What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-08 compared with 2024-05-03 · 114 added, 67 removed, 263 unchanged (41% of the section changed)

2 unchanged sentences

and the terms “our Company,” “we,” “us,” and “our” as used below refer to Skyward Specialty Insurance Group and its consolidated subsidiaries.

The term “first quarter” as used below refers to the three months ended March 31 for the time period then ended.

The term “second quarter” as used below refers to the three and six months ended June 30 for the time period then ended.

We discuss certain key metrics which provide useful information about our business and the operational factors underlying our financial performance.

Many of these metrics are generally standard among insurance companies and help to provide comparability with our peers.

Select insurance, accounting, operating and financial terms for Skyward Specialty are defined in the sections entitled “Select Insurance and Financial Terms” and “Key Operating and Financial Metrics” included in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”).

The discussion and analysis below include certain forward-looking statements that are subject to risks, uncertainties and other factors described in "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2023.

Select insurance, accounting, operating and financial terms for Skyward Specialty are defined in the sections entitled “Select Insurance and Financial Terms” and “Key Operating and Financial Metrics” included in our 2023 Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”).

The discussion and analysis below include certain forward-looking statements that are subject to risks, uncertainties and other factors described in "Risk Factors" in our 2023 Form 10-K.

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors.

The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2024, or for any other future period.

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report, and in conjunction with our audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2023.

The results of operations for the three and six months ended June 30, 2024 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2024, or for any other future period.

The accompanying condensed consolidated financial statements and related notes have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”).

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We believe this structure and expertise allows us to serve the needs of our customers effectively and be a value-add partner to our distributors, while earning attractive risk-adjusted returns.

All of our insurance company subsidiaries are group rated and have financial strength ratings of “A-” (Excellent) with positive outlook from the A.M.

All of our insurance company subsidiaries are group rated and have financial strength ratings of “A” (Excellent) with stable outlook from the A.M.

Best Company.

Results of Operations

The following table summarizes our results for the three months ended March 31, 2024 and 2023:

Three months ended March 31,

The following table summarizes our results for the three and six months ended June 30, 2024 and 2023:

Three months ended June 30, Six months ended June 30,

($ in thousands) 2024 2023 2024 2023

9 unchanged sentences

Net investment income $ 22,138 $ 8,583 $ 40,435 $ 13,229

Net investment gains $ 8,303 $ 961

Net investment (losses) gains $ (1,825) $ 5,351 $ 6,478 $ 6,312

Income before income taxes $ 40,355 $ 25,016 $ 87,332 $ 44,738

20 unchanged sentences

Adjusted Operating Income

The following table provides a reconciliation of adjusted operating income to net income for the three months ended March 31, 2024 and 2023:

Three months ended March 31,

($ in thousands) Pre-tax After-tax Pre-tax After-tax

The following table provides a reconciliation of adjusted operating income to net income for the three and six months ended June 30, 2024 and 2023:

Three months ended June 30, Six months ended June 30,

2024 2023 2024 2023

($ in thousands) Pre-tax After-tax Pre-tax After-tax Pre-tax After-tax Pre-tax After-tax

Income as reported $ 40,355 $ 30,970 $ 25,016 $ 19,452 $ 87,332 $ 67,754 $ 44,738 $ 35,008

Net investment (losses) gains (1,825) (1,442) 5,351 4,227 6,478 5,118 6,312 4,986

Net impact of LPT 241 190 462 365 482 381 704 556

Net investment gains 8,303 6,559 961 759

Other loss (7) (6) — — (7) (6) — —

Other expenses (1,045) (826) (1,465) (1,157) (2,233) (1,764) (2,579) (2,037)

1 unchanged sentence

Underwriting Income

The following table provides a reconciliation of underwriting income to income before federal income tax for the three months ended March 31, 2024 and 2023:

Three months ended March 31,

The following table provides a reconciliation of underwriting income to income before federal income tax for the three and six months ended June 30, 2024 and 2023:

Three months ended June 30, Six months ended June 30,

($ in thousands) 2024 2023 2024 2023

4 unchanged sentences

Net investment income 22,138 8,583 40,435 13,229

Net investment gains 8,303 961

Net investment (losses) gains (1,825) 5,351 6,478 6,312

Other loss (7) — (7) —

Underwriting income $ 23,903 $ 15,499 $ 48,583 $ 33,267

Adjusted Loss Ratio / Adjusted Combined Ratio

The following table provides a reconciliation of the adjusted loss and LAE ratio and adjusted combined ratio to the loss and LAE ratio and combined ratio for the three months ended March 31, 2024 and 2023:

Three months ended March 31,

The following table provides a reconciliation of the adjusted loss and LAE ratio and adjusted combined ratio to the loss and LAE ratio and combined ratio for the three and six months ended June 30, 2024 and 2023:

Three months ended June 30, Six months ended June 30,

($ in thousands) 2024 2023 2024 2023

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Tangible Stockholders’ Equity

The following table provides a reconciliation of tangible stockholders’ equity to stockholders’ equity for the periods ended March 31, 2024 and 2023:

The following table provides a reconciliation of tangible stockholders’ equity to stockholders’ equity for the periods ended June 30, 2024 and 2023:

($ in thousands) 2024 2023

3 unchanged sentences

Annualized Adjusted Return on Equity

The following table provides a reconciliation of annualized adjusted return on equity to annualized return on equity for the three months ended March 31, 2024 and 2023:

Three months ended March 31,

The following table provides a reconciliation of annualized adjusted return on equity to annualized return on equity for the three and six months ended June 30, 2024 and 2023:

Three months ended June 30, Six months ended June 30,

($ in thousands) 2024 2023 2024 2023

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Annualized Return on Tangible Equity

Annualized return on tangible equity for the three months ended March 31, 2024 and 2023 reconciles to annualized return on equity as follows:

Three months ended March 31,

Annualized return on tangible equity for the three and six months ended June 30, 2024 and 2023 reconciles to annualized return on equity as follows:

Three months ended June 30, Six months ended June 30,

($ in thousands) 2024 2023 2024 2023

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Annualized Adjusted Return on Tangible Equity

Annualized adjusted return on tangible equity for the three months ended March 31, 2024 and 2023 reconciles to annualized return on equity as follows:

Three months ended March 31,

Annualized adjusted return on tangible equity for the three and six months ended June 30, 2024 and 2023 reconciles to annualized return on equity as follows:

Three months ended June 30, Six months ended June 30,

($ in thousands) 2024 2023 2024 2023

4 unchanged sentences

Underwriting Results

The following table presents gross written premiums by underwriting division for the three months ended March 31, 2024 and 2023:

Three months ended March 31,

The following tables present gross written premiums by underwriting division for the three and six months ended June 30, 2024 and 2023:

Three months ended June 30,

($ in thousands) 2024 2023 Change % Change

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Programs 59,644 52,598 7,046 13.4 %

Transactional E&S 45,711 30,632 15,079 49.2 %

Accident & Health 44,088 37,252 6,836 18.4 %

Professional Lines 38,106 32,989 5,117 15.5 %

Surety 37,737 26,221 11,516 43.9 %

Total gross written premiums (1)

$ 496,225 $ 422,304 $ 73,921 17.5 %

(1) Excludes exited business

Six months ended June 30,

($ in thousands) 2024 2023 Change % Change

Global Property & Agriculture $ 225,361 $ 198,420 $ 26,941 13.6 %

Industry Solutions 162,371 146,882 15,489 10.5 %

Captives 130,507 85,363 45,144 52.9 %

Programs 111,822 101,297 10,525 10.4 %

Transactional E&S 87,906 60,249 27,657 45.9 %

Accident & Health 84,989 73,265 11,724 16.0 %

Professional Lines 80,345 66,161 14,184 21.4 %

Surety 71,579 50,922 20,657 40.6 %

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(1) Excludes exited business

The increase in gross written premiums for the first quarter of 2024, when compared to the same 2023 period, was primarily driven by double-digit premium growth primarily from our captives, transactional E&S, surety, global property

& agriculture and professional lines underwriting divisions.

