Skyward Specialty Insurance Group, Inc. (SKWD) Earnings

Management highlights

- Overall Financial Performance * Diluted operating earnings per share grew 46% year-over-year to $1.30, with annualized operating return on equity of 19% for Q2 2026 and 20.4% for the first half of 2026. * Net income for the quarter was $49 million, operating income was $59 million, and the group-wide combined ratio was 89.5 (87.6 XCAT). * Gross written premiums increased 13% year-over-year to $741 million, while total managed premiums increased 18% to $1.1 billion. * Net investment income increased more than 60% year-over-year to $31 million, driven by a larger fixed income portfolio generating $29 million in income, with a 5.3% embedded portfolio yield and new money put to work at 5.6% yield. * Stockholders' equity reached ~$1.3 billion as of Q2 end 2026, book value per share increased 15% from year-end 2025 to $28.55, and financial leverage fell to 26% (moving toward the target low 20s debt-to-cap ratio). - Capital Allocation Strategy * The company repurchased ~$10 million of shares in Q2, and increased the total share repurchase authorization to $100 million in July 2026, driven by confidence in the business, attractive valuation, and deleveraging progress. * $50 million of the 2027 maturity term loan was repaid in the quarter, reducing leverage as planned. - Operational Progress * Portfolio diversification and the "rule our niche" strategy allow the company to lean into attractive growth markets while maintaining defensive discipline in soft, competitive segments. * AI and technology investments are driving meaningful operating efficiency gains: 40% faster submission processing, 35% faster quote speed, with half of underwriting benefiting from machine learning and predictive analytics, which has supported expense ratio improvements. * Top growth areas (largely insulated from traditional P&C market pressures) are accident and health (A&H), agriculture, credit insurance, and specialty programs; other high-opportunity niches include healthcare solutions, power and renewables, and political risk/violence coverage. * Market conditions remain challenging for global and excess & surplus (E&S) property, miscellaneous professional lines, and E&S liability, where the company prioritizes profitability over volume and maintains selective underwriting. * Skyward Specialty pure rate change was high single-digit excluding global property, and low single-digit including global property, with retention in the 70s percent and teen submission growth. Apollo risk-adjusted rate change moderated to a low single-digit decline, with disciplined portfolio repositioning.

Guidance

- The full-year 2026 Apollo underwriting fee income guidance of $30 million to $35 million pre-tax is maintained, with management noting the business is positioned to meet or exceed this target. - Full-year combined ratio expectations are maintained, even as portfolio mix is expected to push the aggregate full-year accident year loss ratio up ~1+ percentage point driven by faster growth in higher loss ratio A&H and agriculture segments, with this change offset by a lower acquisition expense ratio. - Management expects business tails to continue shortening, with over 60% of 2026 first half liability having durations of less than two years. No segment is expected to exceed ~17% of total portfolio by the end of 2026, maintaining balanced diversification. - Management maintains its long-term thesis that Apollo's capital-light, fee-focused Lloyd's model delivers high returns on capital, and continues evaluating options to integrate U.S. business into the Lloyd's platform for 2027 or later.

Segment performance

1. Skyward Specialty: Gross written premiums increased 14% year-over-year to $668 million, contributing 90.15% of total gross written premiums. The segment reported a combined ratio of 86.9, with an ex-catastrophe (XCAT) combined ratio of 85.6, loss ratio of 62.6 (including 1.3 points of catastrophe losses), and expense ratio that improved 2.7 points year-over-year to 24.3. 2. Apollo: Gross written premiums increased 6% year-over-year to $73 million, contributing 9.85% of total gross written premiums. Fee-generating gross written premiums increased 29% to $318 million (80% growth in partner syndicates, 13% growth in aligned syndicates), delivering underwriting fee income of $13 million for the quarter. Apollo reported a combined ratio of 97.6 including 5.4 points of catastrophe losses from the Middle East conflict, a non-CAT loss ratio of 54.7, and a quarterly expense ratio of 37.5 (year-to-date 2026 expense ratio of 34.9 and combined ratio of 91.3 is the more representative full performance metric).

Risks & headwinds

- Pricing competition and soft market conditions in traditional property, E&S liability, and miscellaneous professional lines create pressure on margins and returns, leading the company to shrink exposure in these segments to protect profitability. * Loss cost inflation, particularly for occurrence liability lines with bodily injury/personal injury exposure, creates uncertainty around future loss reserves; management has intentionally steered the portfolio away from high-uncertainty exposures to mitigate this risk. * Small alternative and strategic investment portfolio exposures have faced valuation pressure, totaling only $68 million (2.4% of total $2.8 billion invested assets). * Misconduct by irresponsible market participants and poorly managed MGAs creates systemic market risk, particularly in A&H, where some major reinsurers have already exited the market after losses from bad MGA behavior, though this has created incremental growth opportunities for the company. * The ongoing conflict in the Middle East created $5.4 points of catastrophe losses for Apollo in Q2, and political violence coverage remains a dynamic, uncertain exposure. * Property insurance market softness is driven by excess industry capital, and an inflection to harder market conditions is unlikely until meaningful industry losses occur, which cannot be predicted.

Analyst Q&A

• Q: The company doubled its share repurchase authorization to $100 million amid a more efficient capital structure vs peers. Does this signal slower underwriting growth, or will you use debt to fund buybacks after recent deleveraging? /

  A: Management states the company generates excess capital from strong returns even while growing at an attractive rate. The recent deleveraging created headroom for buybacks, which are attractive given the company trades at ~12x 2026 earnings guidance and is meaningfully undervalued. The company will remain opportunistic with capital allocation, and the repurchase program does not signal slower planned underwriting growth.

• Q: Skyward's expense ratio dropped sharply to 24.3 year-over-year, with AI cited as a driver. What AI initiatives are driving this, and what is the outlook for future expense ratio improvement for Skyward and Apollo? /

  A: Management explains that integrated AI tools like agentic underwriting automation, predictive scoring, and the Skyview underwriting platform automate manual work, cutting processing times dramatically. For example, AI auto-ingests and analyzes financial and contract data for surety underwriting, starting the process much further along. Management notes investments are ongoing, but current profitable growth allows funding new capability without pushing the expense ratio back up long-term. Apollo's elevated quarterly expense ratio reflects one-time adjustments, and the year-to-date 34.9% figure is more representative.

• Q: Underlying non-cat loss ratio deteriorated year-over-year. What is driving this, and how is the company positioned on loss cost trend risks? /

  A: The entire increase is due to portfolio mix: faster growth in A&H and agriculture, which are naturally higher loss ratio segments, not unexpected loss cost inflation. Management notes the company proactively steered the portfolio away from occurrence liability lines with uncertain bodily injury loss cost inflation years ago, and keeps exposures limited and short-duration where they do exist. No unexpected loss development has been recognized to date.

• Q: Global property is a soft market with strong pricing pressure, and the segment shrank 15% this quarter. What opportunities remain in this segment for the company? /

  A: Management notes the overall global property market is unreasonably competitive, but the company maintains a small, high-quality portfolio of long-standing accounts, retaining ~25% of renewal accounts this quarter. The company writes first layers above self-insured retentions and uses the facultative reinsurance market to lay off excess risk, so net pricing and profitability are far stronger than gross pricing figures suggest. The company is intentionally shrinking the segment overall amid soft conditions, from $235 million in 2024 to a much smaller run-rate this year.