Skyward Specialty Insurance Group, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The term “Skyward Specialty” as used below refers only to Skyward Specialty Insurance Group, Inc. and the terms “our Company,” “we,” “us,” and “our” as used below refer to Skyward Specialty Insurance Group and its consolidated subsidiaries. The term “second quarter” as used below refers to the three and six months ended June 30 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 2023 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 2023 Form 10-K. 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 six months ended June 30, 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 2023 Form 10-K. The accompanying condensed consolidated financial statements and related notes have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”). Overview Founded in 2006, Skyward Specialty is a specialty insurance holding company incorporated in Delaware. We have one reportable segment through which we offer a broad array of commercial property and casualty products and solutions on a non-admitted (or E&S) and admitted basis, predominantly in the United States. We focus our 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 our customers and prospective customers operating in these markets. Our customers typically require highly specialized, customized underwriting solutions and claims capabilities. As such, we develop and deliver tailored insurance products and services to address each of the niche markets we serve. Each of our eight distinct underwriting divisions has dedicated underwriting leadership supported by high-quality technical staff with deep experience in their respective niches. We believe this structure and expertise allows us to serve the needs of our customers effectively and be a value-add partner to our distributors, while earning attractive risk-adjusted returns. All of our insurance company subsidiaries are group rated and have financial strength ratings of “A” (Excellent) with stable outlook from the A.M. Best Company. 26 Table of Contents Results of Operations The following table summarizes our results for the three and six months ended June 30, 2024 and 2023: Three months ended June 30, Six months ended June 30, ($ in thousands) 2024 2023 2024 2023 Gross written premiums $ 496,243 $ 421,994 $ 954,863 $ 782,492 Ceded written premiums (199,114) (208,257) (370,634) (366,614) Net written premiums $ 297,129 $ 213,737 $ 584,229 $ 415,878 Net earned premiums $ 257,583 $ 194,347 $ 493,925 $ 377,178 Commission and fee income 2,053 2,240 4,079 3,732 Losses and LAE 159,054 124,405 302,968 239,305 Underwriting, acquisition and insurance expenses 76,679 56,683 146,453 108,338 Underwriting income (1) $ 23,903 $ 15,499 $ 48,583 $ 33,267 Net investment income $ 22,138 $ 8,583 $ 40,435 $ 13,229 Net investment (losses) gains $ (1,825) $ 5,351 $ 6,478 $ 6,312 Income before income taxes $ 40,355 $ 25,016 $ 87,332 $ 44,738 Net income $ 30,970 $ 19,452 $ 67,754 $ 35,008 Adjusted operating income (1) $ 33,054 $ 16,017 $ 64,025 $ 31,503 Loss and LAE ratio 61.7 % 64.0 % 61.3 % 63.4 % Expense ratio 29.0 % 28.0 % 28.8 % 27.7 % Combined ratio 90.7 % 92.0 % 90.1 % 91.1 % Adjusted loss and LAE ratio (1) 61.8 % 64.2 % 61.4 % 63.6 % Expense ratio 29.0 % 28.0 % 28.8 % 27.7 % Adjusted combined ratio (1) 90.8 % 92.2 % 90.2 % 91.3 % Annualized return on equity 17.5 % 15.1 % 19.6 % 14.8 % Annualized return on tangible equity (1) 20.0 % 18.3 % 22.4 % 18.3 % Annualized adjusted return on equity (1) 18.7 % 12.4 % 18.5 % 13.3 % Annualized adjusted return on tangible equity (1) 21.3 % 15.1 % 21.2 % 16.5 % (1) See “Reconciliation of Non-GAAP Financial Measures” in this Item 2 Reconciliation of Non-GAAP Financial Measures Adjusted Operating Income The following table provides a reconciliation of adjusted operating income to net income for the three and six months ended June 30, 2024 and 2023: Three months ended June 30, Six months ended June 30, 2024 2023 2024 2023 ($ in thousands) Pre-tax After-tax Pre-tax After-tax Pre-tax After-tax Pre-tax After-tax Income as reported $ 40,355 $ 30,970 $ 25,016 $ 19,452 $ 87,332 $ 67,754 $ 44,738 $ 35,008 Less (add): Net investment (losses) gains (1,825) (1,442) 5,351 4,227 6,478 5,118 6,312 4,986 Net impact of LPT 241 190 462 365 482 381 704 556 Other loss (7) (6) — — (7) (6) — — Other expenses (1,045) (826) (1,465) (1,157) (2,233) (1,764) (2,579) (2,037) Adjusted operating income $ 42,991 $ 33,054 $ 20,668 $ 16,017 $ 82,612 $ 64,025 $ 40,301 $ 31,503 27 Table of Contents Underwriting Income The following table provides a reconciliation of underwriting income to income before federal income tax for the three and six months ended June 30, 2024 and 2023: Three months ended June 30, Six months ended June 30, ($ in thousands) 2024 2023 2024 2023 Income before federal income tax expense $ 40,355 $ 25,016 $ 87,332 $ 44,738 Add: Interest expense 2,449 2,466 5,176 4,618 Amortization expense 360 486 748 873 Other expenses 1,045 1,465 2,233 2,579 Less: Net investment income 22,138 8,583 40,435 13,229 Net investment (losses) gains (1,825) 5,351 6,478 6,312 Other loss (7) — (7) — Underwriting income $ 23,903 $ 15,499 $ 48,583 $ 33,267 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 six months ended June 30, 2024 and 2023: Three months ended June 30, Six months ended June 30, ($ in thousands) 2024 2023 2024 2023 Net earned premiums $ 257,583 $ 194,347 $ 493,925 $ 377,178 Losses and LAE 159,054 124,405 302,968 239,305 Pre-tax net impact of loss portfolio transfer 241 462 482 704 Adjusted losses and LAE $ 159,295 $ 124,867 $ 303,450 $ 240,009 Loss ratio 61.7 % 64.0% 61.3 % 63.4 % Less: Net impact of LPT (0.1) % (0.2)% (0.1) % (0.2)% Adjusted loss ratio 61.8 % 64.2 % 61.4 % 63.6 % Combined ratio 90.7 % 92.0 % 90.1 % 91.1 % Less: Net impact of LPT (0.1) % (0.2)% (0.1) % (0.2)% Adjusted combined ratio 90.8 % 92.2 % 90.2 % 91.3 % Tangible Stockholders’ Equity The following table provides a reconciliation of tangible stockholders’ equity to stockholders’ equity for the periods ended June 30, 2024 and 2023: ($ in thousands) 2024 2023 Stockholders’ equity $ 723,620 $ 522,678 Less: Goodwill and intangible assets 87,868 89,181 Tangible stockholders’ equity $ 635,752 $ 433,497 28 Table of Contents 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 and six months ended June 30, 2024 and 2023: Three months ended June 30, Six months ended June 30, ($ in thousands) 2024 2023 2024 2023 Numerator: annualized adjusted operating income $ 132,214 $ 64,068 $ 128,050 $ 63,006 Denominator: average stockholders’ equity $ 707,946 $ 514,912 $ 692,326 $ 472,170 Annualized adjusted return on equity 18.7 % 12.4 % 18.5 % 13.3 % Annualized Return on Tangible Equity Annualized return on tangible equity for the three and six months ended June 30, 2024 and 2023 reconciles to annualized return on equity as follows: Three months ended June 30, Six months ended June 30, ($ in thousands) 2024 2023 2024 2023 Numerator: annualized net income $ 123,880 $ 77,808 $ 135,508 $ 70,016 Denominator: average tangible stockholders’ equity $ 619,944 $ 425,570 $ 604,174 $ 382,645 Annualized return on tangible equity 20.0 % 18.3 % 22.4 % 18.3 % Annualized Adjusted Return on Tangible Equity Annualized adjusted return on tangible equity for the three and six months ended June 30, 2024 and 2023 reconciles to annualized return on equity as follows: Three months ended June 30, Six months ended June 30, ($ in thousands) 2024 2023 2024 2023 Numerator: annualized adjusted operating income $ 132,214 $ 64,068 $ 128,050 $ 63,006 Denominator: average tangible stockholders’ equity $ 619,944 $ 425,570 $ 604,174 $ 382,645 Annualized adjusted return on tangible equity 21.3 % 15.1 % 21.2 % 16.5 % Underwriting Results Premiums The following tables present gross written premiums by underwriting division for the three and six months ended June 30, 2024 and 2023: Three months ended June 30, ($ in thousands) 2024 2023 Change % Change Global Property & Agriculture $ 124,728 $ 124,080 $ 648 0.5 % Industry Solutions 84,112 79,249 4,863 6.1 % Captives 62,099 39,283 22,816 58.1 % Programs 59,644 52,598 7,046 13.4 % Transactional E&S 45,711 30,632 15,079 49.2 % Accident & Health 44,088 37,252 6,836 18.4 % Professional Lines 38,106 32,989 5,117 15.5 % Surety 37,737 26,221 11,516 43.9 % Total gross written premiums (1) $ 496,225 $ 422,304 $ 73,921 17.5 % (1) Excludes exited business 29 Table of Contents Six months ended June 30, ($ in thousands) 2024 2023 Change % Change Global Property & Agriculture $ 225,361 $ 198,420 $ 26,941 13.6 % Industry Solutions 162,371 146,882 15,489 10.5 % Captives 130,507 85,363 45,144 52.9 % Programs 111,822 101,297 10,525 10.4 % Transactional E&S 87,906 60,249 27,657 45.9 % Accident & Health 84,989 73,265 11,724 16.0 % Professional Lines 80,345 66,161 14,184 21.4 % Surety 71,579 50,922 20,657 40.6 % Total gross written premiums (1) $ 954,880 $ 782,559 $ 172,321 22.0 % (1) Excludes exited business The increase in gross written premiums for the second quarter and first half of 2024, when compared to the same 2023 periods, was driven by double-digit premium growth primarily from our captives, transactional E&S and surety underwriting divisions. The double-digit premium growth was due to new business and increased rates. Our global property & agriculture division contributed double digit premium growth in the first half of 2024, when compared to the same 2023 period, primarily driven by new business in agriculture. Net written premiums for the second quarter of 2024 were $297.1 million compared to $213.7 million for the same 2023 period, an increase of $83.4 million or 39.0%. Net written premiums for the first half of 2024 were $584.2 million compared to $415.9 million for the same 2023 period, an increase of $168.3 million or 40.5%. The increases in net written premiums were primarily driven by the same reasons that drove the increases in gross written premiums discussed above. Net earned premiums for the second quarter of 2024 were $257.6 million compared to $194.3 million for the same 2023 period, an increase of $63.3 million, or 32.5%. Net earned premiums for the first half of 2024 were $493.9 million compared to $377.2 million for the same 2023 period, an increase of $116.7 million or 31.0%. The increases in net earned premiums were primarily driven by the same reasons that drove the increases in gross written premiums discussed above. For additional information regarding our reinsurance programs, see the “Reinsurance” discussion included in this Item 2 . Losses and LAE The following tables set forth the components of the loss and LAE ratios and adjusted loss and LAE ratios for the three and six months ended June 30, 2024 and 2023: Three months ended June 30, 2024 2023 ($ in thousands) Losses and LAE % of Net Earned Premiums Losses and LAE % of Net Earned Premiums Losses and LAE: Non-cat loss and LAE (1) $ 156,295 60.6 % $ 118,062 60.7 % Cat loss and LAE (1) 3,000 1.2 % 6,805 3.5 % Prior accident year development - LPT (241) (0.1) % (462) (0.2)% Total losses and LAE $ 159,054 61.7 % $ 124,405 64.0 % Adjusted losses and LAE (2) : Non-cat loss and LAE (1) $ 156,295 60.6 % $ 118,062 60.7 % Cat loss and LAE (1) 3,000 1.2 % 6,805 3.5 % Total adjusted losses and LAE (2) $ 159,295 61.8 % $ 124,867 64.2 % (1) Current accident year (2) See "Reconciliation of Non-GAAP Financial Measures" included in this Item 2 30 Table of Contents Six months ended June 30, 2024 2023 ($ in thousands) Losses and LAE % of Net Earned Premiums Losses and LAE % of Net Earned Premiums Losses and LAE: Non-cat loss and LAE (1) $ 299,450 60.6 % $ 229,964 60.9 % Cat loss and LAE (1) 4,000 0.8 % 10,045 2.7 % Prior accident year development - LPT (482) (0.1) % (704) (0.2)% Total losses and LAE $ 302,968 61.3 % $ 239,305 63.4 % Adjusted losses and LAE (2) : Non-cat loss and LAE (1) $ 299,450 60.6 % $ 229,964 60.9 % Cat loss and LAE (1) 4,000 0.8 % 10,045 2.7 % Total adjusted losses and LAE (2) $ 303,450 61.4 % $ 240,009 63.6 % (1) Current accident year (2) See "Reconciliation of Non-GAAP Financial Measures" included in this Item 2 The loss ratios for the second quarter and first half of 2024 improved 2.3 points and 2.1 points, respectively, when compared to the same 2023 periods, driven by less severity of convective storms. The non-cat loss and LAE ratio for the second quarter of 2024 was comparable to the same 2023 period. The non-cat loss and LAE ratio for the first half of 2024 improved 0.3 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 six months ended June 30, 2024 and 2023: Three months ended June 30, 2024 2023 ($ in thousands) Expenses % of Net Earned Premiums Expenses % of Net Earned Premiums Net policy acquisition expenses $ 35,931 14.0 % $ 23,136 11.9 % Other operating and general expenses 40,748 15.8 % 33,547 17.3 % Underwriting, acquisition and insurance expenses 76,679 29.8 % 56,683 29.2 % Less: commission and fee income (2,053) (0.8 %) (2,240) (1.2 %) Total net expenses $ 74,626 29.0 % $ 54,443 28.0 % Six months ended June 30, 2024 2023 ($ in thousands) Expenses % of Net Earned Premiums Expenses % of Net Earned Premiums Net policy acquisition expenses $ 67,908 13.7 % $ 44,371 11.7 % Other operating and general expenses 78,545 15.9 % 63,967 17.0 % Underwriting, acquisition and insurance expenses 146,453 29.6 % 108,338 28.7 % Less: commission and fee income (4,079) (0.8 %) (3,732) (1.0 %) Total net expenses $ 142,374 28.8 % $ 104,606 27.7 % The expense ratio for the second quarter and first half of 2024 increased 1.0 point and 1.1 points, respectively, when compared to the same 2023 periods, primarily driven by the business mix shift partially offset by earnings leverage. The expense ratios for the periods presented 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. 31 Table of Contents Investment Results 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 and six months ended June 30, 2024 and 2023: Three months ended June 30, Six months ended June 30, $ in thousands 2024 2023 2024 2023 Short-term investments & cash and cash equivalents $ 4,021 $ 3,206 $ 9,108 $ 4,985 Fixed income 13,786 7,919 26,264 15,380 Equities 751 684 1,378 682 Alternative and strategic investments 3,580 (3,226) 3,685 (7,818) Net investment income $ 22,138 $ 8,583 $ 40,435 $ 13,229 Net unrealized (losses) gains on securities still held $ (1,760) $ 5,017 $ 7,231 $ 8,784 Net realized (losses) gains (65) 334 (753) (2,472) Net investment (losses) gains $ (1,825) $ 5,351 $ 6,478 $ 6,312 Net investment income for the second quarter and first half of 2024 increased $13.6 million and $27.2 million, respectively when compared to the same 2023 periods. The increase in income from our fixed income portfolio for the second quarter and first half of 2024, when compared to the same 2023 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 4.4% at June 30, 2024 compared to 3.9% at June 30, 2023. The increases in income from short-term investments & cash and cash equivalents for the second quarter and first half of 2024 when compared to the same 2023 periods, were due to higher investment yields and a larger asset base. The fair value of our alternative and strategic investments portfolio for the second quarter and first half of 2024 increased when compared to the same 2023 period, due to an increase 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. Future increases in fair value, if related to credit factors, are recognized through earnings limited to the amount previously recognized as an allowance for credit losses. 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 June 30, 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. Investments Composition of Investment Portfolio The following table sets forth the components of our investment portfolio at carrying value at June 30, 2024 and December 31, 2023: 2024 2023 ($ in thousands) Carrying Value % of Total Carrying Value % of Total Cash and cash equivalents $ 72,989 4.1 % $ 65,891 3.9 % Short-term investments 215,041 12.0 % 270,259 16.1 % Fixed income 1,243,943 69.5 % 1,067,721 63.6 % Equities 112,823 6.3 % 118,249 7.0 % Alternative and strategic investments 144,530 8.1 % 157,458 9.4 % Total portfolio $ 1,789,326 100.0 % $ 1,679,578 100.0 % 32 Table of Contents Fixed income 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 June 30, 2024 and December 31, 2023: 2024 2023 ($ in thousands) Carrying Value % of Total Carrying Value % of Total U.S. government securities $ 35,568 2.9 % $ 44,166 4.1 % Corporate securities and miscellaneous 436,382 35.1 % 383,420 35.9 % Municipal securities 94,274 7.6 % 92,778 8.7 % Residential mortgage-backed securities 347,302 27.9 % 281,626 26.4 % Commercial mortgage-backed securities 46,307 3.7 % 29,934 2.8 % Other asset-backed securities 240,440 19.3 % 185,727 17.4 % Total fixed income portfolio, available-for-sale 1,200,273 96.5 % 1,017,651 95.3 % Commercial mortgage loans $ 43,670 3.5 % $ 50,070 4.7 % Total fixed income portfolio $ 1,243,943 100.0 % $ 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 June 30, 2024 and December 31, 2023. The following table sets forth the credit quality of our available-for-sale fixed income portfolio at June 30, 2024 and December 31, 2023, as rated by Standard & Poor’s or equivalent designation: 2024 2023 ($ in thousands) Fair Value % of Total Fair Value % of Total AAA $ 534,283 44.5 % $ 493,252 48.6 % AA 137,565 11.5 % 105,906 10.4 % A 302,740 25.2 % 233,487 22.9 % BBB 201,579 16.8 % 154,096 15.1 % BB and Lower 24,106 2.0 % 30,910 3.0 % Total fixed income portfolio, available-for-sale $ 1,200,273 100.0 % $ 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 4.19 years and 4.24 years, respectively, as of June 30, 2024 and December 31, 2023. Equities 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. 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. Strategic investments consists of equity interests in private entities within the insurance industry. Other Items Income Taxes Income tax expense for the three and six months ended June 30, 2024 was $9.4 million and $19.6 million, respectively, compared to $5.6 million and $9.7 million, respectively, for the same 2023 periods. Our effective tax rates for the three and six months ended June 30, 2024 were 23.3% and 22.4%, respectively, compared to 22.2% and 21.7%, respectively, for the same 2023 periods. For additional information, see Note 7 of our condensed consolidated financial statements included in Item 1 of this Form 10-Q. 33 Table of Contents Liquidity and Capital Resources Sources and Uses of Funds Our most significant source of cash is from premiums received from our insureds, which, for most policies, we receive at the beginning of the coverage period, net of the related commission amount for the policies. Our most significant cash outflow is for claims that arise when a policyholder incurs an insured loss. Because the payment of claims occurs after the receipt of the premium, often years later, we invest the cash in various investment securities that generally earn interest and dividends. We also use cash to pay for operating expenses such as salaries, rent and taxes and capital expenditures such as technology systems. We use reinsurance to manage the risk that we take on our policies. We cede, or pay out, part of the premiums we receive to our reinsurers and collect cash back when losses subject to our reinsurance coverage are paid. The timing of our cash flows from operating activities can vary among periods due to the timing by which payments are made or received. Some of our payments and receipts, including loss settlements and subsequent reinsurance receipts, can be significant, and as a result their timing can influence cash flows from operating activities in any given period. Management believes that cash receipts from premiums and proceeds from investment income are sufficient to cover cash outflows in the foreseeable future. Our cash flows for the six months ended June 30, 2024 and 2023 were: ($ in thousands) 2024 2023 Cash and cash equivalents provided by (used in): Operating activities $ 115,220 $ 108,477 Investing activities (97,824) (198,084) Financing activities (9,465) 66,455 Change in cash and cash equivalents and restricted cash $ 7,931 $ (23,152) The increase in cash provided by operating activities in 2024 and 2023 was primarily due to positive cash flow from our insurance operations. Cash from operations can vary from period to period due to the timing of premium receipts, claim payments and reinsurance activity. Cash flows from operations in each of the past two years were used primarily to fund investing activities. 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 used in financing activities in 2024 was driven by net payments on debt. Credit Agreements Revolving Credit Facility On March 29, 2023, we entered into an unsecured revolving credit facility (the “Revolving Credit Facility”) with a syndicate of participating banks. The Revolving Credit Facility provides us with up to a $150.0 million revolving credit facility, with an accordion that can increase the capacity by $50.0 million, and a letter of credit sub-facility of up to $30.0 million. 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 $50.0 million of undrawn capacity. Interest on the Revolving Credit Facility is payable quarterly. The interest rate on the Revolving Credit Facility is the SOFR plus a margin of between 150 and 190 basis points based on the ratio of debt to total capital and a credit spread adjustment of 10 basis points. The following table sets forth the outstanding draws on the Revolving Credit Facility as of June 30, 2024: ($ in thousands) June 30, 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 % 34 Table of Contents 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 June 30, 2024, we are in compliance with all covenants. Debentures 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. On March 15, 2024, the Company redeemed the Debentures and paid $1.4 million of accrued interest. Subordinated Debt In May 2019, we issued unsecured subordinated notes (the “Notes”) with an aggregate principal amount of $20.0 million. Interest on the subordinated notes is 7.25% fixed for the first eight years and 8.25% fixed thereafter. Early retirement of the debt ahead of the eight-year commitment requires all interest payments to be paid in full, as well as the return of all capital. Principal payment is due at maturity on May 24, 2039 and interest is payable quarterly. At June 30, 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 14.1% 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%. Reinsurance 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. Our reinsurance contracts are predominantly one year in length and renew annually throughout the year. At each annual renewal, we consider several factors that influence any changes to our reinsurance purchases, including any plans to change the underlying insurance coverage we offer, updated loss activity, the level of our capital and surplus, changes in our risk appetite and the cost and availability of reinsurance treaties. We purchase quota share reinsurance, excess of loss reinsurance, and facultative reinsurance coverage to limit our exposure from losses on any one occurrence. The mix of reinsurance purchased considers efficiency, cost, our risk appetite and specific factors of the underlying risks we underwrite. • Quota share reinsurance refers to a reinsurance contract whereby the reinsurer agrees to assume a specified percentage of the ceding company’s losses arising out of a defined class of business in exchange for a corresponding percentage of premiums, net of a ceding commission. • Excess of loss reinsurance refers to a reinsurance contract whereby the reinsurer agrees to assume all or a portion of the ceding company’s losses for an individual claim or an event in excess of a specified amount in exchange for a premium payable amount negotiated between the parties, which includes our catastrophe reinsurance program. • Facultative coverage refers to a reinsurance contract on individual risks as opposed to a group or class of business. 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 six months ended June 30, 2024 our net retention on a written basis (calculated as net written premiums as a percentage of gross written premiums) was 59.9% and 61.2%, respectively, compared to 50.6% and 53.1%, respectively, for the same 2023 periods. 35 Table of Contents The following is a summary of our reinsurance programs as of June 30, 2024: Line of Business Maximum Company Retention Accident & Health $0.90 million per occurrence Commercial Auto (1) $1.00 million per occurrence Excess Casualty (1)(2) $1.25 million per occurrence General Liability (1) $1.50 million per occurrence Professional Lines (2) $5.21 million per occurrence Property (3) $3.00 million per occurrence Representation and Warranty $3.25 million per occurrence Surety (2) $4.00 million per occurrence Workers’ Compensation (2) $2.33 million per occurrence (1) Legal defense expenses can force exposure above the maximum company retention for Excess Casualty, Commercial Auto and General Liability. (2) Reinsurance is subject to a loss ratio cap or aggregate level of loss cover that exceeds a modeled 1:250-year PML event. (3) Catastrophe loss protection is purchased up to $36.0 million in excess of $15.0 million retention, which provides cover for a 1:250-year PML event. On June 21, 2024, R&Q Insurance Holdings Ltd, (“R&Q”) the parent company of Randall & Quilter (R&Q Bermuda (SAC) Ltd or “R&Q SAC Ltd”) the third-party reinsurer domiciled in Bermuda that is the counterparty for our loss portfolio transfer (“LPT”), filed for provisional liquidation with the Bermuda authorities. Due to the complexity of the legal structure of R&Q SAC Ltd and uncertainty relative to the situation, management continues to evaluate the potential financial impact, if any. Credit and Financial Strength Ratings On August 1, 2024, A.M. Best upgraded Skyward Specialty’s financial strength rating to A (Excellent) from A- (Excellent) and revised the outlook to stable from positive. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in market risk from the information provided in our Annual Report on Form 10-K for the year ended December 31, 2023.