Skyward Specialty Insurance Group, Inc. — FY 2023 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2023, with comparisons to FY 2022; it does not provide a separate Q4-only financial summary. Skyward is a U.S.-focused specialty property and casualty insurer operating through eight underwriting divisions and one reportable segment, in admitted and excess and surplus markets. Its financial statements were audited by Ernst & Young, which issued an unqualified opinion. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not attest to internal controls because the company was an emerging growth company.
Financial and operating performance
| Metric | FY 2023 | FY 2022 | Change / context |
|---|---|---|---|
| Gross written premiums | $1,459.8 million | $1,144.0 million | Up 27.6% |
| Net written premiums | $910.7 million | $675.5 million | Up 34.8% |
| Net earned premiums | $829.1 million | $616.0 million | Up 34.6% |
| Net investment income | $40.3 million | $36.9 million | Up 9.2% |
| Net investment gains (losses) | $11.1 million | ($15.7 million) | Shifted to gains |
| Income before tax | $110.1 million | $49.8 million | Up 121% |
| Net income | $86.0 million | $39.4 million | Up 118% |
| Basic / diluted EPS | $2.34 / $2.24 | $1.24 / $1.21 | Per-share comparability is affected by the 2023 IPO and share-count changes |
| Underwriting income | $76.5 million | $36.5 million | Non-GAAP-style operating metric as defined by the company |
| Combined ratio | 90.7% | 94.0% | Improved; below 100% indicates underwriting profit |
| Adjusted combined ratio | 90.9% | 92.6% | Excludes specified LPT effects |
Underwriting and margins. The loss and LAE ratio improved to 62.1% from 65.3%; the expense ratio was nearly flat at 28.6% versus 28.7%. Adjusted loss ratio was 62.3% versus 63.9%. Premium growth was broad-based, with five divisions growing more than 30%; Professional Lines and Transactional E&S rose 66.2% and 63.1%, respectively. The company attributed growth to new business, rate increases, retention, new teams and expanded offerings. Net retention, calculated from reported written premiums, was approximately 62.4% in 2023 versus 59.1% in 2022.
Cash flow and balance sheet. Operating cash flow was $338.2 million, compared with $208.9 million; investing cash outflow was $493.8 million, compared with $193.4 million, largely reflecting purchases of fixed maturities and short-term investments. Financing cash flow was $130.9 million, including equity-offering proceeds and a $50 million revolver draw used to repay the term loan. Cash and cash equivalents were $65.9 million at year-end, plus $34.4 million restricted cash. Total investments were $1.614 billion, up from $1.082 billion. Total assets were $2.953 billion; stockholders’ equity was $661.0 million, up from $421.7 million.
Gross loss and LAE reserves were $1.315 billion, with $859.0 million net of reinsurance; reinsurance recoverables were $596.3 million. Management said it had sufficient liquidity for operating needs and committed capital expenditures over the next 12 months. Holding-company cash and investments were $3.0 million, and insurance subsidiaries paid no dividends to the parent in 2023 or 2022. Total debt outstanding at year-end was $128.7 million on a carrying-value basis, and debt to total capitalization was 16.3%, down from 23.4%. The company reported compliance with revolver covenants.
Material changes versus FY 2022
- Gross written premiums rose 27.6%, and net earned premiums rose 34.6%, reflecting growth across nearly all underwriting divisions and additions to product offerings.
- Net income more than doubled and the combined ratio improved by 3.3 percentage points. Current-year catastrophe losses added 1.4 points to the loss ratio in 2023, compared with 1.1 points in 2022.
- Prior-year reserve development was approximately neutral overall in 2023, versus $14.4 million adverse development in 2022, which was associated with the loss portfolio transfer (LPT). In 2023, favorable development in short-tail/monoline lines was offset by adverse development in multi-line solutions, including general and auto liability.
- Net investment gains were $11.1 million versus a $15.7 million loss in 2022. Investment income from core fixed income and short-term holdings increased, while the opportunistic fixed-income portfolio experienced lower fair values in limited partnership investments.
- Equity increased following the January 2023 IPO and November follow-on offering, which generated approximately $62.3 million and $62.5 million of net proceeds, respectively. The company reported $8.5 million of stock-based compensation expense, up from $2.3 million.
Outlook, risks and unusual items
- Outlook: The filing provides no quantified earnings, premium-growth or combined-ratio guidance. Management described the specialty insurance market as relatively hard but cautioned that pricing cycles and their duration are uncertain. Its stated strategy is to grow selectively in specialty niches while emphasizing underwriting profitability and capital strength.
- Reserves and claims: Reserve estimates are inherently uncertain, particularly for longer-tail liability lines exposed to severity, claims inflation, litigation and social inflation. Management estimated that a 5% change in net IBNR would change reserves by $27.0 million and net income and equity by $21.3 million.
- Reinsurance and catastrophe exposure: The company remains primarily liable to policyholders if reinsurers fail to pay. It reported $596.3 million in recoverables and a $2.3 million allowance for uncollectible reinsurance, established on adoption of a new credit-loss standard. Property represented 27% of gross written premiums; severe weather, catastrophe frequency and reinsurance cost or availability could affect results.
- Investments and interest rates: The $1.018 billion available-for-sale core fixed-income portfolio had a weighted-average effective duration of 3.2 years and an average AA- credit rating. A modeled 100-basis-point rate increase would reduce its fair value by $44.1 million, or 4.3%; a 300-basis-point increase would reduce it by $130.5 million, or 12.8%. These are hypothetical fair-value sensitivities, not forecasts of realized losses.
- Concentrations and related parties: Everest Re was the only reinsurer representing at least 10% of recoverables, at 20.4%; 99% of recoverables were rated A- or better or collateralized. Arena, which manages the opportunistic portfolio and mortgage-loan accounts, is affiliated with Westaim, the largest shareholder. The company also disclosed a 20% ownership interest in RISCOM, a broker and managing general agency.
- Debt subsequent event: On March 15, 2024, the company redeemed the junior subordinated debentures, using a $50 million revolver draw and existing cash, and paid $1.4 million accrued interest. After the draw, $100 million was outstanding on the $150 million revolver, leaving $50 million undrawn.
- Other items: Adoption of the expected-credit-loss accounting standard reduced accumulated equity by $2.3 million, net of tax. The company reported no litigation or other contingencies expected to have a material adverse effect and no material legal proceedings. It does not expect to pay common-stock cash dividends in the foreseeable future.
Important facts for investors to verify
- Whether premium growth and the improved combined ratio persist as market conditions, renewal rates and pricing change.
- Loss-reserve development by accident year and line, especially long-tail general and auto liability; review the company’s IBNR sensitivity and 2023 offsetting favorable and adverse development.
- The recoverability and collateral supporting reinsurance balances, including counterparty concentration and the remaining protection under the LPT.
- Investment portfolio performance, valuation and liquidity, including Arena-managed and other less-liquid holdings, and the impact of interest-rate or credit-market changes.
- Post-redemption debt balances, borrowing costs, revolver capacity and covenant headroom, as well as liquidity available at the holding company versus regulated insurance subsidiaries.
- Potential dilution from stock awards and options, and the effects of IPO and follow-on share issuance on per-share comparisons.