Skyward Specialty Insurance Group, Inc. Q1 FY2024 Earnings Call

Good day, and thank you for joining us. Welcome to the First Quarter 2024 Skyward Specialty Earnings Conference Call. I will now turn the call over to Natalie Schoolcraft, Head of Investor Relations. Please proceed.

Thank you, Liz. Good morning, everyone, and welcome to our first quarter 2024 earnings conference call. Today, I'm joined by our Chairman and Chief Executive Officer, Andrew Robinson, and Chief Financial Officer, Mark Haushill. We'll begin the call today with our prepared remarks and then we will open the line 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. With that, I will turn the call over to Andrew. Andrew?

Thank you, Natalie. Good morning, everyone, and thank you for joining us. We started 2024 strong, reporting Q1 adjusted operating income of $0.75 per diluted share. Gross written premiums grew 27%. Our continued strong growth is a direct reflection of our strategy to have a low diversified portfolio of underwriting divisions that allow us to allocate capital to those areas we believe offer the best opportunity for profitable growth and shareholder returns. I'll remind our analysts and investors that growth during 2023 was not the byproduct of already new property cat. We see limited property cat opportunities that fit with our Rule of Niche strategy in which we aim to build defensible positions that allow us to deliver top quartile underwriting profitability across all market cycles. Our combined ratio was 89.6%, and our annualized adjusted return on equity and tangible equity were 18.3% and 21.1%, respectively. Altogether, these metrics reflect the power of our Rule of Niche strategy and our outstanding execution across all the underwriting divisions and the functions that support our underwriters. Operationally, rate retention and submission flow in the quarter continued to be strong, and we continue to find opportunities to profitably grow our business. I'll talk more about these later in the call. 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 $36.8 million or $0.90 per diluted share compared to $15.6 million or $0.42 per diluted share for the same period a year ago. On an adjusted operating basis, we reported income of $0.75 per diluted share compared to $15.5 million or $0.42 per diluted share for the same period a year ago. In the quarter, gross written premiums grew by approximately 27%. All of our underwriting divisions contributed to the growth in our captives, transactional E&S, surety, professional lines, global property, and agriculture divisions were each up over 20%. Turning to our underwriting results, the first quarter combined ratio of 89.6% improved 0.6 points compared to the first quarter of 2023. The 0.5 point improvement in the current accident year non-cat loss ratio to 60.6% was principally driven by a changing mix of business. During the quarter, catastrophe losses were minimal and accounted for less than 0.5 point on the combined ratio compared to the first quarter of 2023, which was impacted by 1.8 points of catastrophe losses. Excluding the deferred benefit of the LPT, there was no net impact from prior year development. In Q1, as has been the case in the quarters leading up to being a public company and since going public, we increased our conservatism to an already strong loss reserve position. The expense ratio increased 1.3 points compared to the first quarter of 2023 and was in line with the full year 2023. We've talked in prior quarters regarding our business mix shift and investing in the business. So this is in line with our expectations and target of a sub-30 expense ratio. Turning to our investment results, net investment income was $18.3 million in the quarter, an increase of $13.7 million compared to the same period of 2023. During the quarter, you will note we changed how we disclose our investment portfolio and the net investment income results. We will speak to the portfolio in four categories: short-term investments in cash and cash equivalents, fixed income, equities, and alternative and strategic investments. This change was driven by a couple of factors, our desire to simplify how we talk about the portfolio in a more traditional presentation and in line with the industry and more reflective of our strategy and the underlying risk characteristics of the portfolio. Consistent with our investment strategy to deploy all free cash flow to fixed income in the first quarter, we put $98 million to work at 5.4%. The net investment income from our fixed income portfolio increased $5 million from $7.4 million in the prior quarter, driven by improving portfolio yield and the significant increase in the invested asset base. Our embedded yield was 4.7% at March 31 versus 4.0% a year ago and 4.6% at December 31. At March 31, we had approximately $298 million in short-term investments and our yield on short-term investments continued to be over 5%. Lastly, April 1 is when we renew our property reinsurance programs. All these renewals were orderly, and we are satisfied with the terms and structure of these programs. We increased our property cat treaty net retention from $12 million to $15 million and the cover increased from $28 million to $36 million. We were able to improve the terms of the treaty while retaining the same model return period as the expiring treaty. With that, I will turn the call back over to Andrew for concluding remarks.

