Shifting To Less Cyclical Segments Will Reduce Volatility And Improve Stability

Key Takeaways

• Diversifying into less cycle-exposed segments promises consistent growth and reduced volatility, with strategic investments boosting financial stability and earnings.
  
• Strengthened data accuracy and talented underwriter expansion position Skyward to capitalize on niche market growth opportunities effectively.
  
• Dependence on high-growth areas and shift to less cyclical markets may face challenges from competition, inflation, and restructuring costs, impacting revenue and earnings stability.

Catalysts

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

• Skyward Specialty Insurance Group is shifting its portfolio focus to segments that are less exposed to P&C market cycles, such as A&H, surety, captives, mortgage, credit, and agriculture. This strategy is expected to drive consistent top-line growth with reduced earnings volatility.
  
• The company has successfully rebuilt its actuarial data and improved its fidelity by converting from policy year to accident year reporting for more accurate reserving. This enhances reserve strength and could positively impact future earnings stability.
  
• Skyward is experiencing strong submission growth across divisions, indicating robust demand and potential for future premium income growth. With retention rates in the upper 70s, this suggests consistent revenue growth and stronger financial health.
  
• The investment in expanding underwriting talent, as evidenced by the hiring of new underwriters, positions Skyward to leverage growth opportunities promptly and drive revenue growth, especially in specialized and less cycle-exposed niche markets.
  
• They've implemented strategic investment adjustments leading to increased net investment income and a stronger fixed-income portfolio yield, which is expected to continue enhancing earnings through improved investment returns.

Skyward Specialty Insurance Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Skyward Specialty Insurance Group's revenue will grow by 13.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.3% today to 12.1% in 3 years time.
• Analysts expect earnings to reach $204.0 million (and earnings per share of $4.88) by about March 2028, up from $118.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.5x on those 2028 earnings, down from 16.7x today. This future PE is lower than the current PE for the US Insurance industry at 13.9x.
• Analysts expect the number of shares outstanding to grow by 0.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Skyward Specialty Insurance Group Future Earnings Per Share Growth

Risks

• The company's growth strategy heavily relies on double-digit growth in certain high-return areas like surety and captives, which may become saturated or face increased competition, possibly impacting revenue growth rates.
  
• Skyward's shift to less P&C cycle-exposed markets involves upfront restructuring costs, which could temporarily affect net margins as they adjust their business model.
  
• Given the industry challenges in commercial auto and liability, if the inflationary trends and loss costs do not subside as expected, this could affect future earnings due to increased claims.
  
• Any miscalculations in the loss inflation trends, especially for casualty lines, could lead to inadequate pricing, which might impact overall profitability if actual claims surpass the anticipated levels.
  
• The company's investment in fixed income aims to derisk, but if interest rates decrease significantly, the projected net investment income might not materialize as expected, potentially affecting earnings stability.

Valuation

• The analysts have a consensus price target of $57.375 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 $63.0, and the most bearish reporting a price target of just $43.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.7 billion, earnings will come to $204.0 million, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 6.2%.
• Given the current share price of $49.37, the analyst price target of $57.38 is 14.0% higher.
• 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.