Executive Summary / Key Takeaways

• Skyward Specialty's "Rule Our Niche" strategy drives superior underwriting results and capital-efficient growth in specialized, less cyclical P&C markets. This disciplined approach has yielded record financial performance.
• The company reported a record Q2 2025 with an 89.4% combined ratio and $31.2 million in pretax underwriting income, alongside robust gross written premium growth of 18% for the quarter.
• Technological leadership, particularly in AI and the SkyVantage platform, is a core differentiator, enhancing underwriting productivity, risk selection, and contributing to a strong competitive moat.
• Strategic growth initiatives, including the recent acquisition of Apollo Group Holdings Limited (expected to add over $1.5 billion in managed premium) and organic unit launches, are poised to amplify future earnings.
• Despite market softening in property lines and persistent casualty loss inflation, Skyward Specialty maintains a cautious yet confident outlook, guiding for mid-teens GWP growth and a 91-92% combined ratio for 2025, supported by strong liquidity and a share repurchase program.

The Niche Architect's Blueprint

Skyward Specialty Insurance Group, Inc. (SKWD) operates as a distinctive force within the commercial property and casualty (P&C) insurance landscape. Its foundational "Rule Our Niche" strategy targets markets that are underserved, dislocated, or where standard insurance coverages fall short. This approach emphasizes developing tailored insurance products and services, allowing the company to thrive by adapting swiftly to evolving market conditions and reallocating capital to underwriting units offering the greatest returns.

The broader P&C market currently presents a complex picture, characterized by softening conditions in several lines, persistent loss inflation in casualty, and a "frothiness" in the delegated underwriting market. Against this backdrop, Skyward Specialty's operational agility and risk selection are crucial. The company selectively pursues growth where conditions are attractive and moderates exposure where they are not, aiming to deliver top-quartile returns with low volatility.

In a competitive environment dominated by larger, more diversified players such as Chubb Limited (CB), The Travelers Companies, Inc. (TRV), The Hartford Financial Services Group, Inc. (HIG), and W.R. Berkley Corporation (WRB), Skyward Specialty carves out its unique position. While these larger competitors benefit from immense scale and broader market reach, Skyward Specialty's strength lies in its specialized expertise and agility. For instance, in areas like Surety, management asserts the company has built a "genuinely world class" business, operating as "one of one" in its segment. This focused expertise allows for superior risk assessment and tailored solutions, potentially leading to more robust growth and stronger margins in its targeted niches compared to the more generalized approaches of its larger rivals.

A critical differentiator for Skyward Specialty is its technological leadership, particularly through its "award-winning SkyVantage platform" and its advanced application of AI and predictive analytics. This technology is not merely a support function; it's a core competitive advantage. The company leverages AI to multiply the productivity of its underwriters and claims professionals, enhancing risk selection and pricing precision. This "early mover advantage" in AI is expected to "compound and contribute to the competitive moat" around every division, allowing Skyward Specialty to process risks more efficiently and accurately than many competitors, especially in complex specialty markets. This technological edge directly supports its ability to maintain underwriting discipline and achieve superior outcomes, even as market conditions fluctuate.

A History of Strategic Evolution and Disciplined Growth

Skyward Specialty's journey began in 2006 as Houston International Insurance Group, Ltd., undergoing a significant rebranding to Skyward Specialty Insurance Group, Inc. in November 2020. This transformation marked a pivotal shift towards its current "Rule Our Niche" strategy, moving away from a more generalized approach. The company's history is punctuated by strategic initiatives designed to build a diversified, capital-efficient portfolio.

Key milestones include the 2023 launch of a group captive offering within its Accident & Health (A&H) business and an innovative property captive for the automotive dealer sector, developed in partnership with insurtech firm Understory Weather. These initiatives quickly became significant growth engines. Financial restructuring efforts in 2024 saw the redemption of debentures and the securing of a $57 million FHLB Loan, which further strengthened its balance sheet. Operationally, 2024 was transformative, with a comprehensive rebuild of its actuarial data, transitioning from a policy-year to an accident-year basis, enhancing financial reporting fidelity. The company also expanded its market presence by launching new underwriting units in Mortgage and Credit, Renewables, Media Liability, and Life Sciences. This strategic expansion continued into 2025 with the addition of "Agriculture and Credit Reinsurance" as its ninth division and the launch of an Aviation underwriting unit in June 2025, following an asset acquisition.

Looking ahead, a major strategic move was announced in September 2025: the definitive agreement to acquire Apollo Group Holdings Limited for $555 million. This acquisition is expected to significantly amplify the "Rule Our Niche" strategy by adding over $1.5 billion in managed premium and is projected to deliver "double-digit adjusted operating EPS accretion in the first full year post closing." This demonstrates Skyward Specialty's commitment to inorganic growth that aligns with its core strategy and enhances shareholder value. Furthermore, the October 2024 approval of a $50 million share repurchase program signals the company's maturation as a public entity and its commitment to capital management, serving as a tool to "buttress against any moments in time where we believe that there's a situation where the company is not sort of seeing the full and fair value of our stock."

Financial Fortitude: Underwriting Excellence and Capital Discipline

Skyward Specialty's financial performance in recent periods vividly illustrates the effectiveness of its "Rule Our Niche" strategy and disciplined execution. For the second quarter of 2025, the company reported its best-ever adjusted operating income of $37.1 million, or $0.89 per diluted share, driven by a record $31.2 million in pretax underwriting income. The combined ratio for Q2 2025 stood at a company-best 89.4%, with the non-cat loss ratio also reaching a historic low of 59.9%. Gross written premiums (GWP) grew an impressive 18% to $584.9 million for the quarter, and net earned premiums increased 14.7% to $295.5 million. The expense ratio improved by 0.9 points to 28.1%, benefiting from earnings leverage and economies of scale, with controllable expenses (OUE) reaching a company-best 13.1%. No net reserve development was recognized in Q2 2025, with management noting favorable emergence in pockets.

For the first half of 2025, net income reached $80.9 million, or $1.94 per diluted share, with GWP growing 17.3% to $1.12 billion and net earned premiums up 20.6% to $595.9 million. The company's IBNR (incurred but not reported) now constitutes over 70% of net reserves, up from 69% at December 31, 2024, reflecting a strong reserve position despite shortened liability durations and increased claims recognition speed.

Full-year 2024 results also underscored this strong trajectory, with adjusted operating income of $126.7 million, a 57% increase over 2023. GWP grew 19%, and the company achieved a 16.3% return on equity (ROE) with book value per share rising 18% to $19.79. Cash from operations for 2024 was approximately $300 million.

Investment income, while generally strong, saw a decrease in Q2 and H1 2025, primarily due to losses from the alternative strategic investments portfolio, particularly impacted by oil and gas and real estate holdings. However, this was partially offset by increased income from the fixed income portfolio, which benefited from a larger asset base and a higher book yield of 5.3% at June 30, 2025, up from 4.4% a year prior. The alternative portfolio, now less than 5% of total investments, is in redemption, signaling reduced future volatility.

Skyward Specialty maintains a modest financial leverage, with a debt-to-capital ratio just under 12% at June 30, 2025. The company possesses ample debt financing flexibility, including $107 million in undrawn capacity from its revolving credit facility and a $57 million FHLB loan at a fixed 4.0% interest rate. Management is confident that cash receipts from premiums and investment income are sufficient to cover foreseeable cash outflows, supporting both organic growth and strategic capital allocation initiatives.

Segment-Specific Performance: The Power of Diversification

Skyward Specialty's diversified portfolio is the engine of its growth, allowing for strategic capital reallocation to high-return areas. Several divisions demonstrated exceptional performance in Q2 2025:

• Agriculture & Credit Reinsurance: This division saw remarkable growth, with GWP soaring 95.6% to $71.6 million in Q2 2025 and 99.5% to $159.4 million for H1 2025. This growth is fueled by a globally diversified portfolio, unique solutions, and a conservative reserving philosophy, with management "bullish about the future contribution."
• Accident & Health (A&H): GWP increased 37.2% to $60.5 million in Q2 2025 and 45.5% to $123.7 million for H1 2025. Growth is driven by a successful group captive offering in the medical stop-loss market, leveraging unique medical cost management strategies and a claims approach that negotiates payments before cash outflow. This business is considered "virtually almost a capital-free" and "hugely accretive" from a return on capital perspective.
• Specialty Programs: GWP grew 44.1% to $86.0 million in Q2 2025 and 32.9% to $148.6 million for H1 2025. This growth is largely attributed to program managers where Skyward Specialty holds an ownership position (70-75% of the division), ensuring strong alignment and driving new program additions.
• Captives: GWP rose 23.9% to $77.0 million in Q2 2025 and 11.4% to $145.4 million for H1 2025. A key driver is an innovative property-focused captive for automotive dealers, leveraging a partnership with Understory Weather's on-the-ground weather technology, which has delivered "unbelievable" growth and "extraordinary" loss experience.
• Surety: GWP increased 8.2% to $40.7 million in Q2 2025 and 9.9% to $78.5 million for H1 2025. Despite reduced federal funding, management remains "bullish" on this "market-leading business," which benefits from inflation as bond sizes increase without a proportionate rise in loss likelihood. The company is also restructuring statutory entities to effectively double its T-listing, providing further growth capacity.

Conversely, Skyward Specialty has strategically moderated growth in certain areas:

• Global Property: GWP decreased 4.8% to $84.0 million in Q2 2025 and 10.2% to $130.7 million for H1 2025. The company is "pulling back" due to "increasingly softening conditions" and "irresponsible" pricing from competitors. Despite this, high account retention (high 80s) is maintained through disciplined underwriting and leveraging increased quota share reinsurance capacity.
• Construction & Energy Solutions: GWP declined 5.9% to $73.6 million in Q2 2025 and 2.1% to $149.2 million for H1 2025. This was impacted by "intentional actions" in commercial auto and a selective approach to other casualty lines, driven by concerns over loss inflation. The energy segment, however, continues to show consistent growth and profitability, including in renewables.
• Professional Lines: GWP was flat at $38.1 million in Q2 2025 and decreased 1.3% to $79.3 million for H1 2025. This reflects intensified competition in miscellaneous E&O and selective underwriting in management liability. The company is "leaning into opportunities in health care" and media liability to offset these pressures.

