Skyward Specialty Insurance Group, Inc. — Q1 2024 Form 10-Q
Business context and period: Specialty property and casualty insurance holding company operating in one reportable segment, primarily in the U.S. This unaudited filing covers the three months ended March 31, 2024, compared with Q1 2023, and the balance sheet date March 31, 2024. Interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Gross written premiums | $458.6m | $360.5m | +27.3% |
| Net written premiums | $287.1m | $202.1m | +42.0% |
| Net earned premiums | $236.3m | $182.8m | +29.3% |
| Underwriting income | $24.7m | $17.8m | +38.9% |
| Net investment income | $18.3m | $4.6m | +294% |
| Net investment gains | $8.3m | $1.0m | Higher |
| Income before taxes | $47.0m | $19.7m | +138% |
| Net income | $36.8m | $15.6m | +136% |
| Diluted EPS | $0.90 | $0.42 | +114% |
| Operating cash flow | $94.3m | $107.2m | Down $12.9m |
Underwriting and returns: Loss and LAE ratio was 60.9% versus 62.8%; expense ratio was 28.7% versus 27.4%; combined ratio improved to 89.6% from 90.2%. Adjusted combined ratio was 89.7% versus 90.3%. Adjusted operating income was $31.0m versus $15.5m. Annualized return on equity was 21.7% versus 13.4%; annualized adjusted return on equity was 18.3% versus 13.3%. These adjusted and underwriting measures are non-GAAP measures as defined in the filing.
Balance sheet and liquidity: Total assets were $3.19bn, up from $2.95bn at year-end 2023. Stockholders’ equity was $692.3m, up from $661.0m. Cash and cash equivalents were $85.1m, with restricted cash of $30.2m; investments totaled $1.67bn. Loss and LAE reserves were $1.38bn, including $466.1m of ceded unpaid-loss recoverables. Net cash increased $14.9m during the quarter. The company stated that premium receipts and investment income are expected to cover cash outflows in the foreseeable future.
Debt: Notes payable under the revolving facility increased to $100m from $50m; $50m of the $150m facility remained undrawn. The company used the additional draw and cash to redeem its $59.8m trust-preferred debentures on March 15, 2024, paying $1.4m of accrued interest. It also had $18.9m of subordinated notes outstanding. Management reported compliance with credit-facility covenants. Debt to total capitalization was 14.7%, versus 16.3% at year-end 2023.
Material changes and management commentary
- Premium growth was attributed to new business and rate increases, particularly in Captives, Transactional E&S, Surety, Global Property & Agriculture, and Professional Lines. All eight underwriting divisions reported year-over-year gross premium growth.
- Q1 2024 catastrophe losses were $1.0m, or 0.4 percentage points of the loss ratio, compared with $3.2m and 1.8 points in Q1 2023. Management attributed the improved loss ratio partly to the lower catastrophe impact and a more favorable business mix.
- Net investment income increased with a larger fixed-income asset base, a higher book yield (4.7% versus 4.0% a year earlier), and higher short-term investment yields. Investment gains included unrealized gains, principally on equity securities.
- Investment portfolio fair value exceeded $1.75bn including cash and cash equivalents. Available-for-sale fixed maturities had $46.0m of gross unrealized losses at quarter-end, which management attributed to interest rates and not credit impairment; the company said it did not intend, and was not more likely than not required, to sell the securities before recovery.
- Net retention on written premiums rose to 62.6% from 56.1%. Reinsurance mitigates severity and catastrophe exposures, but the company remains liable if reinsurers fail to pay. Reinsurance recoverables were $612.0m; related funded trust accounts held approximately $171.2m for the company’s benefit under the stated arrangements.
Outlook, risks and contingencies
The filing provides no quantified earnings or premium guidance. Management cautions that quarterly results may not predict full-year results and that actual outcomes may differ from forward-looking statements. Relevant exposures include claims and reserve estimation, catastrophe and other loss severity, reinsurance availability and counterparty performance, investment-market movements, and interest-rate sensitivity. Approximately $6.9m of mortgage loans were in foreclosure and were not producing income during the preceding 12 months. The company reported no material change in previously disclosed risk factors or market-risk disclosures. Ordinary-course litigation and certain sale-related indemnifications were described; management did not expect litigation to have a material adverse effect and reported no known significant indemnification claims.
Related-party considerations include Arena-managed investments affiliated with the company’s largest stockholder, Westaim; 78.9% of alternative investments were Arena-managed. Westaim beneficially owned 17.5% of common stock. The company also disclosed brokerage and managing-agency arrangements with RISCOM, in which it holds a 20% interest.
Important facts for investors to verify
- Whether premium growth and improved underwriting performance persist, especially as the expense ratio rose and business mix changed.
- How much earnings growth is supported by recurring underwriting and investment income versus investment gains, including unrealized gains.
- The development and collectibility of loss reserves and reinsurance recoverables, including counterparty exposures and collateral arrangements.
- Mortgage-loan foreclosure and non-income status, portfolio concentration, and valuation assumptions.
- Revolver utilization, floating-rate borrowing costs, covenant headroom, and the effects of future reinsurance renewals on retention and profitability.
- Performance, valuation, and governance of Arena-affiliated and other related-party investments and arrangements.