10-Q: Skyward Specialty Soars with Strong Q3 Growth, Apollo Acquisition

Skyward Specialty Insurance Group reports significant premium growth and improved profitability in Q3 2025, alongside plans to acquire Apollo Group Holdings for $555 million.

Summary

• Net earned premiums increased by 30.5% to $351.8 million for the three months ended September 30, 2025, compared to $269.6 million in the prior year period.
• Net income rose by 25.2% to $45.9 million for the three months ended September 30, 2025, up from $36.7 million in the same period last year.
• Diluted earnings per share (EPS) increased to $1.10 for the three months ended September 30, 2025, from $0.89 in the comparable 2024 period.
• The combined ratio improved by 3.0 points to 89.2% for the three months ended September 30, 2025, driven by better loss and expense ratios.
• Gross written premiums surged by 51.6% to $606.5 million for the three months ended September 30, 2025, primarily due to growth in the agriculture and credit (re)insurance division.
• The company entered into agreements on September 2, 2025, to acquire Apollo Group Holdings Limited for $555.0 million, with approximately 33% to be paid in common stock and the remainder in cash.
• The Apollo acquisition is expected to close in the first quarter of 2026, subject to regulatory approvals.
• Management identified a material weakness in disclosure controls and procedures related to information technology general controls (ITGCs) as of September 30, 2025, but remediation efforts are ongoing.
• Book value per share increased to $23.75 as of September 30, 2025, from $19.79 at December 31, 2024.

Sentiment

Score: 8

Explanation: The company demonstrated robust financial performance with significant growth in premiums, net income, and underwriting income, coupled with improved efficiency ratios. The strategic acquisition of Apollo Group Holdings is a positive long-term move, despite the associated debt. The identified material weakness in ITGCs is a concern but is being actively remediated, and management has certified the financial statements' fairness. Overall, the strong operational results and strategic expansion outweigh the minor declines in net investment gains and the ITGC issue.

Positives

• Net earned premiums grew by 30.5% for the three months and 24.1% for the nine months ended September 30, 2025, demonstrating strong top-line growth.
• Net income increased by 25.2% for the three months and 21.4% for the nine months ended September 30, 2025, indicating enhanced profitability.
• Underwriting income saw substantial growth, up 81.8% to $38.2 million for the three months and 40.7% to $98.0 million for the nine months ended September 30, 2025.
• The combined ratio improved significantly to 89.2% (3-month) and 89.6% (9-month), reflecting better underwriting performance and expense management.
• The loss and loss adjustment expense (LAE) ratio improved by 2.5 points to 60.8% for the three months and 0.6 points to 61.4% for the nine months, driven by business mix shift and lower catastrophe losses in Q3.
• The expense ratio improved by 0.5 points to 28.4% for the three months and 0.7 points to 28.2% for the nine months, due to earnings leverage.
• Annualized return on equity increased to 19.7% for the three months and 19.3% for the nine months ended September 30, 2025.
• Gross written premiums increased by 51.6% for the three months and 27.4% for the nine months, primarily driven by the new agriculture and credit (re)insurance division.
• The company's financial strength rating of A (Excellent) with a stable outlook was affirmed by A.M. Best on August 14, 2025.
• The debt to total capitalization ratio improved to 11.1% at September 30, 2025, from 13.1% at December 31, 2024.

Negatives

• Net investment gains decreased by 32.3% to $6.9 million for the three months ended September 30, 2025, compared to $10.2 million in the prior year period.
• The alternative and strategic investments portfolio continued to be impacted by a decline in the fair value of limited partnership investments.
• Income from short-term investments and cash and cash equivalents decreased due to an overall decrease in yields compared to the same 2024 periods.
• The company recognized $7.0 million in provisions for credit losses on available-for-sale corporate securities during the nine months ended September 30, 2025, due to deteriorating conditions.
• Gross written premiums decreased in the Global Property (-26.3%), Professional Lines (-11.7%), and Construction & Energy Solutions (-5.3%) divisions for the three months ended September 30, 2025.

Risks

• The pending acquisition of Apollo Group Holdings Limited involves risks such as delays in completion, diversion of management's attention, disruption to existing operations, inability to effectively manage expanded operations, and potential loss of key Apollo employees, partners, or customers.
• The agreements governing indebtedness for the Apollo acquisition are expected to contain covenants that will impose restrictions on the company's ability to operate, including limitations on liens, additional indebtedness, investments, asset sales, dividends, and mergers.
• The significant additional indebtedness incurred for the Apollo acquisition could decrease business flexibility, increase interest expense, and potentially lead to credit rating downgrades.
• The rapid growth and development of artificial intelligence (AI) and machine learning may alter the competitive landscape, and the company's competitive position could be harmed if competitors leverage AI solutions more quickly or effectively.
• Risks associated with AI include deficient, inaccurate, or biased content/analyses, costs to adopt and deploy technologies that could become obsolete, and uncertainty in the legal and regulatory landscape for AI.
• A material weakness existed related to the ineffective implementation of information technology general controls (ITGCs) in the area of user access for systems supporting financial reporting processes, which could adversely affect the ability to record, process, summarize, and report financial information.

Future Outlook

The company expects the acquisition of Apollo Group Holdings Limited to close in the first quarter of 2026, subject to regulatory approvals. Management is committed to continuing to improve its ITGCs to remediate the identified material weakness. The company continues to research and implement artificial intelligence-based solutions to improve its business, while acknowledging the evolving legal and regulatory landscape for AI.

Management Comments

• Management believes that cash receipts from premiums and proceeds from investment income are sufficient to cover cash outflows in the foreseeable future.
• The CEO and CFO 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.
• Management is committed to continuing to improve our ITGCs, including conducting thorough reviews, enhancing access controls, strengthening system access procedures, and providing regular training.

Industry Context

The company operates in the specialty insurance market, focusing on underserved or dislocated niches requiring customized underwriting solutions. Its strong premium growth, particularly in agriculture and credit (re)insurance, suggests successful navigation of market opportunities. The strategic acquisition of Apollo Group Holdings Limited indicates a move towards expanding market share and capabilities, aligning with potential consolidation trends in the insurance sector. The discussion of AI adoption reflects a broader industry trend towards leveraging technology for efficiency and risk management, while also highlighting the emerging regulatory and competitive challenges.

Comparison to Industry Standards

• The company benchmarks its net underwriting income, annualized return on equity, and growth in book value per share against competitors, though specific comparable companies or projects are not detailed in the filing.

Corporate Governance

Legal Proceedings

• The company is a party to 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 legal actions related to bad faith claims, disputes with third parties, or alleged errors and omissions.
• Based on present information, insurance coverage, and legal counsel advice, the company believes the resolution of these matters will not have a material adverse effect on its consolidated financial position, results of operations, or cash flows.

Related Party Transactions

• The company holds a 20% ownership interest in RISCOM, which provides wholesale brokerage services and has a managing general agency agreement with the company. Net earned premium related to these agreements was $30.675 million for the three months and $89.521 million for the nine months ended September 30, 2025. Commissions were $7.026 million and $22.191 million, respectively.
• Advisory and professional services fees and expense reimbursements paid to various affiliated stockholders and directors amounted to $0.2 million for the three months and $0.5 million for the nine months ended September 30, 2025.

Stakeholder Impact

• Shareholders are likely to benefit from strong financial performance, increased net income, improved EPS, and the strategic acquisition of Apollo, which could drive future growth.
• Employees of both Skyward Specialty and Apollo may experience changes due to the integration of Apollo's operations, including potential shifts in roles, responsibilities, and corporate culture.
• Customers of Apollo may experience changes in service delivery or product offerings as Apollo integrates into Skyward Specialty's operations.
• Creditors will be impacted by the increased indebtedness taken on to finance the Apollo acquisition, though the company's debt to capitalization ratio remains manageable and covenants are currently in compliance.
• The material weakness in ITGCs could pose a risk to data integrity and security, potentially impacting all stakeholders if not fully remediated.

Next Steps

• Complete the acquisition of Apollo Group Holdings Limited, expected in the first quarter of 2026, subject to regulatory approvals.
• Continue implementing additional measures to improve internal control over ITGCs to remediate the identified material weakness.
• Actively manage the notional value of derivative contracts and hedged exposure based on prevailing market conditions.
• Monitor and assess the impact of the One Big Beautiful Bill Act (OBBBA) on future effective tax rates.
• Continue to research and implement artificial intelligence-based solutions in an effort to improve the business.

Key Dates

Recommendation

The company demonstrates exceptional financial health and growth, with significant increases in net earned premiums, net income, and underwriting income, alongside a notable improvement in its combined ratio. The strategic acquisition of Apollo Group Holdings, while introducing additional debt, is a clear growth driver and expands market presence. Despite the identified ITGC material weakness, management is actively addressing it, and the overall operational performance and strategic direction are highly positive. The strong book value per share growth and affirmed A.M. Best rating further bolster confidence, making it an attractive investment.

Keywords

Specialty Insurance, SEC Filing, 10-Q, Financial Results, Underwriting Income, Combined Ratio, Gross Written Premiums, Net Earned Premiums, Apollo Acquisition, Mergers and Acquisitions, Insurance Industry, Risk Factors, ITGCs, Credit Losses, Investment Portfolio, Reinsurance, Artificial Intelligence