Tactical Moves And Diversified Portfolio Propel Underwriting Profitability And Financial Health

Key Takeaways

• Diversifying underwriting divisions under the Rule our Niche strategy significantly boosts revenue growth and net margins by achieving top quartile underwriting profitability.
  
• Adjusting investment strategy and reducing commercial auto exposure due to loss cost inflation are key moves to increase overall profitability and mitigate risk, respectively.
  
• Skyward Specialty Insurance Group's diversification and expansion strategies carry inherent risks including financial volatility and the potential impact on profitability and growth.

Catalysts

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

• The Rule our Niche strategy, including diversifying the portfolio of underwriting divisions, has contributed to consistent top quartile underwriting profitability, which impacts revenue growth and net margins positively.
  
• The upgrade by AM Best to an A rating reflects the company's strong underwriting execution and financial health, likely enhancing its competitive position and ability to win new business, impacting future revenue growth.
  
• Investment strategy adjustments, including derisking the portfolio and increasing the net investment income significantly compared to the previous year, affect the company's earnings positively by increasing overall profitability.
  
• Focused growth in high return areas less exposed to P&C cycles, like A&H, Surety, Captives, and Agriculture, which comprised 36% of gross written premium, suggest a strategy to improve future earnings stability and growth.
  
• Reduction in commercial auto exposure due to loss cost inflation is a strategic move to mitigate risk and potentially improve long-term profitability and net margins by avoiding exposure to high loss cost inflation areas.

Assumptions

• Analysts are assuming Skyward Specialty Insurance Group's revenue will grow by 15.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 11.5% today to 10.5% in 3 years time.
• Analysts expect earnings to reach $166.5 million (and earnings per share of $3.55) by about October 2027, up from $118.5 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $140.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.4x on those 2027 earnings, which is the same as it is today today. This future PE is greater than the current PE for the US Insurance industry at 14.1x.
• Analysts expect the number of shares outstanding to grow by 5.38% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• The exposure to volatile or catastrophic events, despite a focus on less cyclical lines such as agriculture which can still be impacted by unforeseen natural disasters, could affect underwriting profitability.
  
• A heightened competition in specialty insurance markets, particularly as the company moves into less cyclical lines, might put pressure on pricing and margins.
  
• The strategy to reduce exposure in commercial auto due to loss cost inflation may not fully mitigate the risk of adverse claims development, impacting net margins.
  
• Rapid expansion in new lines of business or geographies could introduce execution risks, potentially affecting revenue growth and earnings stability if expansion does not proceed as planned.
  
• Reliance on external factors such as interest rates for investment income can introduce financial volatility, impacting earnings especially given the current strategy of deploying free cash flow to fixed income.

Valuation

• The analysts have a consensus price target of $47.0 for Skyward Specialty Insurance Group based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.6 billion, earnings will come to $166.5 million, and it would be trading on a PE ratio of 15.4x, assuming you use a discount rate of 5.8%.
• Given the current share price of $45.46, the analyst's price target of $47.0 is 3.3% 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.