Skyward Specialty Insurance Group, Inc. 10-Q

Item 1. Financial Statements SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS September 30, 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 $ 1,359,700 and $ 1,047,713 , respectively) $ 1,357,500 $ 1,017,651 Fixed maturity securities, held-to-maturity, at amortized cost (net of allowance for credit losses of $ 239 and $ 329 , respectively) 39,321 42,986 Equity securities, at fair value 124,719 118,249 Mortgage loans, at fair value 36,267 50,070 Equity method investments 102,111 110,653 Other long-term investments 23,802 3,852 Short-term investments, at fair value 206,358 270,226 Total investments 1,890,078 1,613,687 Cash and cash equivalents 105,573 65,891 Restricted cash 45,783 34,445 Premiums receivable, net 327,176 179,235 Reinsurance recoverables, net 686,725 596,334 Ceded unearned premium 236,962 186,121 Deferred policy acquisition costs 119,910 91,955 Deferred income taxes 18,502 21,991 Goodwill and intangible assets, net 87,607 88,435 Other assets 80,547 75,341 Total assets $ 3,598,863 $ 2,953,435 Liabilities and stockholders’ equity Liabilities: Reserves for losses and loss adjustment expenses $ 1,568,777 $ 1,314,501 Unearned premiums 692,452 552,532 Deferred ceding commission 44,984 37,057 Reinsurance and premium payables 200,967 150,156 Funds held for others 102,219 58,588 Accounts payable and accrued liabilities 73,001 50,880 Notes payable 100,000 50,000 Subordinated debt, net of debt issuance costs 18,956 78,690 Total liabilities 2,801,356 2,292,404 Stockholders’ equity Common stock, $ 0.01 par value, 500,000,000 shares authorized, 40,099,931 and 39,863,756 shares issued and outstanding, respectively 401 399 Additional paid-in capital 716,095 710,855 Stock notes receivable — ( 5,562 ) Accumulated other comprehensive loss ( 1,703 ) ( 22,953 ) Retained earnings (accumulated deficit) 82,714 ( 21,708 ) Total stockholders’ equity 797,507 661,031 Total liabilities and stockholders’ equity $ 3,598,863 $ 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 September 30, Nine months ended September 30, ($ in thousands, except share and per share amounts) 2024 2023 2024 2023 Revenues: Net earned premiums $ 269,557 $ 227,033 $ 763,482 $ 604,211 Commission and fee income 1,818 2,085 5,897 5,817 Net investment income 19,521 13,089 59,956 26,318 Net investment gains (losses) 10,187 ( 2,984 ) 16,665 3,328 Other loss ( 195 ) — ( 202 ) — Total revenues 300,888 239,223 845,798 639,674 Expenses: Losses and loss adjustment expenses 170,521 138,536 473,489 377,841 Underwriting, acquisition and insurance expenses 79,817 68,315 226,270 176,653 Interest expense 2,229 2,632 7,405 7,250 Amortization expense 351 463 1,099 1,336 Other expenses 1,117 1,482 3,350 4,061 Total expenses 254,035 211,428 711,613 567,141 Income before income taxes 46,853 27,795 134,185 72,533 Income tax expense 10,185 6,084 29,763 15,814 Net income 36,668 21,711 104,422 56,719 Net income attributable to participating securities — — — 1,492 Net income attributable to common stockholders $ 36,668 $ 21,711 $ 104,422 $ 55,227 Comprehensive income Net income $ 36,668 $ 21,711 $ 104,422 $ 56,719 Other comprehensive income: Unrealized gains and losses on investments: Net change in unrealized gains (losses) on investments, net of tax 31,396 ( 8,722 ) 24,527 ( 5,309 ) Reclassification adjustment for losses on securities no longer held, net of tax ( 1,963 ) ( 3,667 ) ( 3,277 ) ( 4,879 ) Total other comprehensive income (loss) 29,433 ( 12,389 ) 21,250 ( 10,188 ) Comprehensive income $ 66,101 $ 9,322 $ 125,672 $ 46,531 Per share data: Basic earnings per share $ 0.91 $ 0.59 $ 2.61 $ 1.56 Diluted earnings per share $ 0.89 $ 0.57 $ 2.53 $ 1.50 Weighted-average common shares outstanding Basic 40,098,345 36,743,393 40,039,269 35,502,843 Diluted 41,428,557 38,403,843 41,302,108 37,830,431 The accompanying notes are an integral part of the consolidated financial statements. 4 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) Three months ended September 30, ($ in thousands, except share amounts) 2024 2023 Common shares: Balance at beginning of period 40,096,132 37,674,063 Issuance of shares 3,799 3,458 Balance at September 30 40,099,931 37,677,521 Common stock: Balance at beginning of period $ 401 $ 377 Balance at September 30 $ 401 $ 377 Additional paid-in capital: Balance at beginning of period $ 713,542 $ 642,988 Issuance of common stock 2,553 2,304 Balance at September 30 $ 716,095 $ 645,292 Stock notes receivable: Balance at beginning of period $ ( 5,233 ) $ ( 6,718 ) Employee equity transactions 5,233 1,093 Balance at September 30 $ — $ ( 5,625 ) Accumulated other comprehensive loss: Balance at beginning of period $ ( 31,136 ) $ ( 41,284 ) Other comprehensive gain (loss), net of tax 29,433 ( 12,389 ) Balance at September 30 $ ( 1,703 ) $ ( 53,673 ) Retained earnings (accumulated deficit): Balance at beginning of period $ 46,046 $ ( 72,685 ) Net income 36,668 21,711 Balance at September 30 $ 82,714 $ ( 50,974 ) Total stockholders’ equity $ 797,507 $ 535,397 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 STOCKHOLDERS’ EQUITY (UNAUDITED) Nine months ended September 30, ($ in thousands, except share amounts) 2024 2023 Preferred shares: Balance at beginning of year — 1,969,660 Preferred stock conversion to common shares — ( 1,969,660 ) Balance at September 30 — — Common shares: Balance at beginning of year 39,863,756 16,599,666 Issuance of shares 236,175 4,772,742 Preferred stock conversion to common shares — 16,305,113 Balance at September 30 40,099,931 37,677,521 Preferred stock: Balance at beginning of year $ — $ 20 Preferred stock conversion to common shares — ( 20 ) Balance at September 30 $ — $ — Common stock: Balance at beginning of year $ 399 $ 168 Issuance of common stock 2 — Preferred stock conversion to common shares — 161 Proceeds from equity offerings, net — 48 Balance at September 30 $ 401 $ 377 Treasury stock: Balance at beginning of year $ — $ ( 2 ) Preferred stock conversion to common shares — 2 Balance at September 30 $ — $ — Additional paid-in capital: Balance at beginning of year $ 710,855 $ 577,289 Issuance of common stock 5,240 6,179 Preferred stock conversion to common shares — ( 143 ) Proceeds from equity offerings, net — 61,967 Balance at September 30 $ 716,095 $ 645,292 Stock notes receivable: Balance at beginning of year $ ( 5,562 ) $ ( 6,911 ) Employee equity transactions 5,562 1,286 Balance at September 30 $ — $ ( 5,625 ) Accumulated other comprehensive loss: Balance at beginning of year $ ( 22,953 ) $ ( 43,485 ) Other comprehensive income (loss), net of tax 21,250 ( 10,188 ) Balance at September 30 $ ( 1,703 ) $ ( 53,673 ) Retained earnings (accumulated deficit): Balance at beginning of year $ ( 21,708 ) $ ( 105,417 ) Cumulative effect on adoption of ASU No. 2016-13 — ( 2,276 ) Net income 104,422 56,719 Balance at September 30 $ 82,714 $ ( 50,974 ) Total stockholders’ equity $ 797,507 $ 535,397 The accompanying notes are an integral part of the consolidated financial statements. 6 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine months ended September 30, ($ in thousands) 2024 2023 Cash flows from operating activities Net income $ 104,422 $ 56,719 Adjustments to reconcile net income to net cash provided by operating activities 178,793 161,820 Net cash provided by operating activities 283,216 218,539 Cash flows from investing activities: Purchase of fixed maturity securities, available-for-sale ( 425,642 ) ( 342,088 ) Purchase of illiquid investments — ( 1,156 ) Purchase of equity securities ( 14,156 ) ( 22,436 ) Purchase of equity method investments ( 22,377 ) — Investment in direct and indirect loans 18,445 ( 3,313 ) Purchase of property and equipment ( 3,148 ) — Sales and maturities of investment securities 142,184 110,695 Distributions from equity method investments — 1,704 Proceeds from equity method and other long-term investments 10,054 — Change in short-term investments 63,868 ( 72,891 ) Change in receivable/payable for securities 34 14,442 Cash provided by deposit accounting 2,775 8,631 Other, net — ( 1,421 ) Net cash used in investment activities ( 227,963 ) ( 307,833 ) Cash flows from financing activities: Employee share purchases — 1,287 Repayment of stock notes receivable 5,561 — Proceeds from long term borrowings 107,000 50,000 Payments on long term borrowings and trust preferred ( 116,794 ) ( 50,000 ) Proceeds from initial public offering — 66,262 Net cash (used in) provided by financing activities ( 4,233 ) 67,549 Net increase (decrease) in cash and cash equivalents and restricted cash 51,020 ( 21,745 ) 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) $ 151,356 $ 103,266 Supplemental disclosure of cash flow information: Cash paid for interest $ 6,943 $ 8,503 Cash paid for federal income taxes $ 22,480 $ 10,000 (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. 7 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 September 30, 2024 and December 31, 2023: ($ in thousands) Gross Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Fair Value September 30, 2024 Fixed maturity securities, available-for-sale: U.S. government securities $ 29,416 $ 460 $ ( 235 ) $ — $ 29,641 Corporate securities and miscellaneous 497,305 12,109 ( 11,307 ) — 498,107 Municipal securities 102,865 1,245 ( 4,624 ) — 99,486 Residential mortgage-backed securities 399,951 8,757 ( 11,413 ) — 397,295 Commercial mortgage-backed securities 66,704 1,050 ( 1,525 ) — 66,229 Other asset-backed securities 263,459 4,433 ( 1,150 ) — 266,742 Total fixed maturity securities, available-for-sale $ 1,359,700 $ 28,054 $ ( 30,254 ) $ — $ 1,357,500 Fixed maturity securities, held-to-maturity: Other asset-backed securities $ 39,560 $ 4 $ ( 1,450 ) $ ( 239 ) $ 37,875 Total fixed maturity securities, held-to-maturity $ 39,560 $ 4 $ ( 1,450 ) $ ( 239 ) $ 37,875 8 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 2. Investments (continued) ($ 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 September 30, 2024: ($ in thousands) Amortized Cost Fair Value Due in less than one year $ 35,936 $ 35,733 Due after one year through five years 346,637 344,147 Due after five years through ten years 202,691 205,283 Due after ten years 44,322 42,071 Mortgage-backed securities 466,655 463,524 Other asset-backed securities 263,459 266,742 Total $ 1,359,700 $ 1,357,500 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 September 30, 2024 consisted entirely of asset backed securities that were not due at a single maturity date. At September 30, 2024, the Company had U.S. government agencies mortgage-backed fixed maturity securities, with a carrying value of approximately $ 62.4 million pledged as collateral for a loan (the “FHLB Loan”) from the Federal Home Loan Bank of Dallas (“FHLB”) pursuant to an Advances and Security Agreement between the Company and FHLB (the “Advances and Security Agreement”). In accordance with the terms of the FHLB Loans, the Company retains all rights regarding these pledged securities. At September 30, 2024, the Company had assets with fair values of approximately $ 27.7 million pledged as collateral for the performance obligations under reinsurance agreements. In accordance with the terms of the trust agreements, the Company retains all rights regarding these securities, of which $ 24.9 million are residential mortgage-backed securities, $ 2.2 million of short-term investments and $ 0.6 million of cash and cash equivalents and other assets. 9 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 2. Investments (continued) 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 September 30, 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 September 30, 2024 Fixed maturity securities, available-for-sale: U.S. government securities $ — $ — $ 6,264 $ ( 235 ) $ 6,264 $ ( 235 ) Corporate securities and miscellaneous 11,689 ( 57 ) 158,937 ( 11,250 ) 170,626 ( 11,307 ) Municipal securities 9,899 ( 77 ) 47,299 ( 4,547 ) 57,198 ( 4,624 ) Residential mortgage-backed securities 19,453 ( 193 ) 105,880 ( 11,220 ) 125,333 ( 11,413 ) Commercial mortgage-backed securities — — 17,731 ( 1,525 ) 17,731 ( 1,525 ) Other asset-backed securities 31,803 ( 113 ) 38,198 ( 1,037 ) 70,001 ( 1,150 ) Total fixed maturity securities, available-for-sale 72,844 ( 440 ) 374,309 ( 29,814 ) 447,153 ( 30,254 ) Fixed maturity securities, held-to-maturity: Other asset-backed securities — — 35,749 ( 1,450 ) 35,749 ( 1,450 ) Total fixed maturity securities, held-to-maturity: — — 35,749 ( 1,450 ) 35,749 ( 1,450 ) Total $ 72,844 $ ( 440 ) $ 410,058 $ ( 31,264 ) $ 482,902 $ ( 31,704 ) 10 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 2. Investments (continued) 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 September 30, 2024, the Company had 505 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. 11 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 2. Investments (continued) The following table sets forth the components of net investment gains (losses) for the three and nine months ended September 30, 2024 and 2023: Three months ended September 30, Nine months ended September 30, ($ in thousands) 2024 2023 2024 2023 Gross realized gains Fixed maturity securities, available-for sale $ 575 $ 156 $ 1,405 $ 860 Equity securities 1,591 3,959 3,165 6,000 Other 62 — 80 1 Total 2,228 4,115 4,650 6,861 Gross realized losses Fixed maturity securities, available-for sale ( 11 ) ( 381 ) ( 871 ) ( 837 ) Equity securities ( 280 ) ( 245 ) ( 2,571 ) ( 5,006 ) Other ( 128 ) ( 82 ) ( 152 ) ( 84 ) Total ( 419 ) ( 708 ) ( 3,594 ) ( 5,927 ) Net unrealized gains (losses) on investments Equity securities 7,512 ( 6,417 ) 14,802 2,367 Mortgage loans 866 26 807 27 Net investment gains (losses) $ 10,187 $ ( 2,984 ) $ 16,665 $ 3,328 The following table sets forth the proceeds from sales of available-for-sale fixed maturity securities and equity securities for the nine months ended September 30, 2024 and 2023: Nine months ended September 30, ($ in thousands) 2024 2023 Fixed maturity securities, available-for sale $ 17,540 $ 25,465 Equity securities 22,993 38,581 The following table sets forth the components of net investment income for the three and nine months ended September 30, 2024 and 2023: Three months ended September 30, Nine months ended September 30, ($ in thousands) 2024 2023 2024 2023 Income: Fixed maturity securities, available-for sale $ 15,461 $ 9,180 $ 41,099 $ 23,439 Fixed maturity securities, held-to-maturity 939 1,067 3,295 3,321 Equity securities 591 769 1,969 2,539 Equity method investments ( 1,144 ) ( 4 ) 2,596 ( 6,772 ) Mortgage loans 1,158 1,249 4,165 3,997 Indirect loans ( 401 ) ( 761 ) ( 1,874 ) ( 4,009 ) Short-term investments and cash 3,709 3,165 11,370 8,140 Other 836 ( 115 ) 2,360 ( 106 ) Total investment income 21,149 14,550 64,980 30,549 Investment expenses ( 1,628 ) ( 1,461 ) ( 5,024 ) ( 4,231 ) Net investment income $ 19,521 $ 13,089 $ 59,956 $ 26,318 12 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 2. Investments (continued) The following table sets forth the change in net unrealized gains (losses) on the Company’s investment portfolio, net of deferred income taxes, included in other comprehensive loss for the three and nine months ended September 30, 2024 and 2023: Three months ended September 30, Nine months ended September 30, ($ in thousands) 2024 2023 2024 2023 Fixed maturity securities $ 37,257 $ ( 15,706 ) $ 26,898 $ ( 12,933 ) Deferred income taxes ( 7,824 ) 3,317 ( 5,648 ) 2,745 Total $ 29,433 $ ( 12,389 ) $ 21,250 $ ( 10,188 ) 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. 13 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3. Fair Value Measurements (continued) Fixed maturity securities, available for sale and equity securities classified as Level 3 The Company has corporate securities and miscellaneous, other asset-backed securities and preferred stock that are managed by an independent asset manager that uses an independent pricing model to estimate the value of the securities it manages. These represent Level 3 fair value inputs. 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 September 30, 2024 and December 31, 2023. September 30, 2024 December 31, 2023 High 10.92 % 9.50 % Low 3.61 % 3.25 % Weighted average 7.47 % 7.05 % The following tables set forth the Company’s investments within the fair value hierarchy at September 30, 2024 and December 31, 2023: September 30, 2024 ($ in thousands) Level 1 Level 2 Level 3 Total Fixed maturity securities, available-for-sale: U.S. government securities $ 29,641 $ — $ — $ 29,641 Corporate securities and miscellaneous — 456,797 41,310 498,107 Municipal securities — 99,486 — 99,486 Residential mortgage-backed securities — 397,295 — 397,295 Commercial mortgage-backed securities — 66,229 — 66,229 Other asset-backed securities — 259,378 7,364 266,742 Total fixed maturity securities, available-for-sale 29,641 1,279,185 48,674 1,357,500 Fixed maturity securities, held-to-maturity: Other asset-backed securities — — 37,875 37,875 Total fixed maturity securities, held-to-maturity — — 37,875 37,875 Equity securities: Common stocks 74,526 — — 74,526 Preferred stocks — 1,418 5,817 7,235 Mutual funds 42,958 — — 42,958 Total equity securities 117,484 1,418 5,817 124,719 Mortgage loans — — 36,267 36,267 Short-term investments 206,358 — — 206,358 Total $ 353,483 $ 1,280,603 $ 128,633 $ 1,762,719 14 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3. Fair Value Measurements (continued) 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 nine months ended September 30, 2024 and 2023: 15 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3. Fair Value Measurements (continued) ($ in thousands) Fixed Maturity Securities, Available-For-Sale Equity Securities 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 Total losses for the period recognized in net investment gains (losses) — — ( 1,030 ) Issuances — — 449 Settlements — — ( 58 ) Balance at June 30, 2024 $ — $ — $ 43,670 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 $ — $ — $ ( 1,031 ) Total (losses) gains for the period recognized in net investment gains (losses) ( 118 ) 246 866 Total unrealized gains for the period recognized in accumulated comprehensive income (loss) 1,592 — — Transfers into Level 3 23,533 — — Purchases 23,820 5,571 — Sales/Disposals ( 153 ) — — Issuances — — 8 Settlements — — ( 8,277 ) Balance at September 30, 2024 $ 48,674 $ 5,817 $ 36,267 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 $ — $ 246 $ 829 16 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3. Fair Value Measurements (continued) ($ in thousands) Mortgage Loans Balance at December 31, 2022 $ 52,842 Total gains 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 ) Total losses for the period recognized in net investment gains (losses) ( 21 ) Issuances 30 Settlements ( 9,582 ) Balance at June 30, 2023 $ 32,762 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 $ 3 Total gains for the period recognized in net investment gains (losses) 26 Issuances 26,530 Settlements — Balance at September 30, 2023 $ 59,318 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 $ 26 The transfers into Level 3 during the three and nine months ended September 30, 2024 were the result of securities that began receiving valuations from asset managers that utilized unobservable inputs at the end of the period. The Company measures certain assets, including investments in indirect loans and loan collateral, equity method investments and other invested assets, at fair value on a nonrecurring basis only when they are deemed to be impaired. In addition to the preceding disclosures on assets and liabilities recorded at fair value in the consolidated balance sheets, the Company is also required to disclose the fair values of certain other financial instruments for which it is 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 September 30, 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). The Company estimates the fair value of the FHLB Loan by discounting cash flows using a borrowing rate currently available to the Company for loans with similar terms (Level 3). 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). 17 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3. Fair Value Measurements (continued) The following table sets forth the Company’s carrying and fair values of notes payable and subordinated debt as of September 30, 2024 and December 31, 2023: September 30, 2024 December 31, 2023 ($ in thousands) Carrying Value Fair Value Carrying Value Fair Value Notes payable FHLB Loan $ 57,000 $ 57,000 $ — $ — Revolving credit facility $ 43,000 $ 43,000 $ 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 18,956 21,535 19,504 21,378 Subordinated debt, net of debt issuance costs $ 18,956 $ 21,535 $ 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”). As of September 30, 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 2 to 3 years from loan origination and the principal amounts of the loans range between 64 % to 80 % of the property’s appraised value at the time the loans were made. The carrying value of the Company’s mortgage loans as of September 30, 2024 and December 31, 2023 were as follows: ($ in thousands) September 30, 2024 December 31, 2023 Commercial $ 14,697 $ 14,469 Retail 13,638 16,072 Hospitality 7,932 12,744 Industrial — 6,785 $ 36,267 $ 50,070 The following table sets forth the Company’s gross investment income for mortgage loans for the three and nine months ended September 30, 2024 and 2023: Three months ended September 30, Nine months ended September 30, ($ in thousands) 2024 2023 2024 2023 Commercial $ 376 $ 588 $ 1,685 $ 1,637 Retail 513 364 1,473 1,375 Hospitality 269 204 1,007 497 Office — — — 203 Multi-family — 93 — 285 $ 1,158 $ 1,249 $ 4,165 $ 3,997 18 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4. Mortgage Loans (continued) 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 and nine months ended September 30, 2024 and 2023, respectively. As of September 30, 2024 no mortgage loans were in the process of foreclosure and there were no mortgage loans that were not producing income for the previous 12 months. As of December 31, 2023, approximately $ 7.1 million of mortgage loans were in the process of foreclosure. 5. Equity Method Investments and Other The following table sets forth the carrying value and ownership percentage of the Company’s equity method investments as of September 30, 2024 and December 31, 2023: ($ in thousands) September 30, 2024 December 31, 2023 Carrying Value Ownership % Carrying Value Ownership % Arena Special Opportunities Fund, LP units $ 38,137 15.9 % $ 41,046 16.2 % JVM Funds LLC units 17,831 10.1 % 20,061 10.1 % Arena SOP LP units 2,530 12.6 % 2,463 12.3 % RISCOM 4,689 20.0 % 4,121 20.0 % Hudson Ventures Fund 2 LP units 4,634 2.5 % 4,669 2.5 % Dowling Capital Partners LP units 652 5.0 % 1,708 6.2 % Brewer Lane Ventures Fund II LP units 756 2.4 % 560 2.5 % $ 69,229 $ 74,628 The following table sets forth the components of net investment income (loss) from equity method investments for the three and nine months ended September 30, 2024 and 2023: Three months ended September 30, Nine months ended September 30, ($ in thousands) 2024 2023 2024 2023 Dowling Capital Partners LP units $ 67 $ 172 $ 1,449 $ 777 RISCOM 493 468 1,168 773 Brewer Lane Ventures Fund II LP ( 31 ) ( 25 ) ( 87 ) ( 54 ) Hudson Ventures Fund II LP units ( 594 ) 551 ( 436 ) 138 JVM Funds LLC ( 261 ) ( 252 ) ( 1,280 ) ( 893 ) Universa Black Swan LP units — ( 84 ) — ( 988 ) Arena SOP LP units ( 612 ) ( 1,160 ) 67 ( 3,938 ) Arena Special Opportunities Fund, LP units ( 206 ) 326 1,715 ( 2,587 ) $ ( 1,144 ) $ ( 4 ) $ 2,596 $ ( 6,772 ) The following table sets forth the unfunded commitment of equity method investments as of September 30, 2024 and December 31, 2023: ($ in thousands) September 30, 2024 December 31, 2023 Brewer Lane Ventures Fund II LP units $ 4,227 $ 4,610 Hudson Ventures Fund 2 LP units 447 848 Dowling Capital Partners LP units 386 386 $ 5,060 $ 5,844 19 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5. Equity Method Investments and Other (continued) 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 September 30, 2024 and December 31, 2023: ($ in thousands) September 30, 2024 December 31, 2023 Investment in RISCOM: Underlying equity $ 3,370 $ 2,620 Difference 1,319 1,501 Recorded investment balance $ 4,689 $ 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 September 30, 2024 and December 31, 2023: ($ in thousands) September 30, 2024 December 31, 2023 Investment in JVM Funds LLC: Underlying equity $ 17,188 $ 19,304 Difference 643 757 Recorded investment balance $ 17,831 $ 20,061 Investment in Indirect Loans and Loan Collateral As of September 30, 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 September 30, 2024 and December 31, 2023 were as follows: ($ in thousands) September 30, 2024 December 31, 2023 SMA1 $ 20,915 $ 30,816 SMA2 11,967 5,209 Investment in indirect loans and loan collateral $ 32,882 $ 36,025 6. Notes Payable & Subordinated Debt FHLB Loan On August 30, 2024, the Company entered into the FHLB Loan pursuant to the Advances and Security Agreement. The FHLB Loan is a 4.5-year term loan in the principal amount of $ 57.0 million. The FHLB Loan provides for interest-only payments during its term, with principal due in full at maturity. The interest rate is fixed over the term of the loan at 4.00 %. The FHLB Loan is fully secured by a pledge of specific investment securities of HSIC. The Company used the proceeds to fund redemptions of the draws on the Revolving Credit Facility (see “Revolving Credit Facility” below for additional information regarding the redemption). 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 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 nine months ended September 30, 2024, the Company drew an additional $ 50.0 million on the Revolving Credit Facility and used the 20 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6. Notes Payable & Subordinated Debt (continued) proceeds to pay off the principal on its existing Debentures (defined below). On September 6, 2024, the Company redeemed $ 57.0 million of the draws on the Revolving Credit Facility. 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, 2024, the six-month SOFR on the Revolving Credit Facility was 4.25 %, plus a margin of 1.60 %. 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 September 30, 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. 7. Income Taxes The following table sets forth the Company’s income tax expense and effective tax rates for the three and nine months ended September 30, 2024 and 2023: Three months ended September 30, Nine months ended September 30, ($ in thousands) 2024 2023 2024 2023 Income tax expense $ 10,185 $ 6,084 $ 29,763 $ 15,814 Effective tax rate 21.7 % 21.9 % 22.2 % 21.8 % 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. The Company paid federal income taxes of $ 8.5 million and $ 22.5 million during the three and nine months ended September 30, 2024, respectively, and $ 10.0 million during the nine months ended September 30, 2023. 21 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 nine months ended September 30, 2024 and 2023: Nine months ended September 30, ($ 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 474,289 378,811 Prior years — — Total incurred, net of reinsurance 474,289 378,811 Paid, net of reinsurance, related to: Current period 82,653 67,267 Prior years 224,760 187,256 Total paid 307,413 254,523 Net reserves for losses and LAE, end of period 1,025,893 830,059 Plus: reinsurance recoverable on unpaid claims, end of period 542,884 438,652 Reserves for losses and LAE, end of period $ 1,568,777 $ 1,268,711 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 and nine months ended September 30, 2024 and 2023: Three months ended September 30, Nine months ended September 30, ($ in thousands) 2024 2023 2024 2023 SUA commission revenue $ 1,436 $ 1,357 $ 3,125 $ 3,599 SUA fee income 1,027 672 2,437 1,933 Other ( 645 ) 56 335 285 Total commission and fee income $ 1,818 $ 2,085 $ 5,897 $ 5,817 The Company’s contract assets from commission and fee income as of September 30, 2024 and December 31, 2023 were $ 2.4 million and $ 1.0 million, respectively. 22 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 10. Underwriting, Acquisition and Insurance Expenses The following table sets forth the components of underwriting, acquisition and insurance expenses for the three and nine months ended September 30, 2024 and 2023: Three months ended September 30, Nine months ended September 30, ($ in thousands) 2024 2023 2024 2023 Amortization of policy acquisition costs $ 37,365 $ 34,071 $ 105,273 $ 78,442 Other operating and general expenses 42,452 34,244 120,997 98,211 Total underwriting, acquisition and insurance expenses $ 79,817 $ 68,315 $ 226,270 $ 176,653 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 tables set forth the effects of reinsurance on written and earned premiums and losses and loss adjustment expenses for the three and nine months ended September 30, 2024 and 2023: Three months ended September 30, 2024 2023 ($ in thousands) Written Earned Written Earned Direct premiums $ 347,444 $ 349,980 $ 308,215 $ 299,294 Assumed premiums 52,570 69,436 47,517 51,665 Ceded premiums ( 131,692 ) ( 149,859 ) ( 75,036 ) ( 123,926 ) Net premiums $ 268,322 $ 269,557 $ 280,696 $ 227,033 Ceded losses and LAE incurred $ 108,152 $ 103,753 Nine months ended September 30, 2024 2023 ($ in thousands) Written Earned Written Earned Direct premiums $ 1,118,683 $ 1,012,550 $ 947,977 $ 845,200 Assumed premiums 236,194 202,408 190,247 139,522 Ceded premiums ( 502,326 ) ( 451,476 ) ( 441,650 ) ( 380,511 ) Net premiums $ 852,551 $ 763,482 $ 696,574 $ 604,211 Ceded losses and LAE incurred $ 300,725 $ 255,855 23 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 11. Reinsurance (continued) The following table sets forth the components of reinsurance recoverables and ceded unearned premium as of September 30, 2024 and December 31, 2023: 2024 2023 ($ in thousands) September 30, 2024 December 31, 2023 Ceded unpaid losses and LAE $ 542,884 $ 455,484 Ceded paid losses and LAE 131,812 122,287 Loss portfolio transfer 14,324 20,858 Allowance for credit losses ( 2,295 ) ( 2,295 ) Reinsurance recoverables $ 686,725 $ 596,334 Ceded unearned premium $ 236,962 $ 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 September 30, 2024, the market value of these accounts was approximately $ 196.4 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 September 30, 2024 and December 31, 2023 was $ 27.1 million and $ 29.9 million, respectively, and was included in other assets on the condensed consolidated balance sheets. 24 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 12. Earnings Per Share The following table sets forth the compilation of basic and diluted net earnings per share for the three and nine months ended September 30, 2024 and 2023: Three months ended September 30, Nine months ended September 30, ($ in thousands, except for share and per share amounts) 2024 2023 2024 2023 Numerator Net income $ 36,668 $ 21,711 $ 104,422 $ 56,719 Less: Undistributed income allocated to participating securities — — — ( 1,492 ) Net income attributable to common stockholders (numerator for basic earnings per share) 36,668 21,711 104,422 55,227 Add back: Undistributed income allocated to participating securities — — — 1,492 Net income (numerator for diluted earnings per share under the two-class method) $ 36,668 $ 21,711 $ 104,422 $ 56,719 Denominator Basic weighted-average common shares 40,098,345 36,743,393 40,039,269 35,502,843 Dilutive effect of preferred shares — — — 959,124 Dilutive effect of stock notes — 706,794 — 684,017 Dilutive effect of stock units 932,030 799,982 895,468 609,601 Dilutive effect of options 398,182 153,674 367,371 74,846 Diluted weighted-average common share equivalents 41,428,557 38,403,843 41,302,108 37,830,431 Basic earnings per share $ 0.91 $ 0.59 $ 2.61 $ 1.56 Diluted earnings per share $ 0.89 $ 0.57 $ 2.53 $ 1.50 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 and nine months ended September 30, 2024 and 2023: Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Stock units 7,152 5,069 165,072 4,546 Options 16 2 561 364,714 25 Table of Contents SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 12. Earnings Per Share (continued) The following table presents common share equivalents of contingently issuable instruments that were excluded from basic earnings per share in the three and nine months ended September 30, 2024 and 2023: Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Common shares — 932,588 — 932,588 13. Related Party Transactions 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 and nine months ended September 30, 2024 and 2023 were as follows: Three months ended September 30, Nine months ended September 30, ($ in thousands) 2024 2023 2024 2023 Net earned premium $ 27,456 $ 31,649 $ 79,511 $ 73,750 Commissions 6,448 6,119 19,682 19,122 Premiums receivable as of September 30, 2024 and December 31, 2023 were $ 16.2 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 and nine months ended September 30, 2024 were $ 0.2 million and $ 0.4 million, compared to $ 0.5 million and $ 3.1 million, respectively, for the three and nine months ended September 30, 2023. See Note 4 and 5 for investments involving affiliated companies and additional related party transactions. 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 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. 26 Table of Contents