Operational metrics remain robust, with renewal pricing consistent at mid-single-digit pure rate (excluding global property) and mid-digit exposure growth. Submission growth was strong in the mid-teens for Q2 2025, indicating continued demand for Skyward Specialty's offerings.

Strategic Outlook and Future Catalysts

Skyward Specialty's outlook is firmly anchored in its "Rule Our Niche" strategy, with management guiding for continued profitable growth. For 2025, the company expects net income between $138 million and $150 million, a combined ratio between 91% and 92% (inclusive of 2 to 2.5 points of catastrophe losses), and gross written premium growth in the low to mid-teens. This guidance reflects a cautious yet confident stance, particularly given the dynamic market conditions.

Underlying these projections are several key assumptions. The company will maintain its selective approach to casualty lines, acknowledging that while rates may be high, the potential for loss inflation (which could rise from 8-10% to 12-14% in three years for bodily injury-exposed lines) makes aggressive exposure growth risky. The expense ratio is targeted to remain in the "sub-30s" range, benefiting from business scale despite an expected tick-up in acquisition costs due to business mix. Investment income is anticipated to be less volatile as the alternative asset portfolio runs off, though the extraordinary yields earned on short-term cash in 2024 are not expected to be replicated.

The recently announced acquisition of Apollo Group Holdings Limited is a significant future catalyst, expected to deliver "double-digit adjusted operating EPS accretion in the first full year post closing" and add over $1.5 billion in managed premium. This move underscores Skyward Specialty's commitment to expanding its niche leadership. Organic growth will also be driven by new units like Aviation, with an acquired book of circa $20 million and a target to grow to $50 million without margin deterioration, and continued expansion in healthcare and media liability. Management's confidence is rooted in its ability to adapt and reallocate capital, stating the company is "built not just for today's environment, but for all cycles to deliver long-term outperformance."

Key Risks and Mitigation

While Skyward Specialty's strategy offers compelling advantages, several risks warrant investor attention:

• Loss Inflation: The persistent and potentially escalating loss inflation, particularly in bodily injury-exposed casualty lines, remains a "serious headwind." Skyward Specialty mitigates this by adopting a highly selective growth approach, maintaining conservative reserving practices (booking above actuarial indications), and holding corporate IBNR for new ventures.
• Alternative Asset Portfolio Volatility: Historical losses from the alternative asset portfolio have impacted investment income. However, this risk is diminishing as the portfolio is in redemption and now comprises less than 5% of total investments, with proceeds being reinvested in less volatile fixed income.
• Medical Cost Inflation and Provider Cost-Shifting: In the A&H segment, providers are "systematically cost-shifting." Skyward Specialty counters this with unique medical cost management strategies, including reference-based pricing and proactive negotiation of large medical bills before payment, a capability that differentiates it from competitors who often "pay and pursue."
• Competitive Pressures: The property market is experiencing "irresponsible" pricing, and certain delegated underwriting programs (MGAs) operate on "economics that is distinct from the rest of the industry." Skyward Specialty responds with disciplined underwriting, allowing business to lapse when pricing is unsustainable, and leveraging its niche expertise and technology to maintain strong client relationships and underwriting profitability.
• IT Controls Material Weakness: A material weakness in IT controls was identified in 2024. Remediation efforts are ongoing and expected to be completed in 2025. While this has not impacted financial statements, it highlights the importance of robust internal controls in a technology-driven insurer.
• Economic Uncertainty: A potential economic slowdown and reduced federal funding could impact certain business lines. Skyward Specialty's diversified portfolio and agile capital reallocation strategy are designed to provide resilience against such macroeconomic shifts.

Conclusion

Skyward Specialty Insurance Group, Inc. stands as a compelling investment proposition, distinguished by its "Rule Our Niche" strategy and a proven track record of disciplined execution. The company's ability to consistently deliver top-tier underwriting results, as evidenced by record Q2 2025 performance and robust growth across specialized segments, underscores the efficacy of its focused approach. By strategically reallocating capital, leveraging its technological edge in AI and the SkyVantage platform, and pursuing accretive acquisitions like Apollo Group Holdings, Skyward Specialty is actively building a durable competitive moat.

Despite facing industry headwinds such as market softening in property and persistent casualty loss inflation, the company's cautious yet confident outlook for mid-teens GWP growth and a combined ratio in the low 90s for 2025 reflects a well-managed enterprise. Skyward Specialty's commitment to capital efficiency, strong liquidity, and a proactive share repurchase program further enhance its investment appeal. For discerning investors, Skyward Specialty represents a high-performing specialty insurer poised for continued profitable growth and long-term value creation, driven by its unique blend of strategic focus, technological leadership, and underwriting discipline.