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Item 8. Financial Statements and Supplementary Data

2024-04-01 compared with 2023-03-28 · 590 added, 729 removed, 957 unchanged (58% of the section changed)

1 unchanged sentence

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Skyward Specialty Insurance Group, Inc.

To the Stockholders and the Board of Directors of Skyward Specialty Insurance Group, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Skyward Specialty Insurance Group, Inc.

and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive (loss) income, changes in stockholders' equity and cash flows for each of the two years in the period ended December 31, 2022, and the related notes and financial statement schedules listed in the Index at Item 15 (collectively referred to as the “consolidated financial statements”).

and subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2023, and the related notes and financial statement schedules listed in the Index at Item 15 (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with U.S.

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Houston, Texas

March 28, 2023

Table of Conte nt s

April 1, 2024

SKYWARD SPECIALTY INSURANCE GROUP, INC.

4 unchanged sentences

$ 1,017,651 $ 607,572

Fixed maturity securities, held to maturity, at amortized cost 52,467 47,117

Fixed maturity securities, held-to-maturity, at amortized cost (net of allowance for credit losses of $ 329 as of December 31, 2023)

42,986 52,467

Equity securities, at fair value 118,249 120,169

Mortgage loans 51,859 29,531

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

at amortized cost as of December 31, 2022)

50,070 51,859

Other long-term investments 114,505 129,142

3 unchanged sentences

Restricted cash 34,445 79,573

Premiums receivable, net of allowance 139,215 112,158

Reinsurance recoverables 581,359 536,327

Premiums receivable, net 179,235 139,215

Reinsurance recoverables, net 596,334 581,359

Ceded unearned premium 186,121 157,645

Deferred policy acquisition costs 91,955 68,938

Deferred income taxes 36,188 33,663

Deferred income taxes, net 21,991 36,188

Goodwill and intangible assets, net 88,435 89,870

13 unchanged sentences

Series A preferred stock, $ 0.01 par value;

2,000,000 shares authorized, 1,969,660 and 1,970,124 shares issued and outstanding, respectively

Common stock, $ 0.01 par value, 168,000,000 shares authorized, 16,832,955 and 16,763,069 shares issued, respectively

10,000,000 and 2,000,000 shares authorized, 0 and 1,969,660 shares issued and outstanding, respectively

Common stock, $ 0.01 par value, 500,000,000 and 168,000,000 shares authorized, 39,863,756 and 16,832,955 shares issued, respectively

Treasury stock, $ 0.01 par value, 0 and 233,289 shares, respectively

1 unchanged sentence

Stock notes receivable ( 5,562 ) ( 6,911 )

Accumulated other comprehensive (loss) income ( 43,485 ) 4,640

Accumulated other comprehensive loss ( 22,953 ) ( 43,485 )

Accumulated deficit ( 21,708 ) ( 105,417 )

2 unchanged sentences

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

Table of Conte nt s

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

Years Ended December 31,

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

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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

Total revenues 885,969 642,420

1 unchanged sentence

Underwriting, acquisition and insurance expenses 243,444 182,171

Impairment charges — 2,821

Interest expense 10,024 6,407

Amortization expense 1,798 1,547

Other expenses 5,364 —

Total expenses 775,867 592,637

4 unchanged sentences

Net income attributable to common shareholders $ 84,307 $ 20,517

Comprehensive (loss) income:

Comprehensive income:

Net income $ 85,984 $ 39,396

Other comprehensive loss:

Other comprehensive income (loss):

Unrealized gains and losses on investments:

Net change in unrealized losses on investments, net of tax ( 48,545 ) ( 8,173 )

Reclassification adjustment for gains on securities no longer held, net of tax 420 597

Total other comprehensive loss ( 48,125 ) ( 7,576 )

Comprehensive (loss) income $ ( 8,729 ) $ 30,741

Net change in unrealized gains (losses) on investments, net of tax 25,516 ( 48,545 )

Reclassification adjustment for (losses) gains on securities no longer held, net of tax ( 4,984 ) 420

Total other comprehensive income (loss) 20,532 ( 48,125 )

Comprehensive income (loss) $ 106,516 $ ( 8,729 )

Per share data:

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

Table of Conte nt s

SKYWARD SPECIALTY INSURANCE GROUP, INC.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

($ in thousands) Preferred

Stock Treasury

Stock Additional

Capital Stock

Receivable Accumulated

Comprehensive

Income Accumulated

Deficit Total

Balance at January 1, 2021 $ — $ 168 $ ( 4 ) $ 476,482 $ ( 2,510 ) $ 12,216 $ ( 183,130 ) $ 303,222

Employee equity transactions — — 2 427 880 — — 1,309

Net income — — — — — — 38,317 38,317

Other comprehensive loss, net of tax — — — — — ( 7,576 ) — ( 7,576 )

Reclassification of temporary equity to stockholders’ equity 20 — — 98,250 ( 7,462 ) — — 90,808

Balance at December 31, 2021 $ 20 $ 168 $ ( 2 ) $ 575,159 $ ( 9,092 ) $ 4,640 $ ( 144,813 ) $ 426,080

($ in thousands) 2023 2022

Preferred Stock:

Balance at beginning of year $ 20 $ 20

Preferred stock conversion to common shares ( 20 ) —

Balance at end of year $ — $ 20

Common Stock:

Balance at beginning of year $ 168 $ 168

Issuance of common stock 22 —

Preferred stock conversion to common shares 161 —

Proceeds from equity offerings, net 48 —

Balance at end of year $ 399 $ 168

Treasury Stock:

Balance at beginning of year $ ( 2 ) $ ( 2 )

Preferred stock conversion to common shares 2 —

Balance at end of year $ — $ ( 2 )

Additional Paid-In Capital:

Balance at beginning of year $ 577,289 $ 575,159

Issuance of common stock 9,213 2,130

Preferred stock conversion to common shares ( 143 ) —

Proceeds from equity offerings, net 124,496 —

Balance at end of year $ 710,855 $ 577,289

Stock Notes Receivable:

Balance at beginning of year $ ( 6,911 ) $ ( 9,092 )

Employee equity transactions 1,349 2,181

Balance at end of year $ ( 5,562 ) $ ( 6,911 )

Accumulated Other Comprehensive Loss:

Balance at beginning of year $ ( 43,485 ) $ 4,640

Other comprehensive income (loss), net of tax 20,532 ( 48,125 )

Balance at end of year $ ( 22,953 ) $ ( 43,485 )

Accumulated Deficit:

Balance at beginning of year $ ( 105,417 ) $ ( 144,813 )

Cumulative effect on adoption of ASU No.

2016-13 ( 2,275 ) —

Net income 85,984 39,396

Other comprehensive loss, net of tax — — — — — ( 48,125 ) — ( 48,125 )

Balance at December 31, 2022 $ 20 $ 168 $ ( 2 ) $ 577,289 $ ( 6,911 ) $ ( 43,485 ) $ ( 105,417 ) $ 421,662

Balance at end of year $ ( 21,708 ) $ ( 105,417 )

Total Stockholders’ Equity $ 661,031 $ 421,662

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

Table of Conte nt s

SKYWARD SPECIALTY INSURANCE GROUP, INC.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,

($ in thousands) 2023 2022

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Adjustments to reconcile net income to net cash provided by (used in) operating activities:

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

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

Depreciation and amortization expense 3,891 4,097

Stock-based compensation expense 8,525 2,287

Provision for bad debts 632 79

Unrealized losses (gains) on equity securities 15,058 ( 15,251 )

Earnings on illiquid investments ( 16,032 ) ( 11,413 )

Undistributed loss (earnings) from long-term investments 6,730 ( 16,032 )

Deferred income tax, net 9,383 10,267

Impairment charges — 2,821

Net realized gain on sale of business — ( 5,077 )

Changes in operating assets and liabilities:

Premiums receivable, net ( 40,020 ) ( 27,057 )

Reinsurance recoverables ( 45,032 ) 1,062

Reinsurance recoverables, net ( 17,270 ) ( 45,032 )

Ceded unearned premium ( 28,476 ) ( 19,672 )

Deferred policy acquisition costs ( 23,017 ) ( 9,482 )

Federal income taxes ( 1,892 ) —

Losses and loss adjustment expenses 172,744 162,208

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Purchase of equity securities ( 26,009 ) ( 53,548 )

Purchase of business — ( 10,554 )

Purchase of intangible assets ( 50 ) —

Investment in direct and indirect loans 2,984 ( 9,767 )

Purchase of property and equipment ( 3,108 ) ( 2,325 )

Sale of other invested asset 210 —

Sale of investment in subsidiary — 8,188

Sales and maturities of investment securities 127,228 95,641

Distributions from equity method investments 3,211 2,387

Sales of and distributions from unconsolidated subsidiaries 3,572 3,421

Change in short-term investments ( 149,068 ) 43,120

Payable (receivable) for securities sold 529 ( 725 )

Cash provided by (used in) deposit accounting 3,202 ( 6,074 )

Other, net — 44

Payable for securities sold 76 529

Cash provided by deposit accounting 11,913 3,202

Net cash used in investing activities ( 493,809 ) ( 193,381 )

1 unchanged sentence

Employee share purchases 1,350 2,180

Draw on revolving line of credit 50,000 —

Repayment of term loan ( 50,000 ) —

Proceeds from equity offerings 128,887 —

Proceeds from employee stock purchase plan 710 —

Net cash provided by financing activities 130,947 2,180

Net increase (decrease) in cash and cash equivalents and restricted cash 17,737 ( 6,349 )

Net (decrease) increase in cash and cash equivalents and restricted cash ( 24,675 ) 17,737

Cash and cash equivalents and restricted cash at beginning of year* 125,011 107,274

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Cash paid for interest $ 10,667 $ 5,761

Cash paid for federal income taxes $ 15,800 $ —

*the sum of cash and cash equivalents and restricted cash from the consolidated balance sheets

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

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Nature of Operations

Summary of Significant Accounting Policies

Description of Business

Skyward Specialty Insurance Group, Inc.

(the “Company”), an insurance holding company, is a Delaware corporation that was organized in 2006.

It is a specialty insurance company operating in one segment delivering commercial property and casualty products and group accident and health insurance coverages through its underwriting divisions.

The Company focuses its business on markets that are underserved, dislocated and/or for which standard insurance coverages are insufficient or inadequate to meet the needs of businesses, including its customers and prospective customers operating in these markets.

Its customers typically require highly specialized, customized underwriting solutions and claims capabilities.

As such, the Company develops and delivers tailored insurance products and services to address each of the niche markets it serves.

The Company’s portfolio of insured risks is highly diversified—it insures customers operating in a wide variety of industries;

it distributes through multiple channels;

it writes multiple lines of business, including general liability, excess liability, professional liability, commercial automobile liability, commercial automobile physical damage, group accident and health, property, surety and workers’ compensation.

Insurance Companies

The Company conducts operations principally through its four insurance companies.

Houston Specialty Insurance Company (“HSIC”), its largest insurance subsidiary, underwrites multiple lines of insurance on a surplus lines basis in 50 states and the District of Columbia.

Imperium Insurance Company (“IIC”), a subsidiary of HSIC, underwrites on an admitted basis in all 50 states and the District of Columbia.

Great Midwest Insurance Company (“GMIC”), a subsidiary of IIC underwrites multiple lines of insurance on an admitted basis in all 50 states, the District of Columbia and is a certified surety bond company listed with U.S.

It is a specialty insurance company operating in one segment delivering commercial property and casualty products insurance coverages through its underwriting divisions.

The Company has four wholly owned insurance company subsidiaries based in the United States:

• Houston Specialty Insurance Company (“HSIC”) underwrites insurance on a non-admitted basis.

• Imperium Insurance Company (“IIC”), a subsidiary of HSIC, underwrites insurance on an admitted basis

• Great Midwest Insurance Company (“GMIC”), a subsidiary of IIC, underwrites insurance on an admitted basis and is a certified surety bond company listed with the U.S.

Department of the Treasury.

Oklahoma Specialty Insurance Company (“OSIC”), a subsidiary of GMIC, is an approved surplus lines company in 47 states.

Reinsurance Company

Skyward Re is a wholly owned captive reinsurance company domiciled in the Cayman Islands that was incorporated on January 7, 2020.

Skyward Re assumes net reserves for certain divisions, related to a retroactive reinsurance contract, from the Company’s insurance companies and retrocedes the net reserves to a third-party reinsurer.

Non-insurance Companies

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.

Skyward Service Company, also the Company’s subsidiary, provides various administrative services to the Company’s subsidiaries.

Summary of Significant Accounting Policies

• Oklahoma Specialty Insurance Company (“OSIC”), a subsidiary of GMIC, underwrites insurance on a non-admitted basis.

The Company has a wholly owned captive reinsurance company subsidiary, Skyward Re, that is domiciled in the Cayman Islands and assumes net reserves for certain divisions, related to a retroactive reinsurance contract, from the Company’s insurance companies and retrocedes the net reserves to a third-party reinsurer.

The Company has two non-risk bearing wholly owned subsidiaries, (i) Skyward Underwriters Agency, Inc.

(“SUA”) is a managing general insurance agent and reinsurance broker for property and casualty risks in specialty niche markets, and (ii) Skyward Service Company provides various administrative services to the Company’s subsidiaries.

Basis of Presentation

The Company’s consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America, and include accounts of the Company and its subsidiaries as of and for the years ended December 31, 2022 and 2021.

The Company’s consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), which differ in some respects from those followed in reports to insurance regulatory authorities.

The consolidated financial statements includes the accounts of the holding company and its subsidiaries.

All intercompany transactions and balances have been eliminated in consolidation.

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.

The preparation of the consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect amounts reported in the consolidated financial statements and accompanying notes.

The Company’s actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and highly liquid short-term investments.

Short-term investments purchased with an original maturity of three months or less are considered to be cash equivalents.

Cash and cash equivalents include cash on hand and fixed maturity securities with original maturities of three months or less.

The carrying value of the Company’s cash and cash equivalents approximates fair value.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summary of Significant Accounting Policies (continued)

Restricted Cash

Cash with a legal restriction as to withdrawal or use by the consolidated group is recorded as restricted cash.

Cash with a legal restriction on withdrawal or use by the consolidated group is recorded as restricted cash.

The carrying value of the Company’s restricted cash approximates fair value.

SUA collects premiums from clients, and after deducting commissions and any applicable fees, remits these premiums to the Company’s insurance companies, noted within the Nature of Operations or to third-party insurance companies.

SUA collects premiums from clients, and after deducting commissions and any applicable fees, remits these premiums to the Company’s insurance companies, or to third-party insurance companies.

SUA holds unremitted insurance premiums in a fiduciary capacity to third-party insurance companies, as restricted cash.

The Company is required by state regulations to maintain assets on deposit with certain states and hold cash as collateral for certain reinsurance balances.

Cash it holds in a depository account for others, or which is restricted by a state, is recorded as restricted cash.

Cash held in a depository account for others, or restricted by a state, is recorded as restricted cash.

Available for Sale

Investments in fixed maturity securities are classified as available for sale and are reported at fair value based on quoted market prices or dealer quotes.

Unrealized gains and losses for fixed maturity securities are excluded from net income and reported in stockholders’ equity, net of taxes, as a component of accumulated other comprehensive income (loss).

If quoted market prices or dealer quotes are not available, the Company estimates fair value based on recent trading information.

Premiums and discounts on mortgage-backed securities are amortized using the retroactive method adjusted for anticipated prepayments and the estimated economic life of the securities.

Adjustments related to changes in prepayment assumptions are included in net investment income.

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

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

recognized in net investment 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.

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.

Held to maturity

Investments in fixed maturity securities where the Company has demonstrated the intent and ability to hold until maturity have been classified as held to maturity and are reported at amortized cost.

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 multi-year cumulative loss rates for asset backed securities.

The 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.

Other-than-Temporary Impairments

The Company evaluates declines in the market value of invested assets below amortized cost, for other-than-temporary impairment losses, on a quarterly basis.

Impairment losses for declines in the value of its fixed maturity securities below amortized cost attributable to issuer-specific events are based on all relevant facts and circumstances for each investment and are recognized when appropriate.

For all investments with unrealized losses due to market conditions or industry-related events where the Company does not have intent to sell the security and it has the ability to hold the investment for either a period of time sufficient to allow a market recovery or to maturity, declines in value below cost are not assumed to be other-than-temporary.

When the Company considers the impairment of the value of an investment to be other-than-temporary, it reports the decrease in value in net income within the Consolidated Statements of Operations and a corresponding reduction in carrying value on the consolidated balance sheet.

Prior to the adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326), on January 1, 2023, the Company evaluated declines in the market value of invested assets below amortized cost, for other-than-temporary impairment losses, on a quarterly basis.

Impairment losses for declines in the value of its fixed maturity securities below amortized cost attributable to issuer-specific events were based on all relevant facts and circumstances for each investment and were recognized when appropriate.

For all investments with unrealized losses due to market conditions or industry-related events where the Company did not had intent to sell the security and it had the ability to hold the investment for either a period of time sufficient to allow a market recovery or to maturity, declines in value below cost were not assumed to be other-than-temporary.

When the Company considered the impairment of the value of an investment to be other-than-temporary, it reported the decrease in value in net income within the consolidated statements of operations and a corresponding reduction in carrying value on the consolidated balance sheet.

Equity securities with a readily determinable fair value

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Investments in equity securities with a readily determinable fair value are carried on the balance sheet at fair value using quoted market prices.

Changes in the carrying value of equity securities are included in net investment (losses) gains within the Consolidated Statements of Operations.

Changes in the carrying value of equity securities are included in net investment gains (losses) within the consolidated statements of operations.

Mortgage loan s

Investments in mortgage loans are classified as held for investment and carried on the balance sheet at cost adjusted for unamortized:

premiums, discounts and loan fees.

Investments in mortgage loans are classified as held for investment and carried on the balance sheet at cost adjusted for unamortized premiums, discounts and loan fees.

When an amount is determined to be uncollectible, the Company writes off the uncollectible amount in the period it was determined to be uncollectible.

Interest on the loans is recognized as interest receivable which the Company includes in other assets on the consolidated balance sheet.

The Company elected the fair value option in accounting for mortgage loans effective January 1, 2023 as targeted transition relief from the adoption of ASU 2016-13.

Under the fair value option, mortgage loans are measured at fair value, and changes in unrealized gains and losses on mortgage loans are reported in net investment gains (losses) on the condensed consolidated statements of operations.

Interest income and amortization continue to be recognized in net investment income on the consolidated statements of operations.

Other long-term investments

Other long-term investments include investments in equity and equity securities of non-public entities and indirect investments in loans and loan collateral.

The Company has equity investments in certain limited partnerships and corporations where it has significant influence but not control.

The analysis of entities that are variable interest entities indicated the Company is not the primary

SKYWARD SPECIALTY INSURANCE GROUP, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summary of Significant Accounting Policies (continued)

The Company has equity investments in certain limited partnerships and corporations where it has significant influence but not control.

The analysis of entities that are variable interest entities indicated the Company is not the primary beneficiary, and would not have to consolidate these entities.

Equity method is used to account for these investments.

beneficiary, and would not have to consolidate these entities.

Equity method is used to account for these investments in unconsolidated subsidiaries.

Under the equity method, initial investment is recorded at cost and is subsequently adjusted based on its proportionate share of distributions and net income or loss of the equity method investee.

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Net Investment Income and Net Realized Gains and Losses

Net investment income consists of interest, dividends and equity in earnings (losses) of investees net of investment expenses such as investment management expenses.

Net investment income consists of interest, dividends and equity in earnings (losses) of unconsolidated subsidiaries net of investment expenses such as investment management expenses.

Interest income is recognized on the accrual basis, and dividends as earned at the ex-dividend date.

Interest income on mortgage-backed and asset-backed securities is recognized using the effective-yield method based on estimated principal repayments.

Interest income on mortgage-backed and other asset-backed securities is recognized using the effective-yield method based on estimated principal repayments.

Included in interest income is the amortization of premium and accretion of discounts on debt securities.

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Reinsurance on unpaid losses and settlement expenses represent estimates of the portion of the liabilities recoverable from reinsurers.

On the Consolidated Statements of Operations, net earned premium, losses and loss adjustment expenses, net and underwriting, acquisition and insurance expenses are presented net of reinsurance ceded.

On the Consolidated Statements of Operations, net earned premiums, losses and loss adjustment expenses, net and underwriting, acquisition and insurance expenses are presented net of reinsurance ceded.

The Company purchases retroactive reinsurance on certain lines of business in the form of loss portfolio transfers (“LPT”) and adverse development covers.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summary of Significant Accounting Policies (continued)

Deposit Accounting

10 unchanged sentences

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.

The historical loss rate is adjusted for current conditions, 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.

Reinsurance does not relieve the Company of its legal liability to its policyholders.

3 unchanged sentences

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.

It also assesses the adequacy of collateral obtained, where applicable.

Should its reinsurers fail to fulfill their obligations, the Company has access to collateral from various reinsurers.

The following table presents reinsurance collateral for the years ended December 31, 2022 and 2021:

($ in thousands) 2022 2021

Reinsurance collateral $ 253,870 $ 230,908

When the Company’s review indicates the existence of uncollectible amounts from reinsurers, its policy is to charge net income and provide an allowance for estimated unrecoverable amounts.

As of December 31, 2022 and 2021, it was determined that no allowance for uncollectible reinsurance recoverables was required.

As of December 31, 2023 and 2022, reinsurance collateral from reinsurers was $ 257.5 million and $ 253.9 million, respectively.

Reinsurance recoverables present potential exposures to individual reinsurers.

The following table lists the individual reinsurers which represent 10% or more of the Company’s reinsurance recoverable balances and the respective financial strength rating from A.M.

Best at December 31, 2022 and 2021:

Rating 2022 2021

Everest Reinsurance Co A+ 28.2 % 28.9 %

Randall & Quilter (R&Q Bermuda (SAC) Ltd) Not rated Below 10 % 12.0 %

Everest Reinsurance Co represented 20.4 % and 28.2 % of the Company’s reinsurance recoverable balances at December 31, 2023 and 2022, respectively, and was the only reinsurer that represented 10% or more of the Company’s reinsurance recoverable balances.

Its financial strength rating from A.M.

Best was A+ at December 31, 2023 and 2022.

Concentration of Credit Risk

Other than reinsurance recoverables, financial instruments that potentially subject us to concentrations of credit risk are primarily cash and cash equivalents, restricted cash, investments and premiums receivable.

Cash equivalents and short-term investments include investments in money market funds and securities backed by the U.S.

Cash equivalents and short-term investments include U.S.

government securities and money market funds.

Investments are diversified throughout many industries and geographic regions.

The Company limits the amount of credit exposure with any one financial institution or issuer and believes no significant concentration of credit

The Company limits the amount of credit exposure with any one financial institution or issuer and believes no significant concentration of credit risk exists with respect to cash and investments.

As of December 31, 2023 and 2022, outstanding premiums receivable are generally diversified due to the large number of entities comprising the Company’s customer base and their dispersion across many different lines of business and geographic regions.

Failure by distribution sources to remit premiums could result in premium write-offs and a corresponding loss of income.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summary of Significant Accounting Policies (continued)

risk exists with respect to cash and investments.

As of December 31, 2022 and 2021, outstanding premiums receivable are generally diversified due to the large number of entities comprising the Company’s customer base and their dispersion across many different lines of business and geographic regions.

Failure by distribution sources to remit premiums could result in premium write-offs and a corresponding loss of income.

Deferred Policy Acquisition Costs

12 unchanged sentences

however, it does not amortize indefinite lived intangible assets.

The Company evaluates 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.

The Company’s 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.

The Company determines the fair value of its 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.

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

The Company considers 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.

The Company bases its fair value estimates on assumptions it believes to be reasonable.

Actual results may differ from those estimates.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summary of Significant Accounting Policies (continued)

The following table presents goodwill impairment charges for the years ended December 31, 2022 and 2021:

($ in thousands) 2022 2021

Goodwill impairment $ — $ 2,821

Goodwill impairment is included under “impairment charges” in the Consolidated Statements of Operations and Comprehensive (Loss) Income.

The Company reviews 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.

Based upon this review, the Company did not have any goodwill impairment for the years ended December 31, 2023 and 2022.

Property and Equipment

1 unchanged sentence

Depreciation expense is recognized on a straight-line basis for financial statement purposes over periods ranging from three to seven years .

Right-of-use (ROU) assets are included in other assets and lease liabilities are included in accounts payable and accrued liabilities on the balance sheet.

Right-of-use (ROU) assets are included in other assets and lease liabilities are included in accounts payable and accrued liabilities on the consolidated balance sheets.

For operating leases, the Company determines if a contract contains a lease at inception and recognizes the operating lease ROU assets and lease liabilities based on the present value of the future minimum lease payments at the commencement date.

7 unchanged sentences

Reserves for losses and loss adjustment expenses (“LAE”) represent the Company’s best estimate of the ultimate net cost of all reported and unreported losses that are unpaid as of the balance sheet dates.

Its estimated reserves for losses and LAE include the accumulation of estimates for claims reported and unpaid prior to the balance sheet dates, estimates (based on projections of relevant historical data) of increases in claims costs for claims already reported, of claims incurred but not reported, and estimates of expenses for investigating and adjusting all incurred and unpaid claims.

The Company estimates its reserves on an undiscounted basis, using individual case-basis valuations, statistical analyses, and various actuarial methods such as:

Paid Loss Development — Historical payment patterns for prior claims are used to estimate future payment patterns for claims.

These patterns are applied to current payments by policy year to yield an expected ultimate loss.

Incurred Loss Development — Historical case loss patterns for past claims are used to estimate future case-incurred amounts for current claims.

These patterns are applied to current case losses by policy year to yield an expected ultimate loss.

Case Reserve Development — Patterns of historical development in reported losses relative to historical case reserves are determined.

These patterns are applied to current case reserves by policy year and the result is combined with paid losses to yield an expected ultimate loss.

Expected Loss Ratio — Historical loss ratios, in combination with projections of frequency and severity trends, as well as estimates of price and exposure changes, are analyzed to produce an estimate of the expected loss ratio (“loss pick”) for each policy year.

The loss pick is then applied to the earned premium for each year to estimate the expected ultimate losses.

Paid and Incurred Bornhuetter/Ferguson (BF) — This approach blends the expected loss ratio method with either the paid or incurred loss development method.

In effect, the BF methods produce weighted average indications for each policy year.

The estimates are based on certain actuarial and other assumptions related to the ultimate cost to settle such claims.

Such assumptions are subject to occasional changes due to evolving economic, social and political conditions.

Because of the nature of business the Company has historically written, management believes that it has limited exposure to environmental and other toxic tort type claim liabilities.

All estimates are periodically reviewed and, as experience develops and new information becomes known, the reserves are adjusted as necessary.

Such adjustments are reflected in the results of operations in the period in which they are determined.

Due to the inherent uncertainty in estimating reserves for losses and settlement expenses, there can be no assurance that the ultimate liability will not exceed recorded amounts.

If actual liabilities do exceed recorded

SKYWARD SPECIALTY INSURANCE GROUP, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summary of Significant Accounting Policies (continued)

In most cases, multiple estimation methods will be valid for the particular facts and circumstances of the claim liabilities being evaluated.

Each estimation method has its own set of assumption variables and its own advantages and disadvantages, with no single estimation method being better than the others in all situations, and no one set of assumption variables being meaningful for all underwriting divisions.

The relative strengths and weaknesses of the particular estimation methods, when applied to a particular group of claims, can also change over time.

Therefore, the weight given to each estimation method will likely change by policy year and with each evaluation given the facts and circumstances associated with each underwriting division.

The estimates generated by the methods above are based on the Company’s historical information, industry information, and its estimates of future trends in variable factors such as loss severity and loss frequency.

Reserves for losses and LAE are subject to uncertainty from various sources, including changes in reporting patterns, claims settlement patterns, judicial decisions, legislation, and economic conditions.

Therefore, the Company’s actual loss experience may not conform to the methods used in determining the estimated amounts for such liability at the balance sheet dates.

The Company continually monitors, and reviews reserves and adjusts its estimates as necessary as new information becomes available.

Therefore, the Company’s actual loss experience may not conform to the assumptions used in determining the estimated amounts for such liability at the balance sheet dates.

The Company continually monitors and reviews reserves, and as settlements are made or reserves adjusted, the differences are reported in the current year.

Because of the nature of business the Company has historically written, management believes that it has limited exposure to environmental and other toxic tort type claim liabilities.

amounts, there will be an adverse effect.

Furthermore, we may determine that recorded reserves are more than adequate to cover expected losses, which would lead to a reduction in our reserves.

The Company earns and recognizes property and casualty and surety premiums on a pro-rata basis over the terms of the policies.

2 unchanged sentences

Its premiums receivable includes deferred premiums, which represent installment payments the Company is due from insureds under the payment terms of their policies.

The following table presents recorded allowance for estimated uncollectible premiums receivable for the years ended December 31, 2022 and 2021:

($ in thousands) 2022 2021

Allowance for doubtful accounts $ 629 $ 261

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.

Unearned premiums represent the portion of gross premiums written which is applicable to the unexpired terms of insurance policies or reinsurance contracts in force.

9 unchanged sentences

The Company’s single performance obligation consists of the placement of the policy.

Its transaction price is variable at contract inception and based on a percentage of premium based on risk factors that vary every month such as employee

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summary of Significant Accounting Policies (continued)

census data and worker roles.

The Company’s estimates its transaction price over the life of the policy using the expected value method and recognizes revenue at the point in time the policy is placed.

Its transaction price is variable at contract inception and based on a percentage of premium based on risk factors that vary every month such as employee census data and worker roles.

The Company estimates its transaction price over the life of the policy using the expected value method and recognizes revenue at the point in time the policy is placed.

When there are changes in the estimate of variable consideration, it recognizes those changes in the month they occur.

7 unchanged sentences

The Company files a consolidated federal income tax return in the United States and certain other state tax returns.

Its admitted insurance subsidiaries pay premium taxes on gross written premiums in lieu of most state income or franchise taxes.

Premium tax expense is recognized within underwriting, acquisition and insurance expense on the Consolidated Statement of Operations.

Its admitted insurance subsidiaries pay premium taxes on gross written premiums in lieu of most state income or franchise

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Premium tax expense is recognized within underwriting, acquisition and insurance expense on the Consolidated Statements of Operations.

Fair Value of Financial Instruments

7 unchanged sentences

Stock-Based Compensation

The Company granted common stock to its employees and non-employee directors under the Stock Purchase Program and Equity Incentive Program (the “Legacy Programs”).

The Legacy Programs required that employees who receive an award purchase a certain amount of stock, which the Company then matched.

The matching share awards were subject to certain vesting requirements.

For the purchased portion of the participant’s stock, the participant was required to make a minimum payment toward the purchase commitment, with the remainder of the balance issued as a note receivable to us and recorded as a stock notes receivable within Stockholders’ Equity.

Compensation costs are recognized over the applicable vesting period for share-based payments to employees, former employees, and non-employee directors at fair value of the common stock on the grant date.

The fair value of the common stock on the grant date was determined using an income approach and market approach.

Forfeiture of purchased and awarded shares are recognized as they occur.

In December 2020, the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) approved a new Long Term Incentive Plan (the “2021 Plan”).

The 2021 Plan provides for the granting of restricted stock, restricted stock units, performance share awards, as well as cash-based performance awards, to select employees and non-employee directors of the Company.

Under the 2021 Plan, the Compensation Committee ratifies the selection of participants for each year’s grants which are subject to the terms and conditions of the 2021 Plan.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summary of Significant Accounting Policies (continued)

awards consist of common share awards with either a market or a performance condition and restricted common stock and common stock units.

All awards are subject to a service condition and the accounting policy for each award is presented below.

Market condition awards

For common share awards with a market and service condition, the Company uses a probability assessment to determine the fair value of these awards on the grant date.

It recognizes grant date fair value as compensation costs over the applicable service period of the award.

If the market condition is not obtained, previously recognized compensation expense is not reversed.

Performance and service condition awards

For common share awards with a performance condition and a service condition, the Company calculates a grant date fair value based on the probability weighted assessment of the performance condition and respective award values.

It recognizes compensation costs over the service period based on its latest estimate of grant date fair value.

If the performance condition is not satisfied, the Company will reverse previously recognized compensation expense.

Service condition awards

The Company grants restricted common stock units that only have a service condition.

It recognizes compensation costs over the service period based on the fair value of common stock on the grant date.

We expense the estimated fair value of employee stock options and similar awards.

We measure compensation cost for awards of equity instruments to employees based on the grant-date fair value of those awards and recognize compensation expense over the service period that the awards are expected to vest.

The tax effects related to share-based payments are made through net earnings.

See note 18 for further discussion and related disclosures regarding stock-based compensation.

Employee Stock Purchase Plan

The Company’s employee stock purchase plan (“ESPP”), offers all employees the option to purchase common stock at a discount.

The Company recognizes compensation cost on a straight-line basis over the offering period.

Earnings Per Share

2 unchanged sentences

Basic earnings per share is calculated by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding for the period.

Common shares related to its Legacy Programs are excluded from the weighted-average number of common shares outstanding for the period for basic earnings per share when contingencies, such as vesting requirements, exist and have not been satisfied.

Contingently issuable common shares and common share equivalents are instruments where the holder must return, all or part of, if specified conditions are not met.

Common shares, when contingencies, such as vesting requirements, exist and have not been satisfied, are excluded from basic earnings per share.

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.

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.

These instruments are excluded from basic and diluted earnings per share when the specified conditions are not met presuming the end of the period is the end of the contingency period.

The impact of the contingently issuable instruments on diluted earnings per share was calculated using the treasury stock method and included in the reconciliation of the denominator of the basic and diluted earnings per share computations for the years ended December 31, 2023 and 2022.

Instruments that are convertible into common shares are included in diluted weighted-average common shares outstanding on an if-converted basis based on the legal conversion rate for the respective period, if dilutive.

2 unchanged sentences

When inclusion of common share adjustments increases the earnings per share or reduces the loss per share, the effect on earnings is anti-dilutive, and the diluted net earnings or net loss per share is computed excluding these common share equivalents.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Recent Accounting Pronouncements

2 unchanged sentences

The Company may elect to adopt new or revised accounting guidance within the same time period as private companies, unless, as indicated below, management determines it is preferable to take advantage of early adoption provisions offered within the applicable guidance.

Recent Accounting Standards Not Yet Adopted

Recent Accounting Standards Adopted

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326).

ASU 2016-13 requires organizations to estimate credit losses on certain types of financial instruments, including

ASU 2016-13 requires organizations to estimate credit losses on certain types of financial instruments, including receivables and available-for-sale debt securities, by introducing an approach based on expected losses.

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.

Recent Accounting Standards Not Yet Adopted

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.

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

SKYWARD SPECIALTY INSURANCE GROUP, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Recent Accounting Pronouncements (continued)

receivables and available-for-sale debt securities, by introducing an approach based on expected losses.

The expected loss approach will require entities to incorporate considerations of historical information, current information, and reasonable and supportable forecasts.

The guidance is effective for fiscal years beginning after December 15, 2022.

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, net of tax, in accumulated deficit of approximately $ 2.3 million.

Goodwill and Intangible Assets

Acquisition of Aegis Surety

In January 2021, the Company closed on an agreement to purchase the surety business of Aegis Surety Bonds and Insurance Services, LLC (“Aegis”) in exchange for $ 10.0 million in cash and the disposal of the Company’s Exterminator Pro business.

The Aegis acquisition increased the Company’s scale in surety positioning the business line for profitable growth.

The implied fair value of the Aegis surety underwriting business was $ 15.3 million and the Company recognized a gain of $ 3.5 million on disposal of the assets related to its Exterminator Pro underwriting business.

The Company determined that the remaining goodwill of $ 0.9 million associated with its Exterminator Pro business was fully impaired after the disposal.

The Company recorded the assets from Aegis using the acquisition method of accounting.

The purchase price was allocated to the identifiable assets based on their estimated fair values on the acquisition date.

The final purchase price was an $ 8.3 million intangible asset for agent relationships with a 15-year useful life and $ 6.9 million of goodwill.

During the second quarter of 2021, the Company elected to exit a book of errors & omissions business generated from its acquisition of Compass Group Partners, LLC (“Compass”).

As a result of this decision, the Company determined the fair value of the goodwill and agent relationships was zero, resulting in an impairment of $ 1.9 million and $ 0.1 million, respectively.

Sale of Boston Indemnity Company

During June of 2021, the Company signed a Purchase Agreement with an unrelated third party for the sale of all the issued and outstanding capital stock of Boston Indemnity Company (BIC).

The transaction was completed on October 4, 2021.

The Company recorded $ 8.2 million in net proceeds related to the sale and recognized $ 1.8 million of gain on sale of business.

The carrying amount and changes in the balance of goodwill by reporting unit is as follows:

The following tables set forth the carrying amount and changes in the balance of goodwill by reporting unit at December 31, 2023 and 2022:

($ in thousands) Accident

and Health Surety Energy Other Total

and Health Surety Industry Solutions Other Total

Gross balance at December 31, 2022 $ 91,577 $ 6,781 $ 10,204 $ 3,879 $ 112,441

1 unchanged sentence

Net balance at December 31, 2023 $ 46,756 $ 6,781 $ 10,204 $ 1,993 $ 65,734

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Goodwill and Intangible Assets (continued)

($ in thousands) Accident

and Health Surety Energy Exterminator

Pro Other Total

and Health Surety Industry Solutions Other Total

Gross balance at December 31, 2021 $ 91,577 $ 6,781 $ 10,204 $ 3,879 $ 112,441

Accumulated impairment at December 31, 2021 ( 44,821 ) — — ( 1,886 ) ( 46,707 )

Additions — 6,956 — — — 6,956

Disposals — ( 175 ) — ( 1,680 ) ( 650 ) ( 2,505 )

Impairment — — — ( 882 ) ( 1,886 ) ( 2,768 )

Net balance at December 31, 2022 $ 46,756 $ 6,781 $ 10,204 $ 1,993 $ 65,734

The carrying amount and changes in the balance of other intangible assets are as follows:

The following tables set forth the carrying amount and changes in the balance of other intangible assets at December 31, 2023 and 2022:

($ in thousands) Agent

3 unchanged sentences

Accumulated amortization at December 31, 2022 ( 15,664 ) ( 893 ) — — ( 16,557 )

Additions 50 — — — 50

Amortization ( 1,261 ) ( 224 ) — ( 1,485 )

5 unchanged sentences

Accumulated amortization at December 31, 2021 ( 14,421 ) ( 670 ) — — ( 15,091 )

Additions 8,300 — — — 8,300

Disposals ( 45 ) — ( 123 ) ( 1,000 ) ( 1,168 )

Impairment ( 52 ) — — — ( 52 )

Amortization ( 1,243 ) ( 223 ) — — ( 1,466 )

2 unchanged sentences

Its finite lived intangible assets, which relate to policy renewals, agency relationships, within agent relationships, and non-compete/exclusivity agreements, within non-competes, have a weighted average useful life of approximately 15 years as of December 31, 2023.

The Company’s recognized amortization expense for the years ended December 31, 2022 and 2021 is as follows:

($ in thousands) 2022 2021

Amortization expense $ 1,466 $ 1,441

SKYWARD SPECIALTY INSURANCE GROUP, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Goodwill and Intangible Assets (continued)

Estimated future net amortization expense of intangible assets for the next five years is as follows:

Years Ending December 31, Amount

The Company recognized $ 1.5 million in amortization expense for the years ended December 31, 2023 and 2022.

The following table sets forth the estimated future net amortization expense of intangible assets:

($ in thousands)

The amortized cost and the fair value of the Company’s investments are summarized as follows:

Years Ending December 31,

The following tables set forth the amortized cost and the fair value of investments at December 31, 2023 and 2022:

($ in thousands) Gross

Losses Fair Value

Losses Allowance for Credit Losses Fair Value

December 31, 2023

5 unchanged sentences

Commercial mortgage-backed securities 31,411 449 ( 1,926 ) — 29,934

Asset-backed securities 116,275 91 ( 6,542 ) 109,824

Other asset-backed securities 188,010 1,221 ( 3,504 ) — 185,727

Total fixed maturity securities, available-for-sale $ 1,047,713 $ 12,491 $ ( 42,553 ) $ — $ 1,017,651

Fixed maturity securities, held-to-maturity:

Asset-backed securities $ 52,467 $ — $ ( 5,696 ) $ 46,771

Other asset-backed securities $ 43,315 $ — $ ( 1,969 ) $ ( 329 ) $ 41,017

Total fixed maturity securities, held-to-maturity $ 43,315 $ — $ ( 1,969 ) $ ( 329 ) $ 41,017

Equity securities:

Common stocks $ 50,484 $ 10,015 $ ( 4,503 ) $ 55,996

Preferred stocks 11,798 15 ( 3,042 ) 8,771

Mutual funds 53,968 3,171 ( 1,737 ) 55,402

Total equity securities $ 116,250 $ 13,201 $ ( 9,282 ) $ 120,169

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Investments (continued)

($ in thousands) Gross

7 unchanged sentences

Commercial mortgage-backed securities 40,129 50 ( 3,684 ) 36,495

Asset-backed securities 81,038 226 ( 1,500 ) 79,764

Other 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 $ 47,117 $ — $ — $ 47,117

Other asset-backed securities $ 52,467 $ — $ ( 5,696 ) $ 46,771

Total fixed maturity securities, held-to-maturity $ 52,467 $ — $ ( 5,696 ) $ 46,771

Equity securities:

Common stocks $ 47,379 $ 13,887 $ ( 2,841 ) $ 58,425

Preferred stocks 17,821 349 ( 4 ) 18,166

Mutual funds 33,786 7,611 ( 17 ) 41,380

Total equity securities $ 98,986 $ 21,847 $ ( 2,862 ) $ 117,971

The amortized cost and estimated fair value of fixed maturity securities, available for sale, at December 31, 2022 by contractual maturity are shown below (in thousands).

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The amortized cost and estimated fair value of fixed maturity securities, available for sale, at December 31, 2023 by contractual maturity are shown below.

Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

7 unchanged sentences

Mortgage-backed securities 323,979 311,560

Asset-backed securities 116,275 109,824

Other asset-backed securities 188,010 185,727

Total $ 1,047,713 $ 1,017,651

The Company’s fixed maturity securities, held to maturity, at December 31, 2023 consist entirely of asset backed securities that are not due at a single maturity date.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Investments (continued)

The following tables summarize gross unrealized losses and the corresponding fair values of investments, aggregated by length of time that individual securities have been in a continuous unrealized loss position:

10 unchanged sentences

Commercial mortgage-backed securities 4,942 ( 74 ) 15,290 ( 1,852 ) 20,232 ( 1,926 )

Asset-backed securities 74,684 ( 3,351 ) 25,820 ( 3,191 ) 100,504 ( 6,542 )

Other asset-backed securities 27,887 ( 106 ) 75,253 ( 3,398 ) 103,140 ( 3,504 )

Total fixed maturity securities, available-for-sale 121,362 ( 1,667 ) 441,858 ( 40,886 ) 563,220 ( 42,553 )

Fixed maturity securities, held-to-maturity:

Asset-backed securities 46,771 ( 5,696 ) — — 46,771 ( 5,696 )

Other asset-backed securities — — 41,017 ( 1,969 ) 41,017 ( 1,969 )

Total fixed maturity securities, held-to-maturity — — 41,017 ( 1,969 ) 41,017 ( 1,969 )

Total $ 121,362 $ ( 1,667 ) $ 482,875 $ ( 42,855 ) $ 604,237 $ ( 44,522 )

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Less than 12 Months 12 Months or More Total

9 unchanged sentences

Commercial mortgage-backed securities 25,836 ( 1,488 ) 8,583 ( 2,196 ) 34,419 ( 3,684 )

Asset-backed securities 34,266 ( 1,463 ) 1,256 ( 38 ) 35,522 ( 1,501 )

Other 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:

Other 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 December 31, 2023, the Company has 584 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.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Investments (continued)

As of December 31, 2022, the Company has 111 lots of fixed maturity securities in an unrealized loss position aged over 12 months.

The Company does not have the intent to sell, and it is not more likely-than-not it will be required to sell these fixed maturity securities, available for sale, before the securities recover to their amortized cost value.

In addition, the Company believes none of the declines in fair values of these fixed maturity securities, available for sale relate to credit losses.

The Company believes none of the declines in fair value of these fixed maturity securities, available for sale, were other-than-temporary at December 31, 2022.

The Company recognized no other-than-temporary impairment adjustments on fixed maturity securities, available for sale, for the years ended December 31, 2022 and 2021.

The components of net realized (losses) gains at December 31, 2022 and 2021 are as follows:

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

($ in thousands) 2023 2022

8 unchanged sentences

Total ( 7,137 ) ( 4,861 )

Net unrealized (losses) gains on securities still held

Net unrealized gains (losses) on investments

Equity securities 11,516 ( 15,058 )

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

Proceeds from sales of debt and equity securities at December 31, 2022 and 2021 are as follows:

Mortgage loans ( 386 ) —

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

The following table sets forth the proceeds from sales of debt and equity securities for the years ended December 31, 2023 and 2022:

($ in thousands) 2023 2022

1 unchanged sentence

Equity securities 40,201 37,177

The Company’s net investment income for the years ended December 31, 2022 and 2021 is summarized as follows:

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

($ in thousands) 2023 2022

5 unchanged sentences

Indirect loans ( 4,155 ) 4,846

Short-term investments and cash 1,523 141

Short-term investments 11,392 1,498

Other 318 ( 77 )

Total investment income 44,484 30,045

Investment income 45,879 44,484

Investment expenses ( 5,557 ) ( 7,553 )

3 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Investments (continued)

The change in net unrealized losses on investments, net of deferred income taxes, in other comprehensive loss for the years ended December 31, 2022 and 2021 is as follows:

The following table sets forth the change in net unrealized gains (losses) on the Company’s investment portfolio, net of deferred income taxes, included in other comprehensive income (loss) for the years ended December 31, 2023 and 2022:

($ in thousands) 2023 2022

1 unchanged sentence

Deferred income taxes ( 5,420 ) 12,793

Other comprehensive loss $ ( 48,125 ) $ ( 7,576 )

Total $ 20,532 $ ( 48,125 )

Various state regulations require the Company to maintain cash, investment securities or letters of credit on deposit with the states in a depository account.

7 unchanged sentences

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.

Level 1 - Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement

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:

5 unchanged sentences

These represent Level 2 fair value inputs.

Commercial mortgage-backed securities, residential mortgage-backed securities and asset-backed securities

Commercial mortgage-backed securities, residential mortgage-backed securities and other asset-backed securities

The Company uses a pricing model that utilizes market-based inputs that may include dealer quotes, market spreads, and yield curves.

4 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value Measurements (continued)

The following table presents the carrying value and estimated fair value of the Company’s financial instruments at December 31, 2022 and 2021:

($ in thousands) Carrying

Value Carrying

Fixed maturity securities, available-for-sale $ 607,572 $ 607,572 $ 458,351 $ 458,351

Fixed maturity securities, held-to-maturity 52,467 46,771 47,117 47,117

Equity securities 120,169 120,169 117,971 117,971

Mortgage loans

Short-term investments 121,158 121,158 164,278 164,278

Cash and cash equivalents 45,438 45,438 42,107 42,107

Restricted cash 79,573 79,573 65,167 65,167

Notes payable $ 50,000 $ 50,000 $ 50,000 $ 50,000

Subordinated debt 78,609 78,728 78,529 83,235

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 December 31, 2023:

December 31, 2023

Weighted average 7.05 %

SKYWARD SPECIALTY INSURANCE GROUP, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value Measurements (continued)

The following table summarizes fair value measurements by level within the fair value hierarchy for assets and liabilities with a disclosed fair value:

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

December 31, 2023

6 unchanged sentences

Commercial mortgage-backed securities — 29,934 — 29,934

Asset-backed securities — 109,824 — 109,824

Other asset-backed securities — 185,727 — 185,727

Total fixed maturity securities, available-for-sale 44,166 973,485 — 1,017,651

Fixed maturity securities, held-to-maturity:

Asset-backed securities — — 46,771 46,771

Other asset-backed securities — — 41,017 41,017

Total fixed maturity securities, held-to-maturity — — 41,017 41,017

23 unchanged sentences

Short-term investments 270,226 — — 270,226

Total assets measured at fair value $ 281,097 $ 567,802 $ 99,613 $ 948,512

Notes payable $ — $ 50,000 $ — $ 50,000

Subordinated debt — 78,728 — 78,728

Total investments $ 425,283 $ 980,843 $ 91,087 $ 1,497,213

SKYWARD SPECIALTY INSURANCE GROUP, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value Measurements (continued)

December 31, 2022

6 unchanged sentences

Commercial mortgage-backed securities — 36,495 — 36,495

Asset-backed securities — 79,764 — 79,764

Other 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 — — 47,117 47,117

Other asset-backed securities — — 46,771 46,771

Total fixed maturity securities, held-to-maturity — — 46,771 46,771

10 unchanged sentences

Preferred stocks:

Consumer staples — 117 — 117

Finance — 7,085 — 7,085

Industrial — 1,020 — 1,020

Other — 549 — 549

8 unchanged sentences

Short-term investments 121,158 — — 121,158

Total assets measured at fair value $ 313,346 $ 427,254 $ 76,381 $ 816,981

Notes payable $ — $ 50,000 $ — $ 50,000

Subordinated debt — 83,235 — 83,235

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

Total investments $ 281,097 $ 567,802 $ 99,613 $ 948,512

SKYWARD SPECIALTY INSURANCE GROUP, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value Measurements (continued)

practicable to estimate fair value.

The following table sets forth the changes in the fair value of instruments carried at fair value with a Level 3 measurement during the year ended December 31, 2023:

($ in thousands) Mortgage Loans

Balance at December 31, 2022 $ 52,842

Total losses for the period recognized in net investment gains (losses) ( 385 )

Issuances 27,642

Settlements ( 30,029 )

Balance at December 31, 2023 $ 50,070

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 $ ( 426 )

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.

6 unchanged sentences

As of December 31, 2023, the Company determined the fair value of these instruments using the income approach utilizing inputs that are unobservable (Level 3).

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 unobservable (Level 3).

Notes payable:

The carrying value approximates the estimated fair value for notes payable as the notes payable accrue interest at current market rates plus a spread.

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

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

Subordinated debt:

3 unchanged sentences

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

Other financial instruments qualify as insurance-related products and are specifically exempted from fair value disclosure requirements.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

December 31, 2023 December 31, 2022

($ in thousands) Carrying

Value Carrying

Notes payable

Term loan $ — $ — $ 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 $ 59,186 $ 59,794 $ 59,137 $ 59,794

Unsecured subordinated notes 19,504 21,378 19,472 18,934

Subordinated debt, net of debt issuance costs $ 78,690 $ 81,172 $ 78,609 $ 78,728

Other financial instruments qualify as insurance-related products and are exempt from fair value disclosure requirements.

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, through Westaim HIIG LP (a limited partnership controlled by Westaim), is the Company’s largest shareholder.

As of December 31, 2023 and 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 fixed rates, mature in approximately one to two years from loan origination and the principal amounts of the loans range between 40 % to 90 % of the property’s appraised value at the time the loans were made.

Mortgage loan participations are carried at cost adjusted for unamortized premiums, discounts, and loan fees.

The carrying value of the Company’s mortgage loans for the years ended December 31, 2022 and 2021 is as follows:

The loans earn interest at a fixed spread above a prime rate, mature in approximately 1 to 3 years from loan origination and the principal amounts of the loans range between 61 % to 90 % of the property’s appraised value at the time the loans were made.

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

($ in thousands) 2023 2022

9 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Mortgage Loans (continued)

The Company’s gross investment income for the years ended December 31, 2023 and 2022 is as follows:

9 unchanged sentences

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.

When an amount is determined to be uncollectible, the Company writes off the uncollectible amount in the period it was determined to be uncollectible.

The were no write-offs for uncollectible amount for the years ended December 31, 2022 and 2021.

The Company writes off the uncollectible amount in the period it was determined to be uncollectible.

There was no write-off for uncollectible amounts for the years ended December 31, 2023 and 2022.

As of December 31, 2023 and 2022, approximately $ 7.1 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.

As of December 31, 2023, $ 6.8 million of mortgage loans were not producing income for the previous 12 months.

Other Long-Term Investments

Equity Method Investments

Unconsolidated Subsidiaries - 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 Company owns 100 % of the limited partner interests in Universa Black Swan Protection Protocol LIX L.P.

(“Universa Black Swan”);

however, it does not have the power to direct the activities of Universa Black Swan and the Company does not consolidate the entity.

The Company owns investment products issued by Arena Special Opportunities Partners (Feeder) I, LP (“Arena SOP”), managed by Arena, which is affiliated with Westaim.

3 unchanged sentences

Income in excess of return targets on the senior and junior notes is allocated to the investment in Arena SOP.

During the year ended December 31, 2021, the Company invested $ 1.9 million in Hudson Ventures Fund 2, LP., $ 5.0 million in Universa Black Swan, and $ 12.0 million in JVM Multi-Family Premier Fund IV, LLC and $ 12.0 million in JVM Preferred Equity Fund, LLC, together “JVM Funds LLC”.

During the year ended December 31, 2022, the Company entered into an agreement for limited partnership interests in Brewer Lane Ventures Fund II, L.P.

During the year ended December 31, 2022, the Company invested $ 0.2 million in Brewer Lane Ventures Fund II, L.P.

and $ 1.3 million in Hudson Ventures Fund 2, LP.

During the years ended December 31, 2023 and 2022, the Company invested $ 0.4 million and $ 0.2 million, respectively, in Brewer Lane Ventures Fund II, L.P.

and $ 0.9 million and $ 1.3 million, respectively, in Hudson Ventures Fund 2, LP.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other Long-Term Investments (continued)

The carrying value of equity method investments at December 31, 2023 and 2022 is as follows:

9 unchanged sentences

$ 74,628 $ 86,789

Net investment income from equity method investments at December 31, 2022 and 2021 is summarized as follows:

Equity in (loss) income from unconsolidated subsidiaries for the years ended December 31, 2023 and 2022 is summarized as follows:

($ in thousands) 2023 2022

5 unchanged sentences

RISCOM 884 1,471

Brewer Lane Ventures Fund II LP ( 78 ) —

Universa Black Swan LP units ( 988 ) ( 3,028 )

8 unchanged sentences

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 summarizes the Company’s recorded investment in RISCOM compared to its share of underlying equity for the years ended December 31, 2022 and 2021:

For investment in RISCOM, a similar asset would be agent relationships which is amortized over a 15 -year useful life.

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

($ in thousands) 2023 2022

3 unchanged sentences

Recorded investment balance $ 4,121 $ 4,037

The $ 24.0 million investment in JVM Funds LLC as of December 31, 2021 represented the provisional amount, which reflected an estimate of no difference in the proportionate share of underlying equity in net assets.

During the year ended

SKYWARD SPECIALTY INSURANCE GROUP, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other Long-Term Investments (continued)

December 31, 2022, the Company adjusted its purchase price allocation and allocated the difference between the cost of JVM Funds LLC and its proportionate share of the underlying equity in net assets to investments in rental properties.

The Company amortizes the difference in net assets over the 7 -year estimated useful life of the investment in rental properties.

The following table summarizes the Company’s recorded investment in JVM Funds LLC compared to its share of underlying equity for the years ended December 31, 2022 and 2021:

The Company amortizes the difference in net assets in JVM Funds LLC over the 7 -year estimated useful life of the investment in rental properties.

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

($ in thousands) 2023 2022

3 unchanged sentences

Recorded investment balance $ 20,061 $ 22,473

Investment in Bank Holding Companies

Beginning 2017 and through 2018, the Company acquired a $ 2.0 million investment in Captex Bancshares, a Texas bank holding company.

The Company’s assessment of its ownership percentage and influence through one of its employees on the Board of Directors of Captex Bankshares indicates the Company does not have significant influence over the investee.

The Company carries its investment in Captex Bancshares at cost, less impairment or observable changes in price.

Unconsolidated Subsidiaries - Investment in Bank Holding Companies

The Company carries a $ 2.0 million investment in Captex Bancshares, a Texas bank holding company, at cost, less impairment or observable changes in price.

The Company does not have significant influence over the investee.

The Company reviews these investments for impairment or observable changes in price during each reporting period.

There were no impairments or observable changes in price during the years ended December 31, 2022 and 2021.

During the first quarter of 2020, the Company acquired a $ 2.0 million investment in Gulf Capital Bank, a Texas bank holding company.

The Company’s assessment of its ownership percentage indicates it does not have significant influence over the investee.

During the fourth quarter of 2020, the Company sold approximately $ 1.8 million of shares to other owners of Gulf Capital Bank at cost.

The Company sold its remaining shares of $ 0.2 million in Gulf Capital Bank at cost during the year ended December 31, 2022.

The Company carried its investment in Gulf Capital Bank at cost, less impairment or observable changes in price.

Investment in Indirect Loans and Loan Collateral

There was no impairment or observable change in price during the years ended December 31, 2023 and 2022.

Unconsolidated Subsidiaries - Investment in Indirect Loans and Loan Collateral

As of December 31, 2023 and 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 for the years ended December 31, 2022 and 2021 are as follows:

($ in thousands) Carrying

Value Unfunded

Commitment Carrying

Value Unfunded

The carrying value of the SMA1 and SMA2 as of December 31, 2023 and 2022 are as follows:

($ in thousands) 2023 2022

SMA1 $ 30,816 $ 36,426

1 unchanged sentence

Investment in indirect loans and loan collateral $ 36,025 $ 38,436

See Note 11 for common stock acquired from an entity providing the Company’s subordinated debt.

Unconsolidated Subsidiaries - 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.

The Company does not have significant influence over the investee.

There was no impairment or observable change in price during the years ended ended December 31, 2023 and 2022.

See Note 10 for further information on the Trust.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 year ended ended December 31, 2023.

($ in thousands) Premiums Receivable, Net Allowance for Estimated Uncollectible Premiums

Balance at December 31, 2022 $ 139,215 $ 629

Cumulative effect of adoption of ASU 2016-13 at January 1, 2023 —

Current period change for estimated uncollectible premiums 748

Write-offs of uncollectible premiums receivable ( 513 )

Recoveries of amounts previously written off 100

Balance at December 31, 2023 $ 179,235 $ 964

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 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 following table sets forth the Company’s reinsurance recoverables net of credit enhancements by A.M.

Best as of December 31, 2023:

Best Rating December 31, 2023

A- and above 98.5 %

B++ to B+ 0.7

Not rated 0.8

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 year ended ended December 31, 2023:

($ in thousands) Reinsurance Recoverables, Net Allowance for Estimated Uncollectible Reinsurance

Balance at December 31, 2022 $ 581,359 $ —

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 December 31, 2023 $ 596,334 $ 2,295

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Property and Equipment

The following table presents the components of property and equipment for the years ended December 31, 2022 and 2021, which are included within other assets on the consolidated balance sheets.

The following table presents the components of property and equipment as of December 31, 2023 and 2022, which are included within other assets on the consolidated balance sheets.

($ in thousands) 2023 2022

5 unchanged sentences

Total $ 9,070 $ 8,674

The following table presents recorded depreciation expense at December 31, 2022 and 2021:

($ in thousands) 2022 2021

Depreciation expense $ 3,582 $ 3,636

Depreciation expense related to property and equipment was $ 3.2 million and $ 3.6 million for the years ended December 31, 2023 and 2022, respectively.

The Company determines if a contract contains a lease at inception and recognizes a right-of-use asset, within other assets, and lease liability, within accounts payable and accrued liabilities, based on the present value of future lease payments.

1 unchanged sentence

The Company’s leases are primarily for office facilities which have been classified as operating leases.

Its leases have remaining lease terms ranging from one year to 7 years, some of which include options to extend the leases.

Its leases have remaining lease terms ranging from 1 to 6 years, some of which include options to extend the leases.

Lease expense for the years ended December 31, 2023 and 2022 was $ 2.8 million and $ 2.6 million, respectively.

The following tables provide information regarding the Company’s leases for the years ended December 31, 2022 and 2021:

The following tables provide information regarding the Company’s leases as of and for the years ended December 31, 2023 and 2022:

($ in thousands) 2023 2022

11 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Leases (continued)

The following table sets forth the future minimum lease payment obligations of the Company’s operating leases at December 31, 2023:

5 unchanged sentences

Subordinated Debt

The following table summarizes the Company’s subordinated debt for the years ended December 31, 2022 and 2021:

The following table summarizes the Company’s subordinated debt as of December 31, 2023 and 2022:

($ in thousands) 2023 2022

11 unchanged sentences

The Notes have junior priority to all previously issued debt.

The Company reports debt related to the Notes in its December 31, 2022 and 2021 consolidated balance sheets, net of debt issuance costs of approximately $ 0.5 million and $ 0.6 million, respectively.

The Company reports debt related to the Notes in its December 31, 2023 and 2022 consolidated balance sheets, net of debt issuance costs of approximately $ 0.5 million.

These deferred financing costs are presented as a direct deduction from the carrying amount of the subordinated debt.

On August 2, 2006, Delos Capital Trust n/k/a HIIG Capital Trust I (the “Trust”), a Delaware statutory trust, issued $ 58.0 million of fixed/floating rate capital securities guaranteed by us.

On August 2, 2006, the Trust issued $ 58.0 million of fixed/floating rate capital securities guaranteed by us.

The Trust also issued us $ 1.8 million of common stock, classified within other long-term investments.

The Company has not consolidated the Trust that issued the capital securities, as it does not meet the criteria for consolidation and the Company does not have significant influence over the investee.

The Company has not consolidated the Trust as it does not meet the criteria for consolidation and the Company does not have significant influence over the investee.

The Company carries its investment in the common stock of the Trust at cost.

There were no impairments or observable changes in price during the year ended December 31, 2022.

There was no impairment or observable change in price during the year ended December 31, 2023.

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 the Company.

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

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

Interest on the Debentures 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 %.

The Company reflects debt related to the Debentures in its December 31, 2023 and 2022 consolidated balance sheets, net of debt issuance costs of approximately $ 0.6 million and $ 0.7 million, respectively.

These deferred financing costs are presented as a direct deduction from the carrying amount of the subordinated debt.

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

SKYWARD SPECIALTY INSURANCE GROUP, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Notes Payable

The following table summarizes the Company’s notes payable for the years ended December 31, 2022 and 2021:

($ in thousands) 2022 2021

Term loan, due December 31, 2024, interest payable quarterly $ 50,000 $ 50,000

The interest rate on the $ 50.0 million 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.

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

The principal balance of the $ 50.0 million term loan is due December 31, 2024.

Interest payments on the term loan at December 31, 2022 and 2021 were as follows:

($ in thousands) 2022 2021

Interest payments on term loan $ 1,443 $ 894

The interest rate on the $ 50.0 million revolving line of credit 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.

The entire principal balance of the $ 50.0 million revolving line of credit is due December 31, 2024.

Subject to lender approval, the Company has a right to increase the capacity to $ 75.0 million.

Interest payments on the Company’s revolving line of credit at December 31, 2022 and 2021 were as follows:

the Company with up to $ 150.0 million, 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, 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 December 31, 2023, the six-month SOFR on the Revolving Credit Facility was 5.47 %, plus a margin of 1.60 %.

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 %.

The revolving line of credit included a fee of 0.25 % on the unused portion.

The following table sets forth the interest payments on the Company’s notes payable during the years ended December 31, 2023 and 2022:

($ in thousands) 2023 2022

Interest payments on revolving line of credit $ — $ 127

The indebtedness is collateralized by a perfected first priority security interest in all of the assets of the Company, SUA and the outstanding capital stock of HSIC, which are both subsidiaries of the Company.

The Company’s credit agreement includes financial covenants that require the Company maintain minimum surplus and risk-based capital on HSIC, minimum net worth, and a minimum fixed charge coverage ratio as well as other customary covenants and events of default.

As of December 31, 2022, the Company was in compliance with all covenants in its credit agreement.

Interest payments on terminated term loan $ 1,396 $ 1,443

Interest payments on revolving credit facility 2,598 —

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 December 31, 2023, the Company was in compliance with all covenants.

Stockholders’ Equity

Conversion feature

On April 24, 2020 the Company closed a private preferred share rights offering.

Existing holders of common stock were given the right to subscribe for shares, on a pro rata basis, of Series A Convertible Preferred Stock (the “Preferred Shares”) with a face value of $ 50.00 per share.

The Preferred Shares provide the holder the option at any time to convert the Preferred Shares into common stock based on the Option Conversion Rate.

The initial Option Conversion rate allowed the holder of the Preferred Shares the right to convert into common stock based on a conversion price equal to $ 6.96 per common share.

In accordance with the terms of the Preferred Shares, the Option Conversion Rate was adjusted upon the completion of the audit of the financial statements as of and for the year ended December 31, 2021.

The adjustments to the Option Conversion Rate consisted of adjustments for:

(i) the after-tax cost of the loss portfolio transfer, a retroactive reinsurance agreement the Company entered into during the second quarter of 2020 (“LPT”);

(ii) the after-tax impact of any co-participation expense related to the LPT;

(iii) the development of losses and LAE reserves subject to but in excess of limits on the LPT;

and (iv) the after-tax impact of development on losses and LAE reserves not subject to the LPT subsequent to December 31, 2019.

As of December 31, 2022 and 2021, the Option 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.

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

The Company completed its initial public offering (“IPO”) on January 18, 2023 with 4,750,000 shares offered by the Company at a price of $ 15.00 per share.

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.

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, 1,969,660 Preferred Shares converted to 16,305,113 shares of common stock upon the Company’s closing of its IPO.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stockholders’ Equity (continued)

As of December 31, 2022 and 2021, the Company has the ability to settle in common shares and the Preferred Shares were classified within Stockholders’ Equity.

The following table presents Preferred Shares that could be converted to common shares after the final adjustment to the Option Conversion Rate at December 31, 2022:

Preferred shares outstanding 1,969,660

Common shares upon conversion of preferred shares 16,305,113

The Preferred Shares are subject to mandatory conversion upon a defined change of control transaction or the closing of an initial public offering at the Mandatory Conversion Rate.

The Mandatory Conversion Rate is similar to the Option Conversion Rate but is adjusted for the after-tax impact of any co-participation expense related to the LPT, the development of losses and LAE reserves in excess of limits on the LPT and the after-tax impact of development on losses and LAE reserves not subject to the LPT on the final day of the last quarter-end prior to when a defined change of control transaction or closing of an initial public offering occurs.

As of December 31, 2022 and 2021, 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.

The Preferred Shares have 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.

Income tax (benefit) expense for the years ended December 31, 2022 and 2021 consisted of the following:

Follow-On Offering

On November 20, 2023, the Company completed its follow-on offering with 2,150,000 shares sold by the Company at a price of $ 30.50 per share.

The Company’s net proceeds were approximately $ 62.5 million, after deducting underwriting discounts and specific incremental expenses directly attributable to the offering.

The following table sets forth the components of the Company’s income tax expense for the years ended December 31, 2023 and 2022:

($ in thousands) 2023 2022

Current income tax expense $ 14,736 $ 120

Deferred tax expense related to temporary differences 10,267 9,992

Total income tax expense $ 10,387 $ 9,992

Deferred tax expense 9,382 10,267

Income tax expense $ 24,118 $ 10,387

The Company’s provision for income taxes generally does not deviate substantially from the statutory tax rate.

The effective tax rate may vary slightly from the statutory rate due to tax adjustments for tax-exempt income and dividends-received deduction.

The differences between income taxes expected at the federal statutory income tax rate of 21% and the reported income tax expense for the years ended December 31, 2022 and 2021 are summarized as follows:

The effective tax rate may vary slightly from the statutory rate due to tax adjustments for tax-exempt income, dividends-received deduction and non-deductible expenses.

The following table sets forth the differences between income taxes expected at the federal statutory income tax rate of 21% and the reported income tax expense for the years ended December 31, 2023 and 2022.

($ in thousands) Amount Percentage Amount Percentage

6 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Income Taxes (continued)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at both December 31, 2022 and 2021 are presented below:

The following table sets forth the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2023 and 2022:

($ in thousands) 2023 2022

3 unchanged sentences

Unearned premiums 15,365 11,959

Intangibles 607 1,632

Capital loss carryover 1,321 —

Unrealized losses on investments 11,563 —

Unrealized losses on fixed maturity securities, available-for-sale 6,113 11,563

Stock options/awards 1,714 1,107

5 unchanged sentences

Deferred policy acquisition costs 11,528 8,209

Other long-term investments 6,460 6,055

Section 481(a) adjustment 3,477 1,405

Unrealized gains on equity securities 3,243 825

Depreciation 1,260 1,481

Investments 7,144 5,507

Unrealized gains on investments — 1,230

Other 1,120 891

1 unchanged sentence

Deferred income taxes $ 21,991 $ 36,188

The Company made no payment for federal income taxes, during the years ended December 31, 2022 and 2021, which are available for recoupment in the event of future losses.

The Company paid $ 15.8 million in federal income taxes during the year ended December 31, 2023.

The Company’s federal income tax returns for tax years 2020 to 2022 are subject to examination by the Internal Revenue Service.

As of December 31, 2022 and 2021, management does not believe there are any uncertain tax benefits that could be recognized within the next 12 months that would impact the Company’s effective tax rate.

The Company classifies all interest and penalties related to tax contingencies as income tax expense.

As of December 31, 2022 and 2021, there was no accrued interest recorded as an income tax liability.

The Company has no current U.S.

federal or state and local income tax examinations on-going at this time.

At December 31, 2023, the Company carried no balance for uncertain tax positions.

The Company had no accrual for the payment of interest and penalties at December 31, 2023 or 2022.

The Company has federal net operating loss carryforwards of approximately $ 49.4 million.

These net operating losses are set to expire beginning in 2030.

The Company is limited on the utilization of $ 58.6 million of the net operating losses under Internal Revenue Code Section 382 which imposes limitations on a corporation’s ability to utilize tax attributes if the corporation experiences an “ownership change.” The Company experienced an ownership change during 2013.

The 382 limitation is expected to result in an expiration of $ 2.8 million ($ 0.6 million tax effected) of net operating losses.

A valuation allowance has been established against this balance that is expected to expire without utilization.

The Company also generated a capital loss carryforward during the year ended December 31, 2022, resulting in a deferred tax asset of approximately $ 1.3 million.

This carryforward will expire in 2027 as the Company expects to utilize this carryforward, no valuation allowance is recorded against this deferred tax asset.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Income Taxes (continued)

The Company is limited on the utilization of $ 49.3 million of the net operating losses under Internal Revenue Code Section 382 (“Sec 382”) which imposes limitations on a corporation’s ability to utilize tax attributes if the corporation experiences an “ownership change” which occurred during 2014.

The Sec 382 limitation is expected to result in an expiration of $ 2.8 million ($ 0.6 million tax effected) of net operating losses.

A valuation allowance was established against the balance that is expected to expire without utilization.

The Company generated a capital loss carryforward in 2022, resulting in a deferred tax asset of $ 0.7 million as of December 31, 2023.

No valuation allowance is recorded against this deferred tax asset as the Company expects to utilize this carryforward before it expires in 2027.

The Company provides a valuation allowance against deferred tax assets when it is more likely-than-not that some portion, or all, of deferred tax assets will not be realized.

Its deferred tax valuation allowance for the years ended December 31, 2022 and 2021 is as follows:

($ in thousands) 2022 2021

Balance at beginning of year $ 586 $ 586

Balance at end of year $ 586 $ 586

Its deferred tax valuation allowance at December 31, 2023 and 2022 was $ 0.6 million .

Reserves for Losses and Loss Adjustment Expenses

2 unchanged sentences

multiline solutions, short tail/monoline specialty lines and exited lines.

The Company has chosen to disaggregate its short-duration loss disclosures in this manner as to not obscure useful information by otherwise aggregating items with significantly different characteristics.

A description of the factors the Company considered in its disaggregation by sub-category is as follows:

The Company determined that these disaggregated groupings have more homogeneous risk characteristics with similar development patterns and are generally subject to similar trends.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Short tail/monoline specialty lines

Short tail/monoline specialty lines includes those market niches for which the Company serves with monoline solutions which generally have shorter durations for losses to fully develop.

Short tail/monoline specialty lines includes the Company’s global property & agriculture, accident & health, surety, and professional lines underwriting divisions.

These are market niches for which the Company serves with monoline solutions which generally have shorter durations for losses to fully develop.

Losses for these lines are generally reported within a short period of time from the date of loss, and in most instances, claims are settled and paid within a relatively short timeframe.

1 unchanged sentence

Multi-line Solutions

Multi-line solutions includes those market niches for which the Company provides multiple products most frequently as an integrated solution.

Multi-line solutions includes the Company’s industry solutions, programs, captives and transactional E&S underwriting divisions.

These are market niches for which the Company provides multiple products most frequently as an integrated solution.

The multi-line solution subcategory is made up predominantly of occurrence liability including general liability, excess liability, and commercial auto.

1 unchanged sentence

Due to the unique claim characteristics of each product and the longer-tail nature of the multi-line solutions, this introduces more uncertainty as over time the claims can be impacted by changes in regulation, inflation and other unforeseen factors.

Exited lines includes all underwriting divisions which the Company has placed in run-off and are presented separately from lines that it currently underwrites.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Reserves for Losses and Loss Adjustment Expenses (continued)

The reconciliation of unpaid losses and loss adjustment expenses as reported in the consolidated balance sheets for the years ended December 31, 2022 and 2021 is as follows:

Exited lines includes all underwriting units that the Company placed in run-off and are presented separately from on-going lines of business.

The following table sets forth the reconciliation of unpaid losses and loss adjustment expenses for the years ended December 31, 2023 and 2022:

($ in thousands) 2023 2022

13 unchanged sentences

Reserves for losses and LAE, end of period $ 1,314,501 $ 1,141,757

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, the Company’s 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.

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.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Short Duration Contract Disclosures

4 unchanged sentences

reserve for loss and loss adjustment expenses).

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Reserves for Losses and Loss Adjustment Expenses (continued)

Short Tail/Monoline Specialty — includes specialty/monoline business — Global Property, A&H, Surety, Professional Lines underwriting divisions

Incurred Losses and ALAE, Net of Reinsurance ($ in thousands) As of December 31, 2022

Short Tail/Monoline Specialty

($ in thousands except number of claims)

Incurred Losses and LAE, Net of Reinsurance As of December 31, 2023

Years Ended December 31,

10 unchanged sentences

Total net reserves for loss and LAE $ 276,704

*Data presented for these calendar years is required supplementary information, which is unaudited.

Cumulative Paid Losses and ALAE, Net of Reinsurance ($ in thousands)

*Supplementary information and unaudited

($ in thousands)

Cumulative Paid Losses and LAE, Net of Reinsurance ($ in thousands)

Years Ended December 31,

5 unchanged sentences

Total $ 283,284

*Data presented for these calendar years is required supplementary information, which is unaudited.

Multi-line Solutions — mid to longer tail lines of business, includes the Company’s industry solutions, programs, captives and transactional E&S underwriting divisions

Incurred Losses and ALAE, Net of Reinsurance ($ in thousands) As of December 31, 2022

*Supplementary information and unaudited

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Multi-line Solutions

($ in thousands except number of claims)

Incurred Losses and LAE, Net of Reinsurance ($ in thousands) As of December 31, 2023

Year Years Ended December 31, Reported Claims

14 unchanged sentences

Total net reserves for loss and LAE $ 463,146

*Data presented for these calendar years is required supplementary information, which is unaudited.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Reserves for Losses and Loss Adjustment Expenses (continued)

Cumulative Paid Losses and ALAE, Net of Reinsurance ($ in thousands)

*Supplementary information and unaudited

($ in thousands)

Cumulative Paid Losses and LAE, Net of Reinsurance ($ in thousands)

Years Ended December 31,

10 unchanged sentences

Total $ 994,414

*Data presented for these calendar years is required supplementary information, which is unaudited.

*Supplementary information and unaudited

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Exited Lines — all lines in runoff

Incurred Losses and ALAE, Net of Reinsurance ($ in thousands) As of December 31, 2022

($ in thousands except number of claims)

Incurred Losses and LAE, Net of Reinsurance ($ in thousands) As of December 31, 2023

Years Ended December 31, Reported Claims

14 unchanged sentences

Total net reserves for loss and LAE $ 119,167

*Data presented for these calendar years is required supplementary information, which is unaudited.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Reserves for Losses and Loss Adjustment Expenses (continued)

Cumulative Paid Losses and ALAE, Net of Reinsurance ($ in thousands)

*Supplementary information and unaudited

($ in thousands)

Cumulative Paid Losses and LAE, Net of Reinsurance ($ in thousands)

Years Ended December 31,

10 unchanged sentences

Total $ 637,997

*Data presented for these calendar years is required supplementary information, which is unaudited.

The table below presents the reconciliation of the net incurred and paid claims development to loss reserves in the consolidated balance sheets at December 31, 2022 by sub-category:

*Supplementary information and unaudited

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The table below presents the reconciliation of the net incurred and paid loss development tables to the balance sheet reserves for losses and loss adjustment expenses at December 31, 2023 and 2022:

($ in thousands) 2023

9 unchanged sentences

Total reinsurance recoverable on unpaid claims 455,484

Unallocated LAE 7,680

Reserves for losses and LAE at end of year $ 1,314,501

The following table presents supplementary information about average historical claims duration as of December 31, 2022, by sub-category is as follows:

The following table sets forth the historical average annual payout of incurred losses and allocated loss adjustment expenses (claims duration) for short-duration contracts, based on the disaggregated information in the paid loss development tables, net of reinsurance:

Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance

(Unaudited Required Supplementary Information)

Years 1 2 3 4 5 6 7 8 9 10

1* 2* 3* 4* 5* 6* 7* 8* 9* 10*

Short Tail/Monoline Specialty 54.0 % 24.7 % 12.1 % 5.0 % 2.2 % 1.0 % 0.5 % 0.2 % 0.2 % 0.1 %

1 unchanged sentence

Exited Lines 42.8 % 22.0 % 14.2 % 8.4 % 3.2 % 3.2 % 2.7 % 1.0 % 0.8 % 1.7 %

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Direct and assumed premiums written by line of business pursuant to statutory accounting guidelines for the years ended December 31, 2022 and 2021 are as follows:

($ in thousands) 2022 2021

Property $ 279,384 24.4 % $ 235,686 25.1 %

Commercial Auto Liability $ 243,300 21.3 % $ 227,853 24.2 %

General Liability $ 140,557 12.3 % $ 116,953 12.4 %

Group Accident & Health $ 130,808 11.4 % $ 112,146 11.9 %

Professional Liability $ 90,418 7.9 % $ 61,466 6.5 %

Excess Liability $ 79,922 7.0 % $ 52,176 5.6 %

Surety $ 79,062 6.9 % $ 51,792 5.6 %

Workers’ Compensation $ 51,790 4.5 % $ 41,890 4.5 %

Commercial Auto Physical Damage $ 48,711 4.3 % $ 39,897 4.2 %

Total $ 1,143,952 100.0 % $ 939,859 100.0 %

*Supplementary information and unaudited

Commission and Fee Income

SUA 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 Company’s disaggregated revenues from contracts with customers for the years ended December 31, 2022 and 2021 are as follows:

The following table sets forth the Company’s disaggregated revenues from contracts with customers for the years ended December 31, 2023 and 2022:

($ in thousands) 2023 2022

3 unchanged sentences

Total commission and fee income $ 6,064 $ 5,199

The Company’s contract assets from commission and fee income for the years ended December 31, 2022 and 2021 are as follows:

($ in thousands) 2022 2021

Contract asset $ 1,292 $ 1,209

The following table sets forth the Company’s opening and closing balances of contract assets from commission and fee income for the years ended December 31, 2023 and 2022:

($ in thousands) Contract Assets

Balance at December 31, 2021 $ 1,209

Balance at December 31, 2022 1,292

Balance at December 31, 2023 976

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Underwriting, Acquisition and Insurance Expenses

The Company’s underwriting, acquisition and insurance expenses at December 31, 2022 and 2021 consisted of the following:

The following table sets forth the components of underwriting, acquisition and insurance expenses for the years ended December 31, 2023 and 2022:

($ in thousands) 2023 2022

5 unchanged sentences

The Company remains obligated for amounts ceded if reinsurers do not meet their obligations.

The effects of reinsurance on premiums written and earned at December 31, 2022 and 2021 are as follows:

The following table sets forth the effects of reinsurance on premiums written and earned for years ended December 31, 2023 and 2022:

($ in thousands) Written Earned Written Earned

4 unchanged sentences

Ceded losses and LAE incurred $ 337,011 $ 311,257

The components of reinsurance recoverables and ceded unearned premium at December 31, 2022 and 2021 are as follows:

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

($ in thousands) 2023 2022

Unpaid losses and loss adjustment expenses ceded $ 435,986 $ 381,338

Paid losses and loss adjustment expense ceded 107,228 90,761

Ceded unpaid losses and LAE $ 455,484 $ 435,986

Ceded paid losses and LAE 122,287 107,228

Loss portfolio transfer 20,858 38,145

Allowance for credit losses ( 2,295 ) —

Reinsurance recoverables $ 596,334 $ 581,359

8 unchanged sentences

Under the LPT, the Company received reinsurance protection of approximately $ 127.4 million above the ceded losses and LAE reserves and is subject to co-participations at specified amounts.

During the years ended December 31, 2022 and 2021, the Company strengthened reserves for certain divisions covered by the LPT by $ 14.4 million and $ 28.0 million, respectively, resulting in an increase in the amount ceded under this agreement.

The increase in the amount ceded during the years ended December 31, 2022 and 2021 were partially offset by $ 5.8 million and $ 11.9 million, respectively, of recognized gain.

During the year ended December 31, 2022, the Company strengthened reserves for certain divisions covered by the LPT by $ 14.4 million, resulting in an increase in the amount ceded under this agreement.

The increase in the amount ceded during the year ended December 31, 2022 were partially offset by $ 5.8 million of recognized gain.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Reinsurance (continued)

The following table presents the impact of the LPT on the consolidated statements of operations for the years ended December 31, 2023 and 2022:

2 unchanged sentences

Reinsurance recoveries under the LPT 1,427 5,813

Pretax net impact of the LPT and strengthening of reserves subject to the LPT $ ( 8,572 ) $ ( 16,063 )

Pretax net impact of the LPT $ 1,427 $ ( 8,572 )

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 was included in other assets on the consolidated balance sheets.

The following table presents the Company’s deposit assets for the years ended December 31, 2022 and 2021:

($ in thousands) 2022 2021

Deposit asset $ 41,801 $ 45,003

The Company’s deposit assets as of December 31, 2023 and 2022 were $ 29.9 million and $ 41.8 million, respectively.

Stock-Based Compensation

Legacy Programs

The Legacy Programs were active during the year ended December 31, 2021 and allowed key employees to purchase the Company’s common stock at a price based on fair value of the Company at the end of the quarter in which the employee commits to the purchase.

The Company then matched all purchases with stock grants.

The programs required an initial cash payment of at least 30 % of the committed fair value of the purchase with any remaining commitment recorded as a note receivable to the Company which is included in Stockholders’ Equity.

Grants awarded vest after two conditions are met (i) the employee has worked for us for three years after the grant and (ii) cash payments are made for stock purchases.

All grants awarded under the Legacy Programs vest over a three-year service period and are expensed on a pro rata basis over the service period.

Under the Legacy Programs, the Company sold 63,374 shares of its common stock during the year ended December 31, 2021.

In accordance with the plan, the Company granted a match of 63,374 shares of its common stock during the year ended December 31, 2021.

During the year ended December 31, 2021, members of the Board of Directors were awarded 51,889 common shares with a service period of between 0 to 3 years.

Under the Legacy Programs, the Company offered employees the option to finance up to 70 % of the purchased shares with a stock note receivable.

These stock notes receivable are recorded as a reduction to Stockholders’ Equity.

The stock notes receivable bear interest at a rate ranging from 0.95 % to 2.80 %, based on the Internal Revenue Service applicable federal rates.

The following table presents common stock notes receivable related to Legacy Programs at both December 31, 2022 and 2021:

($ in thousands) 2022 2021

Common stock notes receivable $ 512 $ 1,630

During the year ended December 31, 2021, several employees who previously received common stock awards under the Legacy Programs notified the Company that they would not be repaying the remaining balance on their stock notes receivable.

Under the terms of the Legacy Programs, employees would return their common shares financed by the remaining stock note balance and forfeit the same number of award shares.

During the year ended December 31, 2021, 21,314 common shares financed and awarded were returned and forfeited.

The return of 10,657 financed shares resulted in the cancellation of $ 0.8 million in stock notes for the year ended December 31, 2021.

Forfeitures of the 10,657 award

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 3,200,656 shares of common stock were available for issuance.

In December 2020, the Compensation Committee approved a Long Term Incentive Plan (the “2021 Plan”).

The 2021 Plan provides for the granting of restricted stock, restricted stock units and performance stock units (collectively “restricted stock units” or “stock units”), as well as cash-based performance awards, to select employees and non-employee directors of the Company.

The Compensation Committee granted 1,101,856 and 198,842 shares of restricted stock and restricted stock units during the years ended December 31, 2023 and 2022, under the 2022 Plan and 2021 Plan, respectively.

Members of the Board of Directors were granted 23,482 and 15,196 shares of restricted stock during the years ended December 31, 2023 and 2022, respectively, with a service period of one 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 expense for these equity-based incentives is based on their fair value at the date of grant and amortized over their vesting period.

The Compensation Committee granted 759,990 stock options during the year ended December 31, 2023.

The grant date fair value of the options under the 2022 Plan was determined using the Black-Scholes model where the term was the contractual term of 10 years less the weighted average service period.

The volatility was determined based on the historical volatility of comparable publicly traded insurance companies.

The restricted stock and restricted stock units granted to employees and the Board of Directors during the years ended December 31, 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 year ended December 31, 2023 were valued at approximately $ 4.4 million based on the grant date fair value.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock Based Compensation (continued)

shares resulted in the reversal of previously recognized stock compensation expense of $ 0.8 million for the year ended December 31, 2021.

Long Term Incentive Plan

During the year ended December 31, 2022 and 2021, under the 2021 Plan the Compensation Committee approved 198,842 and 217,395 shares of common stock, respectively.

During the year ended December 31, 2022, members of the Board of Directors were awarded 15,196 common shares with a service period of one year .

The shares granted to employees and the Board of Directors during the year ended December 31, 2022 and 2021 were valued at approximately $ 2.6 million and $ 2.5 million, respectively, based on the grant date fair value.

A summary of the equity awards, target payout ranges based on meeting award conditions and authorized target common shares is as follows:

The following table sets forth the Company’s equity awards, target payout ranges and authorized target restricted stock and stock units for the years ended December 31, 2023 and 2022:

Payout Range Requisite

6 unchanged sentences

3 years 95,456

Restricted share and stock unit awards N/A 1 to 3 years

Service condition awards N/A 1 to 4 years

Stock options N/A 3 to 4 years

Year ended December 31, 2022

3 unchanged sentences

3 years 26,210

Restricted stock unit awards N/A 3 years 141,420

A summary of the status of the Company’s non-vested common stock awards from the Legacy Programs and the 2021 Plan is presented below:

Restricted stock unit awards N/A 1 to 3 years

The following table sets forth option activity for the year ended December 31, 2023 :

Weighted-Average

Fair Value Number of Common Shares

Exercise Price Stock

Outstanding at January 1, 2023 —

Granted $ 15.00 759,990

Outstanding at December 31, 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 December 31, 2023 was $ 14.3 million.

The weighted-average remaining contractual life of the options outstanding at December 31, 2023 was 9.0 years.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table sets forth the Company’s restricted stock and restricted stock units activity for the years ended December 31, 2023 and 2022:

Weighted-Average

Fair Value Stock and Stock Units

Non-vested at January 1, 2023 $ 12.55 419,896

8 unchanged sentences

Non-vested at December 31, 2022 $ 12.55 419,896

The total fair value of shares vested at December 31, 2023 and 2022 were $ 0.5 million and $ 2.2 million, respectively.

As of December 31, 2023 the total unrecognized compensation cost related to non-vested, share-based compensation awards was $ 15.9 million and the weighted average period over which that cost is expected to be recognized is 1.5 years.

The Company recognized $ 8.5 million and $ 2.3 million of stock-based compensation expense for the years ended December 31, 2023 and 2022, respectively.

Employee Stock Purchase Plan

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-period or end-of-period market price.

The company has reserved 376,548 common shares under this plan.

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.

As of December 31, 2023, a total of 35,430 shares had been purchased under this plan.

The Company recognized $ 0.2 million of expense for the year ended December 31, 2023.

As of December 31, 2023, the fair value of unrecognized expense was $ 0.3 million.

Stock Notes Receivable

The Company previously granted common stock to its employees and non-employee directors under the Stock Purchase Program and Equity Incentive Program (the “Legacy Programs”).

The Legacy Programs required that employees who receive an award purchase a certain amount of stock, which the Company then matched.

The matching share awards were subject to certain vesting requirements.

For the purchased portion of the participant’s stock, the participant was required to make a minimum payment toward the purchase commitment, with the remainder of the balance issued as a note receivable to the Company and recorded as a stock notes receivable within stockholders’ equity.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock Based Compensation (continued)

Stock-based compensation expense for the years ended December 31, 2022 and 2021 is summarized as follows:

($ in thousands) 2022 2021

Stock-based compensation expense

Stock-based compensation expense $ 2,325 $ 1,365

Forfeitures ( 38 ) ( 843 )

Total $ 2,287 $ 522

Earnings Per Share

The following table presents a reconciliation of the numerator and denominator of the basic and diluted earnings per share computations contained in the consolidated financial statements for the years ended December 31, 2022 and 2021.

The following table sets forth the compilation of basic and diluted net earnings per share for the years ended December 31, 2023 and 2022:

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

5 unchanged sentences

Basic weighted-average common shares 36,031,907 16,568,393

Preferred shares (if converted method) 15,245,533 15,235,568

Contingently issuable instruments (treasury stock method) 519,080 723,146

Market condition awards (contingently issuable) 94,936 67,598

Performance awards (contingently issuable) 39,148 —

Restricted stock units (treasury stock method) 186,104 133,024

Dilutive effect of preferred shares 716,708 15,245,533

Dilutive effect of stock notes 696,110 519,080

Dilutive effect of awarded stock units 736,837 320,188

Dilutive effect of awarded options 135,972 —

Diluted weighted-average common share equivalents 38,317,534 32,653,194

1 unchanged sentence

Diluted earnings per share $ 2.24 $ 1.21

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

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 presents instruments that were excluded from the calculation of diluted weighted-average common share equivalents at both December 31, 2022 and 2021.

Contingently issuable instruments (treasury stock method) 60,576 —

SKYWARD SPECIALTY INSURANCE GROUP, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Earnings Per Share (continued)

The Company’s common and preferred shares financed by stock notes are contingently issuable instruments where the holder must return, all or part of, the shares if the stock notes are not paid off.

The following table presents anti-dilutive instruments that were excluded from the calculation of diluted weighted-average common share equivalents during the years ended December 31, 2023 and 2022:

Stock notes — 60,576

Awarded stock units 3,931 —

Awarded options 914 —

The following table presents common share equivalents of contingently issuable instruments that were excluded from basic earnings per share in shares for the years ended December 31, 2023 and 2022:

2 unchanged sentences

Total 920,864 1,082,521

Employee Benefit Plans

2 unchanged sentences

The Company matches employee contributions on a discretionary basis.

The following table presents the Company’s expensed matching contributions for the years ended December 31, 2022 and 2021:

($ in thousands) 2022 2021

401(k) matching contributions $ 2,389 $ 2,288

During the years ended December 31, 2023 and 2022, the Company contributed $ 2.9 million and $ 2.4 million in matching contributions to the Plan, respectively.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Related Party Transactions

In 2014 and continuing through 2015, Westaim HIIG LP acquired a majority of the Company’s common stock.

As of December 31, 2022 and 2021, Westaim HIIG LP owns 44.5 % and 71.0 % of the Company’s common stock, respectively.

The changes in Westaim HIIG LP’s ownership percentage were primarily due to transactions between Westaim HIIG LP and its partners.

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

As of December 31, 2023, Westaim owned 17.5 % 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 Westaim HIIG LP’s ownership percentage were primarily due to equity offerings, conversion of preferred common stock, and distribution of shares controlled by Westaim through a limited partnership.

In 2015, the Company purchased 3,076,924 shares of Westaim common stock for $ 8.4 million.

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

The unrealized loss on this investment for the years ended December 31, 2022 and 2021 is as follows:

($ in thousands) 2022 2021

Unrealized losses on investment in Westaim $ ( 2,283 ) $ ( 1,971 )

On April 24, 2020, Westaim HIIG LP affiliates participated in the Company’s preferred share rights offering and purchased $ 68.6 million of Preferred Shares in exchange for $ 68.1 million of cash and $ 0.5 million of stock notes.

Within this group, Westaim purchased $ 44.0 million of Preferred Shares in exchange for $ 44.0 million of cash.

As of December 31, 2022 and 2021, Westaim owns 44.7 % of the Company’s preferred stock.

Westaim performs consulting and certain other services for the Company pursuant to an agreement (the “Management Services Agreement”).

Pursuant to the Management Services Agreement, the Company is required to pay Westaim $ 0.5

SKYWARD SPECIALTY INSURANCE GROUP, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Related Party Transactions (continued)

million a year plus expenses.

The agreement will be effective until the termination date.

The termination date is the earliest of (a) the date on which Westaim HIIG LP owns less than 8 % of the number of shares outstanding, (b) the date on which the Company’s initial public offering is consummated, or (c) the date upon which a change in control occurs.

Pursuant to the current Management Services Agreement, at December 31, 2022 and 2021, the Company incurred the following expenses related to services provided by Westaim:

($ in thousands) 2022 2021

Management services agreement $ 500 $ 500

During 2016, the Company entered into an agency agreement with RISCOM, in which the Company holds a 20 % ownership interest, for wholesale brokerage services in addition to the already existing managing general agency agreement between the parties.

Net earned premium and gross written commissions related to these agreements at December 31, 2022 and 2021 is summarized as follows:

The Company had an unrealized gain on this investment of $ 0.5 million at December 31, 2023, and an unrealized loss of $ 2.3 million at December 31, 2022.

Prior to the closing of the IPO, Westaim performed consulting and certain other services for the Company pursuant to a Management Services Agreement.

The agreement terminated pursuant to its terms upon the closing of the IPO.

RISCOM provides the Company with wholesale brokerage services.

RISCOM and the Company also have a managing general agency agreement.

The Company holds a 20 % ownership interest in RISCOM.

Net earned premium and gross written commissions related to these agreements for the years ended December 31, 2023 and 2022 is summarized as follows:

($ in thousands) 2023 2022

1 unchanged sentence

Gross written commissions 24,177 23,472

Premiums receivable from RISCOM at December 31, 2022 and 2021 are as follows:

($ in thousands) 2022 2021

Premiums receivable $ 9,940 $ 11,334

Premiums receivable from RISCOM as of December 31, 2023 and 2022 were $ 10.6 and $ 9.9 million, respectively.

The Company has reinsurance agreements with Everest Re, an affiliate of Mt.

Whitney Securities, LLC, a limited partner of Westaim HIIG LP and holder of Preferred Shares.

Reinsurance premiums ceded related to the agreement at December 31, 2022 and 2021 are as follows:

($ in thousands) 2022 2021

Reinsurance premiums ceded $ 59,592 $ 101,154

Reinsurance recoverable from Everest Re, net of premium payables for the years ended December 31, 2022 and 2021 are as follows:

($ in thousands) 2022 2021

Reinsurance recoverable, net of premium payables $ 177,455 $ 168,847

During the year ended December 31, 2022, the Company began investing in multiple investment products issued by Arena Special Opportunities Partners (Feeder) II, LP (“Arena SOP II”), managed by Arena, which is affiliated with Westaim.

The investment products include senior and junior notes issued by the Arena SOP II to raise capital from limited partners to fund purchases of investments.

The return on the investments is used to pay interest on the senior and junior

SKYWARD SPECIALTY INSURANCE GROUP, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Related Party Transactions (continued)

notes based on target returns of each class.

The senior and junior notes are debt securities classified as held to maturity and presented on the balance sheet within fixed maturity securities, held to maturity.

As of December 31, 2022, the Company invested $ 3.4 million in the senior and junior notes.

During the second quarter of 2021, the Company began investing in an asset-backed securities investment account managed by Arena.

The asset-backed securities are within fixed maturity securities, available for sale on the consolidated balance sheet.

As of December 31, 2022, the Company has no unfunded commitment related to this investment.

The following table reflects advisory and professional services fees and expense reimbursements paid to various affiliated shareholders and directors during the years ended December 31, 2022 and 2021:

($ in thousands) 2022 2021

Professional fees and reimbursements $ 3,387 $ 3,669

Whitney Securities, LLC, which was a limited partner of Westaim HIIG LP through November 30, 2022, and a holder of preferred shares.

During the year ended December 31, 2023, Mt.

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

Reinsurance premiums ceded during the year ended December 31, 2022 related to the agreement was $ 59.6 million.

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

Advisory and professional services fees and expense reimbursements paid to various affiliated stockholders and directors for the years ended December 31, 2023 and 2022 were $ 3.6 million and $ 3.4 million, respectively.

See Notes 5, 6 and 10 for investments involving affiliated companies and additional related party transactions.

See Note 13 for related party transactions related to the Company’s preferred share rights offering.

See Note 12 for related party transactions related to the Company’s common and preferred shares.

Commitments and Contingencies

3 unchanged sentences

The Company records accruals for these items to the extent the losses are probable and reasonably estimable.

Although the ultimate outcome of these matters cannot be determined at this time, based on present information, the availability of insurance coverage and advice received from outside legal counsel, the Company’s management believes the resolution of any such matters will not, individually or in the aggregate, have a material adverse effect on the Company’s Consolidated Balance Sheets, Consolidated Statements of Operations or Consolidated Statements of Cash Flows.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

material adverse effect on the Company’s consolidated balance sheets, consolidated statements of operations or consolidated statements of cash flows.

During the years ended December 31, 2023 and 2022, the Company recorded no provision for various contingencies.

5 unchanged sentences

As of December 31, 2023, the Company does not have reason to believe any such significant claims exist.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Commitments and Contingencies (continued)

Contingent Consideration Related to Acquisitions

1 unchanged sentence

No earn-out liabilities existed as of December 31, 2023 and 2022.

The following table presents earn-out payments to former owners during the years ended December 31, 2022 and 2021:

No earn-out payment was made to former owners during the years ended December 31, 2023 and 2022.

Statutory Accounting Principles and Regulatory Matters

The following table sets forth statutory net income and statutory capital and surplus for the Company for the years ended and as of December 31, 2023 and 2022:

($ in thousands) 2023 2022

Earn-out payments to former owners $ — $ 554

Regulatory Matters

A significant amount of the consolidated assets represent assets of the Company’s insurance company subsidiaries, HSIC, IIC, GMIC and OSIC.

IIC, OSIC and GMIC are all direct and indirect wholly-owned subsidiaries of HSIC.

HSIC is restricted by Texas law as to the amount of dividends it may pay without the approval of regulatory authorities.

Statutory net income $ 46,884 $ 10,860

Statutory capital and surplus 602,916 408,167

Dividend payments to the Company from HSIC are restricted by Texas state law as to the amount that may be paid without the approval of regulatory authorities.

The maximum amount of dividends which can be paid by HSIC without prior approval is subject to restrictions relating to policyholder surplus, net income, and dividends declared or distributed during the preceding 12 months.

As of December 31, 2023, HSIC is not restricted to paying ordinary dividends.

HSIC did not declare or pay any dividends during the years ended December 31, 2022 and 2021.

HSIC did not declare or pay any dividend during the years ended December 31, 2023 and 2022.

Property and casualty insurance companies are subject to certain Risk Based Capital (“RBC”) requirements as specified by the National Association of Insurance Commissioners (“NAIC”).

Under those requirements, the amount of capital and surplus maintained by a property and casualty insurance company is to be determined based on the various risk factors related to it.

At December 31, 2022 and 2021, the Company’s insurance company subsidiaries met the RBC requirements.

The capital and surplus and RBC level of HSIC on a consolidated statutory basis (including IIC, GMIC OSIC, and BIC) for the years ended December 31, 2022 and 2021 were as follows:

($ in thousands) 2022 2021

Statutory capital and surplus $ 408,167 $ 369,583

RBC authorized control level 110,635 84,968

Statutory Accounting Principles

The statutory capital and surplus for the Company’s principal operating subsidiaries for the years ended December 31, 2022 and 2021 was as follows:

($ in thousands) 2022 2021

HSIC $ 408,167 $ 369,583

IIC 272,413 215,508

GMIC 259,311 209,347

OSIC 21,270 21,095

These amounts include ownership interests in affiliated insurance subsidiaries.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Statutory Accounting Principles (continued)

The statutory net income (loss) for the Company’s principal operating subsidiaries for the years ended December 31, 2022 and 2021 was as follows:

($ in thousands) 2022 2021

HSIC $ 10,860 $ 5,880

IIC 25,394 7,315

GMIC 14,091 ( 947 )

See note 4 for additional information regarding the sale of BIC.

As of December 31, 2023 and 2022, HSIC’s statutory capital and surplus substantially exceeded the regulatory requirements.

Subsequent Events

Reverse Stock Split

On September 23, 2022, the Board of Directors approved a 4 -for-1 reverse stock split of the Company’s common stock.

The stock split became effective January 3, 2023.

All share and per share information included in the accompanying consolidated financial statements and notes to the consolidated financial statements have been retroactively adjusted to reflect the stock split of common stock for all periods presented.

2022 Long-Term Incentive Plan

On September 23, 2022, the Board of Directors approved the Company’s 2022 Long-Term Incentive Plan (the “2022 Plan”), which became effective on January 12, 2023.

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

Employee Stock Purchase Plan

On September 23, 2022, the Board of Directors approved the Company’s 2022 Employee Stock Purchase Plan (the “ESPP”), which became effective on January 12, 2023.

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

New Credit Facility

On January 3, 2023, the Company entered into a term sheet with Truist Securities, Inc.

(the “Term Sheet”) setting forth expected material terms to refinance its existing credit agreement.

The Term Sheet provides a new unsecured credit facility (the “New Credit Facility”), with Truist Securities, Inc.

to lead a syndicate of participating banks, which is expected to provide the Company with up to a $ 150.0 million revolving credit facility and a letter of credit sub-facility of up to $ 10.0 million.

The New Credit Facility is also expected to permit the incurrence of an uncommitted accordion facility up to $ 50.0 million, subject to certain conditions to be agreed.

The Company expects to close on the New Credit Facility in the first quarter of 2023.

Initial Public Offering

On January 4, 2023, the Company announced the launch of its initial public offering (“IPO”) of its common stock.

On January 12, 2023, the Company priced its IPO of 8,952,383 shares of its common stock, with 4,750,000 shares offered by the Company and 4,202,383 shares sold by selling stockholders, at a public price of $ 15.00 per share.

The shares began trading on January 13, 2023 on the Nasdaq Global Select Market under the ticker symbol “SKWD.”

The Company completed its IPO on January 18, 2023.

The underwriters exercised in full their option to purchase 1,342,857 additional shares of common stock from the selling stockholders, at a price per share of $ 15.00 .

The Company’s net proceeds from the IPO were approximately $ 62.3 million, after deducting underwriting discounts and specific incremental expenses directly attributable to the IPO.

SKYWARD SPECIALTY INSURANCE GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Subsequent Events (continued)

The Preferred Shares were subject to mandatory conversion at the Mandatory Conversion Rate upon the closing of an IPO.

On January 18, 2023, the 1,969,660 Preferred Shares converted to 16,305,113 shares of common stock.

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

The Company drew $ 50.0 million on the Revolving Credit Facility and used the proceeds and existing cash to fund the redemption.

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

Changes in and Disagreements With Accountants on Accounting and Financial Disclosures

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 8. Financial Statements and Supplementary Data