Skyward Specialty Insurance Group, Inc. 10-Q

Item 1. Financial Statements SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS March 31, 2024 December 31, 2023 ($ in thousands, except share and per share amounts) (Unaudited) Assets Investments: Fixed maturity securities, available-for-sale, at fair value (amortized cost of $ 1,102,190 and $ 1,047,713 , respectively) $ 1,065,175 $ 1,017,651 Fixed maturity securities, held-to-maturity, at amortized cost (net of allowance for credit losses of $ 329 ) 42,700 42,986 Equity securities, at fair value 117,083 118,249 Mortgage loans, at fair value 44,309 50,070 Equity method investments 103,962 110,653 Other long-term investments 2,045 3,852 Short-term investments, at fair value 297,932 270,226 Total investments 1,673,206 1,613,687 Cash and cash equivalents 85,059 65,891 Restricted cash 30,210 34,445 Premiums receivable, net 273,410 179,235 Reinsurance recoverables, net 612,043 596,334 Ceded unearned premium 204,625 186,121 Deferred policy acquisition costs 104,697 91,955 Deferred income taxes 23,607 21,991 Goodwill and intangible assets, net 88,137 88,435 Other assets 92,063 75,341 Total assets $ 3,187,057 $ 2,953,435 Liabilities and stockholders’ equity Liabilities: Reserves for losses and loss adjustment expenses $ 1,376,946 $ 1,314,501 Unearned premiums 621,794 552,532 Deferred ceding commission 41,062 37,057 Reinsurance and premium payables 193,760 150,156 Funds held for others 88,864 58,588 Accounts payable and accrued liabilities 53,443 50,880 Notes payable 100,000 50,000 Subordinated debt, net of debt issuance costs 18,916 78,690 Total liabilities 2,494,785 2,292,404 Stockholders’ equity Common stock, $ 0.01 par value, 500,000,000 shares authorized, 39,995,027 and 39,863,756 shares issued and outstanding, respectively 400 399 Additional paid-in capital 711,309 710,855 Stock notes receivable ( 5,234 ) ( 5,562 ) Accumulated other comprehensive loss ( 29,279 ) ( 22,953 ) Retained earnings (accumulated deficit) 15,076 ( 21,708 ) Total stockholders’ equity 692,272 661,031 Total liabilities and stockholders’ equity $ 3,187,057 $ 2,953,435 The accompanying notes are an integral part of the consolidated financial statements. 3 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED) Three months ended March 31, ($ in thousands, except share and per share amounts) 2024 2023 Revenues: Net earned premiums $ 236,342 $ 182,831 Commission and fee income 2,026 1,492 Net investment income 18,297 4,646 Net investment gains 8,303 961 Total revenues 264,968 189,930 Expenses: Losses and loss adjustment expenses 143,914 114,900 Underwriting, acquisition and insurance expenses 69,774 51,655 Interest expense 2,727 2,152 Amortization expense 388 387 Other expenses 1,188 1,114 Total expenses 217,991 170,208 Income before income taxes 46,977 19,722 Income tax expense 10,193 4,166 Net income 36,784 15,556 Net income attributable to participating securities — 1,274 Net income attributable to common stockholders $ 36,784 $ 14,282 Comprehensive income: Net income $ 36,784 $ 15,556 Other comprehensive (loss) income: Unrealized gains and losses on investments: Net change in unrealized (losses) gains on investments, net of tax ( 5,418 ) 7,788 Reclassification adjustment for losses on securities no longer held, net of tax ( 908 ) ( 47 ) Total other comprehensive (loss) income ( 6,326 ) 7,741 Comprehensive income $ 30,458 $ 23,297 Per share data: Basic earnings per share $ 0.94 $ 0.43 Diluted earnings per share $ 0.90 $ 0.42 Weighted-average common shares outstanding Basic 39,108,351 32,848,243 Diluted 41,085,136 36,952,073 The accompanying notes are an integral part of the consolidated financial statements. 4 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) Three months ended March 31, ($ in thousands, except share amounts) 2024 2023 Preferred shares: Balance at beginning of period — 1,969,660 Preferred stock conversion to common shares — ( 1,969,660 ) Balance at March 31 — — Common shares: Balance at beginning of period 39,863,756 16,599,666 Issuance of shares 131,271 4,753,332 Preferred stock conversion to common shares — 16,305,113 Balance at March 31 39,995,027 37,658,111 Preferred stock: Balance at beginning of period $ — $ 20 Preferred stock conversion to common shares — ( 20 ) Balance at March 31 $ — $ — Common stock: Balance at beginning of period $ 399 $ 168 Issuance of common stock 1 — Preferred stock conversion to common shares — 161 Proceeds from equity offerings, net — 48 Balance at March 31 $ 400 $ 377 Treasury stock: Balance at beginning of period $ — $ ( 2 ) Preferred stock conversion to common shares — 2 Balance at March 31 $ — $ — Additional paid-in capital: Balance at beginning of period $ 710,855 $ 577,289 Issuance of common stock 454 1,864 Preferred stock conversion to common shares — ( 143 ) Proceeds from equity offerings, net — 62,358 Balance at March 31 $ 711,309 $ 641,368 Stock notes receivable: Balance at beginning of period $ ( 5,562 ) $ ( 6,911 ) Employee equity transactions 328 193 Balance at March 31 $ ( 5,234 ) $ ( 6,718 ) Accumulated other comprehensive loss: Balance at beginning of period $ ( 22,953 ) $ ( 43,485 ) Other comprehensive (loss) income, net of tax ( 6,326 ) 7,741 Balance at March 31 $ ( 29,279 ) $ ( 35,744 ) Retained earnings (accumulated deficit): Balance at beginning of period $ ( 21,708 ) $ ( 105,417 ) Cumulative effect on adoption of ASU No. 2016-13 — ( 2,276 ) Net income 36,784 15,556 Balance at March 31 $ 15,076 $ ( 92,137 ) Total stockholders’ equity $ 692,272 $ 507,146 The accompanying notes are an integral part of the consolidated financial statements. 