10-K/A: Skyward Specialty Amends 2024 10-K to Correct Audit Opinion Dates

Skyward Specialty Insurance Group, Inc. filed an amendment to its 2024 Annual Report on Form 10-K to correct typographical errors in the dates of its independent auditor's opinions.

Summary

• Amendment No. 2 to the 2024 Form 10-K was filed solely to correct typographical errors in the dates of Ernst & Young LLP's (EY) opinions on internal control over financial reporting and financial statements, reverting both to March 3, 2025.
• No other changes were made to the consolidated financial position, results of operations, cash flows, or disclosures from the original Form 10-K.
• EY expressed an adverse opinion on the effectiveness of internal control over financial reporting as of December 31, 2024, due to a material weakness.
• The material weakness identified relates to the ineffective implementation of information technology general controls (ITGCs) in user access for systems supporting financial reporting processes.
• EY issued an unqualified opinion on the consolidated financial statements as of December 31, 2024 and 2023, and for the three years ended December 31, 2024.
• Net income for 2024 was $118.8 million, a significant increase from $86.0 million in 2023 and $39.4 million in 2022.
• Net earned premiums grew to $1,056.7 million in 2024, up from $829.1 million in 2023 and $616.0 million in 2022.
• Total assets increased to $3,729.5 million in 2024 from $2,953.4 million in 2023.
• Reserves for losses and loss adjustment expenses rose to $1,782.4 million in 2024 from $1,314.5 million in 2023.
• Gross written premiums for total continuing business increased 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 and 9.3% in 2022.
• Book value per share increased to $19.79 in 2024 from $16.72 in 2023.

Sentiment

Score: 4

Explanation: While the company demonstrates strong financial performance with significant growth in net income, premiums, and equity, the adverse opinion on internal control over financial reporting due to a material weakness is a serious concern. This control deficiency introduces risk to the reliability of financial reporting, overshadowing the positive operational results.

Positives

• Received an unqualified opinion from Ernst & Young LLP on the consolidated financial statements for the periods ended December 31, 2024.
• Reported significant growth in net income, reaching $118.8 million in 2024, an increase from $86.0 million in 2023.
• Achieved a strong increase in net earned premiums to $1,056.7 million in 2024, demonstrating robust business expansion.
• Experienced substantial growth in gross written premiums for continuing business, totaling $1,743.2 million in 2024.
• Improved return on equity to 16.3% in 2024, up from 15.9% in 2023.
• Increased book value per share to $19.79 in 2024 from $16.72 in 2023.
• Successfully commuted the Loss Portfolio Transfer with R&Q Re (Bermuda) Ltd. on January 31, 2025, resulting in the receipt of $11.7 million in cash.
• GMIC's statutory capital and surplus substantially exceeded regulatory requirements as of December 31, 2024.

Negatives

• Received an adverse opinion from Ernst & Young LLP on the effectiveness of 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 user access for systems supporting financial reporting processes.
• Related process-level IT dependent manual and automated controls were also deemed ineffective due to the identified ITGC material weakness.
• Recognized adverse development of $25.7 million related to prior years' loss and loss expense reserves in 2024, primarily impacting multi-line solutions and exited lines.

Risks

• A material weakness in internal control over financial reporting, specifically regarding ITGCs for user access, poses a reasonable possibility that a material misstatement of financial statements will not be prevented or detected on a timely basis.
• Inherent limitations of internal control over financial reporting mean it may not prevent or detect all misstatements, and effectiveness may deteriorate over time.
• Significant estimation uncertainty exists in the valuation of reserves for unpaid losses and loss adjustment expenses, which could lead to actual liabilities exceeding estimates and adversely affecting financial results.
• Concentration of credit risk with reinsurance recoverables, with Everest Reinsurance Co. and eMaxx Captives representing 18.0% and 16.8% respectively of balances at December 31, 2024, and eMaxx Captives being unrated by A.M. Best.
• Potential for premium write-offs and corresponding loss of income if distribution sources fail to remit premiums.
• Exposure to various legal actions, including claims under insurance policies, bad faith claims, disputes with third parties, and alleged errors and omissions, which could result in unaccrued losses.
• Indemnification obligations related to past sales of business assets and subsidiaries, with potential unknown exposures and some indemnifications having no time limit.
• Regulatory restrictions on dividend payments from insurance subsidiaries (e.g., GMIC) by state law, which could limit cash flow to the parent company.

Future Outlook

Forward-looking statements made in the original Form 10-K have not been revised in this amendment to reflect events that occurred or facts that became known after the filing of the original Form 10-K. Therefore, no new forward-looking statements or guidance are provided.

Management Comments

• "Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report."
• "Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report."
• "The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures... and internal control over financial reporting... for the registrant."
• "The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee... All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting... and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting."

Industry Context

The company operates as a specialty insurance provider, delivering commercial property and casualty products and solutions on both non-admitted (E&S) and admitted bases, primarily within the United States. It serves market niches through eight distinct underwriting divisions. The Chief Operating Decision Maker (CODM) utilizes competitive analysis, benchmarking against industry competitors, to assess performance and allocate resources.

Comparison to Industry Standards

• The company's Chief Operating Decision Maker (CODM) assesses performance and establishes management compensation by monitoring budgeted versus actual results and benchmarking net underwriting income, return on equity, and growth in book value per share against competitors.
• Estimates for reserves for unpaid losses and loss adjustment expenses are based on historical information, industry and peer group information, and estimates of future trends in variable factors.
• The historical loss rate for reinsurance recoverables is developed using A.M. Best impairment rate and rating transition studies, which provide historical loss data for similarly rated reinsurance companies.

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.
• The company records accruals for these items when losses are probable and reasonably estimable, and believes the resolution of such 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 $108.1 million in 2024, and commissions were $25.4 million.
• Advisory and professional services fees and expense reimbursements paid to various affiliated stockholders and directors totaled $0.6 million for the year ended December 31, 2024.
• On September 30, 2024, Skyward Specialty borrowed $57.0 million from Houston Specialty Insurance Company (HSIC) via an Intercompany Loan Promissory Note, with interest payable monthly at a fixed annual rate of 4.00%.

Stakeholder Impact

• **Shareholders:** The reaffirmation of a material weakness in internal controls could negatively impact investor confidence, despite strong financial performance metrics like increased book value per share ($19.79) and return on equity (16.3%).
• **Employees:** The company supports employees through a 401(k) Plan with matching contributions ($3.2 million in 2024) and an Employee Stock Purchase Plan (ESPP) allowing discounted common stock purchases.
• **Customers/Policyholders:** The significant increase in net earned premiums ($1,056.7 million) and reserves for losses and loss adjustment expenses ($1,782.4 million) indicates continued business growth and commitment to meeting policyholder obligations.
• **Reinsurers:** The company actively manages its reinsurance relationships, as evidenced by the commutation of the Loss Portfolio Transfer with R&Q Re (Bermuda) Ltd. and continuous monitoring of reinsurer financial condition and credit risk.
• **Regulatory Authorities:** The company's insurance subsidiaries (e.g., GMIC) substantially exceeded Risk Based Capital (RBC) requirements as of December 31, 2024, demonstrating compliance with regulatory standards. The restacking of subsidiaries also reflects regulatory compliance.

Next Steps

• The company will file its Proxy Statement relating to the 2025 annual meeting of stockholders within 120 days of December 31, 2024.
• 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 income statement expenses) on its consolidated financial statements, effective for annual reporting periods beginning after December 15, 2026.
• The program approved in November 2024 allowing Board of Directors to defer receipt of annual restricted stock units awards will become available for Directors who opt into the provisions for their 2025 grant.

Key Dates

Recommendation

While the company exhibits strong financial growth and profitability, as evidenced by increased net income, earned premiums, and return on equity, the adverse opinion on internal control over financial reporting due to a material weakness is a significant concern. This control deficiency introduces uncertainty regarding the reliability of financial reporting, which could impact investor confidence. An unqualified opinion on financial statements is positive, but the control weakness warrants caution. Therefore, a 'hold' recommendation is appropriate until the material weakness is effectively remediated and demonstrated.

Keywords

Specialty Insurance, SEC Filing, 10-K/A, Financial Reporting, Internal Controls, Material Weakness, Audit Opinion, Insurance, Underwriting, Reinsurance, Financial Performance, Earnings, Equity, Risk Management, Corporate Governance, SKWD