Skyward Specialty Insurance Group, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; filed August 10, 2023. Skyward is a specialty property and casualty insurer operating across eight underwriting divisions, primarily in the United States. Figures below are in millions of dollars unless stated otherwise.
Financial results and key metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Gross written premiums | $422.0 | $326.2 | $782.5 | $608.9 |
| Net written premiums | $213.7 | $188.7 | $415.9 | $324.1 |
| Net earned premiums | $194.3 | $146.1 | $377.2 | $287.8 |
| Underwriting income (non-GAAP) | $15.5 | $12.0 | $33.3 | $23.4 |
| Net investment income | $8.6 | $10.5 | $13.2 | $25.7 |
| Net investment gains (losses) | $5.4 | ($14.4) | $6.3 | ($18.8) |
| Income before tax | $25.0 | $6.4 | $44.7 | $26.9 |
| Net income | $19.5 | $5.1 | $35.0 | $21.4 |
| Combined ratio | 92.0% | 91.8% | 91.1% | 91.9% |
| Adjusted combined ratio (non-GAAP) | 92.2% | 91.8% | 91.3% | 91.9% |
| Diluted EPS | $0.51 | $0.16 | $0.93 | $0.66 |
Q2 loss and LAE ratio was 64.0% (62.8% prior year); the expense ratio improved to 28.0% from 29.0%. For the first half, those ratios were 63.4% (63.2%) and 27.7% (28.7%), respectively. Q2 adjusted operating income was $16.0 million versus $16.4 million; first-half adjusted operating income was $31.5 million versus $36.2 million. These are non-GAAP measures.
Cash flow and balance sheet: Six-month operating cash flow was $108.5 million, investing cash flow was a use of $198.1 million, and financing cash flow was $66.5 million. Cash and restricted cash totaled $101.9 million at June 30, down from $125.0 million at year-end. Total investments were $1.291 billion; total assets were $2.807 billion and stockholders’ equity was $522.7 million. Loss and LAE reserves were $1.224 billion, with $582.9 million in net reinsurance recoverables. Debt comprised $50.0 million drawn on a new revolving facility and $78.7 million of subordinated debt; debt to total capitalization was 19.8%, and the company reported compliance with facility covenants.
Material changes versus prior comparable periods
- Gross written premiums rose 29.4% in Q2 and 28.5% in the first half; net earned premiums increased 33.0% and 31.1%, respectively. Management attributed growth primarily to new business and rate increases, with particularly strong written premium growth in Professional Lines, Transactional E&S, and Global Property & Agriculture.
- Q2 net income increased substantially, while investment income declined. The comparison benefited from a swing in investment gains and losses: Q2 2023 had $5.4 million of gains versus $14.4 million of losses in Q2 2022. First-half net investment income fell $12.5 million, primarily reflecting losses in opportunistic fixed income investments, partly offset by higher core fixed income and short-term investment income.
- Q2 catastrophe losses added 3.5 percentage points to the loss ratio, versus none in Q2 2022. Non-catastrophe loss performance improved 2.1 points, which management attributed primarily to business mix and runoff of exited business. First-half catastrophe losses added 2.7 points to the loss ratio.
- Skyward completed its IPO in January 2023. The company received approximately $62 million in net proceeds; selling stockholders also sold shares. Preferred shares converted to common stock, and the reported common share count increased. The company also replaced its prior term loan with a $150 million unsecured revolving credit facility, drawing $50 million to repay the term loan.
Outlook, commentary, risks, and unusual items
- The filing provides no specific earnings, premium-growth, or other quantitative forward guidance. Management said premium receipts and investment income are expected to cover cash outflows in the foreseeable future, while cautioning that interim results are not necessarily indicative of full-year results.
- Reinsurance supports capacity and limits severity and catastrophe exposure, but Skyward remains responsible for ceded amounts if reinsurers fail to pay. Net retention on written premiums was 50.6% in Q2 and 53.1% for the first half. Net reinsurance recoverables were $582.9 million; 98.6% of balances, net of credit enhancements, were with reinsurers rated A- or above. Funded trust accounts providing additional security had a market value of approximately $134.2 million.
- Available-for-sale fixed maturities had $53.4 million of gross unrealized losses at June 30; held-to-maturity securities had $4.6 million. Management attributed these losses to interest-rate changes, stated it did not intend or expect to be required to sell the securities before recovery, and reported no credit impairment in the available-for-sale losses.
- Skyward adopted the expected-credit-loss accounting standard effective January 1, 2023, recording a $2.3 million after-tax increase in accumulated deficit. It also elected fair-value accounting for mortgage loans; changes in their fair value flow through investment gains or losses.
- Related-party exposures include investment management by Arena, affiliated with major shareholder Westaim, and a 20% ownership interest in RISCOM, which provides brokerage and agency services. Westaim and Westaim HIIG LP owned 28.4% of common stock at June 30. Litigation and indemnification matters were described as not expected to have a material adverse effect based on information available to the company.
Important facts for investors to verify
- Whether premium growth and underwriting profitability persist, and how growth affects net retention and the combined ratio.
- The impact of catastrophe claims, reserve development, and runoff of exited business on future loss ratios and reserves.
- The composition, valuation, and performance of opportunistic investments, including related-party-managed assets, and the sources of investment income volatility.
- Reinsurance recoverability, counterparty concentration, collateral adequacy, and the terms and renewal costs of reinsurance protection.
- Liquidity and capital after substantial investment purchases, the variable-rate revolving facility, IPO-related share issuance, and equity-award dilution.