What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-03 compared with 2023-11-09 · 115 added, 221 removed, 215 unchanged (61% of the section changed)

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and the terms “our Company,” “we,” “us,” and “our” as used below refer to Skyward Specialty Insurance Group and its consolidated subsidiaries.

The term “third quarter” as used below refers to the three and nine months ended September 30 for the time period then ended.

Select insurance and accounting terms for Skyward Specialty are defined in the section entitled “Select Insurance and Financial Terms” included in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”).

The term “first quarter” as used below refers to the three months ended March 31 for the time period then ended.

We discuss certain key metrics which provide useful information about our business and the operational factors underlying our financial performance.

Many of these metrics are generally standard among insurance companies and help to provide comparability with our peers.

Select insurance, accounting, operating and financial terms for Skyward Specialty are defined in the sections entitled “Select Insurance and Financial Terms” and “Key Operating and Financial Metrics” included in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”).

The discussion and analysis below include certain forward-looking statements that are subject to risks, uncertainties and other factors described in "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2023.

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors.

The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2023, or for any other future period.

The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2024, or for any other future period.

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report, and in conjunction with our audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2023.

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Best Company.

Key Operating and Financial Metrics

We discuss certain key metrics, described below, which provide useful information about our business and the operational factors underlying our financial performance.

These metrics are generally standard among insurance companies and help to provide comparability with our peers.

Net retention , expressed as a percentage, is the ratio of net written premiums to gross written premiums.

Underwriting income (loss) is a non-GAAP financial measure defined as income (loss) before income taxes excluding net investment income, net realized and unrealized gains and losses on investments, impairment charges, interest expense, amortization expense and other income and expenses.

See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of underwriting income (loss) to net income, which is the most directly comparable financial metric prepared in accordance with GAAP.

Loss and LAE ratio , expressed as a percentage, is the ratio of losses and LAE to net earned premiums.

Expense ratio , expressed as a percentage, is the ratio of underwriting, acquisition and insurance expenses less commission and fee income to net earned premiums.

Combined ratio is the sum of loss ratio and expense ratio.

A combined ratio under 100% indicates an underwriting profit.

A combined ratio over 100% indicates an underwriting loss.

Adjusted loss and LAE ratio , expressed as a percentage, is a non-GAAP financial measure defined as the ratio of losses and LAE, excluding losses and LAE related to the loss portfolio transfer (“LPT”) and all development on reserves fully or partially covered by the LPT, to net earned premiums.

See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of adjusted loss ratio to loss ratio, which is the most directly comparable financial metric prepared in accordance with GAAP.

Adjusted combined ratio is a non-GAAP financial measure defined as the sum of the adjusted loss ratio and the expense ratio.

See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of adjusted combined ratio to combined ratio, which is the most directly comparable financial metric prepared in accordance with GAAP.

Adjusted operating income (loss) is a non-GAAP financial measure defined as net income excluding the net impact of the LPT, net realized and unrealized gains or losses on investments, goodwill impairment charges and other income and expenses.

See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of adjusted operating income (loss) to net income (loss), which is the most directly comparable financial metric prepared in accordance with GAAP.

Return on equity is annualized net income as a percentage of average beginning and ending stockholders’ equity.

Adjusted return on equity is a non-GAAP financial measure defined as annualized adjusted operating income as a percentage of average beginning and ending stockholders’ equity during the applicable period.

See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of adjusted return on equity to return on equity, which is the most directly comparable financial metric prepared in accordance with GAAP.

Tangible stockholders’ equity is a non-GAAP financial measure defined as stockholders’ equity less goodwill and intangible assets.

See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of tangible stockholders’ equity to stockholders’ equity, which is the most directly comparable financial metric prepared in accordance with GAAP.

Return on tangible equity is a non-GAAP financial measure defined as annualized net income as a percentage of average beginning and ending tangible stockholders’ equity during the applicable period.

See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of return on tangible equity to return on equity, which is the most comparable financial metric prepared in accordance with GAAP.

Adjusted return on tangible equity is a non-GAAP financial measure defined as annualized adjusted operating income as a percentage of average beginning and ending tangible stockholders’ equity during the applicable period.

Results of Operations

The following table summarizes our results for the three and nine months ended September 30, 2023 and 2022:

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

The following table summarizes our results for the three months ended March 31, 2024 and 2023:

Three months ended March 31,

($ in thousands) 2024 2023

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Net investment income $ 18,297 $ 4,646

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

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

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

Net investment gains $ 8,303 $ 961

Income before income taxes $ 46,977 $ 19,722

Net income $ 36,784 $ 15,556

Adjusted operating income (1)

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Reconciliation of Non-GAAP Financial Measures

Adjusted Operating Income (Loss)

The following table provides a reconciliation of adjusted operating income to net income for the three and nine months ended September 30, 2023 and 2022:

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

2023 2022 2023 2022

($ in thousands) Pre-tax After-tax Pre-tax After-tax Pre-tax After-tax Pre-tax After-tax

Income (loss) as reported $ 27,795 $ 21,711 $ (3,118) $ (2,399) $ 72,533 $ 56,719 $ 23,819 $ 18,977

Adjusted Operating Income

The following table provides a reconciliation of adjusted operating income to net income for the three months ended March 31, 2024 and 2023:

Three months ended March 31,

($ in thousands) Pre-tax After-tax Pre-tax After-tax

Income as reported $ 46,977 $ 36,784 $ 19,722 $ 15,556

Net impact of LPT 241 190 242 191

Net investment gains 8,303 6,559 961 759

Other expenses (1,188) (939) (1,114) (880)

Net impact of loss portfolio transfer 266 210 (9,271) (7,324) 970 766 (9,271) (7,324)

Net investment (losses) gains (2,984) (2,357) (7,305) (5,771) 3,328 2,629 (26,117) (20,633)

Adjusted operating income $ 39,621 $ 30,974 $ 19,633 $ 15,486

Underwriting Income (Loss)

The following table provides a reconciliation of underwriting income (loss) to income (loss) before federal income tax for the three and nine months ended September 30, 2023 and 2022:

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

Underwriting Income

The following table provides a reconciliation of underwriting income to income before federal income tax for the three months ended March 31, 2024 and 2023:

Three months ended March 31,

($ in thousands) 2024 2023

Income (loss) before federal income tax expense (benefit) $ 27,795 $ (3,118) $ 72,533 $ 23,819

Income before federal income tax expense $ 46,977 $ 19,722

Interest expense 2,727 2,152

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Net investment income 18,297 4,646

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

Net investment gains 8,303 961

Underwriting income $ 24,680 $ 17,768

Adjusted Loss Ratio / Adjusted Combined Ratio

The following table provides a reconciliation of the adjusted loss and LAE ratio and adjusted combined ratio to the loss and LAE ratio and combined ratio for the three and nine months ended September 30, 2023 and 2022:

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

The following table provides a reconciliation of the adjusted loss and LAE ratio and adjusted combined ratio to the loss and LAE ratio and combined ratio for the three months ended March 31, 2024 and 2023:

Three months ended March 31,

($ in thousands) 2024 2023

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Tangible Stockholders’ Equity

The following table provides a reconciliation of tangible stockholders’ equity to stockholders’ equity for the periods ended September 30, 2023 and 2022:

The following table provides a reconciliation of tangible stockholders’ equity to stockholders’ equity for the periods ended March 31, 2024 and 2023:

($ in thousands) 2024 2023

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Tangible stockholders' equity $ 604,135 $ 417,643

Adjusted Return on Equity

The following table provides a reconciliation of annualized adjusted return on equity to annualized return on equity for the three and nine months ended September 30, 2023 and 2022:

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

Annualized Adjusted Return on Equity

The following table provides a reconciliation of annualized adjusted return on equity to annualized return on equity for the three months ended March 31, 2024 and 2023:

Three months ended March 31,

($ in thousands) 2024 2023

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18.3 % 13.3 %

Return on Tangible Equity

Annualized return on tangible equity for the three and nine months ended September 30, 2023 and 2022 reconciles to annualized return on equity as follows:

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

Annualized Return on Tangible Equity

Annualized return on tangible equity for the three months ended March 31, 2024 and 2023 reconciles to annualized return on equity as follows:

Three months ended March 31,

($ in thousands) 2024 2023

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25.0 % 16.6 %

Adjusted Return on Tangible Equity

Annualized adjusted return on tangible equity for the three and nine months ended September 30, 2023 and 2022 reconciles to annualized return on equity as follows:

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

Annualized Adjusted Return on Tangible Equity

Annualized adjusted return on tangible equity for the three months ended March 31, 2024 and 2023 reconciles to annualized return on equity as follows:

Three months ended March 31,

($ in thousands) 2024 2023

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Underwriting Results

The following tables presents gross written premiums by underwriting division for the three and nine months ended September 30, 2023 and 2022:

Three months ended September 30,

The following table presents gross written premiums by underwriting division for the three months ended March 31, 2024 and 2023:

Three months ended March 31,

($ in thousands) 2024 2023 Change % Change

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Industry Solutions 78,259 67,633 10,626 15.7 %

Programs 41,735 37,239 4,496 12.1 %

Captives 68,408 46,080 22,328 48.5 %

Professional Lines 48,259 27,215 21,044 77.3 %

Accident & Health 39,554 33,368 6,186 18.5 %

Transactional E&S 30,699 21,311 9,388 44.1 %

Surety 24,977 18,206 6,771 37.2 %

Total continuing business $ 355,683 $ 270,426 $ 85,257 31.5 %

Exited business 49 (176) 225 N/M (1)

Total gross written premiums $ 355,732 $ 270,250 $ 85,482 31.6 %

(1) N/M = Not Meaningful

Nine months ended September 30,

($ in thousands) 2023 2022 Change % Change

Global Property & Agriculture $ 247,195 $ 177,565 $ 69,630 39.2 %

Industry Solutions 226,680 202,237 24,443 12.1 %

Programs 52,178 48,699 3,479 7.1 %

Captives 127,249 97,579 29,670 30.4 %

Professional Lines 42,239 33,172 9,067 27.3 %

Accident & Health 112,819 97,107 15,712 16.2 %

Transactional E&S 42,195 29,617 12,578 42.5 %

Accident & Health 40,901 36,013 4,888 13.6 %

Surety 33,842 24,701 9,141 37.0 %

Total continuing business $ 1,138,242 $ 874,746 $ 263,496 30.1 %

Exited business (18) 4,373 (4,391) N/M (1)

Total gross written premiums (1)

(1) N/M = Not Meaningful

The increase in gross written premiums for the third quarter of 2023, when compared to the same 2022 period, was driven by double-digit premium growth from all eight of our underwriting divisions.

The double-digit premium growth was due to (i) new business across all of our underwriting divisions, and (ii) increased rates, primarily in industry solutions, captives and transactional E&S.

The increase in gross written premiums for the first nine months of 2023, when compared to the same 2022 period, was primarily driven by double-digit premium growth in our professional lines, transactional E&S, global property and agriculture, surety and captives underwriting divisions.

The gross written premium increases were primarily driven by new business and rate increases.

During the first nine months of 2023, we added new teams and products in our surety, captives, professional lines and global property and agriculture underwriting divisions.

Net written premiums for the third quarter of 2023 were $280.7 million, an increase of $109.2 million, or 63.7%, when compared to the same 2022 period.

Net written premiums for the nine months ended September 30, 2023 were $696.6 million, an increase of $201.0 million or 40.6%.

During the third quarter of 2023, the Company rescinded a quota share reinsurance contract, the impact of which increased net written premiums by $50.5 million, respectively, for the third quarter and first nine months of 2023, that had previously been ceded under the contract through the first six months of 2023.

Net earned premiums for the third quarter of 2023 were $227.0 million, an increase of $69.0 million, or 43.6%, when compared to the same 2022 period.

Net earned premiums for the nine months ended September 30, 2023 were $604.2 million, an increase of $158.3 million, or 35.5%, when compared to the same 2022 period.

$ 458,655 $ 360,255 $ 98,400 27.3 %

(1) Excludes exited business

The increase in gross written premiums for the first quarter of 2024, when compared to the same 2023 period, was primarily driven by double-digit premium growth primarily from our captives, transactional E&S, surety, global property

& agriculture and professional lines underwriting divisions.

The double-digit premium growth was due to new business and increased rates.

Net written premiums for the first quarter of March 31, 2024 were $287.1 million, an increase of $85.0 million or 42.0%, when compared to the same 2023 period.

Net earned premiums for the three months ended March 31, 2024 were $236.3 million, an increase of $53.5 million, or 29.3%, when compared to the same 2023 period.

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

Net earned premiums for the third quarter and first nine months of 2023 were also impacted by the Company’s decision to rescind a quota share reinsurance contract, the impact of which increased net earned premiums by $13.1 million, respectively, that had previously been ceded under the contract through the first six months of 2023.

For additional information regarding our reinsurance programs, see the “Reinsurance” discussion included in this Item 2 .

Losses and LAE

The following tables set forth the components of the loss and LAE ratios and adjusted loss and LAE ratios for the three and nine months ended September 30, 2023 and 2022:

Three months ended September 30,

($ in thousands) Losses

Losses and LAE:

Non-cat loss and LAE (1)

$ 137,802 60.7 % $ 97,975 62.0 %

Cat loss and LAE (1)

1,000 0.4 % 4,500 2.8 %

Prior accident year development - LPT

(266) (0.1) % 9,271 5.9%

Total losses and LAE $ 138,536 61.0 % $ 111,746 70.7 %

Adjusted losses and LAE (2) :

Non-cat loss and LAE (1)

$ 137,802 60.7 % $ 97,975 62.0 %

Cat loss and LAE (1)

1,000 0.4 % 4,500 2.8 %

Total adjusted losses and LAE (2)

$ 138,802 61.1 % $ 102,475 64.8 %

(1) Current accident year

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

Nine months ended September 30,

The following table sets forth the components of the loss and LAE ratios and adjusted loss and LAE ratios for the three months ended March 31, 2024 and 2023:

Three months ended March 31,

($ in thousands) Losses

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

The loss ratio for the third quarter of 2023 improved 9.7 points when compared to the same 2022 period.

The non-cat loss and LAE ratio improved 1.3 points when compared to the same 2022 period, primarily driven by the shift in the mix of business and continued run-off of exited business.

Catastrophe losses only added 0.4 points to the current quarter loss ratio compared to the third quarter of 2022, which was impacted by 2.8 points of catastrophe losses from Hurricane Ian.

The third quarter of 2022 was impacted by strengthening LPT reserves by $14.4 million partially offset by reinsurance recoveries of $5.1 million, which added 5.9 points to the 2022 loss ratio.

The loss ratio for the first nine months of 2023 improved 3.4 points when compared to the same 2022 period.

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

Catastrophe losses from second and third quarter convective storms and first quarter wind and hail events, including tornadoes, added 1.8 points to the loss ratio compared to the first nine months of 2022, which was impacted by 1.0 point of catastrophe losses from Hurricane Ian.

The loss ratio for the first nine months of 2022 included 2.1 points from the net impact of LPT reserve strengthening.

The loss ratio for the first quarter of 2024 improved 1.9 points when compared to the same 2023 period.

The first quarter of 2024 was minimally impacted by catastrophe losses, while the first quarter of 2023 was impacted by wind and hail events, including tornadoes, which added 1.8 points to the 2023 loss ratio.

The non-cat loss and LAE ratio improved 0.5 points when compared to the same 2023 period, primarily driven by the shift in the mix of business.

Expense Ratio

The following tables set forth the components of the expense ratios for the three and nine months ended September 30, 2023 and 2022:

Three months ended September 30,

($ in thousands) Expenses % of

Net Earned Premiums Expenses % of

Net Earned Premiums

Net policy acquisition expenses $ 34,071 15.0 % $ 17,379 11.0 %

Other operating and general expenses 34,244 15.1 % 29,961 19.0 %

Underwriting, acquisition and insurance expenses 68,315 30.1 % 47,340 30.0 %

commission and fee income (2,085) (0.9 %) (1,362) (0.9 %)

Total net expenses $ 66,230 29.2 % $ 45,978 29.1 %

Nine months ended September 30,

The following table sets forth the components of the expense ratios for the three months ended March 31, 2024 and 2023:

Three months ended March 31,

($ in thousands) Expenses % of

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Total net expenses $ 67,748 28.7 % $ 50,163 27.4 %

The expense ratios for the third quarter and first nine months of 2023 increased slightly and improved 0.5 points, respectively, when compared to the same 2022 periods.

The increase in the net policy acquisition cost ratios for the third quarter and first nine months of 2023, when compared to the same 2022 periods, was primarily driven by the (i) shift in the mix of business, and (ii) impact of the cancellation of the quota share reinsurance contract.

The improvement in the other operating and general expenses ratios for the third quarter and first nine months of 2023, when compared to the same 2022 periods, was primarily due to the increase in earned premiums.

The expense ratios for the third quarter and first nine months of 2023 exclude the impact of IPO related stock compensation and secondary offering expenses, which are reported in other expenses in our condensed consolidated statements of operations and comprehensive income (loss).

The expense ratio for the first quarter of 2024 increased 1.3 points when compared to the same 2023 period, primarily driven by the business mix shift.

The expense ratios for the first quarter of 2024 and 2023, respectively, exclude the impact of IPO related stock compensation and secondary offering expenses, which are reported in other expenses in our condensed consolidated statements of operations and comprehensive income.

Investment Results

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

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

Beginning January 1, 2024 we simplified the investment portfolio classifications to align with our strategy and the underlying risk characteristics of the portfolio.

The prior period has been reclassified to conform to the current period presentation.

The following table sets forth the components of net investment income and net investment gains (losses) for the three months ended March 31, 2024 and 2023:

Three months ended March 31,

$ in thousands 2024 2023

Short-term and money market investments

$ 3,148 $ 496 $ 8,070 $ 631

Core fixed income

8,549 4,682 21,855 10,637

Opportunistic fixed income (47) 632 (5,617) 19,106

Short-term investments & cash and cash equivalents $ 5,088 $ 1,776

Fixed income 12,478 7,461

Equities 627 (2)

Alternative and strategic investments 104 (4,589)

Net investment income $ 18,297 $ 4,646

$ 13,088 $ 5,981 $ 26,315 $ 31,653

Net unrealized (losses) gains on securities still held

$ (6,391) $ (6,297) $ 2,394 $ (26,180)

Net realized gains (losses)

3,407 (1,008) 934 63

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

(1) excludes income from operating cash for the third quarter and first nine months ended September, 30, 2023 and 2022.

Net investment income for the third quarter and first nine months of 2023 increased $7.1 million and decreased $5.3 million, respectively, when compared to the same 2022 periods.

The increase in income from our core fixed income portfolio for the third quarter and first nine months of 2023, when compared to the same 2022 periods, was due to (i) a larger asset base as we continued to increase our allocation to this part of our investment portfolio and (ii) a higher book yield of 4.2% at September 30, 2023 compared to 3.3% at September 30, 2022.

The increase in income from short-term and money market investments for the third quarter and first nine months of 2023, when compared to the same 2022 periods, was due to a larger asset base and higher investment yields when compared to the same 2022 periods.

The opportunistic fixed income portfolio was impacted by a decline in the fair value of limited partnership investments for the third quarter and first nine months of 2023 when compared to the same 2022 periods.

Net unrealized gains on securities still held $ 8,991 $ 3,767

Net realized losses (688) (2,806)

Net investment gains $ 8,303 $ 961

Net investment income for the first quarter of 2024 increased $13.7 million when compared to the same 2023 period.

The increase in income from our fixed income portfolio for the first quarter of 2024, when compared to the same 2023 period, was due to (i) a larger asset base as we continued to increase our allocation to this part of our investment portfolio and (ii) a higher book yield of 4.7% at March 31, 2024 compared to 4.0% at March 31, 2023.

The increase in income from short-term investments & cash and cash equivalents for the first quarter of 2024, when compared to the same 2023 period, was due to higher investment yields and a larger asset base.

The fair value of our alternative and strategic investments portfolio for the first quarter of 2024 increased when compared to the same 2023 period, which was impacted by a decline in the fair value of limited partnership investments.

When a fixed maturity has been determined to have an impairment, the impairment charge is separated into an amount representing the credit loss, which is recognized in earnings as a realized loss and on the balance sheet as an allowance for credit losses netted with the amortized cost of fixed maturities.

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The amount related to non-credit factors is recognized in accumulated other comprehensive income and future increases or decreases in fair value, if not credit losses, are included in accumulated other comprehensive (loss) income.

We reviewed our available-for-sale fixed maturities at September 30, 2023 and determined that no credit impairment existed in the gross unrealized holding losses.

We reviewed our available-for-sale fixed maturities at March 31, 2024 and determined that no credit impairment existed in the gross unrealized holding losses.

See Note 2, “Investments” to our condensed consolidated financial statements included in Item 1 of this Form 10-Q for additional information.

Composition of Investment Portfolio

The following table sets forth the components of our investment portfolio at carrying value at September 30, 2023 and December 31, 2022:

($ in thousands) Fair Value

% of Total Fair Value % of Total

Short-term and money market investments $ 194,844 14.0 % $ 121,268 11.2 %

Core fixed income 874,864 62.7 % 607,572 56.1 %

Opportunistic fixed income 182,533 13.0 % 196,021 18.1 %

The following table sets forth the components of our investment portfolio at carrying value at March 31, 2024 and December 31, 2023:

($ in thousands) Carrying Value

% of Total Carrying Value

Cash and cash equivalents $ 85,059 4.8 % $ 65,891 3.9 %

Short-term investments $ 297,932 16.9 % $ 270,259 16.1 %

Fixed income 1,109,484 63.1 % 1,067,721 63.6 %

Equities 117,083 6.7 % 118,249 7.0 %

Total investment portfolio $ 1,395,878 100.0 % $ 1,082,367 100.0 %

Core fixed income

The core fixed income portfolio consists primarily of investment grade fixed income securities which are predominantly highly-rated and liquid bonds.

Our objective is to earn attractive risk-adjusted returns with a low risk of loss of principal.

The portfolio is managed by third party managers.

The average duration of the portfolio was approximately 4.4 years and 4.3 years, respectively, as of September 30, 2023 and December 31, 2022.

The following table sets forth the components of our core fixed income portfolio at September 30, 2023 and December 31, 2022:

($ in thousands) Fair Value % of Total

Fair Value % of Total

Alternative and strategic investments 148,707 8.5 % 157,458 9.4 %

Total portfolio $ 1,758,265 100.0 % $ 1,679,578 100.0 %

Our fixed income portfolio primarily consists of investment grade fixed income securities, which are predominantly highly-rated and liquid bonds, and commercial mortgage loans.

The following table sets forth the components of our fixed income securities at March 31, 2024 and December 31, 2023:

($ in thousands) Carrying Value % of Total

Carrying Value % of Total

government securities $ 35,566 3.2 % $ 44,166 4.1 %

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Commercial mortgage-backed securities 30,526 2.8 % 29,934 2.8 %

Asset-backed securities 163,737 18.7 % 109,824 18.1 %

Core fixed income securities, available-for-sale $ 874,864 100.0 % $ 607,572 100.0 %

The weighted average credit rating of the portfolio was “AA-” by Standard & Poor’s Financial Services, LLC (“Standard & Poor’s”) at September 30, 2023 and “AA” by Standard & Poor’s at December 31, 2022.

The following table sets forth the credit quality of our core fixed income portfolio at September 30, 2023 and December 31, 2022, as rated by Standard & Poor’s or equivalent designation:

Other asset-backed securities 204,496 18.4 % 185,727 17.4 %

Total fixed income portfolio, available-for-sale 1,065,175 96.0 % 1,017,651 95.3 %

Commercial mortgage loans $ 44,309 4.0 % $ 50,070 4.7 %

Total fixed income portfolio $ 1,109,484 100.0 % $ 1,067,721 100.0 %

The weighted average credit rating of our available-for-sale fixed income portfolio was “AA-” by Standard & Poor’s Financial Services, LLC (“Standard & Poor’s”) at March 31, 2024 and December 31, 2023.

The following table sets forth the credit quality of our available-for-sale fixed income portfolio at March 31, 2024 and December 31, 2023, as rated by Standard & Poor’s or equivalent designation:

($ in thousands) Fair Value % of Total Fair Value % of Total

4 unchanged sentences

BB and Lower 23,255 2.2 % 30,910 3.0 %

Total core fixed income $ 874,864 100.0 % $ 607,572 100.0 %

Opportunistic fixed income

The opportunistic fixed income portfolio is managed by Arena which is affiliated with Westaim, our largest stockholder.

The opportunistic fixed income portfolio consists of separately managed accounts, limited partnerships, promissory notes and equity interests.

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

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

As of September 30, 2023, the opportunistic fixed income portfolio consisted of three components:

diversified asset based lending (54.3%), commercial mortgage loans (32.5%) and cash and cash equivalents (13.2%).

The following table sets forth the components of our opportunistic fixed income portfolio by industry sector at September 30, 2023 and December 31, 2022:

($ in thousands) Fair Value % of Total Fair Value % of Total

Real Estate $ 96,353 52.8 % $ 90,370 46.1 %

Oil & Gas 16,902 9.3 % 20,725 10.6 %

Banking, Finance & Insurance 13,254 7.3 % 13,870 7.1 %

Other sectors (1)

31,943 17.4 % 34,072 17.4 %

Cash and cash equivalents (2)

24,081 13.2 % 36,984 18.8 %

Opportunistic fixed income $ 182,533 100.0 % $ 196,021 100.0 %

(1) Other sectors primarily includes Financial Services and Commercial & Industrial.

(2) Includes cash on settlements that have not yet been reinvested.

The average duration of the debt instruments in the portfolio is approximately 1.3 years and 1.4 years as of September 30, 2023 and December 31, 2022, respectively.

During the third quarter of 2023, we provided Arena with notice to withdraw from our investment in the Arena Special Opportunities Fund, LP.

Total fixed income portfolio, available-for-sale $ 1,065,175 100.0 % $ 1,017,651 100.0 %

Our commercial mortgage loans are primarily senior loans on real estate across the U.S.

The average duration of our fixed income portfolio was approximately 4.18 years and 4.24 years, respectively, as of March 31, 2024 and December 31, 2023.

The equities portfolio primarily consists of domestic preferred stocks, common equities, exchange traded funds, limited partnerships, limited liability corporations and other types of equity interests, 100.0% of which are publicly traded.

The portfolio is directed internally and includes both self-managed investments and portfolios managed by third-party investment management firms.

The following table sets forth the components of our equities portfolio by security type at September 30, 2023 and December 31, 2022:

($ in thousands) Fair Value % of Total Fair Value % of Total

Domestic common equities $ 62,889 43.8 % $ 76,929 48.8 %

International common equities 37,599 26.2 % 34,468 21.9 %

Preferred stock 6,899 4.8 % 8,772 5.6 %

36,250 25.2 % 37,337 23.7 %

Equities $ 143,637 100.0 % $ 157,506 100.0 %

(1) Other includes limited partnerships, limited liability companies and other equity investments in unconsolidated subsidiaries.

Income tax expense for the three and nine months ended September 30, 2023 was $6.1 million and $15.8 million, respectively, compared to an income tax benefit of $0.7 million and income tax expense of $4.8 million, respectively, for the same 2022 periods.

Our effective tax rate for the three and nine months ended September 30, 2023 was 21.9% and 21.8%, respectively, compared to 23.1% and 20.3%, respectively, for the same 2022 periods.

Alternative and strategic investments

Alternative investments consists of promissory notes, limited partnerships, joint ventures and equity interests.

The underlying investments are primarily floating rate senior secured loans, comprised of short duration, collateralized, asset-oriented credit investments.

The limited partnerships and joint ventures are subject to future increases or decreases in asset value as asset values are monetized and the income is distributed.

At March 31, 2024 and December 31, 2023, 78.9% and 77.8%, respectively, of the alternative investments were managed by Arena Investors, LPA which is affiliated with Westaim, our largest stockholder.

Strategic investments consists of equity interests in private entities within the insurance industry.

Income tax expense for the three months ended March 31, 2024 was $10.2 million compared to $4.2 million for the same 2023 period.

Our effective tax rate for the three months ended March 31, 2024 was 21.7%, compared to 21.1% for the same 2023 period.

For additional information, see Note 7 of our condensed consolidated financial statements included in Item 1 of this Form 10-Q.

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Management believes that cash receipts from premiums and proceeds from investment income are sufficient to cover cash outflows in the foreseeable future.

Our cash flows for the nine months ended September 30, 2023 and 2022 were:

Our cash flows for the three months ended March 31, 2024 and 2023 were:

($ in thousands) 2024 2023

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Net cash used in investing activities in 2024 and 2023 was primarily driven by purchases of fixed maturity securities and short-term investments.

Net cash provided by financing activities in 2023 was primarily from proceeds of $66.3 million from our IPO.

Net cash used in financing activities in 2024 was driven by net payments on debt.

Credit Agreements

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The Revolving Credit Facility provides us with up to a $150.0 million revolving credit facility, with an accordion that can increase the capacity by $50.0 million, and a letter of credit sub-facility of up to $30.0 million.

During the nine months ended September 30, 2023, we drew $50.0 million on the Revolving Credit Facility and used the proceeds to pay off the principal on our existing term loan.

