Company History and Business Overview Skyward Specialty Insurance Group, Inc. (SKWD) is a leading specialty property and casualty (P&C) insurance provider that has consistently delivered strong financial results and outperformed the industry. With a focus on underserved, niche markets, Skyward Specialty has built a diversified portfolio that has proven resilient across various market cycles.
Skyward Specialty was founded in 2006 as a specialty insurance holding company incorporated in Delaware. The company initially focused on offering a broad array of commercial property and casualty products and solutions on a non-admitted or excess and surplus (E&S) and admitted basis, predominantly in the United States. In its early years, Skyward Specialty established itself as a provider of highly specialized, customized underwriting solutions and claims capabilities to serve markets that were underserved, dislocated and/or where standard insurance coverages were insufficient or inadequate to meet the needs of businesses.
Over time, Skyward Specialty expanded its portfolio and continued to develop tailored insurance products and services to address the evolving needs of its customers. The company faced some challenges in the early 2010s, including navigating difficult market conditions in certain lines of business like cyber and public D&O. However, the company was able to adapt its strategy and maintain its focus on its core specialty markets.
In 2020, Skyward Specialty undertook a significant portfolio repositioning, exiting several underperforming business lines and refocusing its efforts on higher-margin, less cyclical specialty markets. This strategic shift helped the company strengthen its financial position and position it for more consistent profitability going forward. All of Skyward Specialty's insurance company subsidiaries are group rated and have an A (Excellent) financial strength rating from A.M. Best Company.
The company's eight distinct underwriting divisions, each with dedicated leadership and deep industry expertise, allow Skyward Specialty to provide highly specialized, customized solutions to its customers. This structure has been instrumental in the company's ability to target markets that are underserved, dislocated or where standard insurance coverages are insufficient to meet the needs of businesses.
Over the years, Skyward Specialty has demonstrated a strong track record of profitable growth. In 2023, the company reported revenue of $895.4 million and net income of $85.98 million. Its annualized return on equity (ROE) through the first nine months of 2024 was an impressive 19.1%, highlighting the company's ability to generate attractive risk-adjusted returns.
The specialty property and casualty insurance industry has seen a compound annual growth rate (CAGR) of around 6-8% over the past 5 years, indicating a growing market for Skyward Specialty's services.
Diversified Product Portfolio and Disciplined Underwriting Skyward Specialty's diverse product portfolio spans commercial property, casualty, professional lines, accident & health, surety, and other specialty lines. This diversification has been a key driver of the company's resilience, as it has enabled Skyward Specialty to navigate various market conditions and capitalize on emerging opportunities.
The company's disciplined underwriting approach is another hallmark of its success. Skyward Specialty's underwriting teams are deeply embedded in their respective niche markets, allowing them to make well-informed decisions and maintain a strong risk management culture. This focus on underwriting discipline has contributed to the company's consistent outperformance, with a combined ratio of 90.9% for the first nine months of 2024.
Skyward Specialty's eight distinct underwriting divisions include:
1. Global Property Agriculture: Offering commercial property and agriculture insurance products. 2. Industry Solutions: Providing specialty insurance solutions for targeted industry verticals. 3. Captives: Specializing in captive insurance programs. 4. Programs: Offering customized insurance programs. 5. Transactional ES: Focusing on transactional excess and surplus lines insurance. 6. Accident Health: Providing accident and health insurance products. 7. Professional Lines: Offering professional liability insurance. 8. Surety: Providing surety bonds and related products.
Financials Skyward Specialty's financial performance has been impressive, with strong revenue growth and profitability. In 2023, the company reported revenue of $895.4 million and net income of $85.98 million. The company's annualized return on equity (ROE) through the first nine months of 2024 was 19.1%, demonstrating its ability to generate attractive risk-adjusted returns for shareholders.
For the first nine months of 2024, Skyward Specialty reported gross written premiums of $1.35 billion, up 19% year-over-year. This growth was driven by double-digit premium increases across multiple underwriting divisions. Net written premiums were $852.6 million, up 32% year-over-year, excluding the impact of a quota share reinsurance contract cancellation in 2023. Net earned premiums reached $763.5 million, up 29.2% year-over-year, excluding the quota share reinsurance contract impact.
The company's underwriting income for the first nine months of 2024 was $69.6 million, up from $55.5 million in the prior year period. Net investment income also saw significant growth, reaching $59.9 million, up from $26.3 million in the prior year period, driven by growth in the investment portfolio and higher investment yields. Net income for the first nine months of 2024 was $104.4 million, up from $56.7 million in the prior year period.
In the most recent quarter, Skyward Specialty reported revenue of $300.89 million, representing a year-over-year growth of 25.8%. This increased revenue was driven by double-digit premium growth primarily from the transactional E&S, programs, captives, surety and global property agriculture underwriting divisions. Net income for the quarter was $36.67 million, with operating cash flow (OCF) of $167.996 million and free cash flow (FCF) of $167.617 million.
Liquidity Skyward Specialty maintains a strong liquidity position, which provides the company with financial flexibility to pursue growth opportunities and navigate market challenges. The company's debt-to-capital ratio stood at just 13% as of September 30, 2024, indicating a conservative approach to financial leverage.
As of the most recent reporting period, Skyward Specialty had a debt-to-equity ratio of 0.15, demonstrating a conservative capital structure. The company held cash of $105.57 million and had access to an additional $107 million under its $150 million revolving credit facility. Skyward Specialty's total debt consists of $100 million in notes payable and $18.96 million in subordinated debt, net of debt issuance costs.
The company's current ratio and quick ratio both stand at 0.63, indicating that while the company's short-term liquidity position could be stronger, it is likely sufficient given the nature of the insurance business and the company's strong cash flow generation.
Financial Strength and Liquidity Skyward Specialty's financial position is robust, with a debt-to-capital ratio of just 13% as of September 30, 2024. The company's strong cash generation and liquidity have provided it with the flexibility to fund growth initiatives, make strategic investments, and return capital to shareholders.
In October 2024, Skyward Specialty's board of directors approved a $50 million share repurchase program, reflecting the company's confidence in its long-term prospects and its commitment to enhancing shareholder value. This move is part of the maturation of the company as a public entity and underscores their commitment to maximizing shareholder value.
Outlook and Growth Opportunities Looking ahead, Skyward Specialty remains optimistic about its growth prospects. The company's emphasis on niche, high-return markets has positioned it well to capitalize on emerging trends and opportunities. Despite some pockets of increased competition, Skyward Specialty's management team believes the company is well-equipped to deliver consistent, profitable growth.
In the third quarter of 2024, Skyward Specialty reported gross written premiums growth of 12.4%, with double-digit increases in several of its key divisions, including Transactional E&S, Surety, Captives, and Programs. The company's net investment income also increased by $6.4 million compared to the same period in 2023, driven by the continued deployment of capital into its fixed-income portfolio.
Skyward Specialty reported adjusted operating income of $2.26 per diluted share through the first nine months of 2024, which is up over 50% compared to 2023. The company also reported a combined ratio of 92.2% in Q3 2024, which included less than 3 points of catastrophe losses. Skyward Specialty maintained their previous full-year catastrophe loss guidance of 2 to 2.5 points.
While the company did not provide specific guidance for top-line growth for the next year, management stated they feel as confident about their growth outlook for the next 5 quarters as they did at the start of 2024. They noted that their 12.4% growth in Q3 2024 was in line with their expectations.
Risks and Challenges While Skyward Specialty has demonstrated remarkable resilience, the company is not without its risks and challenges. The specialty insurance industry is highly competitive, and the company must navigate evolving market conditions, regulatory changes, and emerging risks such as cyber threats and social inflation.
Additionally, Skyward Specialty's focus on niche markets means that it is exposed to concentration risks, and any significant loss or disruption in these markets could impact the company's performance.
The company expects the impact of Hurricane Milton, while still being assessed, to be within their 2 to 2.5 point full-year catastrophe loss guidance, barring any further major events. This demonstrates the company's ability to manage and absorb catastrophic events within its planned risk parameters.
Conclusion Skyward Specialty Insurance Group has established itself as a leading player in the specialty P&C insurance market, delivering consistent financial outperformance and generating attractive risk-adjusted returns for its shareholders. The company's diversified product portfolio, disciplined underwriting approach, and strong financial position have been key to its success.
As Skyward Specialty continues to execute on its "rule our niche" strategy, the company appears well-positioned to capitalize on growth opportunities and navigate the challenges of the specialty insurance landscape. With its proven track record and experienced management team, Skyward Specialty remains an intriguing investment proposition for investors seeking exposure to the dynamic specialty insurance sector.