Thank you, Mark. Operationally, we had another strong quarter. We continue to realize pure pricing increases in the high mid-single digits, which is above our estimated loss cost trends. Our new business pricing was up again over our in-force book, an indicator that new business profitability is attractive and should contribute to margin expansion. We also continue to see strong submission activity, which was up over 30% from the prior year quarter. Retention dipped into the 70s driven by business mix shift towards lower retention divisions such as transactional E&S as well as some continued trending of our commercial auto portfolio, which in Q1 was 14.7% of our writings compared to 18.3% in the prior year quarter. Let me turn to the competitive marketplace for a moment. From our vantage point, it is most certainly an increasingly nuanced market for capturing profitable growth. But we continue to identify and invest in market segments that are attractive and where execution of our strategy allows us to profitably grow and deliver attractive returns for our shareholders. In Q1, we launched a new media liability unit within special lines with a team of expert underwriting and claims professionals, each of whom has a distinctive standing and broker following in the marketplace. We remain confident in our ability to continue to attract the very best talent and arm those professionals with advanced technology and data analytics that has proven to be the winning formula for our success as our results in Q1 further reinforced. It's visible in our results, whether it be the talent added this past year in surety or transactional AMS, with the launch of global agriculture or Inland Marine, our investments are clearly paying off for our shareholders. Finally, we recently published our first-ever annual people report. Our people are the lifeblood of our success, and it is what makes Skyward truly unique. The report provides a wonderful view into our company, and we encourage our investors to visit our website to access this report or contact Natalie if you'd like to have a printed copy. I'd like to now turn the call back over to the operator to open it up for Q&A.

Our first question will come from the line of Mark Hughes with Truist Securities.

Andrew, you mentioned 30% commission growth is very strong.

Over 30%.

Even stronger. Maybe we could break that out and kind of the underlying submission growth, your expanded underwriting capacity presumably is contributing to that. Any way to kind of break that out maybe compare it to what you have been seeing in the earlier quarters?

Yes. If you're asking for sort of a same-store sales versus new capacity, we don't share that. But let me just say this. There's no question that, obviously, us bringing on talent that has the marketplace following inevitably leads to business following those. In some cases, the in-force books that those underwriters had in their prior roles. What I can tell you is that if you look across our businesses, by and large, same-store sales are up pretty materially. If you think about same-store sales, meaning our same underwriters, and then growth is also a contribution of the underwriters we've had. And I think there's an appropriate balance. But we're not going to go further than disclosing that, because what's important here is that we are investing in a sensible way for our business that's driving profitable growth, and we're seeing that data correspond.

Yes. To expand, when you say nuanced, I think you've touched on a lot of interesting points. What do you mean when you say nuanced though, if you could expand on that, that would be great.

We are all closely observing the discussions happening in the marketplace, especially during this earnings season. There are broad views circulating about the market dynamics, particularly between casualty and property sectors. However, I believe the situation is quite specific to individual circumstances. I can identify at least three to four distinct areas within property, including global property, inland marine, and certain segments of our transactional excess and surplus (E&S) business, which can range from highly technical to more general property coverage. Each of these areas is behaving very differently, which is what I mean by nuanced. On the liability side, there is conversation around whether the casualty market is becoming attractive due to rising prices, which are partly a result of recognizing loss cost inflation. In our E&S business, for example, a carrier in Lifeguard services recently exited the market. This has led to a significant influx of Lifeguard service opportunities. Previously, we dealt with a $7,500 minimum premium, but now it has risen to $30,000 with stricter exclusions. This exit has allowed us to pursue business more selectively, and we are witnessing similar opportunities regularly. However, these nuances are specific to particular underwriting categories, and this kind of environment favors strong underwriters, which I believe we have on our team. That’s what I mean when I refer to nuanced; it’s an advantageous market for the top underwriters.

