What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-04-01 compared with 2023-03-28 · 111 added, 161 removed, 437 unchanged (38% of the section changed)

6 unchanged sentences

we distribute through multiple channels;

we write multiple lines of business, including general liability, excess liability, professional liability, commercial auto, group accident and health, property, surety and workers’ compensation;

we write multiple lines of business, including general liability, excess liability, professional liability (which includes cyber insurance), commercial auto, group accident and health, property, agriculture, surety and workers’ compensation;

we insure both short and medium duration liabilities;

and our business mix is balanced between E&S and admitted markets.

All of these factors enable us to respond to market opportunities and dislocations by deploying capital with attractive risk-adjusted returns.

All of these factors enable us to respond to market opportunities and

dislocations by deploying capital with attractive risk-adjusted returns.

We believe this diversification, combined with our underwriting and claims expertise, will produce strong growth and consistent profitability across P&C insurance pricing cycles.

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We consistently strive for excellence in risk selection, pricing, and claims outcomes, and to amplify these critical functions with the use of advanced technology and analytics.

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Results of Operations

11 unchanged sentences

Net investment income $ 40,322 $ 36,931

Net investment (losses) gains $ (15,705) $ 17,107

Income before federal income tax $ 49,783 $ 48,309

Net investment gains (losses) $ 11,072 $ (15,705)

Income before income taxes $ 110,102 $ 49,783

Net income $ 85,984 $ 39,396

13 unchanged sentences

Adjusted return on equity (1)

14.9 % 13.8 %

Adjusted return on tangible equity (1)

2 unchanged sentences

Reconciliation of Non-GAAP Financial Measures

Adjusted Operating Income (Loss)

Adjusted Operating Income

The following table provides a reconciliation of adjusted operating income to net income for the years ended December 31, 2023 and 2022:

2 unchanged sentences

Net impact of LPT 1,427 1,127 (8,572) (6,772)

Net investment (losses) gains (15,705) (12,407) 17,107 13,515

Net realized gain on sale of business — — 5,077 4,011

Impairment charges — — (2,821) (2,229)

Other income (loss) 1 1 (445) (352)

Net investment gains (losses) 11,072 8,747 (15,705) (12,407)

Other (loss) income (632) (499) 1 1

Other expenses (5,364) (4,238) — —

Adjusted operating income $ 103,599 $ 80,847 $ 74,059 $ 58,574

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Underwriting income (loss)

The following table provides a reconciliation of underwriting income (loss) to income (loss) before federal income tax for the years ended December 31, 2022 and 2021:

The following table provides a reconciliation of underwriting income to income before federal income tax for the years ended December 31, 2023 and 2022:

($ in thousands) 2023 2022

2 unchanged sentences

Amortization expense 1,798 1,547

Impairment charges — 2,821

Other expenses 5,364 —

Net investment income 40,322 36,931

Net investment (losses) gains (15,705) 17,107

Net realized gain on sale of business — 5,077

Other income (loss) 1 (445)

Net investment gains (losses) 11,072 (15,705)

Other (loss) income (632) 1

Underwriting income $ 76,526 $ 36,510

4 unchanged sentences

Losses and LAE 515,237 402,512

Pre-tax net impact of LPT 8,572 16,063

Pre-tax net impact of loss portfolio transfer (1,427) 8,572

Adjusted losses and LAE $ 516,664 $ 393,940

Loss and LAE ratio 65.3 % 70.9 %

Loss ratio 62.1 % 65.3 %

Net impact of LPT (0.2) % 1.4 %

Adjusted loss and LAE ratio 63.9 % 67.7 %

Adjusted loss ratio 62.3 % 63.9 %

Combined ratio 90.7 % 94.0 %

2 unchanged sentences

Tangible Stockholders’ Equity

The following table provides a reconciliation of tangible stockholders’ equity to stockholders’ equity for the years ended December 31, 2022 and 2021:

The following table provides a reconciliation of tangible stockholders’ equity to stockholders’ equity as of December 31, 2023 and 2022:

($ in thousands) 2023 2022

2 unchanged sentences

Tangible stockholders’ equity $ 572,596 $ 331,792

$ 331,792 $ 334,744

Adjusted Return on Equity

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Adjusted return on equity

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14.9 % 13.8 %

Return on Tangible Equity

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The following table presents gross written premiums by underwriting division for the years ended December 31, 2023 and 2022:

($ in thousands) 2022 2021 Change %

($ in thousands) 2023 2022 %

Industry Solutions $ 305,476 $ 267,628 14.1 %

Global Property 205,081 167,887 37,194 22.2 %

Global Property & Agriculture 273,191 205,081 33.2 %

Programs 178,726 163,653 9.2 %

Accident & Health 130,808 112,146 18,662 16.6 %

Captives 167,624 124,286 34.9 %

Professional Lines 154,565 93,011 66.2 %

Surety 79,062 51,792 27,270 52.7 %

Accident & Health 151,701 130,808 16.0 %

Transactional E&S 122,508 75,098 63.1 %

Surety 106,056 79,062 34.1 %

Total continuing business $ 1,459,847 $ 1,138,627 28.2 %

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Total gross written premiums $ 1,459,829 $ 1,143,952 27.6 %

The year over year increase in gross written premiums, when compared to 2021, was driven by double-digit premium growth in each of our eight underwriting divisions.

The gross written premium increases were primarily driven by (i) retention, (ii) rate increases, and (iii) new business.

Growth was also impacted by the addition of new products and expanded coverage offerings, new underwriting teams and new tech-enabled partnerships.

Partially offsetting the increase in gross written premiums was the continued impact of the run-off of exited business.

The year over year increase in gross written premiums, when compared to 2022, was driven by double-digit premium growth in nearly all of our underwriting divisions, five of which grew over 30%.

The gross written premium increases were primarily driven by (i) new business, (ii) rate increases, and (iii) retention.

During 2023 we broadened our business portfolio, including (i) entry into inland marine and global agriculture, (ii) added an occupational accident offering in our industry solutions division, (iii) expanded our surety division to serve the SBA market and to provide judicial and fiduciary bonds, and (iv) expanded our accident & health coverages to include individual providers.

In addition to the expanded portfolio offerings, growth was also impacted by the addition of new underwriting teams and new tech-enabled partnerships.

Net earned premiums were $829.1 million for the year ended December 31, 2023, compared to $616.0 million for the same 2022 period, an increase of $213.1 million or 34.6%.

The increase in net earned premiums was primarily driven by the same reasons that drove the increase in gross written premiums discussed above.

For additional information regarding out reinsurance programs, see the discussion included in “Item 1 Business - Reinsurance ”.

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For additional information regarding our reinsurance programs, see the discussion included in “Item 1 Business - Reinsurance ”.

Losses and LAE

6 unchanged sentences

12,000 1.4 % 6,500 1.1 %

Prior accident year development - non-LPT — — % — —%

Prior accident year development - LPT

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12,000 1.4 % 6,500 1.1 %

Prior accident year development - non-LPT — — % — — %

Total adjusted losses and LAE (2)

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(2) See "Reconciliation of Non-GAAP Financial Measures" included in this Item 7

The loss and LAE ratio improved 5.6 points when compared to the same 2021 period.

The loss and LAE ratio for the year ended 2022 was impacted by 1.4 points of LPT prior accident year development compared to 3.2 points for the same 2021 period.

The loss ratio for the year ended 2023 improved 3.2 points when compared to the same 2022 period.

The non-cat loss and LAE ratio improved 1.9 points when compared to the same 2022 period, driven by the shift in the mix of business and continued run-off of exited business.

Catastrophe losses from second and third quarter convective storms and first quarter wind and hail events, including tornadoes, added 1.4 points to the loss ratio compared to 2022, which was impacted by 1.1 points of catastrophe losses from Hurricane Ian and Winter Storm Elliott.

The loss ratio for the year ended 2022 included 1.4 points from the net impact of LPT reserve strengthening.

Additional information regarding the LPT can be found in the “Loss Portfolio Transfer” discussion included in this Item 7.

The adjusted loss and LAE ratio improved 3.8 points when compared to the same 2021 period.

The improvement was primarily driven by (i) a shift in the mix of business, (ii) continued run-off of exited business, and (iii) lower catastrophe losses.

Catastrophe losses from Hurricane Ian and Winter Storm Elliott added 1.1 points to the loss and LAE ratio compared to the same 2021 period, which was impacted by 2.4 points of catastrophe losses from tornadoes in the Midwest, Hurricane Ida and the first quarter winter storms.

Losses and LAE Development

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2021 (27,312) (9,000)

2021 (9,000) —

Total $ — $ 14,385

1 unchanged sentence

Reserve development on losses excluding losses subject to LPT $ — $ —

During the year ended December 31, 2022, our net incurred losses for accident years 2021 and prior developed unfavorably by $14.4 million which was related to losses subject to the LPT.

For the year ended December 31, 2023, the Company recognized favorable development related to prior years’ loss and loss expense reserves of $9.2 million in short tail/monoline specialty lines and adverse development of $11.9 million in multi-line solutions, respectively.

The favorable development in short tail/monoline specialty lines was driven by property lines of business from the 2021 accident year.

The adverse development in multi-line solutions was driven by higher than expected severity in general and auto liability lines of business primarily from the 2019 accident year.

During the year ended December 31, 2022, net incurred losses for accident years 2021 and prior developed adversely by $14.4 million which was related to losses subject to the LPT.

Within exited lines, adverse development of $14.5 million was from the 2019 accident year primarily driven by increased frequency and severity in general and professional liability.

The remaining $8.4 million of net adverse development was from various other accident years.

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Within multi-line solutions, favorable development of $10.8 million was from the 2020 through 2021 accident years and was primarily driven by a reduction in frequency of claims in commercial auto and general liability.

The remaining $8.4 million of net adverse development was from other accident years.

Within multi-line solutions, favorable development of $10.8 million was from the 2020 through 2021 accident years and was driven by a reduction in frequency of claims in commercial auto and general liability.

The remaining $2.3 million of net adverse development was from various other accident years.

There was no net development in short tail/monoline specialty lines.

During the year ended December 31, 2021, our net incurred losses and LAE for accident years 2020 and prior developed adversely by $28.0 million driven by $28.8 million of adverse development in exited lines and $4.8 million of adverse development in multi-line solutions, partially offset by $5.6 million of favorable development in short tail lines.

Within exited lines, the $28.8 million of adverse development was primarily related to the 2013, 2015, and 2018 accident years and was predominantly driven by increases in both frequency and severity of losses in general liability.

Within multi-line solutions, adverse development of $4.8 million was primarily related to the 2016 and 2017 accident years and was driven by increased frequency and severity of claims in commercial auto.

Partially offsetting the adverse development was favorable development of $5.6 million within short tail lines, primarily related to the 2019 and 2020 accident years, driven by favorable loss emergence relative to actuarial expectations in property and accident & health.

Loss Portfolio Transfer

On April 1, 2020, with a valuation date of June 30, 2019, we entered into a LPT retroactive reinsurance agreement with R&Q Bermuda (SAC) Limited, a third party reinsurer domiciled in Bermuda that specializes in assuming legacy blocks of insurance business and running them off.

On April 1, 2020 (“Inception Date”), with a valuation date of June 30, 2019 (“Valuation Date”), we entered into a LPT retroactive reinsurance agreement with R&Q Bermuda (SAC) Limited, a third party reinsurer domiciled in Bermuda that specializes in assuming legacy blocks of insurance business and running them off.

The LPT covers liabilities (including claim payments, allocated LAE and certain extra-contractual obligations) related to certain policies issued or assumed for policy years 2017 and prior.

The LPT agreement covers the majority of our exited business.

We believe purchasing this coverage reduces the volatility associated with the covered business produced in 2017 and prior, and has allowed our management team to focus on the continuing business which we believe provide the best path for continued profitable growth.

As of the Valuation Date, we agreed to cede $153.1 million of Net LPT Reserves for certain lines of business, primarily related to 2017 and prior policy years, subject to an aggregate cash deductible of $105 million which was withheld from the reinsurer.

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Section B (representing $130.9 million of ceded net reserves at inception of the LPT) is a substantially larger section, covering claims from other exited business and certain continuing business related to policies written in years 2017 and prior, principally comprised of general liability and commercial auto lines.

As of December 31, 2022, our net loss reserves subject to the LPT were $68.6 million.

We materially strengthened our reserves subject to the LPT in line with the in depth actuarial and claims analyses performed specific to our business subject to the LPT.

At the same time, we reduced the number of open claims by 70.1% since the inception of the LPT.

As of December 31, 2023, our net loss reserves subject to the LPT were $44.8 million compared to $68.6 million as of December 31, 2022.

During 2022 we materially strengthened our reserves subject to the LPT.

Since the inception of the LPT, as of December 31, 2023 we have reduced the number of open claims by 79.5%.

Based on the reserves on the Valuation Date, we ceded $22.2 million of net reserves related to Section A, subject to the aggregate cash deductible.

1 unchanged sentence

Above the $2.8 million coverage layer is a further $5.0 million of reinsurance coverage for which we retain 50% of the incurred losses and LAE.

In April 2021, we reviewed every open claim for the business covered by Section A, with the help of a leading independent actuarial firm, to ensure that our reserves were set to our expected ultimate loss.

Based on the review, we strengthened our reserves subject to Section A.

As of December 31, 2023, total incurred losses and LAE (including claims paid, case reserves and IBNR) were $38.2 million, which is $8.2 million in excess of our reinsurance coverage under Section A of the LPT.

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There is a further $36.0 million of reinsurance that provides 100% coverage above the $70.0 million layer.

In September 2021, we reviewed open claims for the business covered by Section B.

Based on the review, we strengthened our reserves subject to Section B.

As of December 31, 2022, total incurred losses and LAE (including claims paid, case reserves and IBNR) were $220.0 million with the entire $36.0 million of 100% coverage layer are available should new claims arise or existing claims develop adversely.

As of December 31, 2023, total incurred losses and LAE (including claims paid, case reserves and IBNR) were $220.0 million with the entire $36.0 million of 100% coverage layer available should new claims arise or existing claims develop adversely.

As of December 31, 2023, paid losses and LAE on policies subject to Section B were $188.5 million, which is $67.5 million below our total reinsurance coverage under Section B, which includes the co-participation amounts.

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Total net expenses $ 237,380 28.6 % $ 176,972 28.7 %

The expense ratio increased 1.8 points when compared to the same 2021 period.

The increase in the expense ratio was primarily driven by changes in our mix of business resulting in higher net policy acquisition expenses combined with higher operating expenses due to our continued investment in new underwriters and underwriting teams.

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The expense ratio was flat when compared to the same 2022 period.

The increase in the net policy and acquisition expense ratio, when compared to the same 2022 period, was primarily driven by the shift in our mix of business offset by an improved other operating and general expense ratio, when compared to the same 2022 period, due to the increase in earned premiums.

Investment Results

The following table sets forth the components of net investment income and net investment (losses) gains for the years ended December 31, 2023 and 2022:

($ in thousands) Net

($ in thousands) 2023 2022

Cash and short-term investments (1)

4 unchanged sentences

Net investment income (1)

$ 39,763 $ 36,915

Net unrealized gains (losses) on securities still held $ 11,130 $ (15,058)

Net realized (losses) gains (647) 1,856

Net investment (losses) gains $ (15,705) $ 17,107

(1) excludes restricted cash

Net investment income was $36.9 million for the year ended December 31, 2022, compared to $24.6 million for the same 2021 period.

The increase in net investment income was driven by (i) a larger asset base in our core fixed income portfolio as we increase our allocation to this part of our investment portfolio, (ii) higher net investment yields in our core fixed income portfolio of 3.0% compared to 2.3% for the same 2021 period, and (iii) an increase in income from the opportunistic fixed income portfolio due to market appreciation of underlying investments.

Our investment portfolio had a net investment yield of 3.4% for the year ended December 31, 2022 compared to 2.7% for the same 2021 period.

Net realized losses (58) (647)

Net investment gains (losses) $ 11,072 $ (15,705)

(1) excludes income from operating cash for the years ended December, 31, 2023 and 2022.

The increase in income from our core fixed income portfolio for the year ended 2023, when compared to the same 2022 period, was due to (i) a larger asset base as we continued to increase our allocation to this part of our investment portfolio and (ii) a higher book yield of 4.5% at December 31, 2023 compared to 3.7% at December 31, 2022.

The increase in income from short-term and money market investments for the year ended 2023, when compared to the same 2022 period, was due to a larger asset base and higher investment yields when compared to the same 2022 period.

The opportunistic fixed income portfolio continued to be impacted by a decline in the fair value of limited partnership investments for the year ended 2023 when compared to the same 2022 period.

Composition of Investment Portfolio

1 unchanged sentence

($ in thousands) Fair

Cash and short-term investments (1)

$ 166,706 14.8 % $ 207,024 20.9 %

Short-term and money market investments $ 270,259 16.7 % $ 121,268 11.2 %

Core fixed income 1,017,651 63.1 % 607,572 56.1 %

2 unchanged sentences

Total investment portfolio $ 1,613,687 100.0 % $ 1,082,367 100.0 %

(1) Excludes restricted cash

Our fixed maturity securities, comprised of both core fixed income and opportunistic fixed income, comprised 71.2% and 63.2% of our total investment portfolio as of December 31, 2022 and 2021, respectively, and had a weighted average effective duration of 3.1 years and 2.8 years as of December 31, 2022 and 2021, respectively, and an average core fixed income credit rating of “AA” (Standard & Poor’s) as of December 31, 2022 and 2021, respectively.

Our fixed maturity securities, comprised of both core fixed income and opportunistic fixed income, comprised 73.8% and 74.2% of our total investment portfolio as of December 31, 2023 and 2022, respectively, and had a weighted average effective duration of 3.2 years and 3.1 years as of December 31, 2023 and 2022, respectively, and an average core fixed income credit rating of “AA-” and “AA” (Standard & Poor’s) as of December 31, 2023 and 2022, respectively.

Core fixed income

3 unchanged sentences

The average duration of the portfolio was approximately 4.4 years and 4.3 years, respectively, as of December 31, 2023 and 2022.

Table of Conte nt s

The following table sets forth the components of our core fixed income portfolio at December 31, 2023 and 2022:

6 unchanged sentences

Commercial mortgage-backed securities 29,934 2.9 % 36,495 6.0 %

Asset-backed securities 109,824 18.1 % 79,764 17.4 %

Other asset-backed securities 185,727 18.3 % 109,824 18.1 %

Core fixed income securities, available for sale $ 1,017,651 100.0 % $ 607,572 100.0 %

The weighted average credit rating of the portfolio was “AA” by Standard & Poor’s Financial Services, LLC (“Standard & Poor’s”) at December 31, 2022 and 2021.

The weighted average credit rating of the portfolio was “AA-” by Standard & Poor’s Financial Services, LLC (“Standard & Poor’s”) at December 31, 2023 and “AA” by Standard & Poor’s at December 31, 2022.

The following table sets forth the credit quality of our core fixed income portfolio at December 31, 2023 and 2022, as rated by Standard & Poor’s or equivalent designation:

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The underlying securities are primarily floating rate senior secured loans, comprised of short duration, collateralized, asset-oriented credit investments designed to generate attractive risk-adjusted returns.

Investments are backed by a significant amount of collateral and contain strong covenants with a typical loan-to-value of 66% or better.

Investments contain strong covenants and are backed by a significant amount of collateral with a weighted average loan-to-value of 74%.

The limited partnerships are subject to future increases or decreases in asset value and may exhibit volatile results as asset values are monetized and the resultant income is distributed.

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The average duration of the portfolio is approximately 1.3 years and 1.4 years as of December 31, 2023 and 2022, respectively.

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The equities portfolio primarily consists of domestic preferred stocks, common equities, exchange traded funds, limited partnerships, limited liability corporations and other types of equity interests, 77.2% of which are publicly traded.

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Our policy is to invest in investment grade fixed income securities which are high quality and liquid, providing a stable income stream, supplemented by opportunistic fixed income and equity securities, with the objective of further enhancing the portfolio’s diversification and risk-adjusted returns.

At December 31, 2022, approximately 4.4% of our core fixed income portfolio was unrated or rated below investment-grade.

At December 31, 2023, approximately 3.0% of our core fixed income portfolio

was unrated or rated below investment-grade.

Through our investment managers, we monitor the financial condition of all of the issuers of securities in our portfolio.

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Conversely, as interest rates fall, the fair value of our securities increases.

We manage this interest rate risk by investing in securities with varied maturity dates and by managing the duration of our

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investment portfolio in directional relation to the duration of our reserves.

We manage this interest rate risk by investing in securities with varied maturity dates and by managing the duration of our investment portfolio in directional relation to the duration of our reserves.

Expressed in years, duration is the weighted average payment period of cash flows, where the weighting is based on the present value of the cash flows.

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Accordingly, the holding company may receive cash through (1) corporate service fees from our operating subsidiaries, (2) payments pursuant to our consolidated tax allocation agreement, (3) dividends from our subsidiaries, subject to certain limitations discussed below regarding dividends from our insurance subsidiaries, (4) loans from banks, (5) draws on a revolving loan agreement, and (6) issuance of equity and debt securities.

We also may use the proceeds from these sources

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to contribute funds to insurance subsidiaries in order to support premium growth, pay dividends and taxes and for other business purposes.

We also may use the proceeds from these sources to contribute funds to insurance subsidiaries in order to support premium growth, pay dividends and taxes and for other business purposes.

Skyward Service Company receives corporate service fees from the operating subsidiaries to reimburse it for most of the operating expenses that it incurs.

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Our insurance subsidiaries did not pay dividends to us for the years ended December 31, 2023 or 2022.

See Note 25, “Regulatory Matters” to our consolidated financial statements included in Item 8 of this Form 10-K for further information regarding our insurance companies.

As of December 31, 2022, our holding company had $8.9 million in cash and investments compared to $6.0 million as of December 31, 2021.

See Note 23, “Statutory Accounting Principles and Regulatory Matters” to our consolidated financial statements included in Item 8 of this Form 10-K for additional information regarding our insurance companies.

At December 31, 2023, our holding company had $3.0 million in cash and investments compared to $8.9 million at December 31, 2022.

We believe that we have sufficient liquidity available to meet our operating cash needs and obligations and committed capital expenditures for the next 12 months.

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Change in cash and cash equivalents $ (24,675) $ 17,737

The increase in cash provided by operating activities in 2022 and 2021 was primarily due to the timing of premium receipts, claim payments and reinsurance activity.

The increase in cash provided by operating activities in 2023 and 2022 was primarily due to the growth of the business, timing of premium receipts, claim payments and reinsurance activity.

Cash flows from operations in each of the past two years were used primarily to fund investing activities.

The change in net cash used in investing activities from 2022 to 2021 was primarily driven by increases in the purchases of fixed maturities.

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The change in net cash used in investing activities from 2023 to 2022 was primarily driven by an increase in the purchases of fixed maturity securities and short-term investments.

The change in net cash provided by financing activities from 2023 to 2022 was primarily driven by proceeds received from the IPO and the November follow-on offering.

See note 12, “Stockholders’ Equity”, to our consolidated financial statements included in Item 8 of this Form 10-K for additional information regarding the IPO and November follow-on offering.

Credit Agreements

On December 11, 2019, we entered into a credit agreement with Prosperity Bank which provided us with a $50.0 million term loan (the “Term Loan”) and a $50.0 million revolving line of credit (the “Revolver”) with additional capacity up to $75.0 million.

The Term Loan

The interest rate on the Term Loan is the lesser of the one-month LIBOR (4.39% on December 31, 2022) plus the “Applicable Margin,” which is defined as 1.65%, or the Highest Lawful Rate.

The “Highest Lawful Rate” is defined as the lesser of (a) (i) the “weekly ceiling” as defined within Section 303.003 of the Texas Finance code, as amended or (ii) the “annualized ceiling” as defined within Section 303.103 of the Texas Finance Code, as amended and (b) (i) 24% if the principal is less than $250 thousand or (ii) 28% if the principal is greater than $250 thousand.

Interest-only payments are due and payable on a quarterly basis through December 31, 2024.

As of December 31, 2022 the principal balance on the Term Loan was $50.0 million, which is due December 31, 2024.

The interest rate on the Revolver is the lesser of the prime rate, as published by the Wall Street Journal, or the one-month LIBOR (4.39% on December 31, 2022) plus the Applicable Margin, which is defined as the lesser of 1.65%, or the Highest Lawful Rate.

The revolving promissory note includes a fee of 0.25% on the unused portion.

Interest-only payments are due and payable on a quarterly basis through December 31, 2024.

As of December 31, 2022, there was no outstanding balance on the Revolver compared to a contractual capacity of $50.0 million.

Subject to lender approval, we have a right to increase the capacity to $75.0 million.

Borrowings under the Term Loan and Revolver may be used to refinance debt and for general corporate purposes.

Included in the Credit Agreement is a provision that allows for us to issue up to $20.0 million of letters of credit (“LOCs”).

Any amounts drawn on the LOCs must either be repaid, or the balance constitutes additional borrowings under the Revolver.

As of December 31, 2022, there were no LOCs issued.

Trust Preferred

Revolving Credit Facility

On March 29, 2023, we entered into an unsecured revolving credit facility (the “Revolving Credit Facility”) with a syndicate of participating banks.

The Revolving Credit Facility provides us 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 year ended December 31, 2023, we drew $50.0 million on the Revolving Credit Facility and used the proceeds to pay off the principal on our Term Loan (defined below).

We subsequently terminated the Term loan and the Revolver (defined below).

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 December 31, 2023, the six-month SOFR on the Revolving Credit Facility was 5.47%, plus a margin of 1.60%.

We are 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 December 31, 2023, we are in compliance with all covenants.

On March 14, 2024, we drew $50.0 million on the Revolving Credit Facility and used the proceeds and existing cash to fund the redemption of the Debentures (see “Debentures” below for additional information regarding the redemption).

After the draw, we had $100.0 million outstanding under the Revolving Credit Facility with another $50.0 million of undrawn capacity.

In August 2006, we received $58.0 million of proceeds from a debenture offering through a statutory trust, Delos Capital Trust (the “Trust”).

The sole asset of the Trust consists of Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Trust Preferred”) with a principal amount of $59.8 million issued by us and cash of $1.8 million from the issuance of Trust common shares purchased by us equal to 3% of the Trust capitalization.

The Trust Preferred are an unsecured obligation, are redeemable, and have a maturity date of September 15, 2036.

Interest on the Trust Preferred is payable quarterly at an annual rate based on the three-month LIBOR (4.77% at December 31, 2022), plus 3.4%.

The sole asset of the Trust consists of Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Debentures”) with a principal amount of $59.8 million issued by us and cash of $1.8 million from the issuance of Trust common shares purchased by us equal to 3% of the Trust capitalization.

The Debentures are an unsecured obligation, are redeemable, and have a maturity date of September 15, 2036.

Interest on the Trust Preferred is payable quarterly at an annual rate based on the three-month LIBOR (5.59% and 4.77% at December 31, 2023 and 2022,

respectively), plus 3.4%.

On March 15, 2024, the Company redeemed the Debentures and paid $1.4 million of accrued interest.

Subordinated Debt

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Principal payment is due at maturity on May 24, 2039 and interest is payable quarterly.

At December 31, 2022 and December 31, 2021, the ratio of total debt outstanding, including the Term Loan, the Revolver, the Trust Preferred and the Notes, to total capitalization (defined as total debt plus stockholders’ equity, plus any temporary equity) was 23.4% and 23.2%, respectively.

At December 31, 2022, the interest rate on the Term Loan was the one-month LIBOR (4.39% on December 31, 2022) plus the “Applicable Margin,” which was defined as 1.65%.

In connection with our entry into the Revolving Credit Facility, we terminated the existing term loan and revolving line of credit.

At December 31, 2023 the ratio of total debt outstanding, including the Revolving Credit Facility, the Trust Preferred and the Notes, to total capitalization (defined as total debt plus stockholders’ equity) was 16.3% and at December 31, 2022, the ratio of total debt outstanding, including the Term Loan, the Revolver, the Trust Preferred and the Notes, to total capitalization was 23.4%.

At March 15, 2024, capitalization remained unchanged as a result of the draw on the Revolving Credit Facility and subsequent redemption of the Debentures.

Contractual Obligations and Commitments

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Total $ 1,559,275 $ 651,725 $ 907,550

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Reserves for losses and LAE represent our best estimate of the ultimate cost of settling reported and unreported claims and related expenses.

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Reinsurance balances recoverable on reserves for paid and unpaid losses and LAE totaled $596.3 million and $581.4 million at December 31, 2023 and December 31, 2022, respectively.

Critical Accounting Policies and Estimates

Critical Accounting Policies

We identified the accounting estimates below as critical to the understanding of our financial position and results of operations.

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Actual results may differ materially from the estimates and assumptions used in preparing the consolidated financial statements.

We evaluate our estimates regularly using information that we believe to be relevant.

We evaluate our estimates regularly

using information that we believe to be relevant.

For a detailed discussion of our accounting policies, see Note 2, “Summary of Significant Accounting Policies” to our consolidated financial statements included in Item 8 of this Form 10-K.

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Our internal claims managers oversee TPA activities and monitor their individual claim handling activities to our prescribed standards.

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Our IBNR reserves are developed in accordance with Actuarial Standards of Practice promulgated by the American Academy of Actuaries.

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Multiple actuarial methods are used to estimate the reserve for losses and LAE.

These methods utilize, to varying degrees, the initial expected loss ratio, detailed statistical analysis of past claims reporting and payment patterns, claims frequency and severity, paid loss experience, industry loss experience, and changes in market conditions, policy forms, exclusions, and exposures.

These methods utilize, to varying degrees, the initial expected loss ratio, detailed statistical analysis of past claims reporting

and payment patterns, claims frequency and severity, paid loss experience, industry loss experience, and changes in market conditions, policy forms, exclusions, and exposures.

The actuarial methods used to estimate losses and LAE reserves are:

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Such adjustments are included in the results of current operations.

The table below quantifies the impact of potential reserve deviations from our carried reserve at December 31, 2022.

We applied sensitivity factors to incurred losses for the three most recent accident years and to the carried reserve for all prior accident years combined.

In the selection of the volatility factors, we have considered the potential impact of changes

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in current loss trends, pricing trends, and other actuarial reserving assumptions.

The aggregate development depicted in the sensitivity analysis is consistent with the average development in recent calendar periods and a reasonable depiction of the potential volatility of the reserve estimates for the current calendar period.

We believe that potential changes such as these would not have a material impact on our liquidity.

($ in thousands) December 31, 2022 Potential Impact on 2022

Sensitivity Accident

Stockholders’

Sample increases 2022 4.0 % $ 379,083 $ 288,748 $ 15,163 $ 11,979

2021 3.0 % 324,882 182,085 9,746 7,700

2020 2.0 % 295,599 78,813 5,912 4,670

Prior 1.0 % — 156,787 1,568 1,239

Sample decreases 2022 (4.0) % 379,083 288,748 (15,163) (11,979)

2021 (3.0) % 324,882 182,085 (9,746) (7,700)

2020 (2.0) % 295,599 78,813 (5,912) (4,670)

Prior (1.0) % — 156,787 (1,568) (1,239)

(1) The effective rate was consistent with the U.S.

corporate income tax rate of 21% and is used to estimate the potential impact to stockholders’ equity.

The amount by which estimated losses differ from those originally reported for a period is known as “development.” Development is unfavorable when the losses ultimately settle for more than the amount reserved or subsequent estimates indicate a basis for reserve increases on unresolved claims.

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We reflect favorable or unfavorable development of loss reserves in the results of operations in the period the estimates are changed.

Goodwill and intangible assets are recorded as a result of a business combination.

Goodwill represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed.

We amortize identifiable intangible assets with a finite useful life over the period that the intangible asset is expected to contribute directly or indirectly to its future cash flows;

however, we do not amortize indefinite lived intangible assets.

We evaluate goodwill and identifiable intangible assets for recoverability annually in the fourth quarter or on an interim basis should events or changes in circumstances indicate that a carrying amount may not be recoverable.

To test for impairment, a qualitative assessment is performed to determine if it is more likely-than-not that the fair value of a reporting unit is less than its carrying value, including goodwill.

This initial assessment includes, among other factors, consideration of:

(i) past, current and projected future earnings and equity;

(ii) recent trends and market conditions;

and (iii) valuation metrics involving similar companies that are publicly traded and acquisitions of similar companies, if available.

If the more likely-than-not threshold is met, a quantitative impairment test is performed by comparing the estimated fair value with the carrying value.

If the carrying value of the net assets associated with the reporting unit exceeds the fair value of the reporting unit, goodwill is considered impaired and will be determined as the amount by which the reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.

Our reporting unit is at the underwriting division level;

this is one level below the consolidated group where the underwriting division represents a business and discrete financial information is available and reviewed regularly by underwriting management.

Determining the fair value of its reporting units is subjective in nature and involves the use of significant estimates and assumptions, including projected net cash flows, discount and long-term growth rates.

We determine the fair value of our reporting units based on an income approach and market approach, whereby the fair value of the reporting unit is derived from the present value of estimated future cash flows associated with the reporting unit.

The assumptions about estimated cash flows include factors such as future premiums, loss and LAE expenses, general and administrative expenses and industry trends.

We consider historical rates and current market conditions when determining the discount and long-term growth rates to use in its analysis.

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We consider other valuation methods if the facts and circumstances indicate these methods provide a more representative approximation of fair value.

Changes in these estimates based on evolving economic conditions or business strategies could result in material impairment charges in future periods.

We base our fair value estimates on assumptions we believes to be reasonable.

Actual results may differ from those estimates.

A 5% change in net IBNR would result in a $27.0 million change in our reserves for losses and LAE and a $21.3 million change in net income and stockholders’ equity.

Recent Accounting Pronouncements

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The expected loss approach will require 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 the Company recognizing an increase in the allowance for uncollectible reinsurance of $2.3 million an d an increase, net of tax, in accumulated deficit of $2.3 million.

In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures (Topic 280).

ASU 2023-07 requires segment disclosures for (i) significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”), (ii) how the CODM uses the reported measure(s) of segment profitability in assessing segment performance and resource allocation and (iii) the title and position of the CODM.

This update states that entities with a single reportable segment are required to provide full segment disclosures.

The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.

This update is applied retrospectively to all prior periods presented.

We are evaluating the effect of the amendments on our consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures (Topic 740).

ASU 2023-09 requires public companies, on an annual basis, provide enhanced rate reconciliation disclosures, including disclosures of specific categories and additional information that meet a quantitative threshold.

This update also requires public companies to, among other things, disaggregate income taxes paid by federal, state and foreign taxes.

The guidance is effective for fiscal years beginning after December 15, 2024.

The Company will adopt this ASU effective January 1, 2023 using the modified retrospective app roach.

The Company expects to recognize an increase in the allowance for uncollectible reinsurance of approximately $2.3 million an d an increase in accumulated deficit of approximately $2.3 million, net of tax.

The Company is evaluating the effect of the amendments on its consolidated financial statements.

Quantitative and Qualitative Disclosures About Market Risk

Qualitative and Quantitative Disclosures about Market Risk are included in Item 7 of this Form 10-K under “Investments—Market Risk.”

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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-K

Item 7. Management’s Discussion and Analysis