What changed in this filing

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Item 1. Financial Statements

2023-08-10 compared with 2023-05-11 · 214 added, 170 removed, 717 unchanged (35% of the section changed)

3 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

($ in thousands, except share and per share amounts) (Unaudited)

1 unchanged sentence

$ 767,491 $ 607,572

Fixed maturity securities, held-to-maturity, at amortized cost (net of allowance for credit losses of $ 321 as of March 31, 2023)

Fixed maturity securities, held-to-maturity, at amortized cost (net of allowance for credit losses of $ 332 as of June 30, 2023)

47,172 52,467

Equity securities, at fair value 127,861 120,169

Mortgage loans (at fair value as of March 31, 2023;

Mortgage loans (at fair value as of June 30, 2023;

at amortized cost as of December 31, 2022)

32,762 51,859

Other long-term investments 124,845 129,142

37 unchanged sentences

AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

($ in thousands, except share and per share amounts) 2023 2022 2023 2022

14 unchanged sentences

Net income attributable to participating securities — 2,437 1,402 10,283

Net income attributable to common shareholders $ 14,282 $ 8,488

Net income attributable to common stockholders $ 19,452 $ 2,628 $ 33,606 $ 11,093

Comprehensive income (loss):

Net income $ 19,452 $ 5,065 $ 35,008 $ 21,376

Other comprehensive income (loss):

Other comprehensive (loss) income:

Unrealized gains and losses on investments:

Net change in unrealized gains (losses) on investments, net of tax 7,788 ( 16,705 )

Net change in unrealized (losses) gains on investments, net of tax ( 4,375 ) ( 14,797 ) 3,413 ( 31,502 )

Reclassification adjustment for (losses) gains on securities no longer held, net of tax ( 1,165 ) 30 ( 1,212 ) 331

Total other comprehensive income (loss) 7,741 ( 16,404 )

Total other comprehensive (loss) income ( 5,540 ) ( 14,767 ) 2,201 ( 31,171 )

Comprehensive income (loss) $ 13,912 $ ( 9,702 ) $ 37,209 $ ( 9,795 )

19 unchanged sentences

Balance at March 31, 2023 $ — $ 377 $ — $ 641,368 $ ( 6,718 ) $ ( 35,744 ) $ ( 92,137 ) $ 507,146

Employee equity transactions — — — 2,011 — — — 2,011

Expenses from initial public offering ( 391 ) ( 391 )

Net income — — — — — — 19,452 19,452

Other comprehensive loss, net of tax — — — — — ( 5,540 ) — ( 5,540 )

Balance at June 30, 2023 $ — $ 377 $ — $ 642,988 $ ( 6,718 ) $ ( 41,284 ) $ ( 72,685 ) $ 522,678

($ in thousands) Preferred Stock Common Stock Treasury Stock Additional Paid-in Capital Stock Notes Receivable Accumulated Other Comprehensive Loss Accumulated Deficit Total

5 unchanged sentences

Balance at March 31, 2022 $ 20 $ 168 $ ( 2 ) $ 575,661 $ ( 6,962 ) $ ( 11,764 ) $ ( 128,502 ) $ 428,619

Employee equity transactions — — — 670 20 — — 690

Net income — — — — — — 5,065 5,065

Other comprehensive loss, net of tax — — — — — ( 14,767 ) — ( 14,767 )

Balance at June 30, 2022 $ 20 $ 168 $ ( 2 ) $ 576,331 $ ( 6,942 ) $ ( 26,531 ) $ ( 123,437 ) $ 419,607

The accompanying notes are an integral part of the consolidated financial statements.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Three months ended March 31,

Six months ended June 30,

($ in thousands) 2023 2022

7 unchanged sentences

Purchase of equity securities ( 19,192 ) ( 33,899 )

Purchase of intangible assets ( 50 ) —

Proceeds from (investment in) direct and indirect loans 14,032 ( 14,411 )

5 unchanged sentences

Cash provided by deposit accounting 7,549 3,571

Other, net — 2

Net cash used in investment activities ( 198,084 ) ( 75,676 )

Cash flows from financing activities:

Repayment of stock notes receivable 193 186

Employee share purchases 193 2,150

Draw on revolving line of credit 50,000 —

7 unchanged sentences

Cash paid for interest $ 5,194 $ 2,366

Cash paid for federal income taxes $ 4,200 $ —

The accompanying notes are an integral part of the consolidated financial statements.

23 unchanged sentences

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.

The following accounting policies have been updated to reflect the Company's adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments as described above.

Available-for-sale

Investments in fixed maturities that are classified as available-for-sale and are carried at fair value.

Investments in fixed maturities that are classified as available-for-sale 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.

3 unchanged sentences

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).

Changes in the allowance for credit losses are recognized in net investment income 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 (loss) income.

Unrealized losses that are not credit-related continue to be recognized in stockholders’ equity, net of taxes, as a component of accumulated other comprehensive (loss) income.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

1 unchanged sentence

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

Investments in fixed maturity securities that are 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.

1 unchanged sentence

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.

Changes in the allowance for credit losses are recognized in net investment income on the consolidated statements of operations.

Mortgage loans

17 unchanged sentences

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following tables set forth the amortized cost and the fair value by investment category at March 31, 2023 and December 31, 2022:

The following tables set forth the amortized cost and the fair value by investment category at June 30, 2023 and December 31, 2022:

($ in thousands) Gross

Losses Allowance for Credit Losses Fair Value

March 31, 2023

June 30, 2023

Fixed maturity securities, available-for-sale:

26 unchanged sentences

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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:

The following table sets forth the amortized cost and fair value of available-for-sale fixed maturity securities by contractual maturity at June 30, 2023:

($ in thousands) Amortized

9 unchanged sentences

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:

The Company’s fixed maturity securities, held-to-maturity, at June 30, 2023 consisted entirely of asset backed securities that were not due at a single maturity date.

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

June 30, 2023

Fixed maturity securities, available-for-sale:

14 unchanged sentences

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Investments (continued)

Less than 12 Months 12 Months or More Total

17 unchanged sentences

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.

As of June 30, 2023, the Company had 735 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.

4 unchanged sentences

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Investments (continued)

The following table sets forth the components of net investment gains (losses) for the three months ended March 31, 2023 and 2022:

The following table sets forth the components of net investment gains (losses) for the three and six months ended June 30, 2023 and 2022:

Three months ended June 30, Six months ended June 30,

($ in thousands) 2023 2022 2023 2022

2 unchanged sentences

Equity securities 814 1,046 2,041 2,877

Other — 5 1 36

Total 1,025 1,145 2,746 3,023

8 unchanged sentences

Net investment gains (losses) $ 5,351 $ ( 14,374 ) $ 6,312 $ ( 18,812 )

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:

The following table sets forth the proceeds from sales of available-for-sale fixed maturity securities and equity securities for the six months ended June 30, 2023 and 2022:

($ in thousands) 2023 2022

1 unchanged sentence

Equity securities 17,583 19,981

The following table sets forth the components of net investment income for the three months ended March 31, 2023 and 2022:

The following table sets forth the components of net investment income for the three and six months ended June 30, 2023 and 2022:

Three months ended June 30, Six months ended June 30,

($ in thousands) 2023 2022 2023 2022

13 unchanged sentences

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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:

The following table sets forth the change in net unrealized (losses) gains on the Company’s investment portfolio, net of deferred income taxes, included in other comprehensive (loss) income for the three and six months ended June 30, 2023 and 2022:

Three months ended June 30, Six months ended June 30,

($ in thousands) 2023 2022 2023 2022

28 unchanged sentences

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Fair Value Measurements (continued)

Mortgage loans

3 unchanged sentences

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

The following table sets forth the range and weighted average, weighted by relative fair value, of the spread as of June 30, 2023:

June 30, 2023

Weighted average 7.14 %

2 unchanged sentences

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The following tables set forth the Company’s investments within the fair value hierarchy at June 30, 2023 and December 31, 2022:

June 30, 2023

($ in thousands) Level 1 Level 2 Level 3 Total

38 unchanged sentences

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Fair Value Measurements (continued)

December 31, 2022

40 unchanged sentences

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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:

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 June 30, 2023:

($ in thousands) Mortgage Loans

5 unchanged sentences

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 )

Total gains for the period recognized in net investment gains (losses) $ ( 21 )

Issuances $ 30

Settlements $ ( 9,582 )

Balance at June 30, 2023 $ 32,762

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 $ 3

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.

7 unchanged sentences

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).

