Skyward Specialty Insurance Group, Inc. 10-Q

Item 1. Financial Statements SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS September 30, 2023 December 31, 2022 ($ in thousands, except share and per share amounts) (Unaudited) Assets Investments: Fixed maturity securities, available-for-sale, at fair value (amortized cost of $ 942,841 and $ 662,616 , respectively) $ 874,864 $ 607,572 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 September 30, 2023; at amortized cost as of December 31, 2022) 59,318 51,859 Other long-term investments 115,823 129,142 Short-term investments, at fair value 194,049 121,158 Total investments 1,395,878 1,082,367 Cash and cash equivalents 53,730 45,438 Restricted cash 49,536 79,573 Premiums receivable, net 211,940 139,215 Reinsurance recoverables, net 615,675 581,359 Ceded unearned premium 218,784 157,645 Deferred policy acquisition costs 99,255 68,938 Deferred income taxes 35,006 36,188 Goodwill and intangible assets, net 88,808 89,870 Other assets 82,083 82,846 Total assets $ 2,850,695 $ 2,363,439 Liabilities and stockholders’ equity Liabilities: Reserves for losses and loss adjustment expenses $ 1,268,711 $ 1,141,757 Unearned premiums 596,011 442,509 Deferred ceding commission 41,704 29,849 Reinsurance and premium payables 161,832 113,696 Funds held for others 53,963 36,858 Accounts payable and accrued liabilities 64,407 48,499 Notes payable 50,000 50,000 Subordinated debt, net of debt issuance costs 78,670 78,609 Total liabilities 2,315,298 1,941,777 Stockholders’ equity Series A preferred stock, $ 0.01 par value; 10,000,000 and 2,000,000 shares authorized, 0 and 1,969,660 shares issued and outstanding, respectively — 20 Common stock, $ 0.01 par value, 500,000,000 and 168,000,000 shares authorized, 37,677,521 and 16,832,955 shares issued, respectively 377 168 Treasury stock, $ 0.01 par value, 0 and 233,289 shares, respectively — ( 2 ) Additional paid-in capital 645,292 577,289 Stock notes receivable ( 5,625 ) ( 6,911 ) Accumulated other comprehensive loss ( 53,673 ) ( 43,485 ) Accumulated deficit ( 50,974 ) ( 105,417 ) Total stockholders’ equity 535,397 421,662 Total liabilities and stockholders’ equity $ 2,850,695 $ 2,363,439 The accompanying notes are an integral part of the consolidated financial statements. 3 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED) Three months ended September 30, Nine months ended September 30, ($ in thousands, except share and per share amounts) 2023 2022 2023 2022 Revenues: Net earned premiums $ 227,033 $ 158,048 $ 604,211 $ 445,851 Commission and fee income 2,085 1,362 5,817 3,652 Net investment income 13,089 5,988 26,318 31,667 Net investment (losses) gains ( 2,984 ) ( 7,305 ) 3,328 ( 26,117 ) Total revenues 239,223 158,093 639,674 455,053 Expenses: Losses and loss adjustment expenses 138,536 111,746 377,841 293,536 Underwriting, acquisition and insurance expenses 68,315 47,340 176,653 132,258 Interest expense 2,632 1,738 7,250 4,280 Amortization expense 463 387 1,336 1,160 Other expenses 1,482 — 4,061 — Total expenses 211,428 161,211 567,141 431,234 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 (loss) attributable to common stockholders $ 21,711 $ ( 2,399 ) $ 55,227 $ 9,853 Comprehensive income (loss): 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 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 ( 12,389 ) ( 17,775 ) ( 10,188 ) ( 48,946 ) Comprehensive income (loss) $ 9,322 $ ( 20,174 ) $ 46,531 $ ( 29,969 ) Per share data: 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 Basic 36,743,393 16,465,588 35,502,843 16,464,313 Diluted 38,403,843 16,465,588 37,830,431 32,598,669 The accompanying notes are an integral part of the consolidated financial statements. 4 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED) ($ in thousands) Preferred Stock Common Stock Treasury Stock Additional Paid-in Capital Stock Notes Receivable Accumulated Other Comprehensive Loss Accumulated Deficit Total Balance at January 1, 2023 $ 20 $ 168 $ ( 2 ) $ 577,289 $ ( 6,911 ) $ ( 43,485 ) $ ( 105,417 ) $ 421,662 Cumulative effect on adoption of ASU No. 2016-13 — — — — — — ( 2,276 ) ( 2,276 ) Employee equity transactions — — — 1,864 193 — — 2,057 Preferred stock conversion to common shares ( 20 ) 161 2 ( 143 ) — — — — Proceeds from initial public offering, net — 48 — 62,358 — — — 62,406 Net income — — — — — — 15,556 15,556 Other comprehensive income, net of tax — — — — — 7,741 — 7,741 Balance at March 31, 2023 $ — $ 377 $ — $ 641,368 $ ( 6,718 ) $ ( 35,744 ) $ ( 92,137 ) $ 507,146 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 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. 5 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED) ($ in thousands) Preferred Stock Common Stock Treasury Stock Additional Paid-in Capital Stock Notes Receivable Accumulated Other Comprehensive Loss Accumulated Deficit Total Balance at January 1, 2022 $ 20 $ 168 $ ( 2 ) $ 575,159 $ ( 9,092 ) $ 4,640 $ ( 144,813 ) $ 426,080 Employee equity transactions — — — 502 188 — — 690 Reclassification of stock notes receivable to other assets — — — — 1,942 — — 1,942 Net income — — — — — — 16,311 16,311 Other comprehensive loss, net of tax — — — — — ( 16,404 ) — ( 16,404 ) Balance at March 31, 2022 $ 20 $ 168 $ ( 2 ) $ 575,661 $ ( 6,962 ) $ ( 11,764 ) $ ( 128,502 ) $ 428,619 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 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. 6 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine months ended September 30, ($ in thousands) 2023 2022 Cash flows from operating activities Net income $ 56,719 $ 18,977 Adjustments to reconcile net income to net cash provided by operating activities 161,820 105,936 Net cash provided by operating activities 218,539 124,913 Cash flows from investing activities: Purchase of fixed maturity securities, available-for-sale ( 342,088 ) ( 211,097 ) Purchase of illiquid investments ( 1,156 ) ( 4,431 ) Purchase of equity securities ( 22,436 ) ( 49,018 ) Investment in direct and indirect loans ( 3,313 ) ( 13,134 ) Sales and maturities of investment securities 110,695 76,765 Distributions from equity method investments 1,704 2,052 Change in short-term investments ( 72,891 ) 59,363 Receivable for securities sold 14,442 3,273 Cash provided by deposit accounting 8,631 8,780 Other, net ( 1,421 ) ( 834 ) Net cash used in investment activities ( 307,833 ) ( 128,281 ) Cash flows from financing activities: Employee share purchases 1,287 2,180 Draw on revolving line of credit 50,000 — Repayment of term loan ( 50,000 ) — Proceeds from initial public offering 66,262 — Net cash provided by financing activities 67,549 2,180 Net decrease in cash and cash equivalents and restricted cash ( 21,745 ) ( 1,188 ) Cash and cash equivalents and restricted cash at beginning of period 125,011 107,274 Cash and cash equivalents and restricted cash at end of period $ 103,266 $ 106,086 Supplemental disclosure of cash flow information: Cash paid for interest $ 8,503 $ 3,860 Cash paid for federal income taxes $ 10,000 $ — The accompanying notes are an integral part of the consolidated financial statements. 7 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Basis of Presentation The unaudited condensed consolidated financial statements of Skyward Specialty Insurance Group, Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all the disclosures required by GAAP for complete consolidated financial statements. Readers are urged to review the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for a more complete description of the Company’s business and accounting policies. In the opinion of management, all adjustments necessary for a fair statement of the condensed consolidated financial statements have been included. Such adjustments consist only of normal recurring items. Interim results are not necessarily indicative of results of operations for the full year. The consolidated balance sheet as of December 31, 2022 was derived from the Company’s audited annual consolidated financial statements. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from these estimates. Recent Accounting Standards Adopted In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires organizations to estimate credit losses on certain types of financial instruments, including receivables and fixed maturity securities, by introducing an approach based on expected losses. The expected loss approach required entities to incorporate considerations of historical information, current information, and reasonable and supportable forecasts. The Company adopted ASU 2016-13 effective January 1, 2023 using the modified retrospective approach, by which a cumulative-effect adjustment was made to retained earnings as of the date of adoption. In connection with the adoption of ASU 2016-13, the Company elected the fair value option in accounting for mortgage loans effective January 1, 2023 as targeted transition relief. The adoption of ASU 2016-13 resulted in a $ 2.3 million increase in accumulated deficit, net of tax. Updates to Significant Accounting Policies The following accounting policies have been updated to reflect the Company's adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments as described above. Investments Available-for-sale Investments in fixed maturities that are classified as available-for-sale are carried at fair value. For available-for-sale fixed maturities in an unrealized loss position, the Company first determines whether there is an intent to sell the security or if it is more likely than not that the Company will be required to sell the security before maturity or recovery of its cost basis. If either of these criteria were met, the amortized cost of the security is written down to fair value with the losses recognized in net investment (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. If the unrealized losses are due to credit-related factors, an allowance for credit losses is determined using a present value of cash flows compared to the amortized cost of the security. The allowance for credit losses is limited to the amount by which fair value is below amortized cost. Changes in the allowance for credit losses are recognized in net investment 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. 8 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Held-to-maturity 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. The Company develops a historical loss rate from Moody’s table of estimated multi-year cumulative loss rates for asset backed securities. This historical loss rate is adjusted for current conditions and reasonable and supportable forecasts. Changes in the allowance for credit losses are recognized in net investment income on the consolidated statements of operations. Mortgage loans The Company elected the fair value option in accounting for mortgage loans effective January 1, 2023 as targeted transition relief. Under the fair value option, mortgage loans are measured at fair value, and changes in unrealized gains and losses on mortgage loans are reported in net investment (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. Reinsurance Reinsurance Recoverables Reinsurance recoverables are carried net of an allowance for credit losses. The allowance for credit losses represents the current estimate of expected credit losses. The Company develops a historical loss rate using the A.M. Best impairment rate and rating transition study which provides historical loss data of similarly rated reinsurance companies based on the expected duration of the receivables. This historical loss rate is adjusted for current conditions and reasonable and supportable forecasts and consideration of current economic conditions. Changes in the allowance for credit losses are recognized in underwriting, acquisition and insurance expenses on the consolidated statements of operations. Premiums 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. The Company develops a historical loss rate using historical write-offs and aging of receivables. This historical loss rate is adjusted for current conditions, reasonable and supportable forecasts and our ability to cancel coverage on a policy after premium is considered past due. Changes in the allowance for credit losses are recognized in underwriting, acquisition and insurance expenses on the consolidated statements of operations. 9 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 2. Investments The following tables set forth the amortized cost and the fair value by investment category at September 30, 2023 and December 31, 2022: ($ in thousands) Gross Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Fair Value September 30, 2023 Fixed maturity securities, available-for-sale: U.S. government securities $ 47,778 $ — $ ( 1,396 ) $ — $ 46,382 Corporate securities and miscellaneous 357,652 228 ( 24,871 ) — 333,009 Municipal securities 93,489 8 ( 10,130 ) — 83,367 Residential mortgage-backed securities 255,083 36 ( 24,421 ) — 230,698 Commercial mortgage-backed securities 19,877 — ( 2,206 ) — 17,671 Asset-backed securities 168,962 201 ( 5,426 ) — 163,737 Total fixed maturity securities, available-for-sale $ 942,841 $ 473 $ ( 68,450 ) $ — $ 874,864 Fixed maturity securities, held-to-maturity: Asset-backed securities $ 44,757 $ — $ ( 3,668 ) $ ( 320 ) $ 40,769 Total fixed maturity securities, held-to-maturity $ 44,757 $ — $ ( 3,668 ) $ ( 320 ) $ 40,769 ($ in thousands) Gross Amortized Cost Gross Unrealized Gains Gross Unrealized Loss Fair Value December 31, 2022 Fixed maturity securities, available-for-sale: U.S. government securities $ 50,416 $ 1 $ ( 1,876 ) $ 48,541 Corporate securities and miscellaneous 255,116 767 ( 20,754 ) 235,129 Municipal securities 65,836 24 ( 8,133 ) 57,727 Residential mortgage-backed securities 134,844 218 ( 15,206 ) 119,856 Commercial mortgage-backed securities 40,129 50 ( 3,684 ) 36,495 Asset-backed securities 116,275 91 ( 6,542 ) 109,824 Total fixed maturity securities, available-for-sale $ 662,616 $ 1,151 $ ( 56,195 ) $ 607,572 Fixed maturity securities, held-to-maturity: Asset-backed securities $ 52,467 $ — $ ( 5,696 ) $ 46,771 Total fixed maturity securities, held-to-maturity $ 52,467 $ — $ ( 5,696 ) $ 46,771 10 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES 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 September 30, 2023: ($ in thousands) Amortized Cost Fair Value Due in less than one year $ 29,963 $ 29,280 Due after one year through five years 256,015 240,868 Due after five years through ten years 130,724 118,893 Due after ten years 82,217 73,717 Mortgage-backed securities 274,960 248,369 Asset-backed securities 168,962 163,737 Total $ 942,841 $ 874,864 Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Also, changing interest rates, tax considerations or other factors may result in portfolio sales prior to maturity. The Company’s fixed maturity securities, held-to-maturity, at September 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 September 30, 2023 and December 31, 2022: Less than 12 Months 12 Months or More Total ($ in thousands) Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses September 30, 2023 Fixed maturity securities, available-for-sale: U.S. government securities $ 24,001 $ ( 524 ) $ 22,381 $ ( 872 ) $ 46,382 $ ( 1,396 ) Corporate securities and miscellaneous 143,712 ( 5,181 ) 170,048 ( 19,690 ) 313,760 ( 24,871 ) Municipal securities 35,518 ( 1,667 ) 45,324 ( 8,463 ) 80,842 ( 10,130 ) Residential mortgage-backed securities 122,385 ( 4,506 ) 100,990 ( 19,915 ) 223,375 ( 24,421 ) Commercial mortgage-backed securities 7,648 ( 352 ) 10,023 ( 1,854 ) 17,671 ( 2,206 ) Asset-backed securities 81,952 ( 1,317 ) 65,329 ( 4,109 ) 147,281 ( 5,426 ) Total fixed maturity securities, available-for-sale 415,216 ( 13,547 ) 414,095 ( 54,903 ) 829,311 ( 68,450 ) Fixed maturity securities, held-to-maturity: Asset-backed securities — — 40,769 ( 3,668 ) 40,769 ( 3,668 ) Total fixed maturity securities, held-to-maturity: — — 40,769 ( 3,668 ) 40,769 ( 3,668 ) Total $ 415,216 $ ( 13,547 ) $ 454,864 $ ( 58,571 ) $ 870,080 $ ( 72,118 ) 11 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Less than 12 Months 12 Months or More Total ($ in thousands) Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses December 31, 2022 Fixed maturity securities, available-for-sale: U.S. government securities $ 28,966 $ ( 603 ) $ 18,577 $ ( 1,273 ) $ 47,543 $ ( 1,876 ) Corporate securities and miscellaneous 171,506 ( 16,063 ) 34,283 ( 4,691 ) 205,789 ( 20,754 ) Municipal securities 51,701 ( 7,236 ) 3,689 ( 897 ) 55,390 ( 8,133 ) Residential mortgage-backed securities 56,246 ( 4,152 ) 52,778 ( 11,054 ) 109,024 ( 15,206 ) Commercial mortgage-backed securities 25,836 ( 1,488 ) 8,583 ( 2,196 ) 34,419 ( 3,684 ) Asset-backed securities 74,684 ( 3,351 ) 25,820 ( 3,191 ) 100,504 ( 6,542 ) Total fixed maturity securities, available-for-sale 408,939 ( 32,893 ) 143,730 ( 23,302 ) 552,669 ( 56,195 ) Fixed maturity securities, held-to-maturity: Asset-backed securities 46,771 ( 5,696 ) — — 46,771 ( 5,696 ) Total fixed maturity securities, held-to-maturity: 46,771 ( 5,696 ) — — 46,771 ( 5,696 ) Total $ 455,710 $ ( 38,589 ) $ 143,730 $ ( 23,302 ) $ 599,440 $ ( 61,891 ) The Company regularly monitors its available-for-sale fixed maturity securities that have fair values less than cost or amortized cost for signs of impairment, an assessment that requires significant management judgment regarding the evidence known. Such judgments could change in the future as more information becomes known, which could negatively impact the amounts reported. Among the factors that management considers for fixed maturity securities are the financial condition of the issuer including receipt of scheduled principal and interest cash flows, and intent to sell, including if it is more likely than not that the Company will be required to sell the investments before recovery. As of 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. The Company determined that no credit impairment existed in the gross unrealized holding losses because the credit ratings of these securities were consistent with the credit ratings when purchased and/or at origination, there were no adverse changes in financial condition of the issuer and no adverse credit quality events in underlying assets. The Company attributed the unrealized losses to the changes in interest rates. 12 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 Gross realized gains Fixed maturity securities, available-for sale $ 156 $ 64 $ 860 $ 174 Equity securities 3,959 605 6,000 3,481 Other — — 1 36 Total 4,115 669 6,861 3,691 Gross realized losses Fixed maturity securities, available-for sale ( 381 ) ( 288 ) ( 837 ) ( 781 ) Equity securities ( 245 ) ( 1,388 ) ( 5,006 ) ( 2,825 ) Other ( 82 ) ( 1 ) ( 84 ) ( 22 ) Total ( 708 ) ( 1,677 ) ( 5,927 ) ( 3,628 ) Net unrealized (losses) gains on investments Equity securities ( 6,417 ) ( 6,297 ) 2,367 ( 26,180 ) Mortgage loans 26 — 27 — 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 Fixed maturity securities, available-for sale $ 25,465 $ 9,646 Equity securities 38,581 32,356 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 Income: Fixed maturity securities, available-for sale $ 9,180 $ 4,912 $ 23,439 $ 12,103 Fixed maturity securities, held-to-maturity 1,067 805 3,321 4,147 Equity securities 769 912 2,539 2,650 Equity method investments ( 4 ) ( 3,861 ) ( 6,772 ) 7,615 Mortgage loans 1,249 1,275 3,997 3,109 Indirect loans ( 761 ) 3,104 ( 4,009 ) 7,783 Short-term investments and cash 3,165 505 8,140 716 Other ( 115 ) ( 135 ) ( 106 ) ( 153 ) Total investment income 14,550 7,517 30,549 37,970 Investment expenses ( 1,461 ) ( 1,529 ) ( 4,231 ) ( 6,303 ) Net investment income $ 13,089 $ 5,988 $ 26,318 $ 31,667 13 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 Fixed maturity securities $ ( 15,706 ) $ ( 22,500 ) $ ( 12,933 ) $ ( 61,957 ) Deferred income taxes 3,317 4,725 2,745 13,011 Total $ ( 12,389 ) $ ( 17,775 ) $ ( 10,188 ) $ ( 48,946 ) 3. Fair Value Measurements The Company’s financial instruments include assets and liabilities carried at fair value, as well as assets and liabilities carried at cost or amortized cost but disclosed at fair value in its consolidated financial statements. In determining fair value, the market approach is generally applied, which uses prices and other relevant data based on market transactions involving identical or comparable assets and liabilities. The Company uses data primarily provided by third-party investment managers or pricing vendors to determine the fair value of its investments. Periodic analyses are performed on prices received from third parties to determine whether the prices are reasonable estimates of fair value. The analyses include a review of month-to-month price fluctuations and, as needed, a comparison of pricing services’ valuations to other pricing services’ valuations for the identical security. The Company classifies its financial instruments into the following three-level hierarchy: Level 1 - Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date. Level 2 - Inputs are other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date. Level 3 - Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The following methods and assumptions were used in estimating the fair value disclosures for financial instruments in the accompanying consolidated financial statements and in these notes: U.S. government securities, mutual funds and common stock The Company uses unadjusted quoted prices for identical instruments in an active exchange to measure fair value which represent Level 1 inputs. Preferred stocks, municipal securities, corporate securities and miscellaneous The Company uses a pricing model that utilizes market-based inputs such as trades in an illiquid market for a particular security or trades in active markets for securities with similar characteristics. The model considers other inputs such as benchmark yields, issuer spreads, security terms and conditions, and other market data. These represent Level 2 fair value inputs. Commercial mortgage-backed securities, residential mortgage-backed securities and asset-backed securities The Company uses a pricing model that utilizes market-based inputs that may include dealer quotes, market spreads, and yield curves. It may evaluate individual tranches in a security by determining cash flows using the security’s terms and conditions, collateral performance, credit information benchmark yields and estimated prepayments. These represent Level 2 fair value inputs. 14 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Mortgage loans Mortgage loans have variable interest rates and are collateralized by real property. The Company determines fair value of mortgage loans using the income approach utilizing inputs that are observable and unobservable (Level 3). The unobservable input consists of the spread applied to a prime rate used to discount cash flows. The spread represents the incremental cost of capital based on the borrower’s ability to make future payments and the value of the collateral relative to the loan balance and is subject to judgement and uncertainty. The following table sets forth the range and weighted average, weighted by relative fair value, of the spread as of September 30, 2023: September 30, 2023 High 15.28 % Low 4.50 % Weighted average 6.82 % 15 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 Fixed maturity securities, available-for-sale: U.S. government securities $ 46,382 $ — $ — $ 46,382 Corporate securities and miscellaneous — 333,009 — 333,009 Municipal securities — 83,367 — 83,367 Residential mortgage-backed securities — 230,698 — 230,698 Commercial mortgage-backed securities — 17,671 — 17,671 Asset-backed securities — 163,737 — 163,737 Total fixed maturity securities, available-for-sale 46,382 828,482 — 874,864 Fixed maturity securities, held-to-maturity: Asset-backed securities — — 40,769 40,769 Total fixed maturity securities, held-to-maturity — — 40,769 40,769 Common stocks: Consumer discretionary 1,687 — — 1,687 Consumer staples 13,345 — — 13,345 Energy 3,434 — — 3,434 Finance 21,556 — — 21,556 Industrial 10,681 — — 10,681 Information technology 3,974 — — 3,974 Materials 3,173 — — 3,173 Other 2,291 — — 2,291 Total common stocks 60,141 — — 60,141 Preferred stocks: Consumer staples — 404 — 404 Finance — 4,756 — 4,756 Industrial — 1,025 — 1,025 Other — 714 — 714 Total preferred stocks — 6,899 — 6,899 Mutual funds: Fixed income 5,197 — — 5,197 Equity 34,678 — — 34,678 Commodity 472 — — 472 Total mutual funds 40,347 — — 40,347 Total equity securities 100,488 6,899 — 107,387 Mortgage loans — — 59,318 59,318 Short-term investments 194,049 — — 194,049 Total investments $ 340,919 $ 835,381 $ 100,087 $ 1,276,387 16 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2022 ($ in thousands) Level 1 Level 2 Level 3 Total Fixed maturity securities, available-for-sale: U.S. government securities $ 48,541 $ — $ — $ 48,541 Corporate securities and miscellaneous — 235,129 — 235,129 Municipal securities — 57,727 — 57,727 Residential mortgage-backed securities — 119,856 — 119,856 Commercial mortgage-backed securities — 36,495 — 36,495 Asset-backed securities — 109,824 — 109,824 Total fixed maturity securities, available-for-sale 48,541 559,031 — 607,572 Fixed maturity securities, held-to-maturity: Asset-backed securities — — 46,771 46,771 Total fixed maturity securities, held-to-maturity: — — 46,771 46,771 Common stocks: Consumer discretionary 1,948 — — 1,948 Consumer staples 12,036 — — 12,036 Energy 3,241 — — 3,241 Finance 22,636 — — 22,636 Industrial 9,452 — — 9,452 Information technology 2,284 — — 2,284 Materials 2,820 — — 2,820 Other 1,579 — — 1,579 Total common stocks 55,996 — — 55,996 Preferred stocks: Consumer staples — 117 — 117 Finance — 7,085 — 7,085 Industrial — 1,020 — 1,020 Other — 549 — 549 Total preferred stocks — 8,771 — 8,771 Mutual funds: Fixed income 5,068 — — 5,068 Equity 49,773 — — 49,773 Commodity 561 — — 561 Total mutual funds 55,402 — — 55,402 Total equity securities 111,398 8,771 — 120,169 Mortgage loans — — 52,842 52,842 Short-term investments 121,158 — — 121,158 Total investments $ 281,097 $ 567,802 $ 99,613 $ 948,512 17 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES 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 nine months ended September 30, 2023: ($ in thousands) Mortgage Loans Balance at December 31, 2022 $ 52,842 Total gains for the period recognized in net investment gains (losses) 22 Issuances 892 Settlements ( 11,421 ) Balance at March 31, 2023 $ 42,335 Total losses for the period recognized in net investment gains (losses) attributable to the change in unrealized gains or losses relating to assets held as of period end $ ( 14 ) 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 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. In addition to the preceding disclosures on assets and liabilities recorded at fair value in the consolidated balance sheets, the Company is also required to disclose the fair values of certain other financial instruments for which it is practicable to estimate fair value. Estimated fair value amounts, defined as the quoted market price of a financial instrument, have been determined using available market information and other appropriate valuation methodologies. However, considerable judgements are required in developing the estimates of fair value where quoted market prices are not available. Accordingly, these estimates are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions or estimating methodologies may have an effect on the estimated fair value amounts. The following methods and assumptions were used in estimating the fair value disclosures of other financial instruments: Fixed maturity securities, held-to-maturity: Fixed maturity securities, held-to-maturity consists of senior and junior notes with target rates of return. As of 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 observable (Level 2). 18 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Subordinated debt: Subordinated debt consists of two debt instruments, the Junior Subordinated Interest Debentures, due September 15, 2036, and Unsecured Subordinated Notes, due May 24, 2039. The carrying value of the Junior Subordinated Interest Debentures approximates the estimated fair value as the instrument accrues interest at current market rates plus a spread. Unsecured Subordinated Notes have a fixed interest rate. The Company determines the fair value of these instruments using the income approach utilizing inputs that are observable (Level 2). 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 Value Fair Value Carrying Value Fair Value Notes Payable Term loan, due December 31, 2024 $ — $ — $ 50,000 $ 50,000 Revolving credit facility 50,000 50,000 — — Notes payable $ 50,000 $ 50,000 $ 50,000 $ 50,000 Subordinated Debt Junior subordinated interest debentures $ 59,174 $ 59,794 $ 59,137 $ 59,794 Unsecured subordinated notes 19,496 19,326 19,472 18,934 Subordinated debt, net of debt issuance costs $ 78,670 $ 79,120 $ 78,609 $ 78,728 Other financial instruments qualify as insurance-related products and are specifically exempted from fair value disclosure requirements. 4. Mortgage Loans The Company has invested in Separately Managed Accounts (“SMA1” and “SMA2”), managed by Arena Investors, LP (“Arena”), which is affiliated with The Westaim Corporation (“Westaim”) who, directly and through Westaim HIIG LP (a limited partnership controlled by Westaim), is the Company’s largest stockholder. 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 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 Retail 16,262 16,516 Hospitality 17,846 4,915 Industrial 6,117 6,329 Multi-family 2,624 5,593 Office — 3,197 $ 59,318 $ 51,859 19 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 Commercial $ 588 $ 320 $ 1,637 $ 707 Retail 364 337 1,375 846 Hospitality 204 116 497 264 Office — 84 203 306 Multi-family 93 237 285 553 Industrial — 181 — 433 $ 1,249 $ 1,275 $ 3,997 $ 3,109 The uncollectible amounts on loans, on an individual loan basis, are determined based upon consultations and advice from the Company’s specialized investment manager and consideration of any adverse situations that could affect the borrower’s ability to repay, the estimated value of underlying collateral, and other relevant factors. The Company writes off the uncollectible amount in the period it was determined to be uncollectible. There was no write-off for uncollectible amounts during the three 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. 5. Other Long-Term Investments Equity Method Investments The Company’s ownership interests in most of its equity method investments range from approximately 3% to less than 50% where the Company has significant influence but not control. The carrying value of the Company’s equity method investments as of 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 JVM Funds LLC units 20,651 22,473 Arena SOP LP units 4,797 8,734 RISCOM 4,810 4,037 Hudson Ventures Fund 2 LP units 4,365 3,551 Dowling Capital Partners LP units 2,305 1,965 Universa Black Swan LP units — 1,325 Brewer Lane Ventures Fund II LP units 336 200 $ 78,795 $ 86,789 20 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES 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 nine months ended September 30, 2023 and 2022: Three months ended September 30, Nine months ended September 30, ($ in thousands) 2023 2022 2023 2022 Dowling Capital Partners LP units $ 172 $ ( 31 ) $ 777 $ 524 RISCOM 468 373 773 1,199 Brewer Lane Ventures Fund II LP ( 25 ) — ( 54 ) — Hudson Ventures Fund II LP units 551 ( 26 ) 138 371 JVM Funds LLC ( 252 ) 220 ( 893 ) ( 548 ) Universa Black Swan LP units ( 84 ) ( 812 ) ( 988 ) ( 2,362 ) Arena SOP LP units ( 1,160 ) ( 4,068 ) ( 3,938 ) 3,702 Arena Special Opportunities Fund, LP units 326 483 ( 2,587 ) 4,729 $ ( 4 ) $ ( 3,861 ) $ ( 6,772 ) $ 7,615 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 Hudson Ventures Fund 2 LP units 1,120 1,796 Dowling Capital Partners LP units 386 386 $ 6,116 $ 6,982 The difference between the cost of an investment and its proportionate share of the underlying equity in net assets is allocated to the various assets and liabilities of the equity method investment. The Company amortizes the difference in net assets over the same useful life of a similar asset as the underlying equity method investment. For investment in RISCOM, a similar asset would be agent relationships. The Company amortizes this difference over a 15-year useful life. The following table sets forth the Company’s recorded investment in RISCOM compared to its share of underlying equity as of September 30, 2023 and December 31, 2022: ($ in thousands) September 30, 2023 December 31, 2022 Investment in RISCOM: Underlying equity $ 3,248 $ 2,292 Difference 1,562 1,745 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 September 30, 2023 and December 31, 2022: ($ in thousands) September 30, 2023 December 31, 2022 Investment in JVM Funds LLC: Underlying equity $ 19,856 $ 21,565 Difference 795 908 Recorded investment balance $ 20,651 $ 22,473 21 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Investment in Indirect Loans and Loan Collateral 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 SMA1 $ 31,958 $ — $ 36,426 $ — SMA2 444 — 2,010 — Investment in indirect loans and loan collateral $ 32,402 $ — $ 38,436 $ — 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 nine months ended September 30, 2023 and 2022. 6. 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 nine months ended September 30, 2023. ($ in thousands) Allowance for Credit Losses Balance at December 31, 2022 $ 629 Cumulative effect of adoption of ASU 2016-13 at January 1, 2023 — Current period change for estimated uncollectible premiums 409 Write-offs of uncollectible premiums receivable ( 56 ) Balance at March 31, 2023 $ 982 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 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 22 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Reinsurance Recoverables The Company analyzes the credit risk associated with its reinsurance recoverables by monitoring the financial strength rating of its reinsurers from A.M. Best, a widely recognized rating agency with an exclusive insurance industry focus. The Company assesses the financial strength rating annually and updated throughout the year as A.M. Best provides updates on ratings and outlooks. The Company assesses the adequacy of various forms of credit enhancements such as reinsurance payables, letters of credit and funds held. The Company’s reinsurance recoverables net of credit enhancements by A.M. Best rating as of September 30, 2023 was as follows: A.M. Best Rating September 30, 2023 A- and above 98.0 % B++ to B+ 2.0 Not rated — 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 nine months ended September 30, 2023: ($ in thousands) Allowance for Credit Losses Balance at December 31, 2022 $ — Cumulative effect of adoption of ASU 2016-13 at January 1, 2023 2,295 Current period change for estimated uncollectible reinsurance — 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 Current period change for estimated uncollectible reinsurance — Write-offs of uncollectible reinsurance recoverables — Balance at September 30, 2023 $ 2,295 7. Notes Payable The Company entered into an agreement to obtain a new unsecured revolving credit facility (the “Revolving Credit Facility”) with a syndicate of participating banks during the 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 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. 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 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 September 30, 2023, the Company was in compliance with all covenants. 23 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 8. Stockholders’ Equity Reverse Stock Split On September 23, 2022, the Board of Directors approved a 4-for-1 reverse stock split of the Company’s common stock. The 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. 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 price of $ 15.00 per share. The shares began trading on January 13, 2023 on the Nasdaq Global Select Market under the ticker symbol “SKWD.” The Company completed its IPO on January 18, 2023. The underwriters exercised in full their option to purchase 1,342,857 additional shares of common stock from the selling stockholders, at a price per share of $ 15.00 . The Company’s net proceeds from the IPO were approximately $ 62.0 million, after deducting underwriting discounts and specific incremental expenses directly attributable to the IPO. Upon the closing of its IPO, the Company filed an amended and restated certificate of incorporation which, among other things, increased the number of authorized shares consisting of 500,000,000 shares of common stock, par value $ 0.01 per share, and 10,000,000 shares of preferred stock, par value $ 0.01 per share. Preferred Shares Conversion The Preferred Shares had preference in liquidation over common stock in the amount of the face value of $ 50.00 per share and any declared but unpaid dividends to related common shares at the applicable conversion rate. The Preferred Shares provided the holder the option at any time to convert the Preferred Shares into common stock based on the Option Conversion Rate. At December 31, 2022, the Company had 1,969,660 Preferred Shares that could be converted to 16,305,113 common shares based on a conversion price equal to $ 6.04 per common share. The Preferred Shares were subject to mandatory conversion upon the closing of an IPO at the Mandatory Conversion Rate. At December 31, 2022, the Mandatory Conversion Rate allowed the holder of the Preferred Shares the right to convert into common stock based on a conversion price equal to $ 6.04 per common share. On January 18, 2023, the 1,969,660 Preferred Shares converted to 16,305,113 shares of common stock upon the Company’s closing of its IPO. 9. Income Taxes The following table 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 (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 $ 10.0 million during the nine months ended September 30, 2023. 24 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 10. Losses and Loss Adjustment Expenses The following table sets forth the reconciliation of unpaid losses and loss adjustment expenses (“LAE”) as reported in the condensed consolidated balance sheets as of and for the nine months ended September 30, 2023 and 2022: Nine months ended September 30, ($ in thousands) 2023 2022 Reserves for losses and LAE, beginning of period $ 1,141,757 $ 979,549 Less: reinsurance recoverable on unpaid claims, beginning of period ( 435,986 ) ( 381,338 ) Reserves for losses and LAE, beginning of period, net of reinsurance 705,771 598,211 Incurred, net of reinsurance, related to: Current period 378,811 284,265 Prior years — 14,385 Total incurred, net of reinsurance 378,811 298,650 Paid, net of reinsurance, related to: Current period 67,267 62,864 Prior years 187,256 158,749 Total paid 254,523 221,613 Net reserves for losses and LAE, end of period 830,059 675,248 Plus: reinsurance recoverable on unpaid claims, end of period 438,652 386,752 Reserves for losses and LAE, end of period $ 1,268,711 $ 1,062,000 11. Commission and Fee Income Skyward Underwriters Agency, Inc. (“SUA”), a subsidiary of the Company, is a managing general insurance agent and reinsurance broker for property and casualty and accident and health risks in specialty niche markets. Commission and fee income is primarily generated from SUA for the placement of insurance policies on either a third-party insurance or reinsurance company. The following table sets forth the Company’s disaggregated revenues from contracts with customers for the three 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 SUA commission revenue $ 1,357 $ 967 $ 3,599 $ 2,626 SUA fee income 672 280 1,933 785 Other 56 115 285 241 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 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. 25 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 12. Underwriting, Acquisition and Insurance Expenses 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 Amortization of policy acquisition costs $ 34,071 $ 17,379 $ 78,442 $ 45,514 Other operating and general expenses 34,244 29,961 98,211 86,744 Total underwriting, acquisition and insurance expenses $ 68,315 $ 47,340 $ 176,653 $ 132,258 13. Reinsurance Certain premiums and benefits are assumed from and ceded to other insurance companies under various reinsurance agreements. The reinsurance agreements provide the Company with increased capacity to write larger risks and maintain its exposure to loss within its capital resources. The Company remains obligated for amounts ceded in the event that the reinsurers do not meet their obligations. The following table sets forth the effects of reinsurance on 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, 2023 2022 ($ in thousands) Written Earned Written Earned Direct premiums $ 308,215 $ 299,294 $ 246,339 $ 242,727 Assumed premiums 47,517 51,665 23,911 30,020 Ceded premiums ( 75,036 ) ( 123,926 ) ( 98,795 ) ( 114,699 ) Net premiums $ 280,696 $ 227,033 $ 171,455 $ 158,048 Ceded losses and LAE incurred $ 103,753 $ 60,878 Nine months ended September 30, 2023 2022 ($ in thousands) Written Earned Written Earned Direct premiums $ 947,977 $ 845,200 $ 771,668 $ 695,567 Assumed premiums 190,247 139,522 107,451 82,549 Ceded premiums ( 441,650 ) ( 380,511 ) ( 383,532 ) ( 332,265 ) Net premiums $ 696,574 $ 604,211 $ 495,587 $ 445,851 Ceded losses and LAE incurred $ 255,855 $ 190,465 26 Table of Contents 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 September 30, 2023 and December 31, 2022: ($ in thousands) September 30, 2023 December 31, 2022 Ceded unpaid losses and LAE $ 438,652 $ 435,986 Ceded paid losses and LAE 153,735 107,228 Loss portfolio transfer 25,583 38,145 Allowance for credit losses ( 2,295 ) — Reinsurance recoverables $ 615,675 $ 581,359 Ceded unearned premium $ 218,784 $ 157,645 The Company entered into agreements with several of its reinsurers, whereby the reinsurer established funded trust accounts with the Company as the sole beneficiary. These trust accounts provide the Company additional security to collect claim recoverables under reinsurance contracts and the Company does not carry these on the balance sheet because the Company will only have custody over these accounts upon the failure of the reinsurer to pay amounts due. At 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. The trust amount will be adjusted periodically, by mutual agreement, based on loss reserve recoverables. Certain ceded reinsurance contracts that transfer only significant timing risk and do not transfer sufficient underwriting risk are accounted for using the deposit method of accounting. The Company’s deposit asset at 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. 14. Stock Based Compensation On September 23, 2022, the Compensation Committee of the Company’s Board of Directors (“Compensation Committee”) approved the Company’s 2022 Long-Term Incentive Plan (the “2022 Plan”), which became effective on January 12, 2023. The 2022 Plan provides for the granting of restricted stock, restricted stock units, performance stock units, stock options as well as cash-based performance awards, to select employees and non-employee directors of the Company. The 2022 Plan stated that 3,200,516 shares of common stock were available for issuance. 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, 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 1,101,116 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 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 27 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES 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 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: Award Payout Range Requisite Service Period Target Stock and Stock Units Nine months ended September 30, 2023 Market condition awards 0 %– 150 % 3 years 37,622 Performance condition awards 0 %– 150 % 3 years 95,456 Service condition awards N/A 1 – 4 years 968,038 Stock options N/A 3 – 4 years 759,990 1,861,106 Nine months ended September 30, 2022 Market condition awards 0 %– 150 % 3 years 28,495 Performance condition awards 0 %– 150 % 3 years 26,210 Service condition awards N/A 1 – 3 years 144,137 198,842 The following table sets forth option activity for the nine months ended September 30, 2023: Weighted-Average Exercise Price Stock Outstanding at January 1, 2023 — Granted $ 15.00 759,990 Exercised — Forfeited — 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 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. 28 Table of Contents 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 nine months ended September 30, 2023 and 2022: Weighted-Average Grant-Date Fair Value Stock and Stock Units Non-vested at January 1, 2023 $ 12.55 419,896 Granted 16.06 1,101,116 Vested 13.21 ( 35,954 ) Forfeited 15.30 ( 36,354 ) Non-vested at September 30, 2023 $ 15.12 1,448,704 Non-vested at January 1, 2022 $ 13.23 375,643 Granted 14.17 198,842 Vested 15.55 ( 126,978 ) Forfeited 12.51 ( 10,547 ) 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. 29 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 15. Earnings Per Share The following table sets forth a reconciliation of the numerator and denominator of basic and diluted earnings (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 Numerator Net income (loss) $ 21,711 $ ( 2,399 ) $ 56,719 $ 18,977 Less: Undistributed income allocated to participating securities — — ( 1,492 ) ( 9,124 ) Net income (loss) attributable to common stockholders (numerator for basic earnings per share) 21,711 ( 2,399 ) 55,227 9,853 Add back: Undistributed income allocated to participating securities — — 1,492 9,124 Net income (loss) (numerator for diluted earnings per share under the two-class method) $ 21,711 $ ( 2,399 ) $ 56,719 $ 18,977 Denominator Basic weighted-average common shares 36,743,393 16,465,588 35,502,843 16,464,313 Preferred shares (if converted method) — — 959,124 15,245,533 Contingently issuable instruments (treasury stock method) 706,794 — 684,017 518,727 Market condition awards (contingently issuable) 93,935 — 89,467 103,811 Performance awards (contingently issuable) 87,297 — 52,223 39,231 Restricted stock units (treasury stock method) 618,750 — 467,911 227,054 Options (treasury stock method) 153,674 — 74,846 — Diluted weighted-average common share equivalents 38,403,843 16,465,588 37,830,431 32,598,669 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. Instruments awarded to employees that provide the holder the right to purchase common stock at a fixed price were included as potential common shares, weighted for the portion of the period they were granted, if dilutive. Anti-dilutive instruments are excluded from the calculation of diluted weighted-average common share equivalents as they would have an anti-dilutive impact. The following table sets forth the weighted-average instruments that were 30 Table of Contents 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 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 Market condition awards (contingently issuable) 1,881 112,454 1,488 — Performance awards (contingently issuable) 1,670 42,411 1,391 — Restricted stock units (treasury stock method) 1,518 252,180 1,667 — Options (treasury stock method) 2 — 364,714 — 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 (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 Common shares 932,588 80,526 932,588 80,526 Preferred shares, if converted — 1,059,602 — 1,059,602 Total 932,588 1,140,128 932,588 1,140,128 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. 16. Related Party Transactions Westaim 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 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. This agreement terminated pursuant to its terms upon the closing of the IPO. RISCOM RISCOM provides the Company with wholesale brokerage services. RISCOM and the Company also have a managing general agency agreement. The Company holds a 20 % ownership interest in RISCOM. 31 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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. Reinsurance The Company has reinsurance agreements with Everest Re, an affiliate of Mt. Whitney Securities, LLC, which was a limited partner of Westaim HIIG LP through November 30, 2022, and holder of preferred shares. During the 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 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. Other 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. 17. Commitments and Contingencies Litigation The Company is named as a defendant in various legal actions arising from claims made under insurance policies and contracts. Those actions are considered by the Company in estimating the losses and loss adjustment expense reserves. Also, from time to time, the Company is a defendant in various legal actions that relate to bad faith claims, disputes with third parties or that involve alleged errors and omissions. The Company records accruals for these items to the extent the losses are probable and reasonably estimable. Although the ultimate outcome of these matters cannot be determined at this time, based on present information, the availability of insurance coverage and advice received from outside legal counsel, the Company believes the resolution of any such matters will not, individually or in the aggregate, have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. Indemnification In conjunction with the sale of business assets and subsidiaries, the Company has provided indemnifications to certain of the buyers. Certain indemnifications cover typical representations and warranties related to the responsibilities to perform under the sales contracts. The amount of potential exposure covered by the indemnifications is difficult to determine because the indemnifications cover a variety of matters, operations and scenarios. Certain of these indemnifications have no time limit. At this time, the Company does not have reason to believe any such significant claims exist. 32 Table of Contents