What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-03-03 compared with 2024-04-01 · 151 added, 210 removed, 338 unchanged (52% of the section changed)

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we distribute through multiple channels;

we write multiple lines of business, including general liability, excess liability, professional liability (which includes cyber insurance), commercial auto, group accident and health, property, agriculture, surety and workers’ compensation;

we write multiple lines of business, including general liability, excess liability, professional liability (which includes cyber and media liability insurance), commercial auto, group accident and health, property, agriculture, credit, surety and workers’ compensation;

we insure both short and medium duration liabilities;

and our business mix is balanced between E&S and admitted markets.

All of these factors enable us to respond to market opportunities and

dislocations by deploying capital with attractive risk-adjusted returns.

We believe this diversification, combined with our underwriting and claims expertise, will produce strong growth and consistent profitability across P&C insurance pricing cycles.

and our business mix is principally primary insurance and balanced between E&S and admitted markets.

A small portion of our business is specialty reinsurance (principally agriculture and credit) which is similarly focused on attractive specialty classes where we believe it is more efficient to approach these classes through reinsurance given factors such as cost of entry, including the costs of geographic expansion.

All of these factors enable us to respond to market opportunities and dislocations by deploying capital with attractive risk-adjusted returns.

We believe this diversification, which includes businesses not typically aligned with traditional P&C pricing cycles, combined with our underwriting and claims expertise, will more consistently produce strong growth and profitability across all insurance pricing cycles.

We seek to lead in our chosen market niches and establish sustainable competitive positions in these markets.

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We believe that the principles underlying our strategy are key to achieving and sustaining best-in-class underwriting results through P&C insurance pricing cycles.

We consistently strive for excellence in risk selection, pricing, and claims outcomes, and to amplify these critical functions with the use of advanced technology and analytics.

We consistently

strive for excellence in risk selection, pricing, and claims outcomes, and to amplify these critical functions with the use of advanced technology and analytics.

Results of Operations

The following table summarizes our results for the years ended December 31, 2024 and 2023:

Years Ended December 31,

($ in thousands) 2024 2023

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

($ in thousands) Before

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

Income as reported $ 152,739 $ 118,828 $ 110,102 $ 85,984

Net impact of LPT 1,427 1,127 (8,572) (6,772)

Net investment gains (losses) 6,256 4,942 11,072 8,747

Net impact of LPT (11,598) (9,162) 1,427 1,127

Other (loss) income (167) (132) (632) (499)

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Adjusted operating income $ 162,640 $ 126,650 $ 103,599 $ 80,847

Underwriting income (loss)

The following table provides a reconciliation of underwriting income to income before federal income tax for the years ended December 31, 2023 and 2022:

Underwriting Income

The following table provides a reconciliation of underwriting income to income before federal income tax expense for the years ended December 31, 2024 and 2023:

($ in thousands) 2024 2023

Income before federal income tax $ 110,102 $ 49,783

Income before income taxes $ 152,739 $ 110,102

Interest expense 9,496 10,024

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Net investment income 80,686 40,322

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

Other (loss) income (632) 1

Net investment gains 6,256 11,072

Other loss (167) (632)

Underwriting income $ 81,859 $ 76,526

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Tangible Stockholders’ Equity

The following table provides a reconciliation of tangible stockholders’ equity to stockholders’ equity as of December 31, 2023 and 2022:

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

($ in thousands) 2024 2023

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Underwriting Results

The following table presents gross written premiums by underwriting division for the years ended December 31, 2023 and 2022:

($ in thousands) 2023 2022 %

The following tables present gross written premiums by underwriting division for the years ended December 31, 2024 and 2023:

Years Ended December 31,

($ in thousands) 2024 2023 Change % Change

Industry Solutions 317,198 305,476 11,722 3.8 %

Global Property & Agriculture $ 311,402 $ 273,191 $ 38,211 14.0 %

Programs 178,726 163,653 9.2 %

Captives 241,902 167,624 74,278 44.3 %

Professional Lines 154,565 93,011 66.2 %

Programs 218,407 178,726 39,681 22.2 %

Accident & Health 173,073 151,701 21,372 14.1 %

Transactional E&S 169,053 122,508 46,545 38.0 %

Professional Lines 159,785 154,565 5,220 3.4 %

Surety 152,429 106,056 46,373 43.7 %

Total continuing business $ 1,459,847 $ 1,138,627 28.2 %

Exited business (18) 5,325 (100.3) %

Total gross written premiums (1)

The year over year increase in gross written premiums, when compared to 2022, was driven by double-digit premium growth in nearly all of our underwriting divisions, five of which grew over 30%.

The gross written premium increases were primarily driven by (i) new business, (ii) rate increases, and (iii) retention.

During 2023 we broadened our business portfolio, including (i) entry into inland marine and global agriculture, (ii) added an occupational accident offering in our industry solutions division, (iii) expanded our surety division to serve the SBA market and to provide judicial and fiduciary bonds, and (iv) expanded our accident & health coverages to include individual providers.

