Shares of Skyward Specialty Insurance Group, Inc. SKWD closed at $40.73 on Monday, near its 52-week high of $42.26, after having gained 48.8% in a year. Shares outperformed the industry, the Finance sector as well as the Zacks S&P 500 composite index in the same time frame. 

This specialty property and casualty insurer delivered an earnings surprise in the last four quarters. The insurer stated that all eight underwriting divisions in which it operates are individually producing more than $100 million in gross written premiums. Each division is now at a scale that can sustainably contribute to overall earnings.

Skyward Specialty Outperforms Industry, Sector & S&P YTD

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SKWD Trading Above 50-Day Moving Average

SKWD shares are trading well above the 50-day moving average, indicating a bullish trend.  

SKWD Price Movement vs. 50-Day Moving Average

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Optimistic Analyst Sentiment for SKWD

Four of the six analysts covering the stock have raised estimates for 2024 and 2025 over the past 60 days. The Zacks Consensus Estimate for 2024 and 2025 has moved 5.3% and 4.8% north, respectively, in the past 60 days.

The Zacks Consensus Estimate for 2024 implies a 40.3% year-over-year increase, while the same for 2025 suggests a 10.1% increase. The expected long-term earnings growth rate is pegged at 18%, better than the industry’s growth rate of 11.6%.

Average Target Price for SKWD Suggests a Solid Upside

Based on short-term price targets offered by nine analysts, the Zacks average price target is at $46.44 per share. The average suggests a potential 13.4% upside from Monday’s closing price.

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SKWD’s Growth Strategy

Skyward Specialty’s growth strategy involves a focus on underpenetrated niche markets for which standard insurance coverages are insufficient or inadequate. Thus, with tailor-made products and services, prudent underwriting and technology, this insurer remains well poised to capitalize on the sea of opportunities offered by the market in which it operates. These, in turn, help it improve its top line, expand margins and shape a portfolio that offers the best risk-adjusted returns on capital. These also enable SKWD to enjoy low underwriting volatility and a competitive moat.

Skyward Specialty’s focus on high-return areas that are less exposed to P&C cycles, prudent pricing, better retention, and shifting of the business mix toward more profitable lines bodes well for growth. Its combined ratio, measuring its underwriting profitability, has been consistently improving. 

Its intelligent investment strategy has been paying off. While SKWD has been de-risking the portfolio, it is diverting the free cash flow to fixed income. In its recently concluded FOMC meeting, the Federal Reserve cut the interest rate by 50 basis points. Insurers are direct beneficiaries of a rising rate environment. They invest a portion of their premiums and a low-rate environment could weigh on investment results. However, a broader invested asset base should limit the downside. 

An improving debt profile gives financial flexibility. This, coupled with improved cash balance, strengthens the company’s balance sheet. 

SKWD’s Return on Capital

Return on equity in the trailing 12 months was 17.4%, higher than the industry average of 8%. Return on equity, a profitability measure, reflects how effectively a company is utilizing its shareholders.
 

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Its return on invested capital (ROIC) has been increasing in the last few quarters. The insurer has also invested over the same time period. This reflects SKWD’s efficiency in utilizing funds to generate income. ROIC in the trailing 12 months was 13.4%, higher than the industry average of 6.1%.

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SKWD Shares Are Expensive

The stock is overvalued compared to its industry. It is currently trading at a price-to-book multiple of 2.25, higher than the industry average of 1.62. It also has a Value Score of A. Back-tested results have shown that stocks with a solid Value Score and a favorable Zacks Rank are the most attractive and their returns are better. 
 

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Shares of other insurers like Aflac Inc AFL, The Progressive Corporation PGR and The Travelers Companies TRV are also trading at a multiple higher than the industry average.

What Should You Do Now With SKWD Stock?

SKWD’s “Rule Our Niche” to accelerate growth, expand margins, boost earnings potential, increase return on capital and achieve favorable leverage bodes well for growth.  

Despite its expensive valuation, given the positive analyst sentiment, its growth prospects and its VGM Score of B, the time appears right for potential investors to bet on this Zacks Rank #2 (Buy) insurer. 

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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