5 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three months ended March 31, ($ in thousands) 2024 2023 Cash flows from operating activities Net income $ 36,784 $ 15,556 Adjustments to reconcile net income to net cash provided by operating activities 57,481 91,651 Net cash provided by operating activities 94,265 107,207 Cash flows from investing activities: Purchase of fixed maturity securities, available-for-sale ( 97,426 ) ( 72,466 ) Purchase of equity securities ( 2,035 ) ( 12,889 ) Purchase of equity method investments ( 261 ) ( 286 ) Investment in direct and indirect loans 10,816 14,665 Purchase of property and equipment ( 260 ) ( 614 ) Sales and maturities of investment securities 53,473 34,980 Proceeds from equity method and other long-term investments 4,871 355 Change in short-term investments ( 27,706 ) ( 166,193 ) Change in receivable/payable for securities ( 13,755 ) 3,984 Cash provided by deposit accounting 2,417 5,038 Net cash used in investment activities ( 69,866 ) ( 193,426 ) Cash flows from financing activities: Repayment of stock notes receivable 328 193 Draw on revolving line of credit 50,000 50,000 Repayment of term loan — ( 50,000 ) Repayment of trust preferred ( 59,794 ) — Proceeds from initial public offering — 66,262 Net cash (used in) provided by financing activities ( 9,466 ) 66,455 Net increase (decrease) in cash and cash equivalents and restricted cash 14,933 ( 19,764 ) Cash and cash equivalents and restricted cash at beginning of period (1) 100,336 125,011 Cash and cash equivalents and restricted cash at end of period (1) $ 115,269 $ 105,247 Supplemental disclosure of cash flow information: Cash paid for interest $ 2,656 $ 3,145 (1) The sum of cash and cash equivalents and restricted cash from the consolidated balance sheets The accompanying notes are an integral part of the consolidated financial statements. 6 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Basis of Presentation The unaudited condensed consolidated financial statements of Skyward Specialty Insurance Group, Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all the disclosures required by GAAP for complete consolidated financial statements. Readers are urged to review the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 for a more complete description of the Company’s business and accounting policies. In the opinion of management, all adjustments necessary for a fair statement of the condensed consolidated financial statements have been included. Such adjustments consist only of normal recurring items. Interim results are not necessarily indicative of results of operations for the full year. The consolidated balance sheet as of December 31, 2023 was derived from the Company’s audited annual consolidated financial statements. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from these estimates. 2. Investments The following tables set forth the amortized cost and the fair value by investment category at March 31, 2024 and December 31, 2023: ($ in thousands) Gross Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Fair Value March 31, 2024 Fixed maturity securities, available-for-sale: U.S. government securities $ 36,109 $ 30 $ ( 573 ) $ — $ 35,566 Corporate securities and miscellaneous 428,985 4,016 ( 17,245 ) — 415,756 Municipal securities 101,697 586 ( 6,466 ) — 95,817 Residential mortgage-backed securities 297,164 2,446 ( 16,596 ) — 283,014 Commercial mortgage-backed securities 31,878 502 ( 1,854 ) — 30,526 Other asset-backed securities 206,357 1,416 ( 3,277 ) — 204,496 Total fixed maturity securities, available-for-sale $ 1,102,190 $ 8,996 $ ( 46,011 ) $ — $ 1,065,175 Fixed maturity securities, held-to-maturity: Other asset-backed securities $ 43,029 $ 25 $ ( 1,324 ) $ ( 329 ) $ 41,401 Total fixed maturity securities, held-to-maturity $ 43,029 $ 25 $ ( 1,324 ) $ ( 329 ) $ 41,401 7 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands) Gross Amortized Cost Gross Unrealized Gains Gross Unrealized Loss Allowance for Credit Losses Fair Value December 31, 2023 Fixed maturity securities, available-for-sale: U.S. government securities $ 44,685 $ 202 $ ( 721 ) $ — $ 44,166 Corporate securities and miscellaneous 392,773 6,408 ( 15,761 ) — 383,420 Municipal securities 98,266 655 ( 6,143 ) — 92,778 Residential mortgage-backed securities 292,568 3,556 ( 14,498 ) — 281,626 Commercial mortgage-backed securities 31,411 449 ( 1,926 ) — 29,934 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: 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 The following table sets forth the amortized cost and fair value of available-for-sale fixed maturity securities by contractual maturity at March 31, 2024: ($ in thousands) Amortized Cost Fair Value Due in less than one year $ 32,270 $ 31,793 Due after one year through five years 297,619 286,500 Due after five years through ten years 187,841 183,251 Due after ten years 49,061 45,595 Mortgage-backed securities 329,042 313,540 Other asset-backed securities 206,357 204,496 Total $ 1,102,190 $ 1,065,175 Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Also, changing interest rates, tax considerations or other factors may result in portfolio sales prior to maturity. The Company’s fixed maturity securities, held-to-maturity, at March 31, 2024 consisted entirely of asset backed securities that were not due at a single maturity date. 8 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following tables set forth the gross unrealized losses and the corresponding fair values of investments, aggregated by length of time that individual securities had been in a continuous unrealized loss position as of March 31, 2024 and December 31, 2023: Less than 12 Months 12 Months or More Total ($ in thousands) Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses March 31, 2024 Fixed maturity securities, available-for-sale: U.S. government securities $ 19,473 $ ( 79 ) $ 11,240 $ ( 494 ) $ 30,713 $ ( 573 ) Corporate securities and miscellaneous 95,105 ( 1,049 ) 177,017 ( 16,196 ) 272,122 ( 17,245 ) Municipal securities 18,761 ( 369 ) 49,031 ( 6,097 ) 67,792 ( 6,466 ) Residential mortgage-backed securities 80,072 ( 1,351 ) 103,169 ( 15,245 ) 183,241 ( 16,596 ) Commercial mortgage-backed securities 3,765 ( 27 ) 15,426 ( 1,827 ) 19,191 ( 1,854 ) Other asset-backed securities 36,528 ( 258 ) 60,458 ( 3,019 ) 96,986 ( 3,277 ) Total fixed maturity securities, available-for-sale 253,704 ( 3,133 ) 416,341 ( 42,878 ) 670,045 ( 46,011 ) Fixed maturity securities, held-to-maturity: Other asset-backed securities — — 39,371 ( 1,324 ) 39,371 ( 1,324 ) Total fixed maturity securities, held-to-maturity: — — 39,371 ( 1,324 ) 39,371 ( 1,324 ) Total $ 253,704 $ ( 3,133 ) $ 455,712 $ ( 44,202 ) $ 709,416 $ ( 47,335 ) 9 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Less than 12 Months 12 Months or More Total ($ in thousands) Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses December 31, 2023 Fixed maturity securities, available-for-sale: U.S. government securities $ 7,342 $ ( 25 ) $ 25,604 $ ( 696 ) $ 32,946 $ ( 721 ) Corporate securities and miscellaneous 26,742 ( 570 ) 174,947 ( 15,191 ) 201,689 ( 15,761 ) Municipal securities 16,815 ( 290 ) 47,269 ( 5,853 ) 64,084 ( 6,143 ) Residential mortgage-backed securities 37,634 ( 602 ) 103,495 ( 13,896 ) 141,129 ( 14,498 ) Commercial mortgage-backed securities 4,942 ( 74 ) 15,290 ( 1,852 ) 20,232 ( 1,926 ) 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: 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 ) 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 March 31, 2024, the Company had 692 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. 10 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following table sets forth the components of net investment gains for the three months ended March 31, 2024 and 2023: Three months ended March 31, ($ in thousands) 2024 2023 Gross realized gains Fixed maturity securities, available-for sale $ 499 $ 493 Equity securities 1,081 1,227 Other 18 1 Total 1,598 1,721 Gross realized losses Fixed maturity securities, available-for sale ( 394 ) ( 237 ) Equity securities ( 1,874 ) ( 4,289 ) Other ( 18 ) ( 1 ) Total ( 2,286 ) ( 4,527 ) Net unrealized gains on investments Equity securities 8,020 3,745 Mortgage loans 971 22 Net investment gains $ 8,303 $ 961 The following table sets forth the proceeds from sales of available-for-sale fixed maturity securities and equity securities for the three months ended March 31, 2024 and 2023: Three months ended March 31, ($ in thousands) 2024 2023 Fixed maturity securities, available-for sale $ 12,093 $ 8,392 Equity securities 10,458 13,325 The following table sets forth the components of net investment income for the three months ended March 31, 2024 and 2023: Three months ended March 31, ($ in thousands) 2024 2023 Income: Fixed maturity securities, available-for sale $ 12,231 $ 6,676 Fixed maturity securities, held-to-maturity 1,126 1,003 Equity securities 627 726 Equity method investments 1,098 ( 4,664 ) Mortgage loans 1,419 1,473 Indirect loans ( 1,694 ) ( 1,319 ) Short-term investments and cash 4,240 1,789 Other 869 ( 20 ) Total investment income 19,916 5,664 Investment expenses ( 1,619 ) ( 1,018 ) Net investment income $ 18,297 $ 4,646 11 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following table sets forth the change in net unrealized (losses)/gains on the Company’s investment portfolio, net of deferred income taxes, included in other comprehensive loss for the three months ended March 31, 2024 and 2023: Three months ended March 31, ($ in thousands) 2024 2023 Fixed maturity securities $ ( 7,989 ) $ 9,786 Deferred income taxes 1,663 ( 2,045 ) Total $ ( 6,326 ) $ 7,741 3. Fair Value Measurements The Company’s financial instruments include assets and liabilities carried at fair value, as well as assets and liabilities carried at cost or amortized cost but disclosed at fair value in its consolidated financial statements. In determining fair value, the market approach is generally applied, which uses prices and other relevant data based on market transactions involving identical or comparable assets and liabilities. The Company uses data primarily provided by third-party investment managers or pricing vendors to determine the fair value of its investments. Periodic analyses are performed on prices received from third parties to determine whether the prices are reasonable estimates of fair value. The analyses include a review of month-to-month price fluctuations and, as needed, a comparison of pricing services’ valuations to other pricing services’ valuations for the identical security. The Company classifies its financial instruments into the following three-level hierarchy: Level 1 - Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date. Level 2 - Inputs are other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date. Level 3 - Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The following methods and assumptions were used in estimating the fair value disclosures for financial instruments in the accompanying consolidated financial statements and in these notes: U.S. government securities, mutual funds and common stock The Company uses unadjusted quoted prices for identical instruments in an active exchange to measure fair value which represent Level 1 inputs. Preferred stocks, municipal securities, corporate securities and miscellaneous The Company uses a pricing model that utilizes market-based inputs such as trades in an illiquid market for a particular security or trades in active markets for securities with similar characteristics. The model considers other inputs such as benchmark yields, issuer spreads, security terms and conditions, and other market data. These represent Level 2 fair value inputs. Commercial mortgage-backed securities, residential mortgage-backed securities and 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. It may evaluate individual tranches in a security by determining cash flows using the security’s terms and conditions, collateral performance, credit information benchmark yields and estimated prepayments. These represent Level 2 fair value inputs. 12 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Mortgage loans Mortgage loans have variable interest rates and are collateralized by real property. The Company determines fair value of mortgage loans using the income approach utilizing inputs that are observable and unobservable (Level 3). The unobservable input consists of the spread applied to a prime rate used to discount cash flows. The spread represents the incremental cost of capital based on the borrower’s ability to make future payments and the value of the collateral relative to the loan balance and is subject to judgement and uncertainty. The following table sets forth the range and weighted average, weighted by relative fair value, of the spread as of March 31, 2024 and December 31, 2023: March 31, 2024 December 31, 2023 High 9.75 % 9.50 % Low 4.27 % 3.25 % Weighted average 7.39 % 7.05 % The following tables set forth the Company’s investments within the fair value hierarchy at March 31, 2024 and December 31, 2023: March 31, 2024 ($ in thousands) Level 1 Level 2 Level 3 Total Fixed maturity securities, available-for-sale: U.S. government securities $ 35,566 $ — $ — $ 35,566 Corporate securities and miscellaneous — 415,756 — 415,756 Municipal securities — 95,817 — 95,817 Residential mortgage-backed securities — 283,014 — 283,014 Commercial mortgage-backed securities — 30,526 — 30,526 Other asset-backed securities — 204,496 — 204,496 Total fixed maturity securities, available-for-sale 35,566 1,029,609 — 1,065,175 Fixed maturity securities, held-to-maturity: Other asset-backed securities — — 41,401 41,401 Total fixed maturity securities, held-to-maturity — — 41,401 41,401 Equity securities: Common stocks 70,378 — — 70,378 Preferred stocks — 1,189 — 1,189 Mutual funds 45,516 — — 45,516 Total equity securities 115,894 1,189 — 117,083 Mortgage loans — — 44,309 44,309 Short-term investments 297,932 — — 297,932 Total $ 449,392 $ 1,030,798 $ 85,710 $ 1,565,900 13 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023 ($ in thousands) Level 1 Level 2 Level 3 Total Fixed maturity securities, available-for-sale: U.S. government securities $ 44,166 $ — $ — $ 44,166 Corporate securities and miscellaneous — 383,420 — 383,420 Municipal securities — 92,778 — 92,778 Residential mortgage-backed securities — 281,626 — 281,626 Commercial mortgage-backed securities — 29,934 — 29,934 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: Other asset-backed securities — — 41,017 41,017 Total fixed maturity securities, held-to-maturity: — — 41,017 41,017 Equity securities: Common stocks 67,425 — — 67,425 Preferred stocks — 7,358 — 7,358 Mutual funds 43,466 — — 43,466 Total equity securities 110,891 7,358 — 118,249 Mortgage loans — — 50,070 50,070 Short-term investments 270,226 — — 270,226 Total $ 425,283 $ 980,843 $ 91,087 $ 1,497,213 The following tables set forth the changes in the fair value of instruments carried at fair value with a Level 3 measurement during the three months ended March 31, 2024 and 2023: ($ in thousands) Mortgage Loans Balance at December 31, 2023 $ 50,070 Total gains for the period recognized in net investment gains (losses) 971 Issuances 187 Settlements ( 6,919 ) Balance at March 31, 2024 $ 44,309 Total gains 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 $ 952 ($ in thousands) Mortgage Loans Balance at December 31, 2022 $ 52,842 Total losses for the period recognized in net investment gains (losses) 22 Issuances 892 Settlements ( 11,421 ) Balance at March 31, 2023 $ 42,335 Total losses for the period recognized in net investment gains (losses) attributable to the change in unrealized gains or losses relating to assets held as of period end $ ( 14 ) 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. 14 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS In addition to the preceding disclosures on assets and liabilities recorded at fair value in the consolidated balance sheets, the Company is also required to disclose the fair values of certain other financial instruments for which it is practicable to estimate fair value. Estimated fair value amounts, defined as the quoted market price of a financial instrument, have been determined using available market information and other appropriate valuation methodologies. However, considerable judgements are required in developing the estimates of fair value where quoted market prices are not available. Accordingly, these estimates are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions or estimating methodologies may have an effect on the estimated fair value amounts. The following methods and assumptions were used in estimating the fair value disclosures of other financial instruments: Fixed maturity securities, held-to-maturity: Fixed maturity securities, held-to-maturity consists of senior and junior notes with target rates of return. As of March 31, 2024, the Company determined the fair value of these instruments using the income approach utilizing inputs that are unobservable (Level 3). Notes payable: The carrying value approximates the estimated fair value for notes payable as the notes payable accrue interest at current market rates plus a spread. The Company determines fair value using the income approach utilizing inputs that are observable (Level 2). Subordinated debt: Subordinated debt consists of two debt instruments, the Junior Subordinated Interest Debentures, due September 15, 2036, and Unsecured Subordinated Notes, due May 24, 2039. The carrying value of the Junior Subordinated Interest Debentures approximates the estimated fair value as the instrument accrues interest at current market rates plus a spread. Unsecured Subordinated Notes have a fixed interest rate. The Company determines the fair value of these instruments using the income approach utilizing inputs that are observable (Level 2). The following table sets forth the Company’s carrying and fair values of notes payable and subordinated debt as of March 31, 2024 and December 31, 2023: March 31, 2024 December 31, 2023 ($ in thousands) Carrying Value Fair Value Carrying Value Fair Value Notes payable Revolving credit facility 100,000 100,000 50,000 50,000 Notes payable $ 100,000 $ 100,000 $ 50,000 $ 50,000 Subordinated debt Junior subordinated interest debentures $ — $ — $ 59,186 $ 59,794 Unsecured subordinated notes 18,916 21,168 19,504 21,378 Subordinated debt, net of debt issuance costs $ 18,916 $ 21,168 $ 78,690 $ 81,172 Other financial instruments qualify as insurance-related products and are specifically exempted from fair value disclosure requirements. 4. Mortgage Loans The Company has invested in Separately Managed Accounts (“SMA1” and “SMA2”), managed by Arena Investors, LP (“Arena”), which is affiliated with The Westaim Corporation (“Westaim”) who, directly and through Westaim HIIG GP Inc. (a general partnership controlled by Westaim), is the Company’s largest stockholder. As of March 31, 2024 and December 31, 2023, the Company held direct investments in mortgage loans from various creditors through SMA1 and SMA2. The Company’s mortgage loan portfolios are primarily senior loans on real estate across the U.S. The loans earn interest at a fixed spread above a prime rate, mature in approximately 1 year to 3 years from loan origination and the principal amounts of the loans range between 64 % to 90 % property’s appraised value at the time the loans were made. 15 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The carrying value of the Company’s mortgage loans as of March 31, 2024 and December 31, 2023 were as follows: ($ in thousands) March 31, 2024 December 31, 2023 Commercial $ 15,322 $ 14,469 Retail 14,123 16,072 Hospitality 7,928 12,744 Industrial 6,936 6,785 $ 44,309 $ 50,070 The following table sets forth the Company’s gross investment income for mortgage loans for the three months ended March 31, 2024 and 2023: Three months ended March 31, ($ in thousands) 2024 2023 Commercial $ 458 $ 494 Retail 490 595 Hospitality 471 161 Office — 106 Multi-family — 117 $ 1,419 $ 1,473 The uncollectible amounts on loans, on an individual loan basis, are determined based upon consultations and advice from the Company’s specialized investment manager and consideration of any adverse situations that could affect the borrower’s ability to repay, the estimated value of underlying collateral, and other relevant factors. The Company writes off the uncollectible amount in the period it was determined to be uncollectible. There was no write-off for uncollectible amounts during the three months ended March 31, 2024 and 2023. As of March 31, 2024 and December 31, 2023, approximately $ 6.9 million and $ 7.1 million of mortgage loans, respectively, were in the process of foreclosure. As of March 31, 2024, $ 6.9 million of mortgage loans were not producing income for the previous 12 months. 5. Equity Method Investments and Other The Company’s ownership interests in most of its equity method investments range from approximately 3% to less than 5% where the Company has significant influence but not control. The following table sets forth the carrying value of the Company’s equity method investments as of March 31, 2024 and December 31, 2023: ($ in thousands) March 31, 2024 December 31, 2023 Arena Special Opportunities Fund, LP units $ 40,643 $ 41,046 JVM Funds LLC units 19,293 20,061 Arena SOP LP units 2,752 2,463 RISCOM 3,807 4,121 Hudson Ventures Fund 2 LP units 4,742 4,669 Dowling Capital Partners LP units 858 1,708 Brewer Lane Ventures Fund II LP units 663 560 $ 72,758 $ 74,628 16 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following table sets forth the components of net investment income (loss) from equity method investments for the three months ended March 31, 2024 and 2023: Three months ended March 31, ($ in thousands) 2024 2023 Dowling Capital Partners LP units $ 1,342 $ 267 RISCOM 286 81 Brewer Lane Ventures Fund II LP ( 32 ) — Hudson Ventures Fund II LP units ( 52 ) ( 255 ) JVM Funds LLC ( 484 ) ( 420 ) Universa Black Swan LP units — ( 556 ) Arena SOP LP units 289 ( 2,051 ) Arena Special Opportunities Fund, LP units ( 251 ) ( 1,730 ) $ 1,098 $ ( 4,664 ) The following table sets forth the unfunded commitment of equity method investments as of March 31, 2024 and December 31, 2023: ($ in thousands) March 31, 2024 December 31, 2023 Brewer Lane Ventures Fund II LP units $ 4,227 $ 4,610 Hudson Ventures Fund 2 LP units 722 848 Dowling Capital Partners LP units 386 386 $ 5,335 $ 5,844 The difference between the cost of an investment and its proportionate share of the underlying equity in net assets is allocated to the various assets and liabilities of the equity method investment. The Company amortizes the difference in net assets over the same useful life of a similar asset as the underlying equity method investment. For investment in RISCOM, a similar asset would be agent relationships. The Company amortizes this difference over a 15-year useful life. The following table sets forth the Company’s recorded investment in RISCOM compared to its share of underlying equity as of March 31, 2024 and December 31, 2023: ($ in thousands) March 31, 2024 December 31, 2023 Investment in RISCOM: Underlying equity $ 2,367 $ 2,620 Difference 1,440 1,501 Recorded investment balance $ 3,807 $ 4,121 The following table sets forth the Company’s recorded investment in JVM Funds LLC compared to its share of underlying equity as of March 31, 2024 and December 31, 2023: ($ in thousands) March 31, 2024 December 31, 2023 Investment in JVM Funds LLC: Underlying equity $ 18,574 $ 19,304 Difference 719 757 Recorded investment balance $ 19,293 $ 20,061 17 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Investment in Indirect Loans and Loan Collateral As of March 31, 2024 and December 31, 2023, the Company held indirect investments in collateralized loans and loan collateral through SMA1 and SMA2. The carrying value of the SMA1 and SMA2 as of March 31, 2024 and December 31, 2023 were as follows: ($ in thousands) March 31, 2024 December 31, 2023 SMA1 $ 24,883 $ 30,816 SMA2 6,321 5,209 Investment in indirect loans and loan collateral $ 31,204 $ 36,025 6. Notes Payable & Subordinated Debt Revolving Credit Facility The Company entered into an agreement to obtain a new unsecured revolving credit facility (the “Revolving Credit Facility”) with a syndicate of participating banks during the first quarter of 2023. The Revolving Credit Facility provided the Company with up to a $ 150.0 million revolving credit facility, with an accordion that can increase the capacity by $ 50.0 million, and a letter of credit sub-facility of up to $ 30.0 million. As of December 31, 2023, the Company drew $ 50.0 million on the Revolving Credit Facility. During the three months ended March 31, 2024, the Company drew an additional $ 50.0 million on the Revolving Credit Facility and used the proceeds to pay off the principal on its existing Debentures (defined below). Interest on the Revolving Credit Facility is payable quarterly. The interest rate on the Revolving Credit Facility is the Secured Overnight Financing Rate (“SOFR”) plus a margin of between 150 and 190 basis points based on the ratio of debt to total capital and a credit spread adjustment of 10 basis points. 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 % 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 March 31, 2024, the Company was in compliance with all covenants. Debentures In August 2006, the Company 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 “Debentures”) with a principal amount of $ 59.8 million issued by the Company and cash of $ 1.8 million from the issuance of Trust common shares purchased by the Company equal to 3 % of the Trust capitalization. On March 15, 2024, the Company redeemed the Debentures and paid $ 1.4 million of accrued interest. 18 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7. Income Taxes The following table sets forth the Company’s income tax expense and effective tax rates for the three months ended March 31, 2024 and 2023: Three months ended March 31, ($ in thousands) 2024 2023 Income tax expense $ 10,193 $ 4,166 Effective tax rate 21.7 % 21.1 % The effective tax rate will differ from the statutory rate of 21 percent due to permanent differences for disallowed expenses for tax and beneficial adjustments for tax-exempt income, dividends-received deduction and non-deductible expenses. 8. Losses and Loss Adjustment Expenses The following table sets forth the reconciliation of unpaid losses and loss adjustment expenses (“LAE”) as reported in the condensed consolidated balance sheets as of and for the three months ended March 31, 2024 and 2023: Three months ended March 31, ($ in thousands) 2024 2023 Reserves for losses and LAE, beginning of period $ 1,314,501 $ 1,141,757 Less: reinsurance recoverable on unpaid claims, beginning of period ( 455,484 ) ( 435,986 ) Reserves for losses and LAE, beginning of period, net of reinsurance 859,017 705,771 Incurred, net of reinsurance, related to: Current period 144,155 115,142 Prior years — — Total incurred, net of reinsurance 144,155 115,142 Paid, net of reinsurance, related to: Current period 11,805 8,744 Prior years 80,516 68,745 Total paid 92,321 77,489 Net reserves for losses and LAE, end of period 910,851 743,424 Plus: reinsurance recoverable on unpaid claims, end of period 466,095 429,752 Reserves for losses and LAE, end of period $ 1,376,946 $ 1,173,176 19 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 9. Commission and Fee Income Skyward Underwriters Agency, Inc. (“SUA”), a subsidiary of the Company, is a managing general insurance agent and reinsurance broker for property and casualty and accident and health risks in specialty niche markets. Commission and fee income is primarily generated from SUA for the placement of insurance policies on either a third-party insurance or reinsurance company. The following table sets forth the Company’s disaggregated revenues from contracts with customers for the three months ended March 31, 2024 and 2023: Three months ended March 31, ($ in thousands) 2024 2023 SUA commission revenue $ 990 $ 857 SUA fee income 846 456 Other 190 179 Total commission and fee income $ 2,026 $ 1,492 The Company’s contract assets from commission and fee income as of March 31, 2024 and December 31, 2023 were $ 1.5 million and $ 1.0 million, respectively. Contract assets were $ 1.3 million as of both March 31, 2023 and December 31, 2022. 10. Underwriting, Acquisition and Insurance Expenses The following table sets forth the components of underwriting, acquisition and insurance expenses for the three months ended March 31, 2024 and 2023: Three months ended March 31, ($ in thousands) 2024 2023 Amortization of policy acquisition costs $ 31,977 $ 21,235 Other operating and general expenses 37,797 30,420 Total underwriting, acquisition and insurance expenses $ 69,774 $ 51,655 11. Reinsurance Certain premiums and benefits are assumed from and ceded to other insurance companies under various reinsurance agreements. The reinsurance agreements provide the Company with increased capacity to write larger risks and maintain its exposure to loss within its capital resources. The Company remains obligated for amounts ceded in the event that the reinsurers do not meet their obligations. The following table sets forth the effects of reinsurance on written and earned premiums and losses and loss adjustment expenses for the three months ended March 31, 2024 and 2023: Three months ended March 31, 2024 2023 ($ in thousands) Written Earned Written Earned Direct premiums $ 366,796 $ 327,172 $ 308,213 $ 262,658 Assumed premiums 91,824 62,186 52,285 39,131 Ceded premiums ( 171,520 ) ( 153,016 ) ( 158,357 ) ( 118,958 ) Net premiums $ 287,100 $ 236,342 $ 202,141 $ 182,831 Ceded losses and LAE incurred $ 85,619 $ 64,794 20 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following table sets forth the components of reinsurance recoverables and ceded unearned premium as of March 31, 2024 and December 31, 2023: ($ in thousands) March 31, 2024 December 31, 2023 Ceded unpaid losses and LAE $ 466,095 $ 455,484 Ceded paid losses and LAE 127,385 122,287 Loss portfolio transfer 20,858 20,858 Allowance for credit losses ( 2,295 ) ( 2,295 ) Reinsurance recoverables $ 612,043 $ 596,334 Ceded unearned premium $ 204,625 $ 186,121 The Company entered into agreements with several of its reinsurers, whereby the reinsurer established funded trust accounts with the Company as the sole beneficiary. These trust accounts provide the Company additional security to collect claim recoverables under reinsurance contracts and the Company does not carry these on the balance sheet because the Company will only have custody over these accounts upon the failure of the reinsurer to pay amounts due. At March 31, 2024, the market value of these accounts was approximately $ 171.2 million. The trust amount will be adjusted periodically, by mutual agreement, based on claim payments and loss reserve recoverables. Certain ceded reinsurance contracts that transfer only significant timing risk and do not transfer sufficient underwriting risk are accounted for using the deposit method of accounting. The Company’s deposit asset at March 31, 2024 and December 31, 2023 was $ 27.5 million and $ 29.9 million, respectively, and was included in other assets on the condensed consolidated balance sheets. 12. Earnings Per Share The following table sets forth the compilation of basic and diluted net earnings per share for the three months ended March 31, 2024 and 2023: Three months ended March 31, ($ in thousands, except for share and per share amounts) 2024 2023 Numerator Net income $ 36,784 $ 15,556 Less: Undistributed income allocated to participating securities — ( 1,274 ) Net income attributable to common stockholders (numerator for basic earnings per share) 36,784 14,282 Add back: Undistributed income allocated to participating securities — 1,274 Net income (numerator for diluted earnings per share under the two-class method) $ 36,784 $ 15,556 Denominator Basic weighted-average common shares 39,108,351 32,848,243 Dilutive effect of preferred shares — 2,931,256 Dilutive effect of stock notes 711,752 708,746 Dilutive effect of stock units 935,890 444,612 Dilutive effect of options 329,143 19,216 Diluted weighted-average common share equivalents 41,085,136 36,952,073 Basic earnings per share $ 0.94 $ 0.43 Diluted earnings per share $ 0.90 $ 0.42 21 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 following table presents anti-dilutive instruments that were excluded from the calculation of diluted weighted-average common share equivalents during the three months ended March 31, 2024 and 2023: Three months ended March 31, 2024 2023 Stock units 70,671 443,951 Options 48 333,551 The following table presents common share equivalents of contingently issuable instruments that were excluded from basic earnings per share in the three months ended March 31, 2024 and 2023: Three months ended March 31, 2024 2023 Common shares 866,428 1,054,510 13. Related Party Transactions Westaim In July 2023, Westaim dissolved Westaim HIIG LP and obtained direct ownership of the Company’s common stock held by the partnership. Westaim subsequently transferred the direct ownership of the Company’s stock to the wholly owned general partnership, Westaim HIIG GP Inc. As of March 31, 2024 and December 31, 2023, Westaim, including shares beneficially owned through Westaim HIIG GP Inc., owned 17.5 % of the Company’s common stock. RISCOM RISCOM provides the Company with wholesale brokerage services. RISCOM and the Company also have a managing general agency agreement. The Company holds a 20 % ownership interest in RISCOM. Net earned premium and gross commission expense related to these agreements for the three months ended March 31, 2024 and 2023 were as follows: Three months ended March 31, ($ in thousands) 2024 2023 Net earned premium $ 25,894 $ 22,185 Commissions 6,887 6,853 Premiums receivable as of March 31, 2024 and December 31, 2023 were $ 15.6 million and $ 10.6 million, respectively. Other Advisory and professional services fees and expense reimbursements paid to various affiliated stockholders and directors for the three months ended March 31, 2024 were $ 2.0 million, compared to $ 2.1 million for the three months ended March 31, 2023. See Note 4 and 5 for investments involving affiliated companies and additional related party transactions. 22 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 14. Commitments and Contingencies Litigation The Company is named as a defendant in various legal actions arising from claims made under insurance policies and contracts. Those actions are considered by the Company in estimating the losses and loss adjustment expense reserves. Also, from time to time, the Company is a defendant in various legal actions that relate to bad faith claims, disputes with third parties or that involve alleged errors and omissions. The Company records accruals for these items to the extent the losses are probable and reasonably estimable. Although the ultimate outcome of these matters cannot be determined at this time, based on present information, the availability of insurance coverage and advice received from outside legal counsel, the Company believes the resolution of any such matters will not, individually or in the aggregate, have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. Indemnification In conjunction with the sale of business assets and subsidiaries, the Company has provided indemnifications to certain of the buyers. Certain indemnifications cover typical representations and warranties related to the responsibilities to perform under the sales contracts. The amount of potential exposure covered by the indemnifications is difficult to determine because the indemnifications cover a variety of matters, operations and scenarios. Certain of these indemnifications have no time limit. At this time, the Company does not have reason to believe any such significant claims exist. 23 Table of Contents