I'll ask the blunt, simple question. They're talking about casualty accelerating as a general matter? Do you see that in 2024?

Yes. When we examine our casualty occurrences, excluding workers' compensation, there isn't one overarching trend. However, we definitely observe price movements. Over the past few quarters, we've taken steps to tighten terms in specific areas and reduce limits, and we've successfully managed that. We're ensuring retention is consistent, and we believe we've achieved a balance. Among our competitors, who I regard as highly capable, many seem to be operating similarly, which is encouraging. That said, hard market conditions in casualty are relative. One must have a strong technical foundation and pricing that exceeds loss cost trends. This isn't a uniform situation; there are numerous opportunities available, as I mentioned earlier, but the market lacks uniformity. That's what I mean by nuanced. Overall, it's a strong market for top-tier underwriters.

Our next question comes from the line of Paul Newsome with Piper Sandler.

Good morning. I would like to request more detail about investment income and understand the expected run rate. There are many changes occurring, particularly with the new capital being allocated and adjustments in the fixed income portfolio. Could you share your thoughts to help us gauge what the long-term trend or run rate might be once these adjustments are finalized?

Mark, let me see if I can translate that. You're looking for a run rate of investment income in the future, assuming that we've received the flows from opportunistic. I just want to make sure I understand what you're asking.

Yes, that's right. Assuming you've got the flows from the opportunistic investments and considering the current situation, it can be challenging to determine the right midpoint or run rate for investment income.

I think about it simply. If you look at the invested asset base for core fixed income, you can see our embedded yield. I'm not sure what interest rates will do, but we've been investing at over 5% for most of the year. All of our cash flow will continue to go to fixed income. That's where it's headed. Does that clarify your question?

A little bit, I can take it offline, too, as well. Maybe back to the sort of competitive environment question. I think the concerns have been primarily the E&S is where the softening is but specialty is not necessarily yet. Maybe you could talk a little bit further about sort of what is really kind of true E&S that might be of a concern, if at all? Or what could be is really not even in that box at all?

I don't know if I want to prop around the entire industry. We've said it before. I'll say it again. What we write in the surplus lines market, I would consider to be true surplus lines. So I've heard some of the questions about what's happening with the admitted care business team. We don't write the stuff that's E&S light. That just isn't us. We're writing stuff that's in the E&S market for a reason. Now certainly, if there's less flow coming into the E&S market, then our part of the market becomes more competitive, right, because that's where the surplus lines writers would look. I also get all the same data that you guys get about the early views on the major states and so forth. But here are the facts, Paul. We grew 43% in transactional in this quarter, and we grew 27% in professional lines. Those two areas are pure surplus lines areas. I would say that that's a pretty good indicator that regardless of what's happening in the market, I'll just reinforce it. Our strategy is a very specific strategy, and we seem to be executing well, and it seems to be paying off. Do I believe that 27% growth is just like last year's 28% growth, is that a number you can sort of take to the bank? No, absolutely not. It just speaks to the excellent execution of our organization and our ability to pick off opportunities like the example I gave earlier. But I would just tell you, I feel like we're in a market where we can continue to win, we can continue to grow the profitability and the shareholder returns, and we can continue to grow at a level that is meaningfully enough different than sort of the cross-section of the competitors that we're competing with in the market.

Our next question comes from the line of Greg Peters with Raymond James.

There have been many comments from you regarding market conditions. Your gross written premium is quite strong this quarter. I want to revisit your remarks about property and connect that with your discussion on reinsurance, renewal, and increased retention. As we approach 2024, how should we consider your growth in the property sector in relation to the frequency and severity of catastrophic losses? It seems like you haven't faced significant exposure so far, so I'm curious if the profile is changing now.

It's a great question. Thanks, Greg. Let me just start and say something about the tree because I think it's important. Last year, we had an attachment point of 12 when we moved that to $15 million. On a modeled basis, that's a 1- and 10-year attachment point. So we effectively kept our same attachment point. Our exhaustion point, while we added $8 million of cover is in excess of the same sort of point, it's in excess of a 1 in 250 event. That tells you that we've added some exposure from last year, which is no surprise because we grew property, right? Property has been 25-plus percent of our book pretty consistently. As our book grows, property is growing. So unsurprisingly, we're adding exposure. All we're doing is we're keeping our cat cover roughly in line on a return period basis. I don't think anything is going to change in terms of frequency or severity of exposure to storms. You already saw that in the first quarter there was a lot of convective activity again, a relatively light quarter for us. There's still a lot of conductive activity going on. We'll see how Q2 turns out. As we get into the hurricane season, look, a lot of that is just what paths things take and so forth. But I can confidently say right now in Q1 that if we were to have a material event or a set of material events to the industry, I think our results would be very favorable on a relative basis in general. Since we buy an attachment point that's relatively conservative, I think our net results would be very good as well. I feel good about all that. You had asked some questions about market. So let me, before I say anything more, did that address your question on frequency and severity and growth and exposure?

Yes, you did.

Do you want me to just comment on the property market?

Please do.

Okay. It's an interesting market, right? I don't think everything falls into the line of this narrative, well, property pricing is attractive across the board and casualty may be the new opportunity. Again, I think it's much more nuanced. I'll take our global property as an example. We lost a very large account in Q1. Actually, we chose not to write it. This is a large global company, and we had the largest line on the primary insurance above their retention. Think about the primary $100 million that sits above a retention that is measured in tens of millions of dollars. A great example, the broker did a great job, which split out the international exposure from the U.S. exposure. International exposure made up about 40% of the insured values. Yet that international exposure was primarily inside of their retentions. A bunch of competitors came in and provided pricing at a 40% lower rate because theoretically, exposure went down. That was just silly. Ridiculous approach. There’s an example of hungry companies trying to grow quickly. That's fine. We expect a little bit of that. We've won a few in global property over the quarter as well to offset that for sure. I look at places like marine. We steer clear of things like stock throughput stuff because it's just a commodity area, and there are way too many MGAs in there. In Marine, we're competing with very sensible competitors. There's maybe a little change in terms and conditions, which we're incredibly tight on. But by and large, the market feels pretty good. When I look at our property E&S transactional E&S property, submissions were booming still. We're seeing plenty of opportunity. On the hard technical stuff, if you're writing a risk related to something in the wood sector, which is a very low frequency but very high severity, we're not backing up a bit. Our line remains set. We haven't seen many companies pushing into that line. A lot of this stuff is sticking. In the general property part of our book, I'd say pricing is rich. If you get a little bit of competition there to be able to give up some price, you can do that and still feel great that you're able to drive an attractive return from that portfolio. Those four examples should give you a sense that not everything is behaving in a uniform way. Again, we set up our business to have a well-diversified portfolio so that we're not stuck in single market cycles and that we can press down where we see opportunities. Our results talk to the benefit of that strategy.

That's great color. Just to clean up my follow-up question on your answers there. You mentioned limits, what your company is writing out in the marketplace. Maybe you could just close the loop for us on limits and just sort of remind us what your net limits are, broadly speaking, and then maybe by a couple of more important segments.

Yes. In property, generally speaking, our max net limit is about $3.5 million. That applies across the entire piece.

And the other segments too?

Yes, that would apply everywhere. That would apply when we write property in Industry Solutions, in inland marine, certainly in E&S. In Global Property, I think I've explained in the past that we've had long-term quota share support that allows us to be one of the largest lines in the marketplace in writing the primary of those programs. The long-term support is where we're keeping a considerable portion of that aligned to sort of the $3.5 million net.

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

There's been a lot of focus, I'd say, industry-wide right on reserves in the past several quarters. You guys are in kind of a shrinking group of companies, a rare company that's showing a lot of stability there. I think in your opening comments, I picked up a comment about increasing the conservatism. Could you just kind of go behind the scenes a little bit and update us on what you're seeing there, what some of the indications are and how you might be reacting to those?

Well, I'll start and Mark can jump in. Just to be very specific in this quarter, to Mark's comment in the prepared remarks, our emergence in the quarter was favorable, yet we didn't recognize any of that. The simplest way to describe how we think about things is that, of course, we are looking at the level of reserve redundancy in our book. We're also looking at the maturity of that redundancy. You can have redundancy, but the question is, is that redundancy showing up in greener years or more mature years. We're constantly watching those two things. We've been asked probably since we started engaging with you and the other analysts, from pre-IPO to today, when will you release reserves. Our answers are the same, which is we're not going to tell you. Quite honestly, we don't know, right? We have a bias to build a conservative position and then to demonstrate to ourselves that that conservative position is consistent and predictable along the lines of what we're expecting. I think we've done a good job. We also think that we're able to deliver attractive results for our shareholders while not stretching ourselves on the liability side of the balance sheet in any way. I would just say I feel like it's a good news story in that our hope, as I've always said and our belief based on everything that we're seeing, is that our actual results are better than our reported results, and at some point, that should revert to the benefit of our investors.

That makes a lot of sense. Maybe a follow-up just a few years. I want to go back to the net investment income discussion of Paul's question. Maybe if I just take a different look at it. I look at this quarter kind of the new disclosures, right, and the alternatives didn't really have an impact. I think it was 100,000. So I look at that $18 million you reported, it looks pretty clear to me. It seems like a very sustainable number going forward and that, obviously, the changes from there would be more cash flow coming in at higher yields and that works over time. But at least as a leaping-off point, there's no reason to think that that's not a good leaping-off point.

Matt, thank you. I agree. I think that's a good way to look at it. I would highlight the fact that short-term rates could change quickly over a short term. So I look at that $18 million in the quarter as pretty consistent. But again, it depends on what happens with short-term rates. We've been focused on deploying the cash in the short term. We've got a good situation where we're generating more cash than we are putting to work. Our plan is to be fully deployed by the end of '24.

Matt, I would just add one thing. You know that our invested assets grew by $400 million year-over-year. To Mark's point, we've been blessed with short-term rates that are really great. If that changes, that's one variable here that's uncertain. The fact is, the invested assets are growing at a pretty attractive clip. Of course, we’re trying to respond to that, but you can only deploy so quickly within the bounds of how we set our near-term investment strategy.

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

Are you seeing any change in the inflation rate for claims on short tail lines like property or inland marine?

No.

Okay. The second question, just on comments you made earlier, Andrew, with regard to non-res and commercial auto. We're hearing a lot of talk of sustained or accelerating commercial auto rate increases. I was hoping you could talk to at least conceptually why nonrenewal made more sense than just backing up rate?

Okay. I know that at this exact same call last year, I kept making the point that with commercial auto, if we are seeing high single digits, 10-ish loss cost inflation. Now we see that unabated. I can give you a granular view in a moment. But that feels unsustainable when you keep repeating it. What will you get, 11% or 12% rate, but you're in a 10% loss cost inflation environment? That is not the kind of marketplace we want to grow into. Elements of social inflation are finding their way into different things. I'll give you a simple example. This week, we received a first-ever notice of loss with a styles demand, a high moment demand attached to the first notice of loss. It was a pretty heavily prepared document. That just feels like a different day. Whether there's validity to it or not, just the efforts to move onto a first notice of loss is heavy work. It is an indication of what's happening in this marketplace. On the personal injury part of the market, if we can lean up on the accelerator and tap on the brake, we will. Ultimately, it's up to the states to reform the legal environment to make it more reasonable. It is out of control, and everybody understands it viscerally. We've been studying it continually. We're easing up on exposure, and that premium doesn't reflect the lower exposure because the rate we're getting for each unit is higher than the average rate for the rest of our business. So that's the thinking behind it.

And one last quick one if I can. Updated expectations maybe for the net to gross written premium ratio for 2024. First quarter came in a little higher than I expected.

Meyer, it's Mark. It's in line with where we were in the first quarter, low 60s is what we're looking for. So I think it's where we thought it would be.

I'd remind you that there was a little bit of noise for you and others as well. We had a quota-share contract that ran through the first and second quarter that we unwound in the third quarter. There are some geography issues that play through. When we set guidance for the full year, we were quite explicit saying that our full year '23 gross to net is a reasonable planning assumption for your models.

Our next question comes from the line of Yaron Kinar with Jefferies.

I just want to start with maybe a quick one. The Baltimore bridge collapse, do you have any closer to that?

No.

None. Okay. Then maybe a broader conceptual question with regard to the mix shift. Obviously, it benefited the underlying loss ratio to an extent, but we also see that coming back a little bit through a higher expense ratio. Can you maybe talk through in a more holistic sense what the benefit of the mix shift is beyond the underlying combined ratio? Is it a better capital efficiency? Is it a better long-term risk profile? What do you see about the debt mix that is attractive to you?

Great question, by the way. The answer is it’s part of all the things you talked about. If you look at where the growth has been, we've driven growth from Surety and transactional E&S. You are correct, our higher expense ratio business is part of that; in the case of E&S, it's wholesale, so commissions are high. Surety is obviously the highest commission. Yes, we're comfortable with that trade-off. We believe this profile of risk exposure has less uncertainty than, for example, personal injury. That's included in our general liability within transactional E&S. I categorize that similarly. In the case of Surety, they're good applications of our capital, providing diversity. The reason we're achieving capital leverage is that we want a well-diversified portfolio. If we could press down faster in A&H, we would, but there are boundaries to our ability to grow profitably at the same speed we see in certain areas. That may change a year from now, but it's what we're seeing right now.

If I could also squeeze in one comment/question. And I forgot if I missed that; I did not see disclosures of premiums by division in the press release last night. If you chose to remove those, I'm just curious as to why, just considering that so much of the story is about exceptional premium growth. Understanding the drivers for that growth has been helpful for us in the investment.

It's Mark. Good question. We will be including this in the press release going forward. The Q will be out tomorrow, so it's there. It was just a matter of timing. It will be in the Q. We’ll have it in the press releases going forward, and you'll see it in the Q tomorrow.

Just for your benefit, not to throw a bunch of numbers at you, but industry solutions grew 16%; global property and agriculture, 35%; programs, 7%; A&H, 14%; captives, 49%; professional lines, 27%; surety, 37%; and transactional E&S, 43%. Apologies for the oversight. We will correct that. Thank you for that. You're right about that observation.

Our next question comes from the line of Bill Carcache with Wolfe Research.

As investors analyze the interplay between your growth and returns, how much of that is an outcome versus something that you're actively managing to? I appreciate your comments around the nuanced market with attractive opportunities for the best underwriters. It seems like you're focused on identifying those areas where you're competing beyond just price. But it would help to address how important of a lever pricing is as you manage your targets?

Thank you, by the way. It's a great question. Implicit in your question is just what happens if you got double the price but less growth, how does that look? Our general philosophy is as follows: we target a 15-plus percent return on equity. We've been consistently showing up at or above that number. Our sense is that as long as we can add units, and we believe those units fit with our strategy, our ability to capture value in some of our businesses keeps that value for a long time. Surety would be a great example of that. That’s a good proposition for our shareholders. Areas like transactional E&S are more transactional, which is a lower retention business. We might write an account for a couple of years and then you might not write it again. I just will tell you that the watermark for us is trying to ensure that we’re writing above a 15% return. If we can add more units, we generally will. The good news is if we do that well, we might get some expense leverage that gives you a bit more juice in your ROEs.

And then following up on your success onboarding underwriting talent and enjoying incremental business that's come with that. How concerned are you about competitors potentially poaching some of that talent in the future? Have you seen evidence of that? Maybe speak to your success rate in retaining the talent that you have onboard.

It's a really excellent question. Our voluntary attrition last year was 7%. We share data with a consortium of other insurers on retention and various people HR matters. By our measure, that's kind of close to the best, if not the best out there. In specialty, the war for talent is much greater than, for example, if you're in personal lines or small commercial. There's a dearth of talent, and it’s specialty. People are good in their technical focus areas; they’re harder to come by. I feel very good about our specialty. Yes, I think the war for talent continues. Yes, we are concerned. It is one of the reasons we're focused on the people dimensions of our business. It's born from a genuine interest that this is the kind of company we want, a very people-centric company. There's a practical competitive consideration; if we create a culture that people feel genuinely part of, that's our best defense. The MGAs are crazy; there are just spot market pricing for talent not rational when you look at the economics of our industry. That’s the nature of the beast. Due to the dearth of talent, that’s going to happen. We rely on the ecosystem we've built. I really encourage you to look at our annual people report. If you're not part of our organization, that's the best way to have a window into our company.

And then if I could squeeze in one last one. How focused are you on downside risk estimates from a lower rate environment? Is there a point, maybe if you could share any thoughts with us, where you look to protect yourself from lower rates and the actions that you take to potentially lock in relatively more attractive higher rates?

So Bill, just for clarification, you're talking about on the asset side, investments correct?

Yes, that's correct.

Bill, we kept our duration right at about 4, no real interest in extending it. We'll see how rates move during the year. Where we are in our duration, I like it, and I think the returns are fine. We're not going to react immediately. We will just see how the interest rates play out.

Bill, I’ll add one thing. We've been blessed with the interest rate environment we're in. As Mark has commented, every time we put our free cash flow to work in core fixed income, it's going to very high-quality assets. If rates start to back up, the first place we’d look is can we start to blend in slightly lower credit, moving down the investment-grade credit and having a bit more of the lower end of that. If we ever find ourselves in a zero percent interest rate environment where new money yields were 2%, we would have to reconsider how to talk about our returns on capital since it's a different cost of capital environment. We also re-evaluate investment strategy in a different context. I feel we have a long way to go before that, and we keep growing our embedded yield. Even if interest rates were at 4% in the medium term, that's still an attractive place for us to have an allocation to high-quality core fixed income.

Our next question comes from the line of Michael Zaremski with BMO.

I think I can ask one more, a lot of good questions. Given the majority of our questions are on casualty inflation, you've given us good color. Andrew, you talked about kind of tightening some terms. Are these comments about excellent margin experience and reserve experience only on the commercial auto side? Or is it just all casualty? Broadly speaking, are there states you feel are more social inflationary and where you've looked to kind of pull back or, any other gauges you monitor to try to keep social inflation in check?

Great question. My remarks regarding terms and limits mainly centered on general liability and excess, which encompasses auto exposure as well as general liability. We've taken actions consistent with best underwriting practices; we monitor for early indicators and respond proactively. If we notice an emerging issue, we aim to act before it fully develops. This was the context of my comments. Specifically for auto, we have implemented measures such as, in one segment of our business, if telematics are not used or activated during an accident, the coverage reverts to the minimum statutory limit. We also focus on reporting times and deductibles for the insured. Our auto policies are underwritten on an Excess and Surplus lines basis. We have maximized our efforts concerning auto beyond risk selection and pricing. In terms of venue, any venue could potentially be influenced by political or judicial factors; however, very few of our claims are adjudicated by a jury. The conservatism of a jurisdiction can significantly impact outcomes, and only a small number of claims are tried before a jury. I recently observed a case where a jury awarded $30 million, but the judge subsequently reduced it to the $1 million coverage limit in Pennsylvania. This highlights how the conservatism of the jurisdiction can vary from county to county, and it is an aspect we diligently monitor.

Thank you. That concludes today's question-and-answer session. I'd like to turn the call back to Natalie Schoolcraft for closing remarks.

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 that you may have. We look forward to speaking with you again on our second quarter earnings call. Thanks and have a wonderful day.

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