Skyward Specialty Insurance Group, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods. Skyward is a specialty property and casualty insurer with one reportable segment and eight underwriting divisions, operating predominantly in the United States.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Gross written premiums | $355.7m | $270.3m | $1,138.2m | $879.1m |
| Net written premiums | $280.7m | $171.5m | $696.6m | $495.6m |
| Net earned premiums | $227.0m | $158.0m | $604.2m | $445.9m |
| Total revenues | $239.2m | $158.1m | $639.7m | $455.1m |
| Net income | $21.7m | $(2.4)m | $56.7m | $19.0m |
| Diluted EPS | $0.57 | $(0.15) | $1.50 | $0.58 |
| Combined ratio | 90.2% | 99.8% | 90.8% | 94.7% |
| Adjusted combined ratio | 90.3% | 93.9% | 91.0% | 92.6% |
Premium growth reflected new business and rate increases across divisions. Q3 net written premiums also benefited by $50.5m from rescinding a quota-share reinsurance contract; net earned premiums were increased by $13.1m in Q3 and for the nine-month period by the contract change. The adjusted ratios exclude the net impact of the loss portfolio transfer (LPT) as defined by the company.
Q3 underwriting income was $22.3m, compared with $0.3m a year earlier; nine-month underwriting income was $55.5m versus $23.7m. Q3 net investment income rose to $13.1m from $6.0m, while nine-month investment income declined to $26.3m from $31.7m. Net investment losses were $3.0m in Q3; nine-month investment results were gains of $3.3m, versus losses of $26.1m in 2022. The company attributed higher core fixed-income income to a larger portfolio and higher book yield, partly offset by weakness in opportunistic fixed-income investments.
Financial position, cash flow and debt
- At September 30, 2023, total assets were $2.85bn and stockholders’ equity was $535.4m, versus $2.36bn and $421.7m at year-end 2022. Tangible stockholders’ equity was $446.6m.
- Investments totaled $1.40bn; cash and cash equivalents were $53.7m and restricted cash was $49.5m. Accumulated other comprehensive loss was $53.7m, compared with $43.5m at year-end.
- For the first nine months, operating cash flow was $218.5m, investing cash outflow was $307.8m, and financing cash inflow was $67.5m. Cash and restricted cash ended at $103.3m, down from $125.0m at the start of the period. Management said premium receipts and investment income should cover foreseeable cash needs; operating cash flow can fluctuate with premium, claims and reinsurance timing.
- Debt included $50.0m drawn on a new unsecured revolving facility and $78.7m of subordinated debt. Debt to total capitalization was 19.4%, down from 23.4% at year-end 2022. The company reported compliance with facility covenants. The revolver bears SOFR plus a margin; six-month SOFR was 5.47% at quarter-end.
- Loss and LAE reserves were $1.269bn, including $438.7m of reinsurance recoverables on unpaid claims. Total reinsurance recoverables, net, were $615.7m; 98% of recoverables net of credit enhancements were with reinsurers rated A- or higher.
Material changes, outlook and risks
- The loss ratio improved to 61.0% in Q3 from 70.7%, and to 62.5% for nine months from 65.9%. Management cited business mix and run-off of exited business; Q3 2022 included Hurricane Ian losses and LPT reserve strengthening. 2023 catastrophe losses included convective storms and wind and hail events.
- The expense ratio was 29.2% in Q3, broadly flat year over year, and improved to 28.3% for nine months from 28.8%. Higher policy acquisition cost ratios were attributed to business mix and the quota-share cancellation.
- The company completed its IPO in January 2023, receiving approximately $62m in net proceeds; preferred shares converted into common shares. The filing also reports $4.1m of other expenses for the first nine months, including IPO-related stock compensation and secondary-offering expenses. The company adopted the expected-credit-loss accounting standard in January, increasing accumulated deficit by $2.3m net of tax.
- The company reported $72.1m of gross unrealized losses on fixed-maturity securities at quarter-end and attributed them to interest rates, reporting no credit impairment. A.M. Best affirmed its A- financial-strength rating and changed the outlook to positive from stable.
- Skyward provided no specific financial guidance in this filing. Management noted results for the interim periods are not necessarily indicative of full-year results. It reported no material changes to previously disclosed risk factors or market-risk disclosures. Ordinary-course litigation and indemnities were described; management did not expect litigation to have a material adverse effect based on information available.
- Investment and related-party considerations include Arena-managed opportunistic investments affiliated with major stockholder Westaim; the company gave notice to withdraw from Arena Special Opportunities Fund during Q3. Mortgage loans include approximately $6.7m in foreclosure proceedings. The company remains responsible for ceded obligations if reinsurers fail to pay; legal defense costs can also push certain retentions above stated limits.
Important facts for investors to verify
- How much of premium and net-written-premium growth is sustainable, apart from the quota-share contract rescission, and how the change affects future retention and earnings.
- Whether loss-ratio performance persists as catastrophe experience and the mix of business evolve, and how reserve estimates develop.
- The quality and liquidity of investments, including unrealized fixed-income losses, opportunistic holdings, related-party-managed assets, and mortgage loans in foreclosure.
- Reinsurance collectability, protection limits and renewal costs, alongside the company’s substantial reinsurance recoverables.
- Debt costs and covenant headroom under the SOFR-based facility, and whether cash generation continues to support claims, investment and operating needs.
- Potential dilution and compensation expense from outstanding equity awards; the company reported 1.45m non-vested restricted shares and units and 760,000 options at quarter-end.