Skyward Specialty Insurance Group, Inc. (SKWD) Earnings Call Transcript

[Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to introduce Vice President of Investor Relations, Jordan Arnold.

Thank you, Andrew. Good morning, everyone, and welcome to our third quarter 2026 earnings conference call. Today, I am joined by our Chairman and Chief Executive Officer, Andrew Robinson, Chief Financial Officer, Mark Haushill, and Deputy Chief Financial Officer, Taryn McHarg. We will begin the call with our prepared remarks, and then we will open the lines for questions. Our comments may include forward-looking statements, which by their nature involve a number of risk factors and uncertainties, which may affect future financial performance. Such risk factors may cause actual results to differ materially from those contained in our projections or forward-looking statements. These types of factors are discussed in our press release as well as in our Form 10-K that was previously filed with the Securities and Exchange Commission. Financial schedules containing reconciliations of certain non-GAAP measures, along with other supplemental financial schedules, are included as part of our press release and available on our website under the Investors section. With that, I will turn the call over to Andrew.

Good morning, everyone, and thank you for joining us. Before we begin, I'd like to take a minute to recognize an important leadership transition. As previously announced, Mark Haushill will retire as Chief Financial Officer effective March 31, 2027. Mark has been an exceptional partner in helping build Skyward into the organization it is today, and we're immensely grateful for his leadership and his contributions. I'm also pleased to formally introduce Taryn McHarg, who will succeed Mark as CFO upon his retirement. Taryn is a highly respected leader with deep financial and operating experience, and she's already become an important contributor to our organization. We look forward to a seamless transition over the coming months and are excited about the future under her financial leadership. Turning to the quarter, our third quarter results were outstanding and further demonstrate the strength of our Rule Our Niche strategy. Outstanding execution and our diversified portfolio that we have built. Gross written premiums were up 9% and fee-generating gross written premiums were up more than 18%. Diluted operating earnings per share increased 22% to $1.28, and through 9 months, our annualized operating return on equity exceeded 20%. We continue to benefit from multiple earnings growth engines across the organization, allowing us to allocate capital to the most attractive opportunities while remaining disciplined in areas where risk-adjusted returns are less compelling. As we have discussed for several years, the objective has been to build a truly diversified specialty insurance business so we can continue to deliver top-quartile returns regardless of cycle, and that design continues to prove its value. With that, I'll turn the call over to Mark and Taryn to provide the financial details for the quarter.

Thank you, Andrew, and good morning, everyone. We delivered another strong quarter with solid growth across the business, excellent underwriting profitability, and continued momentum in our fee-based earnings. Importantly, we generated these results while remaining disciplined in areas where market conditions are becoming more competitive. Operating income was $58 million or $1.28 per diluted share. Through 9 months, we've generated approximately $175 million in operating income and an annualized operating return on equity of over 20%, demonstrating the consistency of our earnings and the attractive returns we're generating across the portfolio. As Andrew mentioned, premium growth remained strong with gross written premiums up 9% to $803 million and fee-generating gross written premiums up over 18% to $517 million. Underwriting performance was excellent with a consolidated combined ratio of 89.9% and an 88.1% ex-CAT combined ratio. We are particularly pleased with these results, given the increasingly competitive environment in certain property classes and continued loss cost pressures affecting parts of the casualty market. Within Skyward Specialty, gross written premiums increased 10% to $668 million, led by continued momentum in accident and health, global agriculture, credit and surety, and strategic distribution partners, partially offset in areas where competitive market conditions and pricing pressure have increased, particularly across portions of the property market and select casualty and liability classes. Growth in our agriculture business remains strong. We experienced lower-than-expected take-up as higher input costs continue to pressure farmer cash flow and margins, impacting dairy and livestock growth. True-ups related to the 2025 and 2026 treaty years were the primary driver of lower net earned premiums in the quarter. The benefit of the data and monitoring capabilities we have built allowed us to identify and respond to the change in trend quickly. Skyward Specialty's net earned premium growth year-to-date is over 13%. Our new dairy livestock reinsurance placed at 7/1 mitigated our exposures, reduced net written premiums, and locked in a portion of our profits via ceding commissions. Skyward Specialty reported a combined ratio of 88.3% and an ex-CAT combined ratio of 86.8%. The loss ratio was 62.6%, including 1.5 points of catastrophe losses, primarily from convective storm activity. The non-CAT loss ratio was 61.1%, an increase of approximately 1 point year-over-year, driven primarily by business mix, specifically growth in accident and health and global agriculture. Skyward Specialty's expense ratio in the quarter improved to 25.7%. Our year-to-date expense ratio of 25.4% has improved 1.7 points from the prior year period. Pure rate ex-property was in the mid-single digits. Retention remains in the mid- to upper 70s, and we're seeing elevated submission growth in the low 20s. Now I will turn the call over to Taryn to discuss our overall results.

Thank you, Mark. Good morning, all. Apollo's gross written premiums increased 3% to $135 million in the quarter, driven by our Specialty Risk Syndicate 1969, which grew 11% year-over-year. This was partially offset by a modest decrease in our digital economy-focused ibott Syndicate 1971, reflecting the timing of a renewal as well as seasonally lower new business opportunities. Apollo's fee generation continued to be a meaningful growth driver, with fee-generating gross written premiums increasing 18% to $517 million, including 70% growth in partner syndicates. Underwriting fee income was $11 million, bringing the total for the first 9 months to approximately $34 million. Growth across both aligned and partner syndicates demonstrates the benefit of Apollo's capital-light business model as we expand both underwriting and fee-based earnings. Apollo reported a combined ratio of 90.5% and an ex-CAT combined ratio of 87.7%. The loss ratio was 58.0%, including 2.8 points of catastrophe losses, also from convective storm activity. The 55% non-CAT loss ratio reflects strong underlying underwriting performance across the business. Apollo's expense ratio was 32.5% for the quarter. Lastly, while Apollo's rate was slightly negative, rate adequacy continues to be strong. Retention remains in the mid-80s. I'll now pass back to Mark.

Thank you, Taryn. Moving to reserves, we're in the process of completing the Skyward Specialty ground-up review. Initial indications are positive, with emergence as expected or better from occurrence liability, property, surety, and A&H, with some pressure in exited portfolios for commercial auto and claims-made professional liability. Apollo emergence in the quarter was in line with our expectations. We continue to maintain a strong overall reserve position with IBNR now making up 77% of our total reserves, the highest level in company history. We did not recognize any prior year reserve development during the quarter and will provide a more comprehensive update on our fourth quarter call. Turning to investments, investment income continued to benefit from the addition of the Apollo portfolio and higher yields. Net investment income increased 54% to $34 million for the quarter, primarily due to $30 million of income from the fixed income portfolio. Results from alternative and strategic investments remain pressured by lower valuations and certain limited partnership investments. For the fixed income portfolio, we put new money to work at yields of 6.4%, and the embedded yield for the group portfolio was 5.5%. Our balance sheet remains exceptionally strong. Book value per share increased more than 15% from December 2025 to $28.74. As we've seen over the last 2 years, certain areas of the market have softened and competitive conditions typically intensify in the fourth quarter. Despite that, we remain on track to deliver full-year growth near the upper end of our original guidance range of $2.65 billion to $2.8 billion. We remain bullish about our growth and, in turn, our earnings growth outlook. We continue to have numerous attractive opportunities to profitably grow our business. Now I'll turn the call back over to Andrew.