In addition to the expanded portfolio offerings, growth was also impacted by the addition of new underwriting teams and new tech-enabled partnerships.

Net earned premiums were $829.1 million for the year ended December 31, 2023, compared to $616.0 million for the same 2022 period, an increase of $213.1 million or 34.6%.

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

$ 1,743,249 $ 1,459,847 $ 283,402 19.4 %

(1) Excludes exited business

The year-over-year increase in gross written premiums, when compared to 2023, was driven by double-digit premium growth from our captives, surety, transactional E&S, programs and global property & agriculture underwriting divisions.

We continued to broaden and diversify our product portfolio during 2024, growing in areas that are less exposed to the P&C cycles.

The gross written premium increases were primarily driven by (i) new captive members and growth in existing captives, (ii) new product offerings, including participation in the Small Business Administration (“SBA”) Bond Guarantee Program, and regional expansion in surety, (iii) new business and rate in transactional E&S, (iv) the addition of four new programs, including Aviation.

and (iv) new business in global agriculture.

Slightly offsetting the gross written premium increases were (i) downward pricing pressure in the global property market, and (ii) our intentional actions to address profitability in commercial auto.

Net written premiums were $1,123.6 million compared to $910.7 million in 2023, an increase of $212.9 million or 23.4%.

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

Net earned premiums for 2024 were $1,056.7 million compared to $829.1 million for 2023, an increase of $227.6 million, or 27.4%.

The increase in net earned premiums was 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 discussion included in “Item 1 Business - Reinsurance” .

Losses and LAE

The following table sets forth the components of the loss and LAE ratio and adjusted loss and LAE ratio for the years ended December 31, 2023 and 2022:

The following tables set forth the components of the loss and LAE ratios and adjusted loss and LAE ratios for the years ended December 31, 2024 and 2023:

Twelve months ended December 31,

($ in thousands) Losses

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

The loss ratio for the year ended 2023 improved 3.2 points when compared to the same 2022 period.

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

Catastrophe losses from second and third quarter convective storms and first quarter wind and hail events, including tornadoes, added 1.4 points to the loss ratio compared to 2022, which was impacted by 1.1 points of catastrophe losses from Hurricane Ian and Winter Storm Elliott.

The loss ratio for the year ended 2022 included 1.4 points from the net impact of LPT reserve strengthening.

Additional information regarding the LPT can be found in the “Loss Portfolio Transfer” discussion included in this Item 7.

The 2024 loss ratio increased 1.3 points, respectively, when compared to 2023, primarily due to the net impact of prior accident year development related to the LPT, which added 1.1 points to the loss ratio.

The non-cat loss and LAE ratio for 2024 improved 0.3 points when compared to 2023, primarily driven by the shift in the mix of business.

The 2024 cat loss and LAE ratio increased 0.3 points when compared to 2023, primarily due to catastrophe losses from Hurricanes Helene and Beryl in the third quarter of 2024 and Hurricane Milton in the fourth quarter of 2024.

Losses and LAE Development

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Reserve development on losses excluding losses subject to LPT $ 428 $ 10,770

For the year ended December 31, 2023, the Company recognized favorable development related to prior years’ loss and loss expense reserves of $9.2 million in short tail/monoline specialty lines and adverse development of $11.9 million in multi-line solutions, respectively.

The favorable development in short tail/monoline specialty lines was driven by property lines of business from the 2021 accident year.

The adverse development in multi-line solutions was driven by higher than expected severity in general and auto liability lines of business primarily from the 2019 accident year.

During the year ended December 31, 2022, net incurred losses for accident years 2021 and prior developed adversely by $14.4 million which was related to losses subject to the LPT.

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

The remaining $8.4 million of net adverse development was from other accident years.

Within multi-line solutions, favorable development of $10.8 million was from the 2020 through 2021 accident years and was driven by a reduction in frequency of claims in commercial auto and general liability.

The remaining $2.3 million of net adverse development was from various other accident years.

Loss Portfolio Transfer

On April 1, 2020 (“Inception Date”), with a valuation date of June 30, 2019 (“Valuation Date”), we entered into a LPT retroactive reinsurance agreement with R&Q Bermuda (SAC) Limited, a third party reinsurer domiciled in Bermuda that specializes in assuming legacy blocks of insurance business and running them off.

The LPT covers liabilities (including claim payments, allocated LAE and certain extra-contractual obligations) related to certain policies issued or assumed for policy years 2017 and prior.

The LPT agreement covers the majority of our exited business.

We believe purchasing this coverage reduces the volatility associated with the covered business produced in 2017 and prior, and has allowed our management team to focus on the continuing business which we believe provides the best path for continued profitable growth.

As of the Valuation Date, we agreed to cede $153.1 million of Net LPT Reserves for certain lines of business, primarily related to 2017 and prior policy years, subject to an aggregate cash deductible of $105 million which was withheld from the reinsurer.

Subsequent to the Valuation Date but prior to the Inception Date, we strengthened the Net LPT Reserves by $5.5 million.