In connection with our entry into the Revolving Credit Facility, we terminated the existing term loan and revolving line of credit pursuant to our Credit Agreement dated as of December 11, 2019, with Prosperity Bank.

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

As of March 31, 2024, we had $100.0 million outstanding under the Revolving Credit Facility with another $50.0 million of undrawn capacity.

Interest on the Revolving Credit Facility is payable quarterly.

The interest rate on the Revolving Credit Facility is the Secured Overnight Financing Rate (“SOFR”) plus a margin of between 150 and 190 basis points based on the ratio of debt to total capital and a credit spread adjustment of 10 basis points.

At September 30, 2023, the six-month SOFR on the Revolving Credit Facility was 5.47%, plus a margin of 1.60%.

The interest rate on the Revolving Credit Facility is the 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.

The following table sets forth the outstanding draws on the Revolving Credit Facility as of March 31, 2024:

($ in thousands) March 31, 2024

Amount Margin Six-month SOFR Net interest rate

March 15, 2024 $ 50,000 1.60 % 5.25 % 6.85 %

March 29, 2023 $ 50,000 1.60 % 5.23 % 6.83 %

We are subject to covenants on the Revolving Credit Facility based on minimum net worth, maximum debt to capital ratio, minimum A.M.

Best Rating and minimum liquidity.

As of September 30, 2023, we are in compliance with all covenants.

Trust Preferred

As of March 31, 2024, we are in compliance with all covenants.

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

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

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

Interest on the Trust Preferred is payable quarterly at an annual rate based on the three-month LIBOR (5.66% and 4.77% at September 30, 2023 and December 31, 2022, respectively), plus 3.4%.

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

Subordinated Debt

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

At September 30, 2023 the ratio of total debt outstanding, including the Revolving Credit Facility, the Trust Preferred and the Notes, to total capitalization (defined as total debt plus stockholders’ equity) was 19.4% and at December 31, 2022, the ratio of total debt outstanding, including the Term Loan, the Revolver, the Trust Preferred and the Notes, to total capitalization was 23.4%.

At March 31, 2024 the ratio of total debt outstanding, including the Revolving Credit Facility, the Trust Preferred and the Notes, to total capitalization (defined as total debt plus stockholders’ equity) was 14.7% and at December 31, 2023, the ratio of total debt outstanding, including the Term Loan, the Revolver, the Trust Preferred and the Notes, to total capitalization was 16.3%.

We strategically purchase reinsurance from third parties which enhances our business by protecting capital from severity events (either large single event losses or catastrophes) and reducing volatility in our earnings.

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It is used for a variety of reasons, including supplementing the limits provided by the treaty coverage or covering risks or perils excluded from treaty reinsurance.

For the three and nine months ended September 30, 2023 our net retention on a written basis (calculated as net written premiums as a percentage of gross written premiums) was 78.9% and 61.2%, respectively, compared to 63.4% and 56.4%, respectively, for the same 2022 periods.

Net retention for the three and nine months ended September 30, 2023 was impacted by the cancellation of a quota share reinsurance arrangement, the impact of which increased net written premiums by $50.5 million, respectively, that had previously been ceded under the contract through the first six months of 2023.

The following is a summary of our reinsurance programs as of September 30, 2023:

For the three months ended March 31, 2024 our net retention on a written basis (calculated as net written premiums as a percentage of gross written premiums) was 62.6%, compared to 56.1% for the same 2023 period.

The following is a summary of our reinsurance programs as of March 31, 2024:

Line of Business Maximum Company Retention

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$1.00 million per occurrence

Cyber $2.69 million per occurrence

Excess Casualty (1)(2)

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$2.80 million per occurrence

Representation and Warranty $3.25 million per occurrence

$3.00 million per occurrence

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$2.33 million per occurrence

Cyber $2.69 million per occurrence

Representation and Warranty $2.50 million per occurrence

(1) Legal defense expenses can force exposure above the maximum company retention for Excess Casualty, Commercial Auto and General Liability.

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On August 25, 2023, A.M.

Best affirmed Skyward Specialty’s financial strength rating of A- (Excellent) and revised the outlooks to positive from stable.

Best affirmed Skyward Specialty’s financial strength rating of A- (Excellent) and revised the outlook to positive from stable.

Quantitative and Qualitative Disclosures About Market Risk

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis