What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2023-11-09 compared with 2023-08-10 · 182 added, 157 removed, 774 unchanged (30% of the section changed)

3 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

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

1 unchanged sentence

$ 874,864 $ 607,572

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

Fixed maturity securities, held-to-maturity, at amortized cost (net of allowance for credit losses of $ 320 as of September 30, 2023)

44,437 52,467

Equity securities, at fair value 107,387 120,169

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

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

at amortized cost as of December 31, 2022)

39 unchanged sentences

AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

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

Three months ended September 30, Nine months ended September 30,

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

2 unchanged sentences

Net investment income 13,089 5,988 26,318 31,667

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

Net investment (losses) gains ( 2,984 ) ( 7,305 ) 3,328 ( 26,117 )

Total revenues 239,223 158,093 639,674 455,053

5 unchanged sentences

Total expenses 211,428 161,211 567,141 431,234

Income before income taxes 25,016 6,357 44,738 26,937

Income tax expense 5,564 1,292 9,730 5,561

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

Income (loss) before income taxes 27,795 ( 3,118 ) 72,533 23,819

Income tax expense (benefit) 6,084 ( 719 ) 15,814 4,842

Net income (loss) 21,711 ( 2,399 ) 56,719 18,977

Net income attributable to participating securities — — 1,492 9,124

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

Net income (loss) attributable to common stockholders $ 21,711 $ ( 2,399 ) $ 55,227 $ 9,853

Comprehensive income (loss):

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

Other comprehensive (loss) income:

Net income (loss) $ 21,711 $ ( 2,399 ) $ 56,719 $ 18,977

Other comprehensive loss:

Unrealized gains and losses on investments:

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

Net change in unrealized losses on investments, net of tax ( 8,722 ) ( 17,806 ) ( 5,309 ) ( 49,308 )

Reclassification adjustment for (losses) gains on securities no longer held, net of tax ( 3,667 ) 31 ( 4,879 ) 362

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

Total other comprehensive loss ( 12,389 ) ( 17,775 ) ( 10,188 ) ( 48,946 )

Comprehensive income (loss) $ 9,322 $ ( 20,174 ) $ 46,531 $ ( 29,969 )

Per share data:

Basic earnings per share $ 0.53 $ 0.16 $ 0.97 $ 0.67

Diluted earnings per share $ 0.51 $ 0.16 $ 0.93 $ 0.66

Basic earnings (loss) per share $ 0.59 $ ( 0.15 ) $ 1.56 $ 0.60

Diluted earnings (loss) per share $ 0.57 $ ( 0.15 ) $ 1.50 $ 0.58

Weighted-average common shares outstanding

20 unchanged sentences

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

Employee equity transactions — — — 2,304 1,093 — — 3,397

Net income — — — — — — 21,711 21,711

Other comprehensive loss, net of tax — — — — — ( 12,389 ) — ( 12,389 )

Balance at September 30, 2023 $ — $ 377 $ — $ 645,292 $ ( 5,625 ) $ ( 53,673 ) $ ( 50,974 ) $ 535,397

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

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

9 unchanged sentences

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

Employee equity transactions — — — 354 30 — — 384

Net loss — — — — — — ( 2,399 ) ( 2,399 )

Other comprehensive loss, net of tax — — — — — ( 17,775 ) — ( 17,775 )

Balance at September 30, 2022 $ 20 $ 168 $ ( 2 ) $ 576,685 $ ( 6,912 ) $ ( 44,306 ) $ ( 125,836 ) $ 399,817

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

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Six months ended June 30,

Nine months ended September 30,

($ in thousands) 2023 2022

7 unchanged sentences

Purchase of equity securities ( 22,436 ) ( 49,018 )

Purchase of intangible assets ( 50 ) —

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

Purchase of property and equipment ( 1,198 ) ( 564 )

Investment in direct and indirect loans ( 3,313 ) ( 13,134 )

Sales and maturities of investment securities 110,695 76,765

3 unchanged sentences

Cash provided by deposit accounting 8,631 8,780

Other, net ( 1,421 ) ( 834 )

Net cash used in investment activities ( 307,833 ) ( 128,281 )

40 unchanged sentences

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 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 (losses) gains 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.

15 unchanged sentences

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.

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 (losses) gains 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.

6 unchanged sentences

Changes in the allowance for credit losses are recognized in underwriting, acquisition and insurance expenses on the consolidated statements of operations.

Premium receivables are carried net of an allowance for credit losses.

Premiums Receivable

Premiums receivable are carried net of an allowance for credit losses.

The allowance for credit losses represents the current estimate of expected credit losses.

5 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 June 30, 2023 and December 31, 2022:

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

($ in thousands) Gross

Losses Allowance for Credit Losses Fair Value

June 30, 2023

September 30, 2023

Fixed maturity securities, available-for-sale:

26 unchanged sentences

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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:

The following table sets forth the amortized cost and fair value of available-for-sale fixed maturity securities by contractual maturity at September 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 June 30, 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 June 30, 2023 and December 31, 2022:

The Company’s fixed maturity securities, held-to-maturity, at September 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

June 30, 2023

September 30, 2023

Fixed maturity securities, available-for-sale:

33 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 June 30, 2023, the Company had 735 lots of fixed maturity securities in an unrealized loss position.

As of September 30, 2023, the Company had 869 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

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,

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

Three months ended September 30, Nine months ended September 30,

($ in thousands) 2023 2022 2023 2022

9 unchanged sentences

Total ( 708 ) ( 1,677 ) ( 5,927 ) ( 3,628 )

Net unrealized gains (losses) on investments

Net unrealized (losses) gains on investments

Equity securities ( 6,417 ) ( 6,297 ) 2,367 ( 26,180 )

Mortgage loans 26 — 27 —

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 six months ended June 30, 2023 and 2022:

Net investment (losses) gains $ ( 2,984 ) $ ( 7,305 ) $ 3,328 $ ( 26,117 )

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

Nine months ended September 30,

($ in thousands) 2023 2022

1 unchanged sentence

Equity securities 38,581 32,356

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,

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

Three months ended September 30, Nine months ended September 30,

($ in thousands) 2023 2022 2023 2022

13 unchanged sentences

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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,

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

Three months ended September 30, Nine months ended September 30,

($ in thousands) 2023 2022 2023 2022

33 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 June 30, 2023:

June 30, 2023

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

September 30, 2023

Weighted average 6.82 %

2 unchanged sentences

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

September 30, 2023

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

80 unchanged sentences

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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:

The following table sets forth the changes in the fair value of instruments carried at fair value with a Level 3 measurement during the nine months ended September 30, 2023:

($ in thousands) Mortgage Loans

6 unchanged sentences

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

Issuances $ 30

Settlements ( 9,582 )

1 unchanged sentence

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

Total gains for the period recognized in net investment gains (losses) 26

Issuances 26,530

Settlements —

Balance at September 30, 2023 $ 59,318

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 $ 26

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

As of September 30, 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).

The Company determines fair value using the income approach utilizing inputs that are observable (Level 2).

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Subordinated debt:

3 unchanged sentences

The Company determines the fair value of these instruments using the income approach utilizing inputs that are observable (Level 2).

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

September 30, 2023 December 31, 2022

($ in thousands) Carrying

11 unchanged sentences

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 stockholder.

As of June 30, 2023 and December 31, 2022, the Company held direct investments in mortgage loans from various creditors through SMA1 and SMA2.

As of September 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 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 90 % 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

Mortgage loan participations are carried at fair value as of September 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 September 30, 2023 and December 31, 2022 were as follows:

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

Commercial $ 16,469 $ 15,309

1 unchanged sentence

Hospitality 17,846 4,915

Industrial 6,117 6,329

Multi-family 2,624 5,593

Office — 3,197

Industrial — 6,329

$ 59,318 $ 51,859

2 unchanged sentences

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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,

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

Three months ended September 30, Nine months ended September 30,

($ in thousands) 2023 2022 2023 2022

8 unchanged sentences

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 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.

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

As of September 30, 2023 and December 31, 2022, approximately $ 6.7 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 June 30, 2023 and December 31, 2022 were as follows:

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

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

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

Arena Special Opportunities Fund, LP units $ 41,531 $ 44,504

10 unchanged sentences

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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,

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

Three months ended September 30, Nine months ended September 30,

($ in thousands) 2023 2022 2023 2022

8 unchanged sentences

$ ( 4 ) $ ( 3,861 ) $ ( 6,772 ) $ 7,615

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

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

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

Brewer Lane Ventures Fund II LP units $ 4,610 $ 4,800

6 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 June 30, 2023 and December 31, 2022:

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

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

Investment in RISCOM:

2 unchanged sentences

Recorded investment balance $ 4,810 $ 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 June 30, 2023 and December 31, 2022:

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

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

Investment in JVM Funds LLC:

5 unchanged sentences

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 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 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

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

September 30, 2023 December 31, 2022

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

4 unchanged sentences

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 six months ended June 30, 2023 and 2022.

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

Allowance for Credit Losses

Premiums Receivable

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.

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

($ in thousands) Allowance for Credit Losses

8 unchanged sentences

Balance at June 30, 2023 $ 941

Current period change for estimated uncollectible premiums 277

Write-offs of uncollectible premiums receivable ( 228 )

Recoveries of amounts previously written off 17

Balance at September 30, 2023 $ 1,007

SKYWARD SPECIALTY INSURANCE GROUP, INC.

7 unchanged sentences

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 June 30, 2023 was as follows:

Best Rating June 30, 2023

The Company’s reinsurance recoverables net of credit enhancements by A.M.

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

Best Rating September 30, 2023

A- and above 98.0 %

1 unchanged sentence

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:

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

($ in thousands) Allowance for Credit Losses

7 unchanged sentences

Balance at June 30, 2023 $ 2,295

Current period change for estimated uncollectible reinsurance —

Write-offs of uncollectible reinsurance recoverables —

Balance at September 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 six months ended June 30, 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 first quarter of 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 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.

During the nine months ended September 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.

1 unchanged sentence

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 %.

At September 30, 2023, the six-month SOFR on the Revolving Credit Facility was 5.47 %, 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 June 30, 2023, the Company was in compliance with all covenants.

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

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Stockholders’ Equity

3 unchanged sentences

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.

AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.”

10 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 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,

The following table sets forth the Company’s income tax expense (benefit) and effective tax rates for the three and nine months ended September 30, 2023 and 2022:

Three months ended September 30, Nine months ended September 30,

($ in thousands 2023 2022 2023 2022

Income tax expense $ 5,564 $ 1,292 $ 9,730 $ 5,561

Income tax expense (benefit) $ 6,084 $ ( 719 ) $ 15,814 $ 4,842

Effective tax rate 21.9 % 23.1 % 21.8 % 20.3 %

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.

The Company paid federal income taxes of $ 10.0 million during the nine months ended September 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 (“LAE”) as reported in the condensed consolidated balance sheets as of and for the six months ended June 30, 2023 and 2022:

Nine months ended September 30,

($ 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 and six months ended June 30, 2023 and 2022:

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

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

Three months ended September 30, Nine months ended September 30,

($ in thousands) 2023 2022 2023 2022

3 unchanged sentences

Total commission and fee income $ 2,085 $ 1,362 $ 5,817 $ 3,652

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.

The Company’s contract assets from commission and fee income as of September 30, 2023 and December 31, 2022 were $ 2.3 million and $ 1.3 million, respectively.

Contract assets were $ 1.7 million and $ 1.2 million as of September 30, 2022 and December 31, 2021, respectively.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

2 unchanged sentences

Underwriting, Acquisition and Insurance Expenses

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,

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

Three months ended September 30, Nine months ended September 30,

($ in thousands) 2023 2022 2023 2022

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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 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,

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

Three months ended September 30,

($ in thousands) Written Earned Written Earned

4 unchanged sentences

Ceded losses and LAE incurred $ 103,753 $ 60,878

Six months ended June 30,

Nine months ended September 30,

($ in thousands) Written Earned Written Earned

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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

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

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

Ceded unpaid losses and LAE $ 438,652 $ 435,986

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

At September 30, 2023, the market value of these accounts was approximately $ 137.4 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 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.

The Company’s deposit asset at September 30, 2023 and December 31, 2022 was $ 33.2 million and $ 41.8 million, respectively, and was included in other assets on the condensed consolidated balance sheets.

Stock Based Compensation

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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.

Under the ESPP, all employees of the Company may choose, at two different specified time intervals each year, to have a percentage of their annual base earnings withheld to purchase the Company’s common stock.

The purchase price of the common stock is 85 % of the lower of its beginning-of-interval or end-of-interval market price.

As of September 30, 2023, 376,531 common stock were available for purchase under this plan.

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 1,092,554 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 Compensation Committee granted 1,101,116 and 198,842 shares of restricted stock and restricted stock units during the nine months ended September 30, 2023 and 2022, under the 2022 Plan and 2021 Plan, respectively.

Members of the Board of Directors were granted 22,742 and 15,196 shares of restricted stock during the nine months ended September 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 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 Compensation Committee granted 759,990 stock options during the nine months ended September 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

SKYWARD SPECIALTY INSURANCE GROUP, INC.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 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:

The restricted stock and restricted stock units granted to employees and the Board of Directors during the nine months ended September 30, 2023 and 2022 were valued at approximately $ 17.7 million and $ 2.6 million, respectively, based on the grant date fair value.

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

Payout Range Requisite

1 unchanged sentence

Stock and Stock Units

Six months ended June 30, 2023

Nine months ended September 30, 2023

Market condition awards 0 %– 150 %

4 unchanged sentences

Stock options N/A 3 – 4 years

Six months ended June 30, 2022

Nine months ended September 30, 2022

Market condition awards 0 %– 150 %

3 unchanged sentences

Service condition awards N/A 1 – 3 years

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

The following table sets forth option activity for the nine months ended September 30, 2023:

Weighted-Average

2 unchanged sentences

Granted $ 15.00 759,990

Outstanding at June 30, 2023 759,990

Outstanding at September 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 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.

The aggregate intrinsic value of options outstanding at September 30, 2023 was $ 9.4 million.

The weighted-average remaining contractual life of the options outstanding at September 30, 2023 was 9.3 years.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

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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:

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

Weighted-Average

4 unchanged sentences

Forfeited 15.30 ( 36,354 )

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

Non-vested at September 30, 2023 $ 15.12 1,448,704

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

2 unchanged sentences

Forfeited 12.51 ( 10,547 )

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.

Non-vested at September 30, 2022 $ 12.54 436,960

The total fair value of shares vested at September 30, 2023 and 2022 were $ 1.0 million and $ 2.0 million, respectively.

As of September 30, 2023 the total unrecognized compensation cost related to non-vested, stock-based compensation awards was $ 18.1 million and the weighted average period over which that cost is expected to be recognized is 1.7 years.

For the three and nine months ended September 30, 2023, the Company recognized $ 2.3 million and $ 6.2 million of stock-based compensation expense, respectively.

For the three and nine months ended September 30, 2022, the Company recognized $ 0.5 million and $ 1.7 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 and six months ended June 30, 2023 and 2022:

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

The following table sets forth a reconciliation of the numerator and denominator of basic and diluted earnings (loss) per share computations contained in the period-ended consolidated financial statements for the three and nine months ended September 30, 2023 and 2022:

Three months ended September 30, Nine months ended September 30,

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

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

Net income (loss) $ 21,711 $ ( 2,399 ) $ 56,719 $ 18,977

Undistributed income allocated to participating securities — — ( 1,492 ) ( 9,124 )

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

Net income (loss) attributable to common stockholders (numerator for basic earnings per share) 21,711 ( 2,399 ) 55,227 9,853

Undistributed income allocated to participating securities — — 1,492 9,124

Net income (numerator for diluted earnings per share under the two-class method) $ 19,452 $ 5,065 $ 35,008 $ 21,376

Net income (loss) (numerator for diluted earnings per share under the two-class method) $ 21,711 $ ( 2,399 ) $ 56,719 $ 18,977

Basic weighted-average common shares 36,743,393 16,465,588 35,502,843 16,464,313

6 unchanged sentences

Diluted weighted-average common share equivalents 38,403,843 16,465,588 37,830,431 32,598,669

Basic earnings per share $ 0.53 $ 0.16 $ 0.97 $ 0.67

Diluted earnings per share $ 0.51 $ 0.16 $ 0.93 $ 0.66

Basic earnings (loss) per share $ 0.59 $ ( 0.15 ) $ 1.56 $ 0.60

Diluted earnings (loss) per share $ 0.57 $ ( 0.15 ) $ 1.50 $ 0.58

The Company’s preferred shares participate in dividends and distributions with common stock on an as-converted basis and represent a participating security.

5 unchanged sentences

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,

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

Three months ended September 30, Nine months ended September 30,

2023 2022 2023 2022

Preferred shares (if converted method) — 15,247,437 — —

Contingently issuable instruments (treasury stock method) — 510,577 — 3,024

4 unchanged sentences

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 and six months ended June 30, 2023 and 2022:

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

The following table sets forth common share equivalents of contingently issuable instruments (in shares) that were excluded from basic earnings (loss) per share for the three and nine months ended September 30, 2023 and 2022:

Three months ended September 30, Nine months ended September 30,

2023 2022 2023 2022

2 unchanged sentences

Total 932,588 1,140,128 932,588 1,140,128

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 and six months ended June 30, 2023 and 2022.

The impact of the contingently issuable instruments on diluted earnings (loss) per share was calculated using the treasury stock method and included in the reconciliation of the denominator of the basic and diluted earnings (loss) per share computations for the three and nine months ended September 30, 2023 and 2022.

Related Party Transactions

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.

In July 2023, Westaim dissolved Westaim HIIG LP and obtained direct ownership of the Company’s common stock held by the partnership.

As of September 30, 2023, Westaim owned 28.1 % of the Company’s common stock.

As of December 31, 2022, Westaim, including shares beneficially owned through Westaim HIIG LP, owned 44.5 % of the Company’s common stock.

The changes in ownership percentage were primarily due to the IPO, conversion of preferred stock to common stock, distribution of shares controlled by Westaim through a limited partnership, 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.

The unrealized loss on this investment as of September 30, 2023 and December 31, 2022 was $ 1.3 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 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

Net earned premium $ 19,916 $ 22,508 $ 42,101 $ 43,526

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

SKYWARD SPECIALTY INSURANCE GROUP, INC.

1 unchanged sentence

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.

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

Three months ended September 30, Nine months ended September 30,

($ in thousands) 2023 2022 2023 2022

Net earned premium $ 31,649 $ 23,712 $ 73,750 $ 67,239

Commissions 6,119 5,558 19,122 18,666

Premiums receivable as of September 30, 2023 and December 31, 2022 were $ 14.8 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 and six months ended June 30, 2023, Mt.

During the nine months ended September 30, 2023, Mt.

Whitney Securities divested their entire ownership of the Company’s equity securities.

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 premiums ceded during the three and nine months ended September 30, 2022 related to the agreement were $ 11.0 million and $ 53.2 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 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.

Advisory and professional services fees and expense reimbursements paid to various affiliated stockholders and directors for the three and nine months ended September 30, 2023 were $ 0.5 million and $ 3.1 million, respectively, compared to $ 0.6 million and $ 2.8 million for the three and nine months ended September 30, 2022, respectively.

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

12 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