The increase in gross written premiums for the second quarter and first half of 2024, when compared to the same 2023 periods, was driven by double-digit premium growth primarily from our captives, transactional E&S and surety underwriting divisions.

The double-digit premium growth was due to new business and increased rates.

Net written premiums for the first quarter of March 31, 2024 were $287.1 million, an increase of $85.0 million or 42.0%, when compared to the same 2023 period.

Net earned premiums for the three months ended March 31, 2024 were $236.3 million, an increase of $53.5 million, or 29.3%, when compared to the same 2023 period.

Our global property & agriculture division contributed double digit premium growth in the first half of 2024, when compared to the same 2023 period, primarily driven by new business in agriculture.

Net written premiums for the second quarter of 2024 were $297.1 million compared to $213.7 million for the same 2023 period, an increase of $83.4 million or 39.0%.

Net written premiums for the first half of 2024 were $584.2 million compared to $415.9 million for the same 2023 period, an increase of $168.3 million or 40.5%.

The increases in net written premiums were primarily driven by the same reasons that drove the increases in gross written premiums discussed above.

Net earned premiums for the second quarter of 2024 were $257.6 million compared to $194.3 million for the same 2023 period, an increase of $63.3 million, or 32.5%.

Net earned premiums for the first half of 2024 were $493.9 million compared to $377.2 million for the same 2023 period, an increase of $116.7 million or 31.0%.

The increases in net earned premiums were primarily driven by the same reasons that drove the increases in gross written premiums discussed above.

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Losses and LAE

The following table sets forth the components of the loss and LAE ratios and adjusted loss and LAE ratios for the three months ended March 31, 2024 and 2023:

Three months ended March 31,

The following tables set forth the components of the loss and LAE ratios and adjusted loss and LAE ratios for the three and six months ended June 30, 2024 and 2023:

Three months ended June 30,

($ in thousands) Losses

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(2) See "Reconciliation of Non-GAAP Financial Measures" included in this Item 2

The loss ratio for the first quarter of 2024 improved 1.9 points when compared to the same 2023 period.

The first quarter of 2024 was minimally impacted by catastrophe losses, while the first quarter of 2023 was impacted by wind and hail events, including tornadoes, which added 1.8 points to the 2023 loss ratio.

The non-cat loss and LAE ratio improved 0.5 points when compared to the same 2023 period, primarily driven by the shift in the mix of business.

Six months ended June 30,

($ in thousands) Losses

Losses and LAE:

Non-cat loss and LAE (1)

$ 299,450 60.6 % $ 229,964 60.9 %

Cat loss and LAE (1)

4,000 0.8 % 10,045 2.7 %

Prior accident year development - LPT

(482) (0.1) % (704) (0.2)%

Total losses and LAE $ 302,968 61.3 % $ 239,305 63.4 %

Adjusted losses and LAE (2) :

Non-cat loss and LAE (1)

$ 299,450 60.6 % $ 229,964 60.9 %

Cat loss and LAE (1)

4,000 0.8 % 10,045 2.7 %

Total adjusted losses and LAE (2)

$ 303,450 61.4 % $ 240,009 63.6 %

(1) Current accident year

(2) See "Reconciliation of Non-GAAP Financial Measures" included in this Item 2

The loss ratios for the second quarter and first half of 2024 improved 2.3 points and 2.1 points, respectively, when compared to the same 2023 periods, driven by less severity of convective storms.

The non-cat loss and LAE ratio for the second quarter of 2024 was comparable to the same 2023 period.

The non-cat loss and LAE ratio for the first half of 2024 improved 0.3 points when compared to the same 2023 period, primarily driven by the shift in the mix of business.

Expense Ratio

The following table sets forth the components of the expense ratios for the three months ended March 31, 2024 and 2023:

Three months ended March 31,

The following tables set forth the components of the expense ratios for the three and six months ended June 30, 2024 and 2023:

Three months ended June 30,

($ in thousands) Expenses % of

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Total net expenses $ 74,626 29.0 % $ 54,443 28.0 %

The expense ratio for the first quarter of 2024 increased 1.3 points when compared to the same 2023 period, primarily driven by the business mix shift.

The expense ratios for the first quarter of 2024 and 2023, respectively, exclude the impact of IPO related stock compensation and secondary offering expenses, which are reported in other expenses in our condensed consolidated statements of operations and comprehensive income.

Six months ended June 30,

($ in thousands) Expenses % of

Net Earned Premiums Expenses % of

Net Earned Premiums

Net policy acquisition expenses $ 67,908 13.7 % $ 44,371 11.7 %

Other operating and general expenses 78,545 15.9 % 63,967 17.0 %

Underwriting, acquisition and insurance expenses 146,453 29.6 % 108,338 28.7 %

commission and fee income (4,079) (0.8 %) (3,732) (1.0 %)

Total net expenses $ 142,374 28.8 % $ 104,606 27.7 %

The expense ratio for the second quarter and first half of 2024 increased 1.0 point and 1.1 points, respectively, when compared to the same 2023 periods, primarily driven by the business mix shift partially offset by earnings leverage.

The expense ratios for the periods presented exclude the impact of IPO related stock compensation and secondary offering expenses, which are reported in other expenses in our condensed consolidated statements of operations and comprehensive income.

Investment Results

1 unchanged sentence

The prior period has been reclassified to conform to the current period presentation.

The following table sets forth the components of net investment income and net investment gains (losses) for the three months ended March 31, 2024 and 2023:

Three months ended March 31,

The following table sets forth the components of net investment income and net investment gains (losses) for the three and six months ended June 30, 2024 and 2023:

Three months ended June 30, Six months ended June 30,

$ in thousands 2024 2023 2024 2023

4 unchanged sentences

Net investment income $ 22,138 $ 8,583 $ 40,435 $ 13,229

Net unrealized gains on securities still held $ 8,991 $ 3,767

Net realized losses (688) (2,806)

Net investment gains $ 8,303 $ 961

Net investment income for the first quarter of 2024 increased $13.7 million when compared to the same 2023 period.

The increase in income from our fixed income portfolio for the first quarter of 2024, when compared to the same 2023 period, was due to (i) a larger asset base as we continued to increase our allocation to this part of our investment portfolio and (ii) a higher book yield of 4.7% at March 31, 2024 compared to 4.0% at March 31, 2023.

The increase in income from short-term investments & cash and cash equivalents for the first quarter of 2024, when compared to the same 2023 period, was due to higher investment yields and a larger asset base.

The fair value of our alternative and strategic investments portfolio for the first quarter of 2024 increased when compared to the same 2023 period, which was impacted by a decline in the fair value of limited partnership investments.

Net unrealized (losses) gains on securities still held $ (1,760) $ 5,017 $ 7,231 $ 8,784

Net realized (losses) gains (65) 334 (753) (2,472)

Net investment (losses) gains $ (1,825) $ 5,351 $ 6,478 $ 6,312

Net investment income for the second quarter and first half of 2024 increased $13.6 million and $27.2 million, respectively when compared to the same 2023 periods.

The increase in income from our fixed income portfolio for the second quarter and first half of 2024, when compared to the same 2023 periods, was due to (i) a larger asset base as we continued to increase our allocation to this part of our investment portfolio and (ii) a higher book yield of 4.4% at June 30, 2024 compared to 3.9% at June 30, 2023.

The increases in income from short-term investments & cash and cash equivalents for the second quarter and first half of 2024 when compared to the same 2023 periods, were due to higher investment yields and a larger asset base.

The fair value of our alternative and strategic investments portfolio for the second quarter and first half of 2024 increased when compared to the same 2023 period, due to an increase in the fair value of limited partnership investments.

When a fixed maturity has been determined to have an impairment, the impairment charge is separated into an amount representing the credit loss, which is recognized in earnings as a realized loss and on the balance sheet as an allowance for credit losses netted with the amortized cost of fixed maturities.

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The amount related to non-credit factors is recognized in accumulated other comprehensive income and future increases or decreases in fair value, if not credit losses, are included in accumulated other comprehensive (loss) income.

We reviewed our available-for-sale fixed maturities at March 31, 2024 and determined that no credit impairment existed in the gross unrealized holding losses.

We reviewed our available-for-sale fixed maturities at June 30, 2024 and determined that no credit impairment existed in the gross unrealized holding losses.

See Note 2, “Investments” to our condensed consolidated financial statements included in Item 1 of this Form 10-Q for additional information.

Composition of Investment Portfolio

The following table sets forth the components of our investment portfolio at carrying value at March 31, 2024 and December 31, 2023:

The following table sets forth the components of our investment portfolio at carrying value at June 30, 2024 and December 31, 2023:

($ in thousands) Carrying Value

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Our fixed income portfolio primarily consists of investment grade fixed income securities, which are predominantly highly-rated and liquid bonds, and commercial mortgage loans.

The following table sets forth the components of our fixed income securities at March 31, 2024 and December 31, 2023:

The following table sets forth the components of our fixed income securities at June 30, 2024 and December 31, 2023:

($ in thousands) Carrying Value % of Total

9 unchanged sentences

Total fixed income portfolio $ 1,243,943 100.0 % $ 1,067,721 100.0 %

The weighted average credit rating of our available-for-sale fixed income portfolio was “AA-” by Standard & Poor’s Financial Services, LLC (“Standard & Poor’s”) at March 31, 2024 and December 31, 2023.

The following table sets forth the credit quality of our available-for-sale fixed income portfolio at March 31, 2024 and December 31, 2023, as rated by Standard & Poor’s or equivalent designation:

The weighted average credit rating of our available-for-sale fixed income portfolio was “AA-” by Standard & Poor’s Financial Services, LLC (“Standard & Poor’s”) at June 30, 2024 and December 31, 2023.

The following table sets forth the credit quality of our available-for-sale fixed income portfolio at June 30, 2024 and December 31, 2023, as rated by Standard & Poor’s or equivalent designation:

($ in thousands) Fair Value % of Total Fair Value % of Total

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Our commercial mortgage loans are primarily senior loans on real estate across the U.S.

The average duration of our fixed income portfolio was approximately 4.18 years and 4.24 years, respectively, as of March 31, 2024 and December 31, 2023.

The average duration of our fixed income portfolio was approximately 4.19 years and 4.24 years, respectively, as of June 30, 2024 and December 31, 2023.

The equities portfolio primarily consists of domestic preferred stocks, common equities, exchange traded funds, limited partnerships, limited liability corporations and other types of equity interests, 100.0% of which are publicly traded.

3 unchanged sentences

The limited partnerships and joint ventures are subject to future increases or decreases in asset value as asset values are monetized and the income is distributed.

At March 31, 2024 and December 31, 2023, 78.9% and 77.8%, respectively, of the alternative investments were managed by Arena Investors, LPA which is affiliated with Westaim, our largest stockholder.

Strategic investments consists of equity interests in private entities within the insurance industry.

Income tax expense for the three months ended March 31, 2024 was $10.2 million compared to $4.2 million for the same 2023 period.

Our effective tax rate for the three months ended March 31, 2024 was 21.7%, compared to 21.1% for the same 2023 period.

Income tax expense for the three and six months ended June 30, 2024 was $9.4 million and $19.6 million, respectively, compared to $5.6 million and $9.7 million, respectively, for the same 2023 periods.

Our effective tax rates for the three and six months ended June 30, 2024 were 23.3% and 22.4%, respectively, compared to 22.2% and 21.7%, respectively, for the same 2023 periods.

For additional information, see Note 7 of our condensed consolidated financial statements included in Item 1 of this Form 10-Q.