Thanks, Mark. The underlying story of the quarter is straightforward. Our business simply continues to perform. Strong growth and profitability across a number of our specialty businesses, together with the continued expansion of our fee-based earnings streams, demonstrate the benefits of operating a diversified business with multiple avenues for profitable growth. As market conditions evolve, we remain focused on directing capital toward our most attractive opportunities and maintaining the underwriting discipline that has been a hallmark of Skyward. Growth remained broad-based across the portfolio, underscoring the strength of our Rule Our Niche strategy. Our expertise, technology leadership, and disciplined execution continue to create differentiated and defensible positions that drive outstanding, absolute returns and sustain profitable earnings growth. To highlight one, our accident and health business continues to be one of the best examples of high-quality growth, more than doubling over the past 2 years. Our 76% loss ratio ranked fourth best amongst the 30 carriers writing more than $250 million of premium, and outperformed the industry average of 91% by approximately 15 points as reported in the NAIC's 2025 Stop Loss Industry Analysis. AI embedded into our A&H underwriting process developed over the last 5 years continues to mature into a distinctive advantage. Our focus on the smaller employer market, together with our distinctive IP and medical cost management delivered through single company and group captive products, is unique as demonstrated by our results. Recently, we announced two strategic growth initiatives: the launch of ibott in the U.S. and a partnership and founding investment in Slingshot, an AI-native insurance platform for embedded insurance products. We intend to report these through our Strategic Distribution Partners division. As is visible by our growth in fee-generating premium from Apollo, the partner syndicate platform is an exciting and unique differentiator for Skyward. As existing syndicates scale and new partners join the platform, so does high-quality recurring fee income. In the quarter, we launched two partner syndicates and continue to see a strong pipeline of future opportunities heading into 2027. We believe we are still in the early innings of realizing the full potential of this business and remain very encouraged by the opportunities that lie ahead. To wrap up, we're very pleased with our performance in the quarter and through the first 9 months of the year. The diversity of our business continues to create opportunities to profitably grow where market conditions are attractive, and we'll continue to defend our book in areas that are becoming more competitive. We've never been more confident in the quality of our portfolio, the positions we have built, the talent we have, and our leadership in the use of technology and AI as demonstrated by our bionic underwriting and claims at Skyward Specialty and augmented underwriting at Apollo. Altogether, we are exceptionally well-positioned to continue to deliver strong earnings growth and top-quartile financial returns for our shareholders. With that, I'll turn the call over to the operator to open it up for questions. Operator?

[Operator Instructions] Our first question comes from the line of Gregory Peters with Raymond James. Please go ahead.

Good morning, everyone. I guess, from a big picture perspective, you've reaffirmed sort of the revenue guidance or premium guidance for this year. I was wondering perhaps if you could just segue and talk a little bit about what you think the outlook looks like for 2027 in terms of premium growth. And of course, there's the follow-up questions relating to what happened in the dairy business. And I think you called out ibott headwinds in Apollo. So it's a three-part question. Sorry about that.

All right, I'll start, Greg. I think that, first off, thanks for the question and good morning. I think that we're going to be giving guidance and the specifics of the guidance will be provided in the fourth quarter earnings call. I don't think we really want to say much more than what we've already said. I think our results speak for themselves. Growth through the first 9 months of the year continues to be low teens, and it's in the places where I think investors should appreciate that we're delivering because those are in the places that by their very nature we have opportunities to deliver higher returns on capital. And unsurprisingly, it's sort of consistent with the Skyward way here. You know, we always are leaning into kind of the next thing, the next thing that should help provide new avenues for earnings growth. And I think anything more specific than that, we'll talk about when we get to the fourth quarter call. Listen, I'll speak very quickly on the dairy livestock. This is really quite simple. We effectively saw just a change in take-up rate amongst farmers as diesel prices started to move. So if you look back to the first quarter of the year, diesel prices in January, February were kind of in the $3.50, $3.70 range, and now you sort of fast forward to October and we're at $6.25. And as we got into the second quarter of the year, it really started to accelerate. The dairy livestock product offered through the federal government is a voluntary product. It's the ability to sort of lock in their profits. And as margins and cash flows were squeezed amongst farmers, we just simply saw a lower uptake. I will tell you that because of our data that we are using to monitor exposure, we think we're probably the first in the market, maybe even ahead of some of the cedants that we exchanged that data with, in really seeing the trends. And you saw the effect of that coming through in the quarter in terms of our adjustment to net earned premium. And notwithstanding that adjustment, I think the results are still outstanding on every dimension.

Great. Just the follow-up, can you speak to Apollo?

Oh, yes, ibott.

And by the way, I didn't add in, the follow-up on that would just be to then talk about the managed premium portion because that showed growth. So yes, please.

Yes. Taryn might want to jump in here, but I think that we were not giving any caution on ibott. I think that the commentary was just simply that the growth this quarter was where there was seasonality and sort of new business opportunities that we would ordinarily expect, and there was one account where there was just a change in the renewal terms that moved it out in time. Otherwise, I wouldn't read into it because it's a small number, and everything that we have said about ibott and seeing that as a unique and, quite honestly, non-cyclical growth platform still holds today.

Got it. Thanks, Andrew.

And on the managed premium, I think that we would, as a company, broadly expect our growth in managed premium, which includes the capture of the premium that drives our fee earnings growth, to outgrow our reported GWP. We don't see anything there that would give us pause to say that quite explicitly now, and we would expect to keep saying that as we look forward as well.

Got it. Thank you.

Thanks, Greg. Thank you.

And our next question comes from the line of Alex Scott with Barclays.

Good morning, this is Justin Ahn for Alex. First question I had was just around growth. I understand there was some question on the livestock side. I was just wondering, based on the comments that you made around the pressures on the cash flow, should we expect this to be sort of more ongoing or is the true-up impact more of a large-sized, one-time issue? I would be curious if you can give a little color there. Thank you.

Again, as Andrew -- I'll jump in first. You know, I think that we don't know, right? I mean, you take a look at July to August, diesel prices went from under $5 to roughly $5.50, then they jumped above $6. And you can see that genuinely affecting farmers, right? And so it's really hard for us to say. There are some other things that are going on that will affect it. Farmers will want to lock in on profits as beef prices are high. What I can say to you quite specifically is that as we rolled into the 2026-2027 treaty year, the expected earned premium that we would ordinarily book in this quarter, which is a direct byproduct of effectively the subject premium from our cedants that are placing quota share reinsurance with us, we in fact have haircutted that with the expectation that a conservative position given the cost of diesel and the cost of input for farmers may affect their buying behavior. But I think the most important thing I would say to you and to all on the call and to our investors is the fundamentals of this remain outstanding. In this market, as far as we can tell, we have created this product, we are one-of-one, it's an incredibly profitable product, it's uncorrelated for us. In fact, what we have built is so attractive to the retrocessional quota share reinsurance community that we are able to lock in a meaningful portion of our underwriting profits via retrocessional insurance, where we capture it on our ceding commission. What we've manufactured is viewed as something that could not easily be replicated. And so guess what? We get paid for that. Certainly at some point here, the input costs for farmers come down and we'll continue on the kind of high growth trajectory that you've seen. And yet still, the growth in our ag driven by dairy livestock is still good growth. It's just that we had this net earned premium adjustment in the quarter.

Understood, thank you for the color. And maybe a second one I had was just around sort of the growth. When I see the growth in sort of the fee-generating written premiums against sort of the fee income, I was just wondering, I think we've seen pretty significant growth in the managed premiums, so I was wondering if you can give a little bit more color on how that should look for the trajectory of the underwriting fee income going forward.

Hi, it's Taryn. You're absolutely right. We've seen great growth in our fee-generating GWP through the year, and we expect that to continue in line with the guidance we've given. The fee income does lag a little, but the run rate through the year and the 9 months to date is a good indicator of where the year's going to land. And then as we look to guidance for next year, we'll give you a further view of what 2027 looks like.

Thank you. And our next question comes from the line of Meyer Shields with KBW.

Good morning, this is Scott on for Meyer. Thanks for taking my question. My first question is on reinsurance purchasing plans for 2027. How are you guys thinking about both traditional reinsurance and the use of non-owned syndicate paper? Are you planning any changes relative to 2026?

Well, I think we'll probably all try to gang-tackle this one. Generally speaking, most of our reinsurance, the big things are relatively set for Skyward Specialty in the United States. There is certainly one specific area that we are looking at, and we're active on that right now, and should some development there come to pass, we'll certainly update you on the next earnings call. As you would expect from any good management team, we're in an environment where across the board in the insurance market there's abundant capital, but the reinsurance market in particular, obviously the emergence of additional forms of third-party capital, open up the aperture as to what's possible. We are spending time on that for sure as a company. I will note that I've said this in a prior call: we will avail ourselves to Syndicate 1972 for a portion of the placement of the U.S.-based reinsurance through 1972, which, of course, inures to our benefit as a company where we're able to recapture some fees through that process. And broadly for Apollo, I don't know if Taryn, you want to just add specifics to what you expect for '27 there.

Yeah, thanks, Andrew. At this point, working through our plans for 2027, in terms of the structure and the way that reinsurance buying works at Apollo, I don't see any changes moving into 2027. But as we get closer and revisit where the market is at, we'll firm up our plans.

I would also just make one additional point. While not reinsurance, as you very well know, 1969 and 1971 are both supported by third-party capital, and the third-party capital is 75% of the total capital for those two syndicates. Every indication is that is also where we will land for next year as well.

Got it. Thanks for the detail. And then some peers have mentioned on this quarter's earnings seeing some E&S premium shift back to the admitted market. Have you guys observed any meaningful flow of premium back to the admitted market from E&S?

I'm going to take this one. No. We have listened to some of that commentary as well, which we had heard from at least one broker who has both retail and wholesale platforms. No is the answer. If I go directly to our E&S business, property submissions this quarter were up 60% for our E&S property. Just as another example, within the excess portion of the liability part of our E&S business, submissions were up 32%. I will tell you, consistent with some of the other messages you've heard, our average premium is down and our hit rates are down. I have specific examples of where competitors are doing things that are just downright irresponsible and will come back around. But just straight up in terms of the amount of flow that we're seeing, I think that part of that is that more business is being marketed. So maybe we don't necessarily see what's happening on the front end, but we're seeing a very significant step-up in flow. The good news is because we're so far ahead in our use of technology, our ability to service that submission flow is really great, while as you see in our results, simultaneously meaningfully reducing our expense ratio.

Great. Thanks so much.

Thank you.

Thank you. And our next question comes from the line of Matt Carletti with Citizens.

Hey, thanks. Good morning. Andrew, you touched a little bit on a few of the kind of diversifying non-P&C lines. We touched on ag a bit and A&H. Can you talk about surety? You're seeing good growth there. Just kind of where you're seeing success and how we should think about that going forward.

Yes. I will oftentimes say that surety is genuinely maybe our pristine business. We have an amazing team. We keep adding talent. And quite honestly, the growth is really broad-based. On commercial surety, we've talked about some of our proprietary products, but not just in oil and gas. We're seeing growth in judicial and fiduciary bonds on the commercial side. We've seen a big step-up in transactional commercial surety, which is very small, stick-to-your-ribs bonds. Some of the spaces that we occupy that others don't, like bonds for the cannabis industry, we have a dominant position. Meanwhile, oftentimes we're turned to for some of the most interesting creative things that are happening in the world of renewables as another area. Across the board, energy infrastructure is building and growing and creating opportunities for us, and I think that there will be more of that. On the contract side, we're very broad-based in terms of the trades that we serve. One of the most interesting things is that we have a really special relationship with, in particular, one distributor in the world of bonding on the federal side. With that, we see opportunities. We're in the process right now of getting licensed in Puerto Rico, where we see a really unique and special opportunity specifically tied to the federal world. It's broad-based. The growth -- we're the 14th largest surety in the country, crossing $200 million-plus in premium around the world. Results are out in the public domain, and they're just amazing and outstanding. I'm pretty confident that in the course of the next 6 weeks, we'll be adding an additional team that in itself will probably bring a following that we measure in a $20 million-ish kind of book of business. So I couldn't feel better about where we're at, and I think the backdrop, given the diversity of that business and our ability to tap into multiple sources, is really distinct and unique for us.

That's great. Thank you for that color. One more if I could. I think it's been a few quarters now ago you announced a partnership with Uber around autonomous vehicles. And in listening to Uber, it sounds like they've put out some pretty aggressive timelines in terms of how many cities they expect to be live in this year, next year, 2028. Can you maybe update us from your standpoint on how that's going and how we should think about that?