Skyward Specialty Insurance Group, Inc. 10-Q

Item 1. Financial Statements SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS March 31, 2023 December 31, 2022 ($ in thousands, except share and per share amounts) (Unaudited) Assets Investments: Fixed maturity securities, available-for-sale, at fair value (amortized cost of $ 718,395 and $ 662,616 , respectively) $ 673,137 $ 607,572 Fixed maturity securities, held-to-maturity, at amortized cost (net of allowance for credit losses of $ 321 as of March 31, 2023) 48,216 52,467 Equity securities, at fair value 120,465 120,169 Mortgage loans (at fair value as of March 31, 2023; at amortized cost as of December 31, 2022) 42,335 51,859 Other long-term investments 118,784 129,142 Short-term investments, at fair value 287,351 121,158 Total investments 1,290,288 1,082,367 Cash and cash equivalents 41,200 45,438 Restricted cash 64,047 79,573 Premiums receivable, net 178,954 139,215 Reinsurance recoverables, net 570,504 581,359 Ceded unearned premium 197,044 157,645 Deferred policy acquisition costs 80,103 68,938 Deferred income taxes 30,572 36,188 Goodwill and intangible assets, net 89,503 89,870 Other assets 79,110 82,846 Total assets $ 2,621,325 $ 2,363,439 Liabilities and stockholders’ equity Liabilities: Reserves for losses and loss adjustment expenses $ 1,173,176 $ 1,141,757 Unearned premiums 501,218 442,509 Deferred ceding commission 40,824 29,849 Reinsurance and premium payables 185,748 113,696 Funds held for others 44,256 36,858 Accounts payable and accrued liabilities 40,328 48,499 Notes payable 50,000 50,000 Subordinated debt, net of debt issuance costs 78,629 78,609 Total liabilities 2,114,179 1,941,777 Stockholders’ equity Series A preferred stock, $ 0.01 par value; 10,000,000 and 2,000,000 shares authorized, 0 and 1,969,660 shares issued and outstanding, respectively — 20 Common stock, $ 0.01 par value, 500,000,000 and 168,000,000 shares authorized, 37,658,111 and 16,832,955 shares issued, respectively 377 168 Treasury stock, $ 0.01 par value, 0 and 233,289 shares, respectively — ( 2 ) Additional paid-in capital 641,368 577,289 Stock notes receivable ( 6,718 ) ( 6,911 ) Accumulated other comprehensive loss ( 35,744 ) ( 43,485 ) Accumulated deficit ( 92,137 ) ( 105,417 ) Total stockholders’ equity 507,146 421,662 Total liabilities and stockholders’ equity $ 2,621,325 $ 2,363,439 The accompanying notes are an integral part of the consolidated financial statements. 3 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED) Three months ended March 31, ($ in thousands, except share and per share amounts) 2023 2022 Revenues: Net earned premiums $ 182,831 $ 141,726 Commission and fee income 1,492 230 Net investment income 4,646 15,149 Net investment gains (losses) 961 ( 4,438 ) Total revenues 189,930 152,667 Expenses: Losses and loss adjustment expenses 114,900 89,989 Underwriting, acquisition and insurance expenses 51,655 40,534 Interest expense 2,152 1,177 Amortization expense 387 387 Other expenses 1,114 — Total expenses 170,208 132,087 Income before income taxes 19,722 20,580 Income tax expense 4,166 4,269 Net income 15,556 16,311 Net income attributable to participating securities 1,274 7,823 Net income attributable to common shareholders $ 14,282 $ 8,488 Comprehensive income (loss): Net income $ 15,556 $ 16,311 Other comprehensive income (loss): Unrealized gains and losses on investments: Net change in unrealized gains (losses) on investments, net of tax 7,788 ( 16,705 ) Reclassification adjustment for (losses) gains on securities no longer held, net of tax ( 47 ) 301 Total other comprehensive income (loss) 7,741 ( 16,404 ) Comprehensive income (loss) $ 23,297 $ ( 93 ) Per share data: Basic earnings per share $ 0.43 $ 0.52 Diluted earnings per share $ 0.42 $ 0.50 Weighted-average common shares outstanding Basic 32,848,243 16,376,720 Diluted 36,952,073 32,412,307 The accompanying notes are an integral part of the consolidated financial statements. 4 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED) ($ in thousands) Preferred Stock Common Stock Treasury Stock Additional Paid-in Capital Stock Notes Receivable Accumulated Other Comprehensive Loss Accumulated Deficit Total Balance at January 1, 2023 $ 20 $ 168 $ ( 2 ) $ 577,289 $ ( 6,911 ) $ ( 43,485 ) $ ( 105,417 ) $ 421,662 Cumulative effect on adoption of ASU No. 2016-13 — — — — — — ( 2,276 ) ( 2,276 ) Employee equity transactions — — — 1,864 193 — — 2,057 Preferred stock conversion to common shares ( 20 ) 161 2 ( 143 ) — — — — Proceeds from initial public offering, net — 48 — 62,358 — — — 62,406 Net income — — — — — — 15,556 15,556 Other comprehensive income, net of tax — — — — — 7,741 — 7,741 Balance at March 31, 2023 $ — $ 377 $ — $ 641,368 $ ( 6,718 ) $ ( 35,744 ) $ ( 92,137 ) $ 507,146 ($ in thousands) Preferred Stock Common Stock Treasury Stock Additional Paid-in Capital Stock Notes Receivable Accumulated Other Comprehensive Loss Accumulated Deficit Total Balance at January 1, 2022 $ 20 $ 168 $ ( 2 ) $ 575,159 $ ( 9,092 ) $ 4,640 $ ( 144,813 ) $ 426,080 Employee equity transactions — — — 502 188 — — 690 Reclassification of stock notes receivable to other assets — — — — 1,942 — — 1,942 Net income — — — — — — 16,311 16,311 Other comprehensive loss, net of tax — — — — — ( 16,404 ) — ( 16,404 ) Balance at March 31, 2022 $ 20 $ 168 $ ( 2 ) $ 575,661 $ ( 6,962 ) $ ( 11,764 ) $ ( 128,502 ) $ 428,619 5 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three months ended March 31, ($ in thousands) 2023 2022 Cash flows from operating activities Net income $ 15,556 $ 16,311 Adjustments to reconcile net income to net cash provided by operating activities 91,651 29,571 Net cash provided by operating activities 107,207 45,882 Cash flows from investing activities: Purchase of fixed maturity securities, available-for-sale ( 72,466 ) ( 23,370 ) Purchase of illiquid investments ( 286 ) ( 2,376 ) Purchase of equity securities ( 12,889 ) ( 25,221 ) Proceeds from (investment in) direct and indirect loans 14,665 ( 8,019 ) Purchase of property and equipment ( 614 ) ( 431 ) Sales and maturities of investment securities 34,980 33,935 Distributions from equity method investments 355 1,326 Change in short-term investments ( 166,193 ) ( 38,631 ) Receivable for securities sold 3,984 5,671 Cash provided by deposit accounting 5,038 1,518 Other, net — 2 Net cash used in investment activities ( 193,426 ) ( 55,596 ) Cash flows from financing activities: Repayment of stock notes receivable 193 186 Draw on revolving line of credit 50,000 — Repayment of term loan ( 50,000 ) — Proceeds from initial public offering 66,262 — Net cash provided by financing activities 66,455 186 Net decrease in cash and cash equivalents and restricted cash ( 19,764 ) ( 9,528 ) Cash and cash equivalents and restricted cash at beginning of period 125,011 107,274 Cash and cash equivalents and restricted cash at end of period $ 105,247 $ 97,746 Supplemental disclosure of cash flow information: Cash paid for interest $ 3,145 $ 1,124 The accompanying notes are an integral part of the consolidated financial statements. 6 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Basis of Presentation The unaudited condensed consolidated financial statements of Skyward Specialty Insurance Group, Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all the disclosures required by GAAP for complete consolidated financial statements. Readers are urged to review the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for a more complete description of the Company’s business and accounting policies. In the opinion of management, all adjustments necessary for a fair statement of the condensed consolidated financial statements have been included. Such adjustments consist only of normal recurring items. Interim results are not necessarily indicative of results of operations for the full year. The consolidated balance sheet as of December 31, 2022 was derived from the Company’s audited annual consolidated financial statements. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from these estimates. Recent Accounting Standards Adopted In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires organizations to estimate credit losses on certain types of financial instruments, including receivables and fixed maturity securities, by introducing an approach based on expected losses. The expected loss approach required entities to incorporate considerations of historical information, current information, and reasonable and supportable forecasts. The Company adopted ASU 2016-13 effective January 1, 2023 using the modified retrospective approach, by which a cumulative-effect adjustment was made to retained earnings as of the date of adoption. In connection with the adoption of ASU 2016-13, the Company elected the fair value option in accounting for mortgage loans effective January 1, 2023 as targeted transition relief. The adoption of ASU 2016-13 resulted in a $ 2.3 million increase in accumulated deficit, net of tax. Updates to Significant Accounting Policies The following accounting policies have been updated to reflect the Company's adoption of ASU 2016-13 Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments as described above. Investments Available-for-sale Investments in fixed maturities that are classified as available-for-sale and are carried at fair value. For available-for-sale fixed maturities in an unrealized loss position, the Company first determines whether there is an intent to sell the security or if it is more likely than not that the Company will be required to sell the security before maturity or recovery of its cost basis. If either of these criteria were met, the amortized cost of the security is written down to fair value with the losses recognized in net investment gains (losses) on the consolidated statements of operations. If neither of the these criteria were met, the Company determines whether unrealized losses are due to credit-related factors. If the unrealized losses are due to credit-related factors, an allowance for credit losses is determined using a present value of cash flows compared to the amortized cost of the security. The allowance for credit losses is limited to the amount by which fair value is below amortized cost. Changes in the allowance for credit losses are recognized in net investment gains (losses) on the consolidated statements of operations. Credit losses that are limited by the fair value of the security are recognized in stockholders’ equity, net of taxes, as a component of accumulated other comprehensive income (loss). Unrealized losses that are not credit-related continue to be recognized in stockholders’ equity, net of taxes, as a component of accumulated other comprehensive income (loss). 7 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies (continued) Held-to-maturity Investments in fixed maturity securities, held-to-maturity are carried at amortized cost net of an allowance for credit losses. The allowance for credit losses represents the current estimate of expected credit losses. The Company develops a historical loss rate from Moody’s table of estimated multi-year cumulative loss rates for asset backed securities. This historical loss rate is adjusted for current conditions and reasonable and supportable forecasts. Changes in the allowance for credit losses are recognized in net investment gains (losses) on the consolidated statements of operations. Mortgage loans The Company elected the fair value option in accounting for mortgage loans effective January 1, 2023 as targeted transition relief. Under the fair value option, mortgage loans are measured at fair value, and changes in unrealized gains and losses on mortgage loans are reported in net investment gains (losses) on the condensed consolidated statements of operations. Interest income and amortization continue to be recognized in net investment income on the consolidated statements of operations. Reinsurance Reinsurance Recoverables Reinsurance recoverables are carried net of an allowance for credit losses. The allowance for credit losses represents the current estimate of expected credit losses. The Company develops a historical loss rate using the A.M. Best impairment rate and rating transition study which provides historical loss data of similarly rated reinsurance companies based on the expected duration of the receivables. This historical loss rate is adjusted for current conditions and reasonable and supportable forecasts and consideration of current economic conditions. Changes in the allowance for credit losses are recognized in underwriting, acquisition and insurance expenses on the consolidated statements of operations. Premiums Premium receivables are carried net of an allowance for credit losses. The allowance for credit losses represents the current estimate of expected credit losses. The Company develops a historical loss rate using historical write-offs and aging of receivables. This historical loss rate is adjusted for current conditions, reasonable and supportable forecasts and our ability to cancel coverage on a policy after premium is considered past due. Changes in the allowance for credit losses are recognized in underwriting, acquisition and insurance expenses on the consolidated statements of operations. 8 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 2. Investments The following tables set forth the amortized cost and the fair value by investment category at March 31, 2023 and December 31, 2022: ($ in thousands) Gross Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Fair Value March 31, 2023 Fixed maturity securities, available-for-sale: U.S. government securities $ 46,347 $ 35 $ ( 1,464 ) $ — $ 44,918 Corporate securities and miscellaneous 278,980 1,571 ( 18,117 ) — 262,434 Municipal securities 73,232 152 ( 6,045 ) — 67,339 Residential mortgage-backed securities 146,830 458 ( 13,398 ) — 133,890 Commercial mortgage-backed securities 55,183 228 ( 3,229 ) — 52,182 Asset-backed securities 117,823 213 ( 5,662 ) — 112,374 Total fixed maturity securities, available-for-sale $ 718,395 $ 2,657 $ ( 47,915 ) $ — $ 673,137 Fixed maturity securities, held-to-maturity: Asset-backed securities $ 48,537 $ — $ ( 3,724 ) $ ( 321 ) $ 44,492 Total fixed maturity securities, held-to-maturity $ 48,537 $ — $ ( 3,724 ) $ ( 321 ) $ 44,492 ($ in thousands) Gross Amortized Cost Gross Unrealized Gains Gross Unrealized Loss Fair Value December 31, 2022 Fixed maturity securities, available-for-sale: U.S. government securities $ 50,416 $ 1 $ ( 1,876 ) $ 48,541 Corporate securities and miscellaneous 255,116 767 ( 20,754 ) 235,129 Municipal securities 65,836 24 ( 8,133 ) 57,727 Residential mortgage-backed securities 134,844 218 ( 15,206 ) 119,856 Commercial mortgage-backed securities 40,129 50 ( 3,684 ) 36,495 Asset-backed securities 116,275 91 ( 6,542 ) 109,824 Total fixed maturity securities, available-for-sale $ 662,616 $ 1,151 $ ( 56,195 ) $ 607,572 Fixed maturity securities, held-to-maturity: Asset-backed securities $ 52,467 $ — $ ( 5,696 ) $ 46,771 Total fixed maturity securities, held-to-maturity $ 52,467 $ — $ ( 5,696 ) $ 46,771 9 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 2. Investments (continued) The following table sets forth the amortized cost and fair value of available-for-sale fixed maturity securities by contractual maturity at March 31, 2023: ($ in thousands) Amortized Cost Fair Value Due in less than one year $ 27,656 $ 26,956 Due after one year through five years 214,722 205,835 Due after five years through ten years 108,566 99,254 Due after ten years 47,615 42,646 Mortgage-backed securities 202,013 186,072 Asset-backed securities 117,823 112,374 Total $ 718,395 $ 673,137 Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Also, changing interest rates, tax considerations or other factors may result in portfolio sales prior to maturity. The Company’s fixed maturity securities, held-to-maturity, at March 31, 2023 consisted entirely of asset backed securities that were not due at a single maturity date. The following tables set forth the gross unrealized losses and the corresponding fair values of investments, aggregated by length of time that individual securities had been in a continuous unrealized loss position as of March 31, 2023 and December 31, 2022: Less than 12 Months 12 Months or More Total ($ in thousands) Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses March 31, 2023 Fixed maturity securities, available-for-sale: U.S. government securities $ 19,722 $ ( 443 ) $ 18,777 $ ( 1,021 ) $ 38,499 $ ( 1,464 ) Corporate securities and miscellaneous 107,567 ( 4,059 ) 98,368 ( 14,058 ) 205,935 ( 18,117 ) Municipal securities 35,247 ( 1,764 ) 22,752 ( 4,281 ) 57,999 ( 6,045 ) Residential mortgage-backed securities 41,507 ( 1,919 ) 65,869 ( 11,479 ) 107,376 ( 13,398 ) Commercial mortgage-backed securities 28,658 ( 869 ) 11,393 ( 2,360 ) 40,051 ( 3,229 ) Asset-backed securities 62,813 ( 2,636 ) 35,681 ( 3,026 ) 98,494 ( 5,662 ) Total fixed maturity securities, available-for-sale 295,514 ( 11,690 ) 252,840 ( 36,225 ) 548,354 ( 47,915 ) Fixed maturity securities, held-to-maturity: Asset-backed securities 1,624 ( 19 ) 42,868 ( 3,705 ) 44,492 ( 3,724 ) Total fixed maturity securities, held-to-maturity: 1,624 ( 19 ) 42,868 ( 3,705 ) 44,492 ( 3,724 ) Total $ 297,138 $ ( 11,709 ) $ 295,708 $ ( 39,930 ) $ 592,846 $ ( 51,639 ) 10 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 2. Investments (continued) Less than 12 Months 12 Months or More Total ($ in thousands) Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses December 31, 2022 Fixed maturity securities, available-for-sale: U.S. government securities $ 28,966 $ ( 603 ) $ 18,577 $ ( 1,273 ) $ 47,543 $ ( 1,876 ) Corporate securities and miscellaneous 171,506 ( 16,063 ) 34,283 ( 4,691 ) 205,789 ( 20,754 ) Municipal securities 51,701 ( 7,236 ) 3,689 ( 897 ) 55,390 ( 8,133 ) Residential mortgage-backed securities 56,246 ( 4,152 ) 52,778 ( 11,054 ) 109,024 ( 15,206 ) Commercial mortgage-backed securities 25,836 ( 1,488 ) 8,583 ( 2,196 ) 34,419 ( 3,684 ) Asset-backed securities 74,684 ( 3,351 ) 25,820 ( 3,191 ) 100,504 ( 6,542 ) Total fixed maturity securities, available-for-sale 408,939 ( 32,893 ) 143,730 ( 23,302 ) 552,669 ( 56,195 ) Fixed maturity securities, held-to-maturity: Asset-backed securities 46,771 ( 5,696 ) — — 46,771 ( 5,696 ) Total fixed maturity securities, held-to-maturity: 46,771 ( 5,696 ) — — 46,771 ( 5,696 ) Total $ 455,710 $ ( 38,589 ) $ 143,730 $ ( 23,302 ) $ 599,440 $ ( 61,891 ) The Company regularly monitors its available-for-sale fixed maturity securities that have fair values less than cost or amortized cost for signs of impairment, an assessment that requires significant management judgment regarding the evidence known. Such judgments could change in the future as more information becomes known, which could negatively impact the amounts reported. Among the factors that management considers for fixed maturity securities are the financial condition of the issuer including receipt of scheduled principal and interest cash flows, and intent to sell, including if it is more likely than not that the Company will be required to sell the investments before recovery. As of March 31, 2023, the Company had 551 lots of fixed maturity securities in an unrealized loss position. The Company does not have an intent to sell these securities and it is not more likely than not that the Company will be required to sell these securities before maturity or recovery of its cost basis. The Company determined that no credit impairment existed in the gross unrealized holding losses because the credit ratings of these securities were consistent with the credit ratings when purchased and/or at origination, there were no adverse changes in financial condition of the issuer and no adverse credit quality events in underlying assets. The Company attributed the unrealized losses to the changes in interest rates. 11 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 2. Investments (continued) The following table sets forth the components of net investment gains (losses) for the three months ended March 31, 2023 and 2022: ($ in thousands) 2023 2022 Gross realized gains Fixed maturity securities, available-for sale $ 493 $ 16 Equity securities 1,227 1,830 Other 1 31 Total 1,721 1,877 Gross realized losses Fixed maturity securities, available-for sale ( 237 ) ( 276 ) Equity securities ( 4,289 ) ( 654 ) Other ( 1 ) ( 16 ) Total ( 4,527 ) ( 946 ) Net unrealized gains (losses) on investments Equity securities 3,745 ( 5,369 ) Mortgage loans 22 — Net investment gains (losses) $ 961 $ ( 4,438 ) The following table sets forth the proceeds from sales of available-for-sale fixed maturity securities and equity securities for the three months ended March 31, 2023 and 2022: ($ in thousands) 2023 2022 Fixed maturity securities, available-for sale $ 8,392 $ 7,575 Equity securities 13,325 11,966 The following table sets forth the components of net investment income for the three months ended March 31, 2023 and 2022: ($ in thousands) 2023 2022 Income: Fixed maturity securities, available-for sale $ 6,676 $ 3,224 Fixed maturity securities, held-to-maturity 1,003 1,937 Equity securities 726 738 Equity method investments ( 4,664 ) 9,210 Mortgage loans 1,473 818 Indirect loans ( 1,319 ) 1,657 Short-term investments and cash 1,789 27 Other ( 20 ) 7 Total investment income 5,664 17,618 Investment expenses ( 1,018 ) ( 2,469 ) Net investment income $ 4,646 $ 15,149 12 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 2. Investments (continued) The following table sets forth the change in net unrealized gains (losses) on the Company’s investment portfolio, net of deferred income taxes, included in other comprehensive income (loss) for the three months ended March 31, 2023 and 2022: ($ in thousands) 2023 2022 Fixed maturity securities $ 9,786 $ ( 20,764 ) Deferred income taxes ( 2,045 ) 4,360 Total $ 7,741 $ ( 16,404 ) 3. Fair Value Measurements The Company’s financial instruments include assets and liabilities carried at fair value, as well as assets and liabilities carried at cost or amortized cost but disclosed at fair value in its consolidated financial statements. In determining fair value, the market approach is generally applied, which uses prices and other relevant data based on market transactions involving identical or comparable assets and liabilities. The Company uses data primarily provided by third-party investment managers or pricing vendors to determine the fair value of its investments. Periodic analyses are performed on prices received from third parties to determine whether the prices are reasonable estimates of fair value. The analyses include a review of month-to-month price fluctuations and, as needed, a comparison of pricing services’ valuations to other pricing services’ valuations for the identical security. The Company classifies its financial instruments into the following three-level hierarchy: Level 1 - Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date. Level 2 - Inputs are other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date. Level 3 - Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The following methods and assumptions were used in estimating the fair value disclosures for financial instruments in the accompanying consolidated financial statements and in these notes: U.S. government securities, mutual funds and common stock The Company uses unadjusted quoted prices for identical instruments in an active exchange to measure fair value which represent Level 1 inputs. Preferred stocks, municipal securities, corporate securities and miscellaneous The Company uses a pricing model that utilizes market-based inputs such as trades in an illiquid market for a particular security or trades in active markets for securities with similar characteristics. The model considers other inputs such as benchmark yields, issuer spreads, security terms and conditions, and other market data. These represent Level 2 fair value inputs. Commercial mortgage-backed securities, residential mortgage-backed securities and asset-backed securities The Company uses a pricing model that utilizes market-based inputs that may include dealer quotes, market spreads, and yield curves. It may evaluate individual tranches in a security by determining cash flows using the security’s terms and conditions, collateral performance, credit information benchmark yields and estimated prepayments. These represent Level 2 fair value inputs. 13 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3. Fair Value Measurements (continued) Mortgage loans Mortgage loans have variable interest rates and are collateralized by real property. The Company determines fair value of mortgage loans using the income approach utilizing inputs that are observable and unobservable (Level 3). The unobservable input consists of the spread applied to a prime rate used to discount cash flows. The spread represents the incremental cost of capital based on the borrower’s ability to make future payments and the value of the collateral relative to the loan balance and is subject to judgement and uncertainty. The following table sets forth the range and weighted average, weighted by relative fair value, of the spread as of March 31, 2023: March 31, 2023 High 9.50 % Low 2.05 % Weighted average 5.85 % 14 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3. Fair Value Measurements (continued) The following tables set forth the Company’s investments within the fair value hierarchy at March 31, 2023 and December 31, 2022: March 31, 2023 ($ in thousands) Level 1 Level 2 Level 3 Total Fixed maturity securities, available-for-sale: U.S. government securities $ 44,918 $ — $ — $ 44,918 Corporate securities and miscellaneous — 262,434 — 262,434 Municipal securities — 67,339 — 67,339 Residential mortgage-backed securities — 133,890 — 133,890 Commercial mortgage-backed securities — 52,182 — 52,182 Asset-backed securities — 112,374 — 112,374 Total fixed maturity securities, available-for-sale 44,918 628,219 — 673,137 Fixed maturity securities, held-to-maturity: Asset-backed securities — — 44,492 44,492 Total fixed maturity securities, held-to-maturity — — 44,492 44,492 Common stocks: Consumer discretionary 1,965 — — 1,965 Consumer staples 13,116 — — 13,116 Energy 2,947 — — 2,947 Finance 19,088 — — 19,088 Industrial 11,244 — — 11,244 Information technology 2,912 — — 2,912 Materials 3,253 — — 3,253 Other 2,292 — — 2,292 Total common stocks 56,817 — — 56,817 Preferred stocks: Consumer staples 473 — 473 Finance 3,979 — 3,979 Industrial — 1,135 — 1,135 Other — 735 — 735 Total preferred stocks — 6,322 — 6,322 Mutual funds: Fixed income 5,191 — — 5,191 Equity 51,615 — — 51,615 Commodity 520 — — 520 Total mutual funds 57,326 — — 57,326 Total equity securities 114,143 6,322 — 120,465 Mortgage loans — — 42,335 42,335 Short-term investments 287,351 — — 287,351 Total investments $ 446,412 $ 634,541 $ 86,827 $ 1,167,780 15 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3. Fair Value Measurements (continued) December 31, 2022 ($ in thousands) Level 1 Level 2 Level 3 Total Fixed maturity securities, available-for-sale: U.S. government securities $ 48,541 $ — $ — $ 48,541 Corporate securities and miscellaneous — 235,129 — 235,129 Municipal securities — 57,727 — 57,727 Residential mortgage-backed securities — 119,856 — 119,856 Commercial mortgage-backed securities — 36,495 — 36,495 Asset-backed securities — 109,824 — 109,824 Total fixed maturity securities, available-for-sale 48,541 559,031 — 607,572 Fixed maturity securities, held-to-maturity: Asset-backed securities — — 46,771 46,771 Total fixed maturity securities, held-to-maturity: — — 46,771 46,771 Common stocks: Consumer discretionary 1,948 — — 1,948 Consumer staples 12,036 — — 12,036 Energy 3,241 — — 3,241 Finance 22,636 — — 22,636 Industrial 9,452 — — 9,452 Information technology 2,284 — — 2,284 Materials 2,820 — — 2,820 Other 1,579 — — 1,579 Total common stocks 55,996 — — 55,996 Preferred stocks: Consumer staples — 117 — 117 Finance — 7,085 — 7,085 Industrial — 1,020 — 1,020 Other — 549 — 549 Total preferred stocks — 8,771 — 8,771 Mutual funds: Fixed income 5,068 — — 5,068 Equity 49,773 — — 49,773 Commodity 561 — — 561 Total mutual funds 55,402 — — 55,402 Total equity securities 111,398 8,771 — 120,169 Mortgage loans — — 52,842 52,842 Short-term investments 121,158 — — 121,158 Total investments $ 281,097 $ 567,802 $ 99,613 $ 948,512 16 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3. Fair Value Measurements (continued) The following table sets forth the changes in the fair value of instruments carried at fair value with a Level 3 measurement during the three months ended March 31, 2023: ($ in thousands) Mortgage Loans Balance at December 31, 2022 $ 52,842 Total gains for the period recognized in net investment gains (losses) $ 22 Issuances $ 892 Settlements ( 11,421 ) Balance at March 31, 2023 $ 42,335 Total losses for the period recognized in net investment gains (losses) attributable to the change in unrealized gains or losses relating to assets held as of period end $ ( 14 ) The Company measures certain assets, including investments in indirect loans and loan collateral, equity method investments and other invested assets, at fair value on a nonrecurring basis only when they are deemed to be impaired. In addition to the preceding disclosures on assets and liabilities recorded at fair value in the consolidated balance sheets, the Company is also required to disclose the fair values of certain other financial instruments for which it is practicable to estimate fair value. Estimated fair value amounts, defined as the quoted market price of a financial instrument, have been determined using available market information and other appropriate valuation methodologies. However, considerable judgements are required in developing the estimates of fair value where quoted market prices are not available. Accordingly, these estimates are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions or estimating methodologies may have an effect on the estimated fair value amounts. The following methods and assumptions were used in estimating the fair value disclosures of other financial instruments: Fixed maturity securities, held-to-maturity: Fixed maturity securities, held-to-maturity consists of senior and junior notes with target rates of return. As of March 31, 2023, the Company determined the fair value of these instruments using the income approach utilizing inputs that are unobservable (Level 3). Notes payable: The carrying value approximates the estimated fair value for notes payable as the notes payable accrue interest at current market rates plus a spread. The Company determines fair value using the income approach utilizing inputs that are available (Level 2). Subordinated debt: Subordinated debt consists of two debt instruments, the Junior Subordinated Interest Debentures, due September 15, 2036, and Unsecured Subordinated Notes, due May 24, 2039. The carrying value of the Junior Subordinated Interest Debentures approximates the estimated fair value as the instrument accrues interest at current market rates plus a spread. Unsecured Subordinated Notes have a fixed interest rate. The Company determines the fair value of these instruments using the income approach utilizing inputs that are observable (Level 2). 17 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3. Fair Value Measurements (continued) The following table sets forth the Company’s carrying and fair values of notes payable and subordinated debt as of March 31, 2023 and December 31, 2022: March 31, 2023 December 31, 2022 ($ in thousands) Carrying Value Fair Value Carrying Value Fair Value Notes Payable Term loan, due December 31, 2024 $ — $ — $ 50,000 $ 50,000 Revolving credit facility 50,000 50,000 — — Notes payable $ 50,000 $ 50,000 $ 50,000 $ 50,000 Subordinated Debt Junior subordinated interest debentures $ 59,149 $ 59,794 $ 59,137 $ 59,794 Unsecured subordinated notes 19,480 18,622 19,472 18,934 Subordinated debt, net of debt issuance costs $ 78,629 $ 78,416 $ 78,609 $ 78,728 Other financial instruments qualify as insurance-related products and are specifically exempted from fair value disclosure requirements. 4. Mortgage Loans The Company has invested in Separately Managed Accounts (“SMA1” and “SMA2”), managed by Arena Investors, LP (“Arena”), which is affiliated with The Westaim Corporation (“Westaim”) who, directly and through Westaim HIIG LP (a limited partnership controlled by Westaim), is the Company’s largest shareholder. As of March 31, 2023 and December 31, 2022, the Company held direct investments in mortgage loans from various creditors through SMA1 and SMA2. The Company’s mortgage loan portfolios are primarily senior loans on real estate across the U.S. The loans earn interest at a fixed rate above a prime rate, mature in approximately 1 to 2 years from loan origination and the principal amounts of the loans range between 40 % to 80 % property’s appraised value at the time the loans were made. Mortgage loan participations are carried at cost adjusted for unamortized premiums, discounts, and loan fees. The carrying value of the Company’s mortgage loans as of March 31, 2023 and December 31, 2022 were as follows: ($ in thousands) March 31, 2023 December 31, 2022 Retail $ 15,568 $ 16,516 Industrial — 6,329 Commercial 16,086 15,309 Multi-family 2,596 5,593 Office 3,210 3,197 Hospitality 4,875 4,915 $ 42,335 $ 51,859 18 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4. Mortgage Loans (continued) The Company’s gross investment income for mortgage loans for the three months ended March 31, 2023 and 2022 were as follows: ($ in thousands) 2023 2022 Retail $ 595 $ 359 Commercial 494 210 Multi-family 117 69 Office 106 166 Hospitality 161 14 $ 1,473 $ 818 The uncollectible amounts on loans, on an individual loan basis, are determined based upon consultations and advice from the Company’s specialized investment manager and consideration of any adverse situations that could affect the borrower’s ability to repay, the estimated value of underlying collateral, and other relevant factors. The Company writes off the uncollectible amount in the period it was determined to be uncollectible. There was no write-off for uncollectible amounts during the three months ended March 31, 2023 and 2022. As of March 31, 2023 and December 31, 2022, approximately $ 0.0 million and $ 6.4 million of mortgage loans, respectively, were in the process of foreclosure. The carrying value of the mortgage loans in foreclosure is the lower of cost adjusted for unamortized premiums, discounts, and loan fees or the fair value of the collateral less costs to sell. 5. Other Long-Term Investments Equity Method Investments The Company’s ownership interests in most of its equity method investments range from approximately 3% to less than 50% where the Company has significant influence but not control. The carrying value of the Company’s equity method investments as of March 31, 2023 and December 31, 2022 were as follows: ($ in thousands) March 31, 2023 December 31, 2022 Arena SOP LP units $ 6,683 $ 8,734 Arena Special Opportunities Fund, LP units 42,701 44,504 Brewer Lane Ventures Fund II LP units 390 200 Dowling Capital Partners LP units 2,231 1,965 Hudson Ventures Fund 2 LP units 3,391 3,551 JVM Funds LLC units 21,698 22,473 RISCOM 4,118 4,037 Universa Black Swan LP units 770 1,325 $ 81,982 $ 86,789 19 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5. Other Long-Term Investments (continued) The following table sets forth the components of net investment (loss) income from equity method investments for the three months ended March 31, 2023 and 2022: ($ in thousands) 2023 2022 Arena SOP LP units $ ( 2,051 ) $ 6,117 Arena Special Opportunities Fund, LP units ( 1,730 ) 2,804 Dowling Capital Partners LP units 267 514 Hudson Ventures Fund 2 LP units ( 255 ) 64 JVM Funds LLC ( 420 ) 186 RISCOM 81 18 Universa Black Swan LP units ( 556 ) ( 493 ) $ ( 4,664 ) $ 9,210 The following table sets forth the unfunded commitment of equity method investments as of March 31, 2023 and December 31, 2022: ($ in thousands) March 31, 2023 December 31, 2022 Brewer Lane Ventures Fund II LP units $ 4,610 $ 4,800 Dowling Capital Partners LP units 386 386 Hudson Ventures Fund 2 LP units 1,701 1,796 $ 6,697 $ 6,982 The difference between the cost of an investment and its proportionate share of the underlying equity in net assets is allocated to the various assets and liabilities of the equity method investment. The Company amortizes the difference in net assets over the same useful life of a similar asset as the underlying equity method investment. For investment in RISCOM, a similar asset would be agent relationships. The Company amortizes this difference over a 15 -year useful life. The following table sets forth the Company’s recorded investment in RISCOM compared to its share of underlying equity as of March 31, 2023 and December 31, 2022: ($ in thousands) March 31, 2023 December 31, 2022 Investment in RISCOM: Underlying equity $ 2,434 $ 2,292 Difference 1,684 1,745 Recorded investment balance $ 4,118 $ 4,037 The following table sets forth the Company’s recorded investment in JVM Funds LLC compared to its share of underlying equity as of March 31, 2023 and December 31, 2022: ($ in thousands) March 31, 2023 December 31, 2022 Investment in JVM Funds LLC: Underlying equity $ 20,828 $ 21,565 Difference 870 908 Recorded investment balance $ 21,698 $ 22,473 20 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5. Other Long-Term Investments (continued) Investment in Bank Holding Company The Company carries its investment in Captex Bancshares at cost, less impairment or observable changes in price. The Company reviews these investments for impairment or observable changes in price during each reporting period. There were no impairments or observable changes in price during the three months ended March 31, 2023 and the year ended December 31, 2022. Investment in Indirect Loans and Loan Collateral As of March 31, 2023 and December 31, 2022, the Company held indirect investments in collateralized loans and loan collateral through SMA1 and SMA2. The carrying value and unfunded commitment of the SMA1 and SMA2 as of March 31, 2023 and December 31, 2022 were as follows: March 31, 2023 December 31, 2022 ($ in thousands) Carrying Value Unfunded Commitment Carrying Value Unfunded Commitment SMA1 $ 34,654 $ — $ 36,426 $ — SMA2 (1) ( 1,652 ) — 2,010 — Investment in indirect loans and loan collateral $ 33,002 $ — $ 38,436 $ — (1) The carrying value of SMA2 is negative as of March 31, 2023 due to distribution in-transit. Investment in Trust The Company carries its investment in the common stock of the Delos Capital Trust n/k/a HIIG Capital Trust I (“Trust”) at cost. There were no impairments or observable changes in price during the three months ended March 31, 2023 and 2022. 6. Allowance for Credit Losses Premiums Receivable The following table sets forth the changes in the allowance for expected credit losses for the three months ended March 31, 2023. ($ in thousands) Allowance for Credit Losses Balance at December 31, 2022 $ 629 Cumulative effect of adoption of ASU 2016-13 at January 1, 2023 — Current period change for estimated uncollectible premiums 409 Write-offs of uncollectible premiums receivable ( 56 ) Balance at March 31, 2023 $ 982 21 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6. Allowance for Credit Losses (continued) Reinsurance Recoverables The Company analyzes the credit risk associated with its reinsurance recoverables by monitoring the financial strength rating of its reinsurers from A.M. Best, a widely recognized rating agency with an exclusive insurance industry focus. The Company assesses the financial strength rating annually and updated throughout the year as A.M. Best provides updates on ratings and outlooks. The Company assesses the adequacy of various forms of credit enhancements such as reinsurance payables, letters of credit and funds held. A summary of the Company’s reinsurance recoverables net of credit enhancements by A.M. Best rating as of March 31, 2023 was as follows: A.M. Best Rating March 31, 2023 A- and above 98.5 % B++ to B+ 1.4 Not rated 0.1 The Company considers reinsurance balances to be past due when it is 90 days past due. The following table sets forth the changes in the allowance for estimated uncollectible reinsurance for the three months ended March 31, 2023: ($ in thousands) Allowance for Credit Losses Balance at December 31, 2022 $ — Cumulative effect of adoption of ASU 2016-13 at January 1, 2023 2,295 Current period change for estimated uncollectible reinsurance — Balance at March 31, 2023 $ 2,295 7. Notes Payable The Company entered into an agreement to obtain a new unsecured revolving credit facility (the “Revolving Credit Facility”) with a syndicate of participating banks during the three months ended March 31, 2023. The Revolving Credit Facility provided the Company with up to a $ 150.0 million revolving credit facility, with an accordion that can increase the capacity by $ 50.0 million, and a letter of credit sub-facility of up to $ 30.0 million. During the three months ended March 31, 2023, the Company drew $ 50.0 million on the Revolving Credit Facility and used the proceeds to pay off the principal on its existing term loan. The Company subsequently terminated the existing term loan and revolving line of credit. The interest rate on the Revolving Credit Facility was the Secured Overnight Financing Rate (“SOFR”) plus a margin of between 150 and 190 basis points based on the ratio of debt to total capital and a credit spread adjustment of 10 basis points. The Company was subject to covenants on the Revolving Credit Facility based on minimum net worth, maximum debt to capital ratio, minimum A.M. Best Rating and minimum liquidity. As of March 31, 2023, the Company was in compliance with all covenants. 8. Stockholders’ Equity Reverse Stock Split On September 23, 2022, the Board of Directors approved a 4-for-1 reverse stock split of the Company’s common stock. The stock split became effective January 3, 2023. All share and per share information included in the accompanying consolidated financial statements and notes to the consolidated financial statements have been retroactively adjusted to reflect the stock split of common stock for all periods presented. 22 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 8. Stockholders’ Equity (continued) Initial Public Offering On January 4, 2023, the Company announced the launch of its initial public offering (“IPO”) of its common stock. On January 12, 2023, the Company priced its IPO of 8,952,383 shares of its common stock, with 4,750,000 shares offered by the Company and 4,202,383 shares sold by selling stockholders, at a public price of $ 15.00 per share. The shares began trading on January 13, 2023 on the Nasdaq Global Select Market under the ticker symbol “SKWD.” The Company completed its IPO on January 18, 2023. The underwriters exercised in full their option to purchase 1,342,857 additional shares of common stock from the selling stockholders, at a price per share of $ 15.00 . The Company’s net proceeds from the IPO were approximately $ 62.4 million, after deducting underwriting discounts and specific incremental expenses directly attributable to the IPO. Upon the closing of its IPO, the Company filed an amended and restated certificate of incorporation which, among other things, increased the number of authorized shares consisting of 500,000,000 shares of common stock, par value $ 0.01 per share, and 10,000,000 shares of preferred stock, par value $ 0.01 per share. Preferred Shares Conversion The Preferred Shares had preference in liquidation over common stock in the amount of the face value of $ 50.00 per share and any declared but unpaid dividends to related common shares at the applicable conversion rate. The Preferred Shares provided the holder the option at any time to convert the Preferred Shares into common stock based on the Option Conversion Rate. At December 31, 2022, the Company had 1,969,660 Preferred Shares that could be converted to 16,305,113 common shares based on a conversion price equal to $ 6.04 per common share. The Preferred Shares were subject to mandatory conversion upon the closing of an IPO at the Mandatory Conversion Rate. At December 31, 2022, the Mandatory Conversion Rate allowed the holder of the Preferred Shares the right to convert into common stock based on a conversion price equal to $ 6.04 per common share. On January 18, 2023, the 1,969,660 Preferred Shares converted to 16,305,113 shares of common stock upon the Company’s closing of its IPO. 9. Income Taxes The following table set forth t he Company’s income tax expense and effective tax rates for the three months ended March 31, 2023 and 2022: ($ in thousands 2023 2022 Income tax expense $ 4,166 $ 4,269 Effective tax rate 21.1 % 20.7 % The effective tax rate will differ from the statutory rate of 21 percent due to permanent differences for disallowed expenses for tax and beneficial adjustments for tax-exempt income and dividends-received deduction. 23 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 10. Losses and Loss Adjustment Expenses The following table sets forth the reconciliation of unpaid losses and loss adjustment expenses as reported in the condensed consolidated balance sheets as of and for the three months ended March 31, 2023 and 2022: ($ in thousands) 2023 2022 Reserves for losses and LAE, beginning of period $ 1,141,757 $ 979,549 Less: reinsurance recoverable on unpaid claims, beginning of period ( 435,986 ) ( 381,338 ) Reserves for losses and LAE, beginning of period, net of reinsurance 705,771 598,211 Incurred, net of reinsurance, related to: Current period 115,142 89,989 Prior years — — Total incurred, net of reinsurance 115,142 89,989 Paid, net of reinsurance, related to: Current period 8,744 10,605 Prior years 68,745 62,959 Total paid 77,489 73,564 Net reserves for losses and LAE, end of period 743,424 614,636 Plus: reinsurance recoverable on unpaid claims, end of period 429,752 385,146 Reserves for losses and LAE, end of period $ 1,173,176 $ 999,782 11. Commission and Fee Income Skyward Underwriters Agency, Inc. (“SUA”), a subsidiary of the Company, is a managing general insurance agent and reinsurance broker for property and casualty and accident and health risks in specialty niche markets. Commission and fee income is primarily generated from SUA for the placement of insurance policies on either a third-party insurance or reinsurance company. The following table sets forth the Company’s disaggregated revenues from contracts with customers for the three months ended March 31, 2023 and 2022: ($ in thousands) 2023 2022 SUA commission revenue $ 857 $ 624 SUA fee income 456 ( 159 ) Other 179 ( 235 ) Total commission and fee income $ 1,492 $ 230 The Company’s contract assets from commission and fee income as of March 31, 2023 and December 31, 2022 were $ 1.3 million and $ 1.3 million, respectively. Contract assets were $ 0.8 million and $ 1.2 million as of March 31, 2022 and December 31, 2021, respectively. 12. Underwriting, Acquisition and Insurance Expenses The following table sets forth the components of underwriting, acquisition and insurance expenses for the three months ended March 31, 2023 and 2022: ($ in thousands) 2023 2022 Amortization of policy acquisition costs $ 21,235 $ 13,421 Other operating and general expenses 30,420 27,113 Total underwriting, acquisition and insurance expenses $ 51,655 $ 40,534 24 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 13. Reinsurance Certain premiums and benefits are assumed from and ceded to other insurance companies under various reinsurance agreements. The reinsurance agreements provide the Company with increased capacity to write larger risks and maintain its exposure to loss within its capital resources. The Company remains obligated for amounts ceded in the event that the reinsurers do not meet their obligations. The following table sets forth the effects of reinsurance on premiums written and earned for the three months ended March 31, 2023 and 2022: 2023 2022 ($ in thousands) Written Earned Written Earned Direct premiums $ 308,213 $ 262,658 $ 248,635 $ 222,637 Assumed premiums 52,285 39,131 34,007 26,595 Ceded premiums ( 158,357 ) ( 118,958 ) ( 147,241 ) ( 107,506 ) Net premiums $ 202,141 $ 182,831 $ 135,401 $ 141,726 Ceded losses and LAE incurred $ 64,794 $ 61,527 The following table sets forth the components of reinsurance recoverables and ceded unearned premium as of March 31, 2023 and December 31, 2022: ($ in thousands) March 31, 2023 December 31, 2022 Unpaid losses and loss adjustment expenses ceded $ 429,752 $ 435,986 Paid losses and loss adjustment expense ceded 107,463 107,228 Loss portfolio transfer 35,584 38,145 Allowance for credit losses ( 2,295 ) — Reinsurance recoverables $ 570,504 $ 581,359 Ceded unearned premium $ 197,044 $ 157,645 The Company entered into agreements with several of its reinsurers, whereby the reinsurer established funded trust accounts with the Company as the sole beneficiary. These trust accounts provide the Company additional security to collect claim recoverables under reinsurance contracts and the Company does not carry these on the balance sheet because the Company will only have custody over these accounts upon the failure of the reinsurer to pay amounts due. At March 31, 2023, the market value of these accounts was approximately $ 127.1 million. The agreements provide that, as was customary in the past, the reinsurer will continue claim payment reimbursements without disturbing the trust balances. The trust amount will be adjusted periodically, by mutual agreement, based on loss reserve recoverables. Certain ceded reinsurance contracts that transfer only significant timing risk and do not transfer sufficient underwriting risk are accounted for using the deposit method of accounting. The Company’s deposit asset at March 31, 2023 and December 31, 2022 was $ 36.8 million and $ 41.8 million, respectively, and was included in other assets on the condensed consolidated balance sheets. 14. Stock Based Compensation On September 23, 2022, the Compensation Committee of the Company’s Board of Directors (“Compensation Committee”) approved the Company’s 2022 Long-Term Incentive Plan (the “2022 Plan”), which became effective on January 12, 2023. The 2022 Plan provides for the granting of restricted stock, restricted stock units, performance stock units, stock options as well as cash-based performance awards, to select employees and non-employee directors of the Company. The 2022 Plan stated that 3,200,516 shares of common stock were available for issuance. 25 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 14. Stock Based Compensation (continued) In December 2020, the Compensation Committee approved a Long Term Incentive Plan (the “2021 Plan”). The 2021 Plan provides for the granting of restricted stock, restricted stock units and performance stock units (collectively “restricted stock units” or “stock units”), as well as cash-based performance awards, to select employees and non-employee directors of the Company. The Compensation Committee granted 1,073,494 and 191,691 restricted stock and restricted stock units during the three months ended March 31, 2023 and 2022, under the 2022 Plan and 2021 Plans, respectively. Members of the Board of Directors were granted 3,332 and 15,196 restricted stock during the three months ended March 31, 2023 and 2022, respectively, with a service period of 1 year. The fair value of restricted stock and restricted stock units under the 2022 Plan for awards granted at the time of the Company’s IPO were granted at the IPO price of $ 15.00 per share. The fair value of subsequent grants were equal to the closing stock price on the date the restricted stock units were granted. The Compensation Committee granted 759,990 stock options during the three months ended March 31, 2023. The grant date fair value of the options was determined using the Black-Scholes model where the term was the contractual term of 10 years less the weighted average service period. The volatility was determined based on the historical volatility of comparable publicly traded insurance companies. The restricted stock and restricted stock units granted to employees and the Board of Directors during the three months ended March 31, 2023 and 2022 were valued at approximately $ 17.0 million and $ 2.5 million, respectively, based on the grant date fair value. The stock options granted to employees during the three months ended March 31, 2023 were valued at approximately $ 4.4 million based on the grant date fair value. The following table sets forth the Company’s equity awards, target payout ranges and authorized target restricted stock and stock units for the three months ended March 31, 2023 and 2022: Award Payout Range Requisite Service Period Target Stock and Stock Units Three months ended March 31, 2023 Market condition awards 0 %– 150 % 3 years 37,622 Performance condition awards 0 %– 150 % 3 years 91,350 Service condition awards N/A 1 – 4 years 944,522 Stock options N/A 3 – 4 years 759,990 1,833,484 Three months ended March 31, 2022 Market condition awards 0 %– 150 % 3 years 28,495 Performance condition awards 0 %– 150 % 3 years 26,214 Service condition awards N/A 1 – 3 years 136,982 191,691 26 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 14. Stock Based Compensation (continued) The following table sets forth option activity for the three months ended March 31, 2023: Weighted-Average Exercise Price Stock Outstanding at January 1, 2023 — Granted $ 15.00 759,990 Exercised — Forfeited — Outstanding at March 31, 2023 $ 15.00 759,990 The intrinsic value of each option is determined based on the difference between the fair value of the underlying share and the exercise price of the underlying option. The aggregate intrinsic value of options outstanding at March 31, 2023 was $ 5.2 million. The weighted-average remaining contractual life of the options outstanding at March 31, 2023 was 9.8 years. The following table sets forth the Company’s restricted stock and restricted stock units activity for the three months ended March 31, 2023 and 2022: Weighted-Average Grant-Date Fair Value Stock and Stock Units Non-vested at January 1, 2023 $ 12.55 419,896 Granted 15.85 1,073,494 Vested 12.91 ( 32,496 ) Forfeited 15.10 ( 7,459 ) Non-vested at March 31, 2023 $ 14.97 1,453,435 Non-vested at January 1, 2022 $ 13.23 375,643 Granted 13.16 191,691 Vested 12.47 ( 55,851 ) Forfeited $ — — Non-vested at March 31, 2022 $ 13.28 511,483 The total fair value of shares vested at March 31, 2023 and 2022 were $ 0.7 million and $ 0.7 million, respectively. As of March 31, 2023 the total unrecognized compensation cost related to non-vested, share-based compensation awards was $ 22.2 million and the weighted average period over which that cost is expected to be recognized is 2.1 years. For the three months ended March 31, 2023 and 2022, the Company recognized $ 1.9 million and $ 0.5 million, respectively, of stock based compensation expense. 27 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 15. Earnings Per Share The following table sets forth a reconciliation of the numerator and denominator of basic and diluted earnings per share computations contained in the period-ended consolidated financial statements for the three months ended March 31, 2023 and 2022: ($ in thousands, except for share and per share amounts) 2023 2022 Numerator Net income $ 15,556 $ 16,311 Less: Undistributed income allocated to participating securities ( 1,274 ) ( 7,823 ) Net income attributable to common shareholders (numerator for basic earnings per share) 14,282 8,488 Add back: Undistributed income allocated to participating securities 1,274 7,823 Net income (numerator for diluted earnings per share under the two-class method) $ 15,556 $ 16,311 Denominator Basic weighted-average common shares 32,848,243 16,376,720 Preferred shares (if converted method) 2,931,256 15,092,585 Contingently issuable instruments (treasury stock method) 708,746 714,185 Market condition awards (contingently issuable) 87,750 40,460 Performance awards (contingently issuable) 38,441 32,362 Restricted stock units (treasury stock method) 318,421 155,995 Options (treasury stock method) 19,216 — Diluted weighted-average common share equivalents 36,952,073 32,412,307 Basic earnings per share $ 0.43 $ 0.52 Diluted earnings per share $ 0.42 $ 0.50 The Company’s preferred shares participate in dividends and distributions with common stock on an as-converted basis and represent a participating security. Instruments awarded to employees that provide the holder the right to purchase common stock at a fixed price were included as potential common shares, weighted for the portion of the period they were granted, if dilutive. Anti-dilutive instruments are excluded from the calculation of diluted weighted-average common share equivalents as they would have an anti-dilutive impact. The following table sets forth the weighted-average instruments that were excluded from the calculation of diluted weighted-average common share equivalents during the three months ended March 31, 2023 and 2022. 2023 2022 Contingently issuable instruments (treasury stock method) 345,764 — Market condition awards (contingently issuable) 13,795 — Performance awards (contingently issuable) 40,080 — Restricted stock units (treasury stock method) 390,076 — Options (treasury stock method) 333,551 — 28 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 15. Earnings Per Share (continued) The Company’s common and preferred shares financed by stock notes are contingently issuable instruments where the holder must return, all or part of, the shares if the stock notes are not paid off. The following table sets forth common share equivalents of contingently issuable instruments (in shares) that were excluded from basic earnings per share for the three months ended March 31, 2023 and 2022: 2023 2022 Common shares 1,054,510 183,604 Preferred shares, if converted — 1,216,389 Total 1,054,510 1,399,993 The impact of the contingently issuable instruments on diluted earnings per share was calculated using the treasury stock method and included in the reconciliation of the denominator of the basic and diluted earnings per share computations for the three months ended March 31, 2023 and 2022. 16. Related Party Transactions Westaim As of March 31, 2023 and December 31, 2022, Westaim and Westaim HIIG LP owned 39.0 % and 44.5 %, respectively, of the Company’s common stock. The changes in ownership percentage were primarily due to the IPO and conversion of preferred stock to common stock. The Company’s investment in Westaim is included in equity securities on the consolidated balance sheets. The unrealized loss on this investment as of March 31, 2023 and December 31, 2022 were $ 1.5 million and $ 2.3 million, respectively. Prior to the closing of the IPO, Westaim performed consulting and certain other services for the Company pursuant to a Management Services Agreement. This agreement terminated pursuant to its terms upon the closing of the IPO. RISCOM RISCOM provides the Company with wholesale brokerage services. RISCOM and the Company also have a managing general agency agreement. The Company holds a 20 % ownership interest in RISCOM. Net earned premium and gross commission expense related to these agreements for the three months ended March 31, 2023 and 2022 were as follows: ($ in thousands) 2023 2022 Net earned premium $ 22,185 $ 21,018 Commissions 6,853 7,348 Premiums receivable as of March 31, 2023 and December 31, 2022 were $ 17.6 million and $ 9.9 million, respectively. Reinsurance The Company has reinsurance agreements with Everest Re, an affiliate of Mt. Whitney Securities, LLC, which was a limited partner of Westaim HIIG LP through November 30, 2022, and holder of preferred shares. During the three months ended March 31, 2023, Mt. Whitney Securities divested their entire ownership of the Company’s equity securities. Reinsurance premiums ceded during the three months ended March 31, 2022 related to the agreement were $ 19.6 million. Reinsurance recoverable from Everest Re, net of premium payables at December 31, 2022 were $ 177.5 million. Other Advisory and professional services fees and expense reimbursements paid to various affiliated shareholders and directors for the three months ended March 31, 2023 and 2022 were $ 2.1 million and $ 0.7 million, respectively. See Note 4 and 5 for investments involving affiliated companies and additional related party transactions. 29 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 17. Commitments and Contingencies Litigation The Company is named as a defendant in various legal actions arising from claims made under insurance policies and contracts. Those actions are considered by the Company in estimating the losses and loss adjustment expense reserves. Also, from time to time, the Company is a defendant in various legal actions that relate to bad faith claims, disputes with third parties or that involve alleged errors and omissions. The Company records accruals for these items to the extent the losses are probable and reasonably estimable. Although the ultimate outcome of these matters cannot be determined at this time, based on present information, the availability of insurance coverage and advice received from outside legal counsel, the Company’s management believes the resolution of any such matters will not, individually or in the aggregate, have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. Indemnification In conjunction with the sale of business assets and subsidiaries, the Company has provided indemnifications to certain of the buyers. Certain indemnifications cover typical representations and warranties related to the responsibilities to perform under the sales contracts. The amount of potential exposure covered by the indemnifications is difficult to determine because the indemnifications cover a variety of matters, operations and scenarios. Certain of these indemnifications have no time limit. At this time, the Company does not have reason to believe any such significant claims exist. 30 Table of Contents