Expanding Into Surety And Agriculture Will Strengthen Future Performance

Key Takeaways

• Strong growth in gross written premiums and effective underwriting cost management support positive revenue and net margin prospects.
  
• Diversification into high-return areas less affected by P&C cycles positions the company for robust and diversified growth.
  
• Rising competition and pricing pressure in key markets could constrain profitability, revenue growth, and increase claims, impacting Skyward's financial performance and strategy.

Catalysts

An insurance holding company, underwrites commercial property and casualty insurance products in the United States.

• Skyward Specialty Insurance Group is experiencing significant growth in gross written premiums, with a year-to-date increase of 19%, highlighting strong expansion across various segments such as transactional E&S, surety, captives, and agriculture. This is likely to have a positive impact on future revenue growth.
  
• The company is effectively managing underwriting costs, maintaining a combined ratio of 92.2% despite industry-wide challenges from catastrophe events, indicating strong risk management which should positively impact future net margins.
  
• Continued investment in fixed income, with $118 million deployed at a 5.8% yield, is expected to enhance earnings through increased investment income, having risen by $6.4 million compared to the previous year.
  
• The recent Board-approved share repurchase program of up to $50 million indicates confidence in sustained cash generation and financial flexibility, which could positively influence earnings per share by reducing outstanding share count.
  
• Expanding into high-return areas less affected by P&C cycles, such as A&H (Accident & Health), surety, captives, mortgage, credit, and agriculture, positions Skyward Specialty for robust and diversified growth, likely enhancing earnings and margins.

Skyward Specialty Insurance Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Skyward Specialty Insurance Group's revenue will grow by 15.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.2% today to 10.6% in 3 years time.
• Analysts expect earnings to reach $176.7 million (and earnings per share of $3.78) by about December 2027, up from $133.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.2x on those 2027 earnings, up from 15.5x today. This future PE is greater than the current PE for the US Insurance industry at 12.9x.
• Analysts expect the number of shares outstanding to grow by 5.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.95%, as per the Simply Wall St company report.

Skyward Specialty Insurance Group Future Earnings Per Share Growth

Risks

• The increase in competition within the Global Property market, leading to more aggressive and potentially irresponsible pricing practices, could pressure profitability and underwriting margins.
  
• The ongoing challenges in the Directors & Officers (D&O) and Miscellaneous Errors & Omissions (E&O) markets, driven by increased competition and pricing pressures, may affect future revenue growth and could impact net margins.
  
• The company’s reliance on large-line writing with significant reinsurance support in Global Property, which is experiencing increased competition and pricing pressure, may restrict revenue growth opportunities and affect gross written premiums.
  
• Skyward’s exposure to casualty and bodily injury risks, combined with concerns about loss cost inflation, may impact the company’s reserve adequacy and lead to higher than expected claims, impacting net earnings.
  
• The company’s intentional reduction in Commercial Auto exposures due to aggressive loss cost inflation may result in lower revenue growth in the Industry Solutions segment, affecting overall top-line growth.

Valuation

• The analysts have a consensus price target of $52.44 for Skyward Specialty Insurance Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $59.0, and the most bearish reporting a price target of just $45.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.7 billion, earnings will come to $176.7 million, and it would be trading on a PE ratio of 16.2x, assuming you use a discount rate of 6.0%.
• Given the current share price of $51.51, the analyst's price target of $52.44 is 1.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.