JMP points to misunderstood 10-Q as catalyst for Skyward stock decline

Analysts at JMP have described the recent selloff in Skyward Specialty Insurance shares as “overdone”, attributing it largely to a misinterpretation of details in the company’s 10-Q disclosure. This misunderstanding, they argue, has created an attractive buying opportunity for long-term investors.

In its Q2 results, Skyward reported a rise of 17.6% in gross written premiums (GWP) and an improved underwriting result of $23.9 million, compared to last year’s $15.5 million.

The reported GWP was $496 million for Q2 2024, compared to $422 million for Q2 2023, and hit $955 million for H1 2024, representing a 22% increase compared to the $783 million reported for the first six months of 2023.

Yet, according to JMP, despite these positive figures, Skyward’s shares have declined ~17% since then.

“We believe this is in large part due to a misunderstanding of the circumstances surrounding a disclosure in the 10-Q related to the loss portfolio transfer Skyward put in place in 2020 covering certain legacy liabilities,” the firm’s analysts said.

For those unaware, Syward’s disclosure read: “On June 21, 2024, R&Q Insurance Holdings Ltd., the parent company of Randall & Quilter, the third-party reinsurer domiciled in Bermuda that is the counterparty for our loss portfolio transfer, filed for provisional liquidation with the Bermuda authorities. Due to the complexity of the legal structure of R&Q SAC Ltd. and uncertainty relative to the situation, management continues to evaluate the potential financial impact, if any.”

JMP’s analysts observed that the reinsurance recoverable due from the counterparty ($20.9m at 12/31/23) is fully collateralized, which significantly reduces any risk to Skyward of not collecting on these claims already made under the policy.

JMP added, “What remains potentially at risk is the remaining $36m of limit if Skyward were to need to use it.

“If Skyward were to need to use that limit (i.e., reserves on the underlying subject years/lines developed a further $36m adversely, beyond what we believe is likely a very conservative starting point) but the coverage was not there, we believe it would amount to ~$29m after-tax or ~$0.70 per share.

“This compares to the $173, in market capitalization lost since Skyward reported its 2Q results, $137m of which was lost in the past two trading days since the filing of the 10-Q (we note the R&Q news has been in the market broadly since June, but the 10-Q filing brought it to the attention of many investors).”

JMP’s analysts also highlighted the fact that A.M. Best recently upgraded Skyward to A+ on August 1, with the R&Q news fully six weeks old at that point.

“We do not believe it would have done so if it had any concerns that this could pose a potential meaningful financial impact to Skyward. Bottom line, we believe the recent selloff in shares of Skyward is overdone and provides long-term investors with a highly attractive entry point,” JMP concluded.

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