10-K/A: Skyward Specialty Amends 10-K, Discloses Control Weakness

Skyward Specialty Insurance Group, Inc. filed an amendment to its annual report, correcting an omission regarding an adverse audit opinion on its internal control over financial reporting, while reporting strong financial growth.

Summary

• Skyward Specialty Insurance Group, Inc. filed an Amendment No. 1 on Form 10-K/A to its Annual Report for the fiscal year ended December 31, 2024, solely to correct a typographical error in Ernst & Young LLP's (EY) financial statement audit opinion.
• The corrected audit opinion now explicitly states that EY expressed an adverse opinion on the Company's internal control over financial reporting (ICFR) as of December 31, 2024.
• The adverse opinion on ICFR is due to a material weakness identified in the ineffective implementation of information technology general controls (ITGCs) related to user access for systems supporting financial reporting processes.
• Despite the material weakness in ICFR, EY's report dated August 7, 2025, expressed an unqualified opinion on the Company's consolidated financial statements for the period ended December 31, 2024.
• The Company reported strong financial performance for 2024, with net earned premiums of $1,056.7 million, net investment income of $80.7 million, and net income of $118.8 million.
• Basic earnings per share increased to $2.97 in 2024 from $2.34 in 2023, and diluted earnings per share rose to $2.87 from $2.24.
• Gross written premiums grew to $1,743.2 million in 2024 from $1,459.8 million in 2023.
• Return on equity improved to 16.3% in 2024 from 15.9% in 2023.
• The Company recognized adverse development related to prior years' loss and loss expense reserves of $25.7 million in 2024, primarily from accident years 2018 and prior.
• Total assets increased to $3,729.5 million in 2024 from $2,953.4 million in 2023, and total stockholders' equity grew to $794.0 million from $661.0 million.
• The Company commuted a Loss Portfolio Transfer (LPT) with R&Q Re (Bermuda) Ltd. effective January 31, 2025, receiving $11.7 million in cash, which led to a $13.6 million increase in the allowance for uncollectible reinsurance that was subsequently written off in 2024.

Sentiment

Score: 4

Explanation: While the Company demonstrates strong financial performance and growth, the adverse opinion on internal control over financial reporting due to a material weakness is a significant negative. This governance issue introduces uncertainty and overshadows the positive financial results, leading to a slightly negative sentiment.

Positives

• Net earned premiums increased significantly to $1,056.7 million in 2024 from $829.1 million in 2023, demonstrating strong top-line growth.
• Net investment income more than doubled to $80.7 million in 2024 from $40.3 million in 2023, indicating effective investment strategies.
• Net income grew to $118.8 million in 2024 from $86.0 million in 2023, reflecting improved profitability.
• Basic earnings per share increased to $2.97 in 2024 from $2.34 in 2023, and diluted earnings per share rose to $2.87 from $2.24.
• Gross written premiums showed robust growth, reaching $1,743.2 million in 2024 compared to $1,459.8 million in 2023.
• Return on equity improved to 16.3% in 2024 from 15.9% in 2023, indicating enhanced efficiency in generating shareholder returns.
• The Company received an unqualified opinion on its consolidated financial statements for 2024, affirming the fair presentation of its financial position and results.
• Statutory capital and surplus substantially exceeded regulatory requirements, demonstrating strong financial solvency and stability.
• The Company is in compliance with all covenants on its Revolving Credit Facility as of December 31, 2024.

Negatives

• The independent registered public accounting firm, Ernst & Young LLP, expressed an adverse opinion on the Company's internal control over financial reporting as of December 31, 2024.
• A material weakness was identified related to the ineffective implementation of information technology general controls (ITGCs) in the area of user access for systems supporting financial reporting processes.
• Related process-level IT dependent manual and automated controls that rely upon the affected ITGCs were also deemed ineffective.
• The Company recognized adverse development related to prior years' loss and loss expense reserves of $25.7 million in 2024, primarily from accident years 2018 and prior.
• Adverse development of $10.8 million in 2023 was driven by greater than expected severity in auto, general, and excess liability lines of business from accident years 2020 to 2022.
• Book value per share decreased from $25.82 in 2022 to $16.72 in 2023, although it recovered to $19.79 in 2024.

Risks

• The material weakness in internal control over financial reporting related to ITGCs for user access poses a risk that material misstatements in financial statements may not be prevented or detected on a timely basis.
• Estimation uncertainty associated with evaluating management's methods and assumptions for reserves for unpaid losses and loss adjustment expenses (LAE), including incurred but not reported (IBNR) reserves, could lead to significant variations from estimated liabilities.
• The Company faces credit risk associated with reinsurance recoverables, particularly from reinsurers not rated by A.M. Best, such as eMaxx Captives, which represented 16.8% of recoverables at December 31, 2024.
• Future adverse development in loss reserves, as seen in prior years, could negatively impact financial results, especially for longer-duration multi-line solutions which are subject to changes in regulation, inflation, and unforeseen factors.
• Failure by distribution sources to remit premiums could result in premium write-offs and a corresponding loss of income.

Future Outlook

No new forward-looking statements or guidance were provided in this amendment; prior forward-looking statements from the original Form 10-K have not been revised and should be read in their historical context.

Management Comments

• Andrew Robinson, Chairman and Chief Executive Officer, certified that the report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made not misleading, and that the financial statements fairly present the financial condition, results of operations, and cash flows.
• Mark Haushill, Chief Financial Officer, provided a similar certification regarding the accuracy and fair presentation of the financial information in the report.

Industry Context

The Company operates in the specialty insurance sector, offering commercial property and casualty products. Its performance metrics, such as net underwriting income, return on equity, and growth in book value per share, are benchmarked against competitors for competitive analysis and management compensation assessment. The identified material weakness in internal controls, while not impacting the financial statement audit opinion, highlights a governance challenge that could be viewed critically within an industry reliant on robust risk management and operational integrity.

Comparison to Industry Standards

• The audit of internal control over financial reporting was based on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013 framework), a widely recognized standard for internal controls.
• Audits of financial statements and internal controls were conducted in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB), which sets auditing standards for U.S. public companies.
• The Company assesses the credit risk of its reinsurance recoverables by monitoring the financial strength ratings from A.M. Best, a leading credit rating agency focused exclusively on the insurance industry, with 97.4% of recoverables from reinsurers rated Aand above.
• The Company's statutory capital and surplus substantially exceeded the Risk Based Capital (RBC) requirements specified by the National Association of Insurance Commissioners (NAIC), indicating strong regulatory compliance and financial health compared to industry benchmarks.

Corporate Governance

Legal Proceedings

• The Company is named as a defendant in various legal actions arising from claims made under insurance policies and contracts, which are considered in estimating loss and loss adjustment expense reserves.
• From time to time, the Company is a defendant in legal actions related to bad faith claims, disputes with third parties, or alleged errors and omissions.
• Accruals are recorded for these items where losses are probable and reasonably estimable. Based on present information and legal advice, the Company believes the resolution of these matters will not have a material adverse effect on its consolidated financial position, results of operations, or cash flows.

Related Party Transactions

• RISCOM, in which the Company holds a 20% ownership interest, provides wholesale brokerage services and has a managing general agency agreement with the Company. Net earned premium related to these agreements was $108.13 million in 2024, and commissions were $25.372 million.
• Advisory and professional services fees and expense reimbursements paid to various affiliated stockholders and directors totaled $0.6 million in 2024.
• On September 30, 2024, Skyward Specialty entered into an Intercompany Loan Promissory Note with Houston Specialty Insurance Company (HSIC), a subsidiary, borrowing $57.0 million at a fixed annual interest rate of 4.00%.

Stakeholder Impact

• Shareholders: The adverse opinion on internal controls could raise concerns about financial reporting reliability, potentially impacting investor confidence, despite strong financial performance. The capital raises in 2023 indicate dilution but also strengthened the capital base.
• Employees: Stock-based compensation plans (2022 Plan, ESPP) are in place, aligning employee incentives with company performance. The material weakness in ITGCs could imply operational inefficiencies that might affect employee workflows.
• Customers (Policyholders): The Company's strong statutory capital and surplus, exceeding RBC requirements, provides assurance regarding its ability to meet future claims obligations. The adverse development in loss reserves, while managed, highlights the inherent uncertainty in the insurance business.
• Creditors: Compliance with debt covenants and the ability to manage and restructure debt (e.g., FHLB Loan, Revolving Credit Facility, Debenture redemption) indicates sound financial management, which is positive for creditors.
• Regulatory Authorities: The adverse opinion on internal controls will likely draw scrutiny from regulatory bodies, requiring the Company to demonstrate remediation efforts to maintain compliance and trust.

Next Steps

• The Company is continuing to evaluate the effect of ASU 2023-09 (Improvements to Income Tax Disclosures) on its consolidated financial statements, effective for fiscal years beginning after December 15, 2024.
• The Company is evaluating the effect of ASU 2024-03 (disaggregated disclosure of income statement expenses) on its consolidated financial statements, effective for annual reporting periods beginning after December 15, 2026.
• The Board of Directors' program to permit deferral of annual restricted stock units awards will become available for Directors opting into the provisions for their 2025 grants.

Key Dates

Recommendation

While Skyward Specialty Insurance Group, Inc. demonstrates robust financial growth across key metrics like net earned premiums, net income, and EPS, the disclosure of an adverse opinion on its internal control over financial reporting due to a material weakness is a significant concern. This weakness, particularly in IT general controls, introduces a notable risk to the reliability of financial reporting, even though the financial statements themselves received an unqualified opinion. The strong operational performance and capital position are positives, but the governance and control deficiencies warrant caution. A 'hold' recommendation is appropriate as investors should monitor the Company's progress in remediating the identified material weakness before considering further investment, balancing the strong fundamentals against the control risks.

Keywords

Specialty Insurance, SEC Filing, 10-K/A, Internal Control, Financial Reporting, Insurance, Underwriting, Loss Reserves, Reinsurance, Corporate Governance, Financial Performance, SKWD, ITGCs, Adverse Opinion