The Offer

Company Overview

SKWD is a developing specialty insurance provider that offers non-admitted and admitted business P&C products and solutions, mostly in the United States. Areas that are underserved, disconnected, or for which typical insurance coverages are insufficient or inadequate to fulfill the demands of enterprises, including the clients and potential clients operating in these markets, are where SKWD concentrates its activity. Customers of SKWD often need underwriting solutions and claims capabilities that are highly specialized and specifically tailored. To cater to each of the specialty markets it serves, SKWD creates and provides customized insurance products and services.

Key Highlights

Primary Offering: Based on an offering price of USD 16.00, the total gross proceeds to the business, before underwriting discounts and expenses, will be USD 156,400,000. The company intends to issue 8,500,000 shares with 4,750,000 shares by SKWD and 3,750,000 shares by stockholders. Additionally, with an option for the underwriters to acquire up to an additional 1,275,000 shares from the selling shareholders, exercisable for 30 days from the date of this prospectus. Based on the projected initial public offering price of USD 15.00 per share, the company anticipates that the net proceeds to the business from the sale of shares of its common stock in this offering would be close to USD 61.8 million.

Use of proceeds:

Based on the projected initial public offering price of USD 15.00 per share, the company anticipates that the net proceeds to the business from the sale of shares of its common stock in this offering would be close to USD 61.8 million. The main goals of this offering are to expand capitalization and financial flexibility, establish a public market for SKWD common stock, and give the firm and its investors access to the public equity markets. To expand its insurance company subsidiaries' businesses, SKWD plans to spend at least USD 45 million of the net proceeds from this offering as capital contributions, with the remaining funds going toward general corporate objectives. SKWD plans to invest the net proceeds from the offering in line with the investment strategy chosen by the Investment Committee, pending the utilization of the funds as stated above.

Dividend policy: Although SKWD has paid dividends in the past, it now intends to save any further revenues for use in running the company and has no immediate plans to declare or pay any cash dividends. The board of directors will decide whether to pay dividends on the capital stock in the future at their discretion, subject to any applicable laws, and considering the company's financial situation, operational performance, capital needs, general business environment, and other relevant considerations. The conditions of any future debt securities, preferred stock, or credit facility may potentially place restrictions on SKWD's capacity to pay cash dividends on the common stock in the future.

Industry and competitive analysis

• M. Best estimates that the U.S. P&C insurance market, the largest P&C market in the world, wrote roughly USD 798 billion in direct premiums in 2021. Direct premiums issued by the property and casualty insurance sector are closely associated with the increase in the gross domestic product. 96% or thereabouts of the total written premiums in 2021 were for underlying risks with a U.S. basis.
• The U.S. P&C insurance industry can be divided between standard and specialty insurance products. Standard insurance products generally have more uniformity, cover more homogenous risks, and offer more standardized coverage. Although there is no standard definition of “specialty insurance,” it is believed “specialty” insurance products typically cover higher-hazard or non-standard risks and/or risks in niche market segments or geographies that require tailored underwriting and claims handling. Within the P&C industry, SKWD operates in the specialty insurance market.
• As most states require that the retail agent or broker attempt to obtain coverage on behalf of the insured from a specified number of admitted carriers before insurance can be placed in the non-admitted market, admitted products are more strictly regulated by state insurance departments about terms of coverage and price and are frequently simpler for retail agents or brokers to sell. 48% of SKWD's total written premiums for the nine months ending September 30, 2022, for the continuing company, were attributed to admitted products.
• E&S business is underwritten using more lenient policy forms and rates, and E&S carriers are not subject to the same level of regulatory supervision as admitted carriers. The non-admitted carriers can properly assess the distinctive characteristics of the underlying risk thanks to this freedom, and they can also tailor the price and terms and conditions to the demands of the insured. Non-admitted carriers often aren't allowed to underwrite business until either coverage has been rejected in the admitted market or until it has been explicitly approved for the E&S market by state regulators. 52% of SKWD's gross written premiums for the nine months that ended September 30, 2022, for the ongoing company, were attributed to E&S products.
• Cyclicality of the industry: The number of insured losses, the degree of industrial excess, the accessibility of capital, and other variables all affects the supply of insurance. The amount of industry surplus, in turn, may alter in reaction to loss experience, reserve development, changes in the rates at which investments in the insurance sector are earning returns, and other factors. P&C insurance is consequently a cyclical industry, with periods of excess underwriting capacity and a lack of underwriting discipline leading to increased competition on price and policy terms, followed by periods of favorable underwriting conditions for carriers caused by capacity shortages, favorable rate environments, and favorable policy terms and conditions.

Financial Highlights (Expressed in USD):

• Increased Gross written premiums: Gross written premiums increased by USD 163.4 million, or 22.8%, to USD 879.1 million for the nine months ending September 30, 2022, from USD 715.7 million for the nine months ending September 30, 2021. Growth in the company's ongoing business, which climbed by a total of USD 224.2 million or 34.5% compared to the preceding year, was responsible for the increase in gross written premiums. A reduction inside a closed operation of USD 60.7 million, or 93.3%, partially offset this rise.
• Loss Ratio: For the nine months ending September 30, 2022, the loss ratio and adjusted loss ratio were 65.9% and 63.8%, respectively, as opposed to a loss ratio and adjusted loss ratio of 68.3%, respectively, for the nine months ending September 30, 2021. The decrease in catastrophic losses combined with an increase in the current accident year loss ratio, which excludes catastrophe losses, is what caused the loss ratio to improve over the previous year.
• Liquidity and capital resources: SKWD holding firm had USD 9.3 million in cash and investments as of September 30, 2022, as opposed to USD 5.8 million and USD 12.6 million on December 31, 2021, and 2020, respectively. According to SKWD, the firm has enough cash on hand to cover its liabilities, operational cash needs and committed capital expenditures for the upcoming 12 months.

Investment Portfolio

The portfolio for cash and short-term investments is made up of cash, cash equivalents, money market funds, and other short-term assets with a short duration (less than a year). Investment grade fixed income instruments, typically highly rated and liquid bonds, make up most of the Core Fixed Income portfolio. The Core Fixed Income portfolio's goal for SKWD is to generate appealing risk-adjusted returns with little chance of principal loss. Third-party managers oversee the Core Fixed Income portfolio.

Promissory notes, limited partnerships, equity holdings, and separately managed accounts make up the Opportunistic Fixed Income portfolio. The underlying assets are mostly floating-rate senior secured loans, which are asset-oriented, short-term, collateralized credit investments with good risk-adjusted returns. Strong covenants and a considerable quantity of collateral are used to underpin investments, which often have a loan-to-value ratio of 60% or more.

Publicly traded domestic preferred stocks, ordinary stocks, exchange-traded funds, limited partnerships, limited liability corporations, and other equity assets make up the bulk (74.1%) of the components of the equity portfolio. With the intention of safeguarding the stock portfolio from a significant decrease in the S&P 500 within a 30-day window, SKWD began a tail-risk management strategy in 2021. SKWD maintained this policy for the fiscal year that ended on September 30, 2022.

Key Management Highlights

Risk Associated (High)

Investment in the IPO of “SKWD” is exposed to a variety of risks such as:

• Stiff Competition: Competitors of SKWD include general insurance providers, underwriting firms, and other specialty insurance providers. The cost of insurance coverage, the company's general reputation and perceived financial strength, relationships with distribution partners, the terms and conditions of products offered, ratings assigned by independent rating agencies, the speed of claims payment and reputation, and the experience and reputation of the underwriting team members in the specific lines of insurance and rei are just a few of the factors that affect competition in the insurance industry.
• Reliance on the distribution channels: Because the firm relies on insurance retail agents, brokers, wholesalers, and program administrators, there are risks associated with this dependence that might have a negative impact on the company's performance. The connection between SKWD and the program administrators, brokers, retail agents, and wholesalers may be terminated at any moment. Even if the partnerships do endure, they might not be on advantageous terms for the business.
• Market and Interest rate Risk: SKWD is prone to market fluctuations in all the capital markets that the company invests its investments in as the previous year has been a downward trending year for both fixed income and equity markets. Furthermore, the company is prone to interest rate risk due to its investments in fixed income as well as its operations in insurance.

Conclusion

In comparison to the nine months ending September 30, 2021, net written premiums increased by USD 107.4 million, or 27.7%, to USD 495.6 million for the nine months ending September 30, 2022. The rise in gross written premiums was the primary factor in the expansion of net written premiums. Additionally, the income was decreased because of rising losses and LAEs in addition to rising costs for underwriting, insurance, and acquisitions. Additionally, for the nine months ending September 30, 2022, SKWD earned annualized adjusted ROE and annualized adjusted return on tangible equity of 15.2% and 19.4%, respectively. SKWD has a well-diversified portfolio divided among different asset classes, but still, the company is prone to the risk highlighted in the risk section.

Hence, given the financial performance of the company for the nine months ending September 30, 2022, increased revenue, industry analysis, use of proceeds, and associated risks “Skyward Specialty Insurance Group, Inc. (SKWD)” IPO seems “Attractive" at the IPO price.

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