10-Q: Skyward Specialty Posts Strong Q2 Growth, Underwriting Gains

Skyward Specialty Insurance Group, Inc. reported significant revenue and net income growth for the second quarter and first half of 2025, driven by strong premium increases and improved underwriting profitability.

Summary

• Net income for the three months ended June 30, 2025, increased by 25.4% to $38.8 million, up from $31.0 million in the prior year period.
• Diluted earnings per share rose to $0.93 for the second quarter of 2025, a 24.0% increase from $0.75 in the same period of 2024.
• Net earned premiums grew by 14.7% to $295.5 million for the second quarter of 2025, compared to $257.6 million in the second quarter of 2024.
• The combined ratio improved by 1.3 points to 89.4% for the second quarter of 2025, down from 90.7% in the second quarter of 2024, driven by improvements in both the loss and expense ratios.
• Gross written premiums increased by 17.9% to $584.9 million for the second quarter of 2025, with notable growth in Agriculture and Credit (Re)insurance (+95.6%), Accident & Health (+37.2%), and Specialty Programs (+44.1%).
• Book value per share increased to $22.23 as of June 30, 2025, up from $19.79 at December 31, 2024.
• Net investment income decreased by 15.7% to $18.6 million for the second quarter of 2025, primarily due to losses from alternative and strategic investments, partially offset by increased income from the fixed income portfolio.
• A material weakness in information technology general controls (ITGCs) related to user access for financial reporting systems persists, with ongoing remediation efforts.

Sentiment

Score: 8

Explanation: The company demonstrated strong financial performance with significant growth in net income, EPS, and premiums, coupled with improved underwriting profitability. The A.M. Best rating upgrade is a positive indicator of financial strength. While a material weakness in ITGCs is noted, management is actively addressing it, and the overall operational and financial results are robust.

Positives

• Net income increased by 25.4% to $38.8 million for the second quarter of 2025 and by 19.4% to $80.9 million for the first half of 2025.
• Diluted earnings per share grew by 24.0% to $0.93 for the second quarter of 2025 and by 17.6% to $1.94 for the first half of 2025.
• Net earned premiums increased by 14.7% for the second quarter and 20.6% for the first half of 2025, reflecting strong business growth.
• The combined ratio improved to 89.4% in Q2 2025 (from 90.7% in Q2 2024) and to 90.0% in H1 2025 (from 90.1% in H1 2024), indicating enhanced underwriting profitability.
• The expense ratio improved by 0.9 points to 28.1% in Q2 2025 and by 0.7 points to 28.1% in H1 2025, driven by earnings leverage.
• Gross written premiums increased by 17.9% in Q2 2025 and 17.3% in H1 2025, with significant growth in key underwriting divisions such as Agriculture and Credit (Re)insurance (+99.5% H1), Accident & Health (+45.5% H1), and Specialty Programs (+32.9% H1).
• Book value per share increased by 12.3% to $22.23 as of June 30, 2025, from $19.79 at December 31, 2024.
• The ratio of total debt outstanding to total capitalization improved to 11.7% at June 30, 2025, from 13.1% at December 31, 2024.
• A.M. Best upgraded the financial strength rating to A (Excellent) from A(Excellent) on August 1, 2024, with a stable outlook.

Negatives

• Net investment income decreased by 15.7% to $18.6 million in Q2 2025 and by 5.9% to $37.9 million in H1 2025, primarily due to losses from the alternative & strategic investments portfolio.
• The loss and loss adjustment expense (LAE) ratio for the first half of 2025 slightly increased by 0.6 points to 61.9% compared to 61.3% in the same period of 2024, impacted by higher catastrophe losses.
• Catastrophe losses increased to $10.5 million in H1 2025 from $4.0 million in H1 2024, driven by convective storms and California wildfires.
• Identified credit impairments of $6.2 million for two available-for-sale corporate securities based on deteriorating conditions.
• Gross written premiums decreased in Global Property (-10.2% H1) and Construction & Energy Solutions (-2.1% H1) divisions.

Risks

• A material weakness exists related to the ineffective implementation of information technology general controls (ITGCs) in user access for systems supporting financial reporting processes, which could adversely affect the ability to record, process, summarize, and report financial information.
• The company cannot assure that remediation efforts for the identified material weakness will be sufficient to avoid potential future material weaknesses or significant deficiencies.
• Security breaches, loss of data, cyberattacks, and other information technology failures could disrupt operations, damage reputation, and adversely affect business and financial results.
• The company remains obligated for amounts ceded to reinsurers in the event that reinsurers do not meet their obligations.
• The company is subject to various legal actions arising from claims under insurance policies and contracts, as well as disputes with third parties or alleged errors and omissions, though no material adverse effect is currently expected.

Future Outlook

The company is currently assessing the impact of the recently enacted One Big Beautiful Bill Act (OBBBA) on its consolidated financial statements, with provisions effective in 2025 and through 2027. Management believes that cash receipts from premiums and investment income will be sufficient to cover cash outflows in the foreseeable future.

Management Comments

• The Chief Executive Officer and Chief Financial Officer certified that, based on their knowledge, the financial statements and other financial information included in this Form 10-Q fairly present in all material respects the financial condition, results of operations, and cash flows as of, and for, the periods presented, despite the identified material weakness in internal controls.
• Management believes that cash receipts from premiums and proceeds from investment income are sufficient to cover cash outflows in the foreseeable future.

Industry Context

The company operates as a specialty insurance holding company, focusing on underserved, dislocated, and niche markets where standard insurance coverages are often insufficient. It develops tailored insurance products and services to address the specific needs of businesses in these markets, emphasizing highly specialized, customized underwriting solutions and claims capabilities. The strategic purchase of reinsurance is integral to managing risk, protecting capital from severity events, and reducing earnings volatility, which is a common practice in the insurance industry.

Legal Proceedings

• The company is named as a defendant in various legal actions arising from claims made under insurance policies and contracts, which are considered in estimating loss and loss adjustment expense reserves.
• The company is also a defendant in various legal actions related to bad faith claims, disputes with third parties, or alleged errors and omissions, with accruals recorded where losses are probable and estimable.
• Management believes the resolution of these matters will not, individually or in the aggregate, have a material adverse effect on the company's consolidated financial position, results of operations, or cash flows.

Related Party Transactions

• Skyward Underwriters Agency, Inc. (SUA), a subsidiary, generates commission and fee income from placing insurance policies for third-party insurers or reinsurers.
• RISCOM, in which the company holds a 20% ownership interest, provides wholesale brokerage services and has a managing general agency agreement with the company. Net earned premium related to these agreements was $58.8 million and commissions were $15.2 million for the six months ended June 30, 2025.
• Advisory and professional services fees and expense reimbursements of $0.3 million were paid to various affiliated stockholders and directors for the six months ended June 30, 2025.

Stakeholder Impact

• Shareholders: Benefited from increased net income, diluted EPS, and book value per share. The approved share repurchase program could further enhance shareholder value.
• Policyholders: The A.M. Best rating upgrade to A (Excellent) indicates improved financial strength and ability to meet policyholder obligations. The focus on specialized solutions caters to specific customer needs.
• Employees: Tax benefits from stock-based compensation were noted. Ongoing remediation of ITGCs aims to improve internal processes, which could impact employees involved in financial reporting.
• Creditors: The improved debt to total capitalization ratio and compliance with debt covenants indicate a healthier financial position for creditors.

Next Steps

• Continue ongoing remediation efforts to improve internal control over information technology general controls (ITGCs).
• Assess the impact of the One Big Beautiful Bill Act (OBBBA) on consolidated financial statements.
• Potentially execute share repurchases under the approved $50.0 million program, as no shares have been repurchased as of June 30, 2025.

Key Dates

Recommendation

The company demonstrated robust growth in net earned premiums, net income, and earnings per share for both the quarter and year-to-date periods. Underwriting profitability significantly improved, evidenced by a lower combined ratio. The A.M. Best rating upgrade to A (Excellent) reinforces financial strength. While there's an acknowledged material weakness in ITGCs, management is actively addressing it, and the financial statements are certified as fairly presented. The strong operational performance and positive outlook outweigh the identified internal control issue, making it an attractive investment.

Keywords

Specialty insurance, Underwriting, Financial results, SEC filing, 10-Q, SKWD, Property and casualty, Insurance, Financial performance, Risk management