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Management believes that cash receipts from premiums and proceeds from investment income are sufficient to cover cash outflows in the foreseeable future.

Our cash flows for the three months ended March 31, 2024 and 2023 were:

Our cash flows for the six months ended June 30, 2024 and 2023 were:

($ in thousands) 2024 2023

17 unchanged sentences

The interest rate on the Revolving Credit Facility is the SOFR plus a margin of between 150 and 190 basis points based on the ratio of debt to total capital and a credit spread adjustment of 10 basis points.

The following table sets forth the outstanding draws on the Revolving Credit Facility as of March 31, 2024:

($ in thousands) March 31, 2024

The following table sets forth the outstanding draws on the Revolving Credit Facility as of June 30, 2024:

($ in thousands) June 30, 2024

Amount Margin Six-month SOFR Net interest rate

3 unchanged sentences

Best Rating and minimum liquidity.

As of March 31, 2024, we are in compliance with all covenants.

As of June 30, 2024, we are in compliance with all covenants.

In August 2006, we received $58.0 million of proceeds from a debenture offering through a statutory trust, Delos Capital Trust (the “Trust”).

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Principal payment is due at maturity on May 24, 2039 and interest is payable quarterly.

At March 31, 2024 the ratio of total debt outstanding, including the Revolving Credit Facility, the Trust Preferred and the Notes, to total capitalization (defined as total debt plus stockholders’ equity) was 14.7% and at December 31, 2023, the ratio of total debt outstanding, including the Term Loan, the Revolver, the Trust Preferred and the Notes, to total capitalization was 16.3%.

At June 30, 2024 the ratio of total debt outstanding, including the Revolving Credit Facility, the Trust Preferred and the Notes, to total capitalization (defined as total debt plus stockholders’ equity) was 14.1% and at December 31, 2023, the ratio of total debt outstanding, including the Term Loan, the Revolver, the Trust Preferred and the Notes, to total capitalization was 16.3%.

We strategically purchase reinsurance from third parties which enhances our business by protecting capital from severity events (either large single event losses or catastrophes) and reducing volatility in our earnings.

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It is used for a variety of reasons, including supplementing the limits provided by the treaty coverage or covering risks or perils excluded from treaty reinsurance.

For the three months ended March 31, 2024 our net retention on a written basis (calculated as net written premiums as a percentage of gross written premiums) was 62.6%, compared to 56.1% for the same 2023 period.

The following is a summary of our reinsurance programs as of March 31, 2024:

For the three and six months ended June 30, 2024 our net retention on a written basis (calculated as net written premiums as a percentage of gross written premiums) was 59.9% and 61.2%, respectively, compared to 50.6% and 53.1%, respectively, for the same 2023 periods.

The following is a summary of our reinsurance programs as of June 30, 2024:

Line of Business Maximum Company Retention

2 unchanged sentences

$1.00 million per occurrence

Cyber $2.69 million per occurrence

Excess Casualty (1)(2)

12 unchanged sentences

(3) Catastrophe loss protection is purchased up to $36.0 million in excess of $15.0 million retention, which provides cover for a 1:250-year PML event.

On June 21, 2024, R&Q Insurance Holdings Ltd, (“R&Q”) the parent company of Randall & Quilter (R&Q Bermuda (SAC) Ltd or “R&Q SAC Ltd”) the third-party reinsurer domiciled in Bermuda that is the counterparty for our loss portfolio transfer (“LPT”), filed for provisional liquidation with the Bermuda authorities.

Due to the complexity of the legal structure of R&Q SAC Ltd and uncertainty relative to the situation, management continues to evaluate the potential financial impact, if any.

Credit and Financial Strength Ratings

On August 1, 2024, A.M.

Best affirmed Skyward Specialty’s financial strength rating of A- (Excellent) and revised the outlook to positive from stable.

Best upgraded Skyward Specialty’s financial strength rating to A (Excellent) from A- (Excellent) and revised the outlook to stable from positive.

Quantitative and Qualitative Disclosures About Market Risk

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis