auto. Our concern is not about our capability to select and price risks effectively or to manage claims exposure better than our competitors. Instead, this area is where we see the most significant impact of social inflation on bodily injury claims. Despite consistently implementing rate increases in the double-digit range, we believe that keeping pace with loss cost inflation suggests it might be prudent to approach this segment with caution, even if we are confident in generating attractive returns on capital.

Our next question comes from the line of C. Gregory Peters of Raymond James.

I'd like to take a moment to focus on the Global Property book. We aren't experiencing the same level of catastrophe volatility in our book as others are facing. Could you provide some insight on how that book has developed, given the growth in this area? Additionally, when considering how to model this moving forward, what would be the appropriate catastrophe load over the year that might indicate potential exposure, particularly since it seems we've been overly cautious regarding the third quarter?

Thank you, Greg, for the great question. You're right that Global Property is up this quarter, around 20% for the year, and up 39% overall. We've been recognizing the market opportunities in property. We've mentioned in previous calls our general approach; we are not intentionally taking on catastrophic risk, which includes Tier 1 cat and other severe weather events. However, these risks are still part of our portfolio. We focus on managing risk across our book, and particularly in Global Property, we pay close attention to our risk distribution to avoid significant aggregation. The most notable risk we face might be earthquake exposure, rather than Tier 1 North Atlantic hurricane risk. Additionally, our underwriting leader has excelled in aligning our coverages, attachment points, and deductibles with the underlying exposure, which is evident in our results. For instance, we experienced a significant loss last quarter due to a tornado hitting a large property. Otherwise, we’ve managed to avoid substantial risks thanks to our underwriting practices and aggregation management. Looking forward, we will reassess our full-year portfolio. Our average annual losses typically run about 2% of premiums. Historically, adjusting for growth in the book, the 10-year average is also around 2% of premiums. Therefore, before providing guidance for next year, this has been a consistent reference point and aligns with what we projected for 2023, and I don't see significant changes despite our growth in Global Property.

Excellent. Another question just in another business area. I think earlier in the third quarter, you announced sort of a rebranding of your Healthcare Solutions business. And I guess I have 2 questions on that. First of all, inside sort of the Accident & Health business, it feels like there's been increased market attention in medical stop-loss, seeing other announcements around the industry. So I guess I was wondering if you could provide an update on how your medical stop-loss business is developing in the competitive forces? And then secondly, in that Healthcare Solutions announcement, it kind of sounded like you were going to start getting into actually medical malpractice too. So maybe you could comment on where you see the strategic direction of the Healthcare Solutions business going?

Yes, definitely. For clarity, our Healthcare Solutions refers to the professional liability aspect of our operations, which falls under our Professional division. Last quarter, we formalized our focus on a specific sub-segment of practitioners. Let me be clear that we operate as a true excess and surplus lines market, and we are not competing with traditional insurers. We are targeting specific, non-standard cases rather than typical medical professionals. Additionally, we are assuming a lot of professional risk at facilities that involve ancillary exposure, which aligns with our strategy for achieving higher earnings in this sector. Often, these markets have short policy limits, which we prefer, and the nature of the statute of limitations allows us to identify losses quickly. We are confident in our position as a true E&S writer, particularly in our Professional Lines. Regarding medical stop-loss, we recognize that it is a growing and attractive market. Our primary focus is on smaller employers, who are usually more attentive to managing medical costs. We often engage with these employers as they transition from guaranteed cost models to self-insurance, an area where we excel in capturing opportunities and underwriting risks. However, we do not cater to large groups, and our expertise is tailored to the smaller employer market. Our distributors acknowledge that we have taken distinctive steps to support this market, and we believe that our capabilities in loss cost management enable us to effectively address issues like medical cost inflation, making the results from this business especially favorable for us.

Thanks for clarifying the geography of those businesses for me. My final question is about the quota share contract that you canceled. Can you explain the strategy behind that decision and your thoughts on it? That's my last question.

In the fourth quarter earnings call back in March, I mentioned that we took on a quota share contract for auto liability. I also pointed out that our net retentions for the following quarters would be slightly lower. The reasoning is straightforward; we've been discussing bodily injury inflation since we became a public company. We've adopted a multifaceted strategy for our auto writings with bodily injury exposure, focusing on our underwriting platforms, which were a significant aspect of our IPO presentation. Additionally, we've implemented a quick response approach to claims, allowing us to manage them early on. I've also highlighted our portfolio remixing, meaning we've reduced the percentage of auto in our portfolio. Lastly, we're continuously assessing any opportunities for strategic reinsurance purchases, which we did earlier this year. This was the contract Mark mentioned that we reversed in this quarter. Essentially, if a ceding commission is available that we consider a fair way to mitigate volatility without substantially impacting our underwriting income, we'll proceed with that, and that's what happened in this case, but we reversed it out in this quarter.

Our next question comes from the line of Meyer Shields of KBW.

So a couple of sort of basic questions. First, in terms of capital adequacy, given both the phenomenal gross written premium growth and the contract decision, how should we think about that just in terms of the ability to capture all the growth that you're seeing?

It's Mark. Look, the way we look at capital, we've talked about this before with the revolver and the capacity we have. Under the revolver, we've got flexibility there in terms of alternative versus equity capital. And the way we look at the equity capital is we'll do what's right by shareholders, granted growing at the rate that we are, that would imply that we would need some capital. But back when we did the IPO, we had planned on growing. So I would say to you, right now we're really comfortable where we are with our capital position frankly due to the flexibility that we've got.

Yes, Meyer. I would like to highlight a couple of things for you. As many are probably aware, we received a positive outlook from AM Best just a couple of months ago. This indicates that they believe our capital is well positioned to support our growth. As Mark mentioned, if we need capital, we will utilize all available options. Our financial leverage is low, but if we identify an opportunity to enter the market and determine that it would be appropriate to raise equity capital under certain criteria we establish, we would consider that. However, at this moment, I believe we are in a solid position with our capital.

A number of, I guess, specialty insurers have talked about accelerating casualty rate increases broadly and that's sort of on a sequential basis. I was wondering if you could talk about what you're seeing in your casualty lines?

Meyer, I appreciate your questions; they're both insightful. The industry is quite interesting, often resembling an echo chamber. Recently, I've shared articles from the IPCA with our senior leadership team to highlight current discussions. It tends to create a feedback loop within our sector. To address your question, we have noticed stable rates in our book for quite some time. Excluding property, which has contributed to our strong overall results, everything else has been progressing steadily. This consistent approach is above our expectations for loss costs, which is encouraging. There are two key factors at play here. First, there’s a realization that older, softer market years have not performed as well as anticipated, often resetting expectations. Second, we believe that social inflation is impacting our industry, particularly in bodily injury claims. We're not heavily affected by large verdicts, but we see the implications when injured individuals are quickly pursued by plaintiff attorneys. As Evan Greenberg aptly puts it, you never want to fall behind on these matters; once that happens, catching up becomes challenging. We feel we have effectively managed this situation, which gives me confidence in our book. However, the industry needs to remain vigilant. Unlike the MedMal tort reform of the early 2000s, the current situation is complex and widespread, partially driven by litigation financing. I don't foresee immediate structural changes; rather, this will evolve state by state over time. Therefore, it's wise to maintain rates above loss trends, and companies that fall behind will face significant challenges in recovering. I believe we are in a strong position and have safeguarded ourselves, particularly through the loss portfolio transfer transaction we executed around my arrival in policy year '17.

And I promise this one is basic if I may have missed it. I was just looking for the new money yield currently?

We invested at 5.6%. Is that what you're asking about the 5.5% or 5.6% investment?

Yes.

Yes. And our embedded yield at the end of the quarter was about 4.2%, Meyer Shields. Yes, we feel good. We're making progress there and feel good about our investment portfolio as I think both Mark and I commented in our prepared remarks.

Our next question comes from Paul Newsome of Piper Sandler. We will move to the next question. Our next question comes from Tracy Benguigui of Barclays.

Just a quick clarification on the quota share reinsurance contract that you rescinded. I remember the fourth quarter earnings call, you talked about a whole account quota share for commercial auto. I thought that incepted at 1.1. We're not 12 months in. Was it another contract you were talking about? Or is it that one?

That's the one. What we rescinded was what I referenced in the March earnings call.

Okay. But we're not 12 months in. So was it a shorter tenure, that policy?

No, I want to make sure I understand your question. During this quarter, we terminated the contract and effectively reversed the first two quarters. As a result, the premium that was ceded came back to us, and we retained that as net.

I also have a question about the new money yields. When you're redeploying 68% of the $183 million from the opportunistic fixed income redemptions at year-end, how would that, I think you mentioned around 5% or possibly 5.2%, compare to the yields of those routine assets?

The yield on the opportunistic fixed income since inception has been slightly above 7%. Recently, it has fluctuated a bit. Currently, we are focused on achieving a yield of 5.5%, and that is where we plan to allocate our funds. While the opportunistic fixed income has performed adequately, we prefer to invest in core fixed income, which we have been doing for the past 1.5 years.

Yes, Tracy, to revisit our discussion on opportunistic fixed income, we originally targeted returns in the 8% range. However, we entered that position during a different yield environment. To be straightforward regarding the risk-return trade-off, we prefer core fixed income. We also have the chance to explore core plus options, which could provide high-quality investment assets with slightly higher yields. I believe we can implement strategies that align with our goal of reducing portfolio risk while also minimizing the volatility in our net interest income that we have experienced over the past few quarters.

And when do you think the remaining 32% will be redeemed?

The remaining 32%, we actually like what's left. And so it's a particular portfolio that we like. And so our intent will be to hold on to that. That has in our view, lower volatility, a bit more yield to it and we like it as part of our overall mix.

Yes, Tracy, hey, it's Mark. It's the commercial mortgage loan piece of the opportunistic that Andrew is talking about. And we will continue with that.

And as a reminder, in that portfolio is not what we would characterize as the economically disposed parts of real estate. It tends to be more industrial in nature and areas that we tend to like.

Will you grow it or just maintain...

Just maintain it. So it will shrink as a portion of our overall portfolio because we're committed certainly in this environment to put our free cash flow towards our core and sort of core-plus kinds of strategies.

Our next question comes from the line of Matt Carletti of JMP Securities.

Andrew, you mentioned in your opening remarks that you believe your reserves are the strongest in the company's history. Could you elaborate on that? Are your actual results aligning with expectations, or do you see your position improving compared to the midpoint as you progress? Any insights you could share would be appreciated.

Yes. So well, I'd say a number of things. So first, I mean, just to talk about history, right? The further we get away from the history, so reference in this case, LPT, the '18, '19 year after the LPT policy years, we get a better and better view. So we have more confidence, right? So that's one feature. And so that informs our thinking. The second is I would just point you towards our pace, right, as a measure. We believe that we have maintained, let's call it, the same margin throughout. So every cycle that we've gone through, we've maintained the same margin. So when we look back at our reserve position going back, let's say, this time last year and the year before and the year before, our margin is the same. Yet, that we get further and further away from some of those legacy years on one hand. The second is that that margin position remains the same, yet our reserve base is growing, right? So there's just kind of a law of large numbers here playing out. And it's those combination of things. If you look at our distance from those years, you look at just the margin position that we've been very consistent and the reserve base gets larger and larger. And then you look at our paid patterns, I think that that sort of 3 elements that along with all the things that actuarial does around emergence that really give us confidence.

You mentioned making ongoing investments in the business and adding teams. I noticed a larger ad in the Surety space, which you described as a strategic move. Could you elaborate on what you aim to achieve there?

Thank you for that. Surety continues to perform well for us. We have an excellent team of leaders in the Surety division, including our head of Commercial and our head of contracts. Recently, we brought in Scott Bailey to manage our field organization. In the Surety space, we have become the preferred destination for top talent. We have been actively recruiting to expand in various regions, with a recent hire in Texas being a strong example of adding senior personnel to develop that market. Additionally, we have received interest from qualified individuals in the field. It’s worth noting that professionals in Surety tend to be cautious in their career moves. We made a significant announcement regarding the addition of seven people to our team, but this is just one aspect of our broader talent acquisition strategy. Over the past few quarters, we have been successful across many different areas, but Surety distinctly stands out in our consistent growth. This focus is deliberate; we value this sector and believe we can continue to expand it. Our strategy allows for diversification and effective capital leverage, which benefits our shareholders. Furthermore, if managed properly, the returns from this business can be exceptional.

Our next question comes from the line of Mike Zaremski of BMO.

First question regarding the other operating general expense line. Is this related to the acquisition cost ratio? It appears that other operating expenses are decreasing year-over-year, although this trend is being partially countered by increased acquisition costs due to shifts in the business mix. Should we expect this dynamic to continue at these levels, or is there anything specific you would like to mention?

So Mike, let me see if I can unpack it for you. The acquisition expense ratio, as we've talked about for a while now, has ticked up slightly as we have moved the business mix. So that upward trend is not unexpected. The reversal of the quota share did impact the acquisition expense ratio a little bit in the quarter. With respect to other operating expenses, what I'd tell you is the leverage we're getting from the earned premium is reducing the operating expense. Does that answer your question?

Yes. And so the quota share, that had a positive impact on it or negative this quarter?

It depends on which part you're looking at, but it would increase the acquisition expense ratio while lowering the operating expense ratio due to the earned premium benefit.

I would like to follow up on the earlier commentary regarding catastrophe losses. Your results were outstanding, and I’m not trying to nitpick. However, I’m interested in understanding more about your low catastrophe losses. When we review industry-wide data for 3Q, it appears that catastrophe losses were above the historical average. Notably, many companies reported much higher-than-expected catastrophe losses, while your results were on the benign side. Was there anything unusual about the catastrophes this quarter in the U.S. that made them more geographically concentrated? Or do you consider this a typical 3Q for your company, assuming there are no earthquakes or hurricanes?

Yes, that's a very good question, Mike. We've been monitoring our peers as well as companies outside our direct competition to understand how they are performing. From my perspective, there has been a significant concentration of catastrophe losses among companies, particularly in the Midwest and Upper Midwest, which experienced a considerable number of severe convective storms last quarter. Even when compared to our peers, including both specialty insurers and the primary insurance divisions of larger companies, our loss numbers were notably low. Most other companies are feeling the impact from a challenging quarter with severe storms, but I believe we excel in managing our risks and retention strategies, which has been evident this quarter. We consistently showcased this data prior to our IPO, during the IPO, and even in last quarter's elevated catastrophe environment, where we still outperformed our competitors. Property will remain an important segment of our portfolio, approximately 26%, and we expect to manage the volatility that often affects others' quarterly results. While we will always experience some catastrophe losses, they will not be significant enough to disrupt our performance for the quarter.

Our next question comes from the line of C. Gregory Peters of Raymond James.

I guess in the context of your results this year, can you remind us of the renewal waterfall of your various reinsurance programs in place? And I know it's a little early, but it's November. Have you had any sneak peeks on how pricing for your reinsurance and ceding commissions for reinsurance next year might trend?

Thank you for your question, Greg. First, I want to highlight that most of our property renewals, including our catastrophe reinsurance, our per risk structures, and our Global Property quota share, are set for April 1. It’s still too soon to provide much insight, and that is likely the most significant aspect. The next key period is January 1, which includes our excess quota share and several related treaties, with the excess quota share being the most impactful. Currently, I don’t have any updates. Our team is attending the PCI conference today and is meeting with reinsurers. We began our reinsurance renewal discussions early, but I don’t have enough information to provide any meaningful comments at this moment. We will be glad to provide more details during our next earnings call.

And then one of the businesses that you highlight in your slide deck inside Global Properties also in agricultural business.

Yes.

And that seems to have come up in a couple of other earnings reports. And so I'm just curious if you could comment on your business and how it's performing year-to-date for...

Yes, I have been tracking this closely, especially regarding two major players in the large government program. To start, only about 15% of our portfolio has exposure to MPCI. Generally, this year is being viewed as slightly worse than average, a perspective we share. However, within that segment of our portfolio, we anticipate generating a better return than the industry average. Despite its relatively small size, the current value of that segment is around $30 million, with approximately 15% exposed to MPCI. Frankly, I believe that this 15%, while small, is positioned to yield a solid return for us due to some excess loss in that area, which will perform well alongside the quota shares, potentially leading to a better overall result.

Our next question comes from the line of Tracy Benguigui of Barclays.

I also have a question about the expense ratio. I understand there has been a change in the business mix this quarter, and some of that might be related to the quota share contract that you ended. Looking ahead, how should we view the balance between the acquisition ratio and the operating expense ratio? This quarter appears to be quite similar. Do you expect it to return to the levels we've seen in previous quarters?

I think this quarter is how you should look at it, Tracy, with the reversal, et cetera. Yes, I think Q3 is more the way you should look at it.

Okay. So like a higher policy acquisition ratio run rate?

Yes. Thank you. Yes.

And premium leverage opening OpEx?

Yes. I mean, the one comment I would have, Tracy, is it's kind of intuitive, right? So if you take a look at our highest growth businesses, things like Transactional E&S, Surety, and so forth, Surety is the highest commission line of business in the industry or Transactional E&S, as you certainly know, is wholesale distributors, so you have a higher commission rate. And what's happened is that many of the wholesale-driven parts of our business have been growing disproportionately and you kind of see that running through in our acquisition expense.

Appreciate the color on the business mix.

I would now like to turn the call back over to Natalie Schoolcraft for closing remarks. Madam?

Thanks, everyone, for your questions, for participating in our conference call and for your continued interest in and support of Skyward Specialty. I am available after the call to answer any additional questions you may have. We look forward to speaking with you again on our fourth quarter earnings call. Thank you and have a wonderful day.

This concludes today's conference call. Thank you for participating. You may now disconnect.