As of June 30, 2023, the Company determined the fair value of these instruments using the income approach utilizing inputs that are unobservable (Level 3).

Notes payable:

9 unchanged sentences

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The following table sets forth the Company’s carrying and fair values of notes payable and subordinated debt as of June 30, 2023 and December 31, 2022:

June 30, 2023 December 31, 2022

($ in thousands) Carrying

10 unchanged sentences

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.

As of June 30, 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

The loans earn interest at a fixed spread above a prime rate, mature in approximately 1 to 2 years from loan origination and the principal amounts of the loans range between 61 % to 80 % property’s appraised value at the time the loans were made.

Mortgage loan participations are carried at fair value as of June 30, 2023 and cost adjusted for unamortized premiums, discounts, and loan fees as of December 31, 2022.

The carrying value of the Company’s mortgage loans as of June 30, 2023 and December 31, 2022 were as follows:

($ in thousands) June 30, 2023 December 31, 2022

Commercial $ 16,075 $ 15,309

Retail 9,201 16,516

Hospitality 4,845 4,915

Multi-family 2,641 5,593

Office — 3,197

Hospitality 4,875 4,915

Industrial — 6,329

$ 32,762 $ 51,859

2 unchanged sentences

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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:

The Company’s gross investment income for mortgage loans for the three months ended June 30, 2023 and 2022 were as follows:

Three months ended June 30, Six months ended June 30,

($ in thousands) 2023 2022 2023 2022

Retail $ 595 $ 359

Commercial $ 555 $ 155 $ 1,049 $ 365

Multi-family 117 69

Office 106 166

Retail 416 235 1,011 479

Hospitality 132 103 293 148

Office 97 134 203 222

Multi-family 75 199 192 316

Industrial — 138 — 252

$ 1,275 $ 964 $ 2,748 $ 1,782

1 unchanged sentence

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.

There was no write-off for uncollectible amounts during the three and six months ended June 30, 2023 and 2022.

As of June 30, 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.

2 unchanged sentences

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

The carrying value of the Company’s equity method investments as of June 30, 2023 and December 31, 2022 were as follows:

($ in thousands) June 30, 2023 December 31, 2022

Arena Special Opportunities Fund, LP units $ 41,364 $ 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 21,190 22,473

Arena SOP LP units 5,956 8,734

RISCOM 4,342 4,037

Hudson Ventures Fund 2 LP units 3,623 3,551

Dowling Capital Partners LP units 2,133 1,965

Universa Black Swan LP units 421 1,325

Brewer Lane Ventures Fund II LP units 361 200

$ 79,390 $ 86,789

2 unchanged sentences

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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:

The following table sets forth the components of net investment (loss) income from equity method investments for the three and six months ended June 30, 2023 and 2022:

Three months ended June 30, Six months ended June 30,

($ in thousands) 2023 2022 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 $ 338 $ 41 $ 605 $ 555

Hudson Ventures Fund 2 LP units ( 255 ) 64

RISCOM 224 808 305 826

Brewer Lane Ventures Fund II LP ( 29 ) — ( 29 ) —

Hudson Ventures Fund II LP units ( 158 ) 332 ( 413 ) 396

JVM Funds LLC ( 221 ) ( 955 ) ( 641 ) ( 768 )

Universa Black Swan LP units ( 348 ) ( 1,057 ) ( 904 ) ( 1,550 )

Arena SOP LP units ( 727 ) 1,631 ( 2,778 ) 7,771

Arena Special Opportunities Fund, LP units ( 1,183 ) 1,443 ( 2,913 ) 4,245

$ ( 2,104 ) $ 2,243 $ ( 6,768 ) $ 11,475

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

The following table sets forth the unfunded commitment of equity method investments as of June 30, 2023 and December 31, 2022:

($ in thousands) June 30, 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 1,311 1,796

Dowling Capital Partners LP units 386 386

$ 6,307 $ 6,982

3 unchanged sentences

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

The following table sets forth the Company’s recorded investment in RISCOM compared to its share of underlying equity as of June 30, 2023 and December 31, 2022:

($ in thousands) June 30, 2023 December 31, 2022

Investment in RISCOM:

2 unchanged sentences

Recorded investment balance $ 4,342 $ 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

The following table sets forth the Company’s recorded investment in JVM Funds LLC compared to its share of underlying equity as of June 30, 2023 and December 31, 2022:

($ in thousands) June 30, 2023 December 31, 2022

Investment in JVM Funds LLC:

5 unchanged sentences

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

The Company reviews this investment for impairment or observable changes in price during each reporting period.

There were no impairments or observable changes in price during the six months ended June 30, 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

As of June 30, 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 June 30, 2023 and December 31, 2022 were as follows:

June 30, 2023 December 31, 2022

($ in thousands) Carrying Value Unfunded Commitment Carrying Value Unfunded Commitment

SMA1 $ 32,867 $ — $ 36,426 $ —

( 1,652 ) — 2,010 —

SMA2 8,779 — 2,010 —

Investment in indirect loans and loan collateral $ 41,646 $ — $ 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.

There were no impairments or observable changes in price during the six months ended June 30, 2023 and 2022.

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.

The following table sets forth the changes in the allowance for expected credit losses on premiums receivable for the six months ended June 30, 2023.

($ in thousands) Allowance for Credit Losses

4 unchanged sentences

Balance at March 31, 2023 $ 982

Current period change for estimated uncollectible premiums 37

Write-offs of uncollectible premiums receivable ( 96 )

Recoveries of amounts previously written off 18

Balance at June 30, 2023 $ 941

SKYWARD SPECIALTY INSURANCE GROUP, INC.

1 unchanged sentence

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Allowance for Credit Losses (continued)

Reinsurance Recoverables

5 unchanged sentences

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:

Best Rating March 31, 2023

Best rating as of June 30, 2023 was as follows:

Best Rating June 30, 2023

A- and above 98.6 %

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:

The Company considers reinsurance balances to be past due when they are 90 days past due.

The following table sets forth the changes in the allowance for estimated uncollectible reinsurance for the six months ended June 30, 2023:

($ in thousands) Allowance for Credit Losses

2 unchanged sentences

Current period change for estimated uncollectible reinsurance —

Write-offs of uncollectible reinsurance recoverables —

Balance at March 31, 2023 $ 2,295

Current period change for estimated uncollectible reinsurance —

Write-offs of uncollectible reinsurance recoverables —

Balance at June 30, 2023 $ 2,295

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 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 six months ended June 30, 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.

During the six months ended June 30, 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.

Interest on the Revolving Credit Facility is payable quarterly.

The interest rate on the Revolving Credit Facility is 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.

At June 30, 2023, the six-month SOFR on the Revolving Credit Facility was 4.66 %, plus a margin of 1.60 %.

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.

As of June 30, 2023, the Company was in compliance with all covenants.

Stockholders’ Equity

1 unchanged sentence

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.

The reverse 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 reverse stock split of common stock for all periods presented.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

1 unchanged sentence

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Stockholders’ Equity (continued)

Initial Public Offering

13 unchanged sentences

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.

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:

The following table sets forth the Company’s income tax expense and effective tax rates for the three and six months ended June 30, 2023 and 2022:

Three months ended June 30, Six months ended June 30,

($ in thousands 2023 2022 2023 2022

2 unchanged sentences

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.

The Company paid federal income taxes of $ 4.2 million during the three and six months ended June 30, 2023.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

2 unchanged sentences

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:

The following table sets forth the reconciliation of unpaid losses and loss adjustment expenses (“LAE”) as reported in the condensed consolidated balance sheets as of and for the six months ended June 30, 2023 and 2022:

($ in thousands) 2023 2022

17 unchanged sentences

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:

The following table sets forth the Company’s disaggregated revenues from contracts with customers for the three and six months ended June 30, 2023 and 2022:

Three months ended June 30, Six months ended June 30,

($ in thousands) 2023 2022 2023 2022

3 unchanged sentences

Total commission and fee income $ 2,240 $ 2,060 $ 3,732 $ 2,290

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.

The Company’s contract assets from commission and fee income as of June 30, 2023 and December 31, 2022 were $ 1.7 million and $ 1.3 million, respectively.

Contract assets were $ 1.5 million and $ 1.2 million as of June 30, 2022 and December 31, 2021, respectively.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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:

The following table sets forth the components of underwriting, acquisition and insurance expenses for the three and six months ended June 30, 2023 and 2022:

Three months ended June 30, Six months ended June 30,

($ in thousands) 2023 2022 2023 2022

2 unchanged sentences

Total underwriting, acquisition and insurance expenses $ 56,683 $ 44,383 $ 108,338 $ 84,918

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Certain premiums and benefits are assumed from and ceded to other insurance companies under various reinsurance agreements.

1 unchanged sentence

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:

The following table sets forth the effects of reinsurance on written and earned premiums and losses and loss adjustment expenses for the three and six months ended June 30, 2023 and 2022:

Three months ended June 30,

($ in thousands) Written Earned Written Earned

4 unchanged sentences

Ceded losses and LAE incurred $ 99,981 $ 68,060

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

Six months ended June 30,

($ in thousands) Written Earned Written Earned

Direct premiums $ 640,275 $ 546,419 $ 525,329 $ 452,840

Assumed premiums 142,217 87,345 83,540 52,529

Ceded premiums ( 366,614 ) ( 256,586 ) ( 284,737 ) ( 217,566 )

Net premiums $ 415,878 $ 377,178 $ 324,132 $ 287,803

Ceded losses and LAE incurred $ 164,775 $ 129,587

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table sets forth the components of reinsurance recoverables and ceded unearned premium as of June 30, 2023 and December 31, 2022:

($ in thousands) June 30, 2023 December 31, 2022

Ceded unpaid losses and LAE $ 441,227 $ 435,986

Ceded paid losses and LAE 115,672 107,228

Loss portfolio transfer 28,318 38,145

4 unchanged sentences

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.

At June 30, 2023, the market value of these accounts was approximately $ 134.2 million.

The agreements provide that, as was customary in the past, the reinsurer will continue claim payment reimbursements without disturbing the trust balances.

1 unchanged sentence

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.

The Company’s deposit asset at June 30, 2023 and December 31, 2022 was $ 34.3 million and $ 41.8 million, respectively, and was included in other assets on the condensed consolidated balance sheets.

Stock Based Compensation

2 unchanged sentences

The 2022 Plan stated that 3,200,516 shares of common stock were available for issuance.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Stock Based Compensation (continued)

On September 23, 2022, the Compensation Committee approved the Company’s 2022 Employee Stock Purchase Plan (the “ESPP”), which became effective on May 15, 2023.

Under the ESPP, employees are granted options to purchase shares at the lower of 85 % of the fair market value at the time of grant or 85 % of the fair market value at the time of exercise through payroll withholding.

Options to purchase shares are granted twice yearly or on or about June 1 and December 1, and are exercisable on or about the succeeding November 30 and May 31, respectively.

The ESPP stated that 376,531 shares of common stock were available for issuance.

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 Compensation Committee granted 1,092,554 and 192,411 restricted stock and restricted stock units during the six months ended June 30, 2023 and 2022, under the 2022 Plan and 2021 Plans, respectively.

Members of the Board of Directors were granted 19,284 and 15,196 restricted stock during the six months ended June 30, 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 Compensation Committee granted 759,990 stock options during the six months ended June 30, 2023.

The grant date fair value of the options under the 2022 Plan 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:

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The grant date fair value of options under the ESPP was determined using the Black-Scholes model where the term was the length of time between the grant date and the date the options are exercisable of 6 months.

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 six months ended June 30, 2023 and 2022 were valued at approximately $ 17.5 million and $ 2.5 million, respectively, based on the grant date fair value.

The stock options granted to employees during the six months ended June 30, 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 six months ended June 30, 2023 and 2022:

Payout Range Requisite

1 unchanged sentence

Stock and Stock Units

Three months ended March 31, 2023

Six months ended June 30, 2023

Market condition awards 0 %– 150 %

4 unchanged sentences

Stock options N/A 3 – 4 years

Three months ended March 31, 2022

Six months ended June 30, 2022

Market condition awards 0 %– 150 %

3 unchanged sentences

Service condition awards N/A 1 – 3 years

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Stock Based Compensation (continued)

The following table sets forth option activity for the three months ended March 31, 2023:

The following table sets forth option activity for the six months ended June 30, 2023:

Weighted-Average

2 unchanged sentences

Granted $ 15.00 759,990

Outstanding at March 31, 2023 $ 15.00 759,990

Outstanding at June 30, 2023 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:

The aggregate intrinsic value of options outstanding at June 30, 2023 was $ 7.9 million.

The weighted-average remaining contractual life of the options outstanding at June 30, 2023 was 9.5 years.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table sets forth the Company’s restricted stock and restricted stock units activity for the six months ended June 30, 2023 and 2022:

Weighted-Average

4 unchanged sentences

Forfeited 15.07 ( 25,176 )

Non-vested at March 31, 2023 $ 14.97 1,453,435

Non-vested at June 30, 2023 $ 15.08 1,454,778

Non-vested at January 1, 2022 $ 13.23 375,643

2 unchanged sentences

Forfeited 12.69 ( 1,950 )

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.

Non-vested at June 30, 2022 $ 12.54 452,479

The total fair value of shares vested at June 30, 2023 and 2022 were $ 0.8 million and $ 1.8 million, respectively.

As of June 30, 2023 the total unrecognized compensation cost related to non-vested, share-based compensation awards was $ 20.3 million and the weighted average period over which that cost is expected to be recognized is 1.9 years.

For the three and six months ended June 30, 2023, the Company recognized $ 2.0 million and $ 3.9 million of stock based compensation expense, respectively.

For the three and six months ended June 30, 2022, the Company recognized $ 0.7 million and $ 1.2 million, of stock based compensation expense, respectively.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

2 unchanged sentences

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:

Three months ended June 30, Six months ended June 30,

($ in thousands, except for share and per share amounts) 2023 2022 2023 2022

1 unchanged sentence

Undistributed income allocated to participating securities — ( 2,437 ) ( 1,402 ) ( 10,283 )

Net income attributable to common shareholders (numerator for basic earnings per share) 14,282 8,488

Net income attributable to common stockholders (numerator for basic earnings per share) 19,452 2,628 33,606 11,093

Undistributed income allocated to participating securities — 2,437 1,402 10,283

13 unchanged sentences

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.

The following table sets forth the weighted-average instruments that were

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

excluded from the calculation of diluted weighted-average common share equivalents during the three and six months ended June 30, 2023 and 2022:

Three months ended June 30, Six months ended June 30,

2023 2022 2023 2022

Contingently issuable instruments (treasury stock method) — 58 — —

3 unchanged sentences

Options (treasury stock method) 315 — 357,059 —

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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:

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 and six months ended June 30, 2023 and 2022:

Three months ended June 30, Six months ended June 30,

2023 2022 2023 2022

Common shares 1,054,510 83,811 1,054,510 83,811

1 unchanged sentence

Total 1,054,510 1,143,412 1,054,510 1,143,412

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.

Related Party Transactions

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.

As of June 30, 2023 and December 31, 2022, Westaim and Westaim HIIG LP owned 28.4 % and 44.5 %, respectively, of the Company’s common stock.

The changes in ownership percentage were primarily due to the IPO, conversion of preferred stock to common stock, and secondary offering.

The Company’s investment in Westaim was included in equity securities on the consolidated balance sheets.

The unrealized loss on this investment as of June 30, 2023 and December 31, 2022 were $ 1.1 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.

3 unchanged sentences

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:

Net earned premium and gross commission expense related to these agreements for the three and six months ended June 30, 2023 and 2022 were as follows:

Three months ended June 30, Six months ended June 30,

($ in thousands) 2023 2022 2023 2022

1 unchanged sentence

Commissions 6,149 5,759 13,002 13,107

Premiums receivable as of March 31, 2023 and December 31, 2022 were $ 17.6 million and $ 9.9 million, respectively.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Premiums receivable as of June 30, 2023 and December 31, 2022 were $ 17.0 million and $ 9.9 million, respectively.

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.

During the three and six months ended June 30, 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 premiums ceded during the three and six months ended June 30, 2022 related to the agreement were $ 22.6 million and $ 42.2 million, respectively.

Reinsurance recoverable from Everest Re, net of premium payables at December 31, 2022 were $ 177.5 million.

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.

Advisory and professional services fees and expense reimbursements paid to various affiliated stockholders and directors for the three and six months ended June 30, 2023 were $ 0.5 million and $ 2.6 million, respectively, compared to $ 1.5 million and $ 2.2 million, respectively, for the three and six months ended June 30, 2022.

See Note 4 and 5 for investments involving affiliated companies and additional related party transactions.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Commitments and Contingencies

3 unchanged sentences

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.

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 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

5 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements