Skyward Specialty Insurance Group, Inc. Q3 FY2025 earnings call

Andrew noted the third quarter extended the track record of profitable growth with company-best operating income, underwriting income, and combined ratio. The Rule Our Niche strategy and diversified portfolio were highlighted. Mark discussed financial results including adjusted operating income, net income, and gross written premiums growth. The Apollo acquisition was mentioned, expected to close early in Q1 2026. Operational highlights included growth in various divisions like Agriculture, A&H, Captives, and Surety, along with innovation in technology like SkyView and AI use.

Skyward Specialty's third quarter results were exceptional. Gross written premiums grew by 52% compared to the prior year. A significant driver was the Agricultural unit. Excluding Agriculture, gross written premiums grew at a strong mid-teens rate. Five out of nine divisions grew by over 25%. Adjusted operating income was $44 million, and net income was $45.9 million. The combined ratio was 89.2%, and annualized return on equity was 19.7%.

Management mentioned that guidance on Apollo's 2026 financial metrics will be provided once regulatory approval is further along, likely in early December. Guidance on Skyward business will be provided during the fourth quarter call in February. Quarterly growth is expected to be uneven due to concentrated renewal cycles in some divisions.

Market conditions across much of the P&C market show increased competition. There are concerns about loss inflation, particularly in auto liability and construction. Reinsurance markets are competitive, which may impact the business. Also, there are uncertainties related to regulatory approvals for the Apollo acquisition.

Q: Just on the overall retention levels that you all give us, which are helpful. I guess, in mid-70s, and I guess just at a high level, when we think of E&S business, we think of E&S kind of being in the 70s and more traditional being in the mid-80s, maybe higher. So I guess the fact that you guys are mid-70s, I guess I just want to make sure just means that the non-E&S portion of your book, just -- Specialty portion is just runs at a naturally lower retention level?

A: Yes. So Andrew, this is Andrew, and Mark may add to that. I think more of what we're seeing, to be honest, is I don't know how to be sort of too vivid about this, but we basically see the kind of severity that you might see in heavy auto now making its way into F-150 accidents. Construction, some of our book, the trades basically leading the site, an accident occurring. And what we're seeing is severity inflation that, to be honest, is just -- listen, I feel like I've been one of the earliest and most consistent protagonists on this, because this is not new. The way I know this isn't new, is because through 9 months this year, 11% of our book is auto. And we took the company public, it was 25%. And that 11% has probably gone about 80% rate since then. And so we're probably down on an exposure basis, well less than the 60% from a premium basis -- 40% from a premium basis. It's just that we keep seeing the loss inflationary dimensions emerge in areas that we're surprised by. And I don't mean like we're surprised like we're not responsible, prudent professionals about how we're looking at our business, like you're just simply surprised that, that a claim of this size and an injury of this could result in that kind of loss. And yet I have full confidence in our claims folks the way that they're executing. And it's really nothing much more complex than that. And I think that it should give everybody pause for -- even if you believe that you have ring-fenced the inflationary areas, I believe that anything that is personal injury exposed occurrence liability is further ground for considerable inflation. And you have to be incredibly thoughtful about how you're constructing your occurrence liability book. And I wouldn't read into anything more than what I just said, because that really is kind of the dimension. And you are right that we've been talking about construction now for a couple of quarters, but it has been auto-focused thing. And -- but that's been a theme that's been consistent for us for some number of quarters.

Q: I guess the logical place to start will be with your top line results. If we can put the Agricultural opportunity aside, just curious about some of the numbers we're seeing, Accident & Health, it has been strong all year, and the Captives are doing quite well, too. So maybe give us some perspective on where you're having some success in some of those other segments of your business is a good starting point?

A: Well, look, I think that as I said in the prepared remarks, I think we're just -- I'd start by saying we're being appropriately cautious, thoughtful. Describe it how you want in large chunks of what I would describe as the more traditional parts of the P&C market. It's just -- it's becoming more competitive and certainly more nuanced. I think the places we're writing business in those other divisions are done on smart terms and conditions. That said, look, I think that we just simply have connected in other parts of our business. You saw Surety has bounced back 26% growth this past quarter. And a lot of that really was we were still maintaining strong growth as compared to the industry on Surety, for the first half of the year, just it bounced back to an -- sort of a much more impressive level once the federal funds began to flow. And I highlighted a new product launch where we've had some really good success already. We're very bullish about the outlook on that, and that's sort of in the commercial Surety part of our business. On A&H, I think we've talked at length about, I did highlight the loss ratio number just to provide an external reference point. Again, I think it's the small account market, medical cost management focus, and the fact that we built an operating model that I think is really quite distinctive. And we're seeing that come through both in sort of traditional single company stop-loss accounts as well as on the group Captive side. Within Captives, on the P&C side, a lot of that really is just continuing to grow with the Captives we have in place. We -- it's been some number of quarters since we launched a new Captive, but the ones that we have seem to be continuing to add members. Of course, we're -- I think, more insulated to the market in total in terms of the price that we're able to put into the Captives, that's really much more sort of like a -- I would describe it as a stable, you're always keeping price up against loss trend, your Captive members understand that, and that seems to work really well. And so I think each one is unique, but I think the reasons are a lot about how we basically have built our business and our product? And the fact that through 9 months this year, nearly 50% of our business is in those categories that are not P&C cycle exposed. And I think that it's hard for me to sort of identify any other company who's got a portfolio that looks like ours.