Skyward Specialty Insurance Group, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparative period is Q1 2022. Skyward Specialty is a U.S. specialty property and casualty insurer serving niche markets through eight underwriting divisions. Its insurance subsidiaries held A.M. Best financial strength ratings of A-.
Financial and operating results
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Gross written premiums | $360.5 million | $282.6 million; up 27.5% |
| Net written premiums | $202.1 million | $135.4 million; up 49.3% |
| Net earned premiums | $182.8 million | $141.7 million; up 29.0% |
| Total revenue | $189.9 million | $152.7 million |
| Underwriting income | $17.8 million | $11.4 million |
| Net income | $15.6 million | $16.3 million |
| Net income attributable to common shareholders | $14.3 million | $8.5 million |
| Basic / diluted EPS | $0.43 / $0.42 | $0.52 / $0.50 |
| Operating cash flow | $107.2 million | $45.9 million |
Underwriting margins: Loss and LAE ratio was 62.8% versus 63.5%; expense ratio was 27.4% versus 28.4%; combined ratio was 90.2% versus 91.9%. The adjusted combined ratio was 90.3% versus 91.9%. A combined ratio below 100% indicates underwriting profit.
Investment results: Net investment income fell to $4.6 million from $15.1 million, mainly reflecting losses in the opportunistic fixed-income portfolio, including negative equity-method investment income. Net investment gains were $1.0 million, compared with a $4.4 million loss a year earlier. Management reported no credit impairment in available-for-sale fixed maturities and attributed unrealized losses primarily to interest-rate changes.
Balance sheet, debt and liquidity
- At March 31, 2023, total assets were $2.62 billion, total liabilities $2.11 billion and stockholders’ equity $507.1 million.
- Total investments were $1.29 billion; cash and cash equivalents were $41.2 million, with another $64.0 million in restricted cash. Cash and restricted cash combined were $105.2 million at quarter-end.
- Loss and LAE reserves were $1.17 billion. Net reinsurance recoverables were $570.5 million; 98.5% of net recoverables by reinsurer rating were with reinsurers rated A- or above.
- Debt included $50.0 million drawn on a new revolving facility and $78.6 million of subordinated debt. The reported debt-to-capital ratio was 20.2%, versus 23.4% at year-end 2022. The company said it was compliant with facility covenants.
- Operating cash flow was more than offset by $193.4 million of investing outflows, largely associated with investment purchases. IPO proceeds contributed to $66.5 million of financing inflows.
Material changes and management commentary
- Premium growth was driven by new business, rate increases and new products or units. Continuing-business gross written premiums rose 28.7%; notable growth included Transactional E&S, Professional Lines, Global Property & Agriculture and Surety.
- Net retention on a written basis increased to 56.1% from 47.9%. The filing describes reinsurance as protection against severity events and earnings volatility.
- Catastrophe losses from wind and hail, including tornadoes, were $3.2 million, adding 1.8 points to the loss ratio. The non-catastrophe loss ratio improved 2.4 points, which management attributed mainly to exited-business run-off and changes in business mix.
- The company completed its IPO in January 2023, receiving approximately $62.4 million in net proceeds; selling stockholders also sold shares. Preferred shares converted into common shares at the IPO closing. Shares outstanding were 37,658,111 as of May 4, 2023.
- Effective January 1, 2023, the company adopted the expected-credit-loss accounting standard, recording a $2.3 million increase in accumulated deficit, net of tax, and elected fair-value accounting for mortgage loans.
- Management gave no specific financial guidance in the supplied filing text. It said premium receipts and investment income were expected to cover cash outflows in the foreseeable future; interim results may not indicate full-year performance.
Risks, contingencies and unusual items
- Investment performance is exposed to market movements, and the portfolio included $51.6 million of gross unrealized losses on fixed maturities at quarter-end. Management said it did not intend, nor expect to be required, to sell the securities before recovery or maturity.
- The company remains responsible for ceded claims if reinsurers fail to perform. Reinsurance recoverables are material; funded trust accounts providing additional security had a market value of approximately $127.1 million, but were not recorded as balance-sheet assets.
- Mortgage loans and opportunistic investments include affiliated-party relationships: Arena manages investment accounts and is affiliated with Westaim, the company’s largest shareholder. The quarter included negative equity-method investment income of $4.7 million.
- The filing describes ordinary-course litigation and buyer indemnifications, but management did not expect these matters to have a material adverse effect based on information available. It reported no material quarterly changes to risk factors or market-risk disclosures.
- Debt-term disclosure to reconcile: The notes state the revolving facility rate is SOFR plus a margin of 150–190 basis points and a 10-basis-point credit spread adjustment. The MD&A text instead prints a margin and adjustment of zero basis points. The filing text does not provide a clear, consistent value.
Most important facts for investors to verify
- Confirm the revolving facility’s actual interest-rate margin and all covenant thresholds in the executed credit agreement, given the inconsistent MD&A disclosure.
- Assess whether premium growth and improved combined ratios persist, particularly after catastrophe losses and as business mix changes.
- Review the drivers and valuation of opportunistic and affiliated investments, including the effect of equity-method losses on recurring investment income.
- Monitor reserve adequacy, reinsurance recoverability and collateral arrangements, as well as exposure to interest-rate changes and unrealized investment losses.
- Consider share-count dilution and ongoing stock-based compensation following the IPO; Q1 included substantial equity awards and $1.9 million of stock-based compensation expense.