This development resulted in an increase in the Net LPT Reserves of $5.5 million to $158.6 million.

Consequently, at the Inception Date, the cash remitted to the third party reinsurer for the cession of the Net LPT reserves was $53.6 million (reflecting the $158.6 million of Net LPT Reserves less the $105.0 million cash deductible).

As of the Inception Date, the LPT provided reinsurance protection of approximately $127.4 million above the Net LPT Reserves, subject to co-participations at specified amounts, detailed below.

We paid $43.5 million in premium to the reinsurer for this reinsurance protection.

This premium payment of $43.5 million combined with the $53.6 million remitted to the reinsurer resulted in a total cash transfer of $97.1 million on the Inception Date.

The LPT is structured into two distinct sections with separate and independent reinsurance structures.

Section A (representing $22.2 million of ceded net reserves at inception of the LPT) is the smaller section of the LPT covering claims from exited workers’ compensation and general liability lines of business primarily related to business written in policy years 2011 and prior.

Section B (representing $130.9 million of ceded net reserves at inception of the LPT) is a substantially larger section, covering claims from other exited business and certain continuing business related to policies written in years 2017 and prior, principally comprised of general liability and commercial auto lines.

As of December 31, 2023, our net loss reserves subject to the LPT were $44.8 million compared to $68.6 million as of December 31, 2022.

During 2022 we materially strengthened our reserves subject to the LPT.

Since the inception of the LPT, as of December 31, 2023 we have reduced the number of open claims by 79.5%.

Based on the reserves on the Valuation Date, we ceded $22.2 million of net reserves related to Section A, subject to the aggregate cash deductible.

The LPT provides 100% reinsurance coverage on the first $2.8 million of incurred losses and LAE above the ceded net reserves for Section A.

Above the $2.8 million coverage layer is a further $5.0 million of reinsurance coverage for which we retain 50% of the incurred losses and LAE.

As of December 31, 2023, total incurred losses and LAE (including claims paid, case reserves and IBNR) were $38.2 million, which is $8.2 million in excess of our reinsurance coverage under Section A of the LPT.

As a result, should new claims arise or existing claims develop adversely such that we need to increase our incurred losses and LAE on business covered by Section A, there would be no further reinsurance coverage on these policies subject to the LPT.

As of December 31, 2023, paid losses and LAE on policies subject to Section A of the LPT were $24.9 million, which is $5.1 million below our total reinsurance coverage under Section A.

We believe the ratio of paid losses and LAE to total incurred losses and LAE of 65.1% as of December 31, 2023, on policies covered under Section A of the LPT, in combination with the age of the policies (primarily policy years 2011 and prior) and the declining number of open claims (Section A open claims have been reduced by 68.9% since the Valuation Date), underscores the strength of our reserve position on Section A.

The following chart sets forth the Section A reinsurance structure, the paid and incurred losses and LAE positions within the structure as of December 31, 2023, and the reduction in open claims from the Valuation Date through December 31, 2023.

Based on the reserves on the Valuation Date, we ceded $130.9 million of net reserves related to Section B, subject to the aggregate cash deductible.

The LPT provides 100% reinsurance coverage on the first $19.1 million of incurred losses and LAE above the ceded net reserves for Section B.

Above the $19.1 million layer, a further $70.0 million of reinsurance coverage is provided, for which we have a 50% co-participation on the incurred losses and LAE in the layer.

There is a further $36.0 million of reinsurance that provides 100% coverage above the $70.0 million layer.

As of December 31, 2023, total incurred losses and LAE (including claims paid, case reserves and IBNR) were $220.0 million with the entire $36.0 million of 100% coverage layer available should new claims arise or existing claims develop adversely.

As of December 31, 2023, paid losses and LAE on policies subject to Section B were $188.5 million, which is $67.5 million below our total reinsurance coverage under Section B, which includes the co-participation amounts.

As with Section A, we believe that the Section B ratio of paid losses and LAE to total incurred losses and LAE of 85.7% as of December 31, 2023 in combination with and the rapidly declining number of open claims (reduced by 81.9%) since the Valuation Date underscores the strength of our reserve position on Section B.

The following chart sets forth the Section B reinsurance structure, the paid and incurred losses and LAE positions within the structure as of December 31, 2023, and the reduction in open claims from the Valuation Date through December 31, 2023:

In 2024, the Company transitioned from evaluating reserves on a policy year basis to an accident year basis which results in earlier recognition of underlying claim trends, better alignment of exposure to risks, and adherence to commonly used industry best practices.

In prior years, the Company’s methodology allocated IBNR from its policy year analysis to accident year.

As a result of transitioning to accident year, IBNR within short-tail/monoline specialty lines, multi-line solutions, and exited lines was reallocated for the years ended December 31, 2023, 2022, 2021 and 2020, and certain amounts have been conformed to the current year presentation.

For the year ended December 31, 2024, the Company recognized adverse development related to prior years’ loss and loss expense reserves of $25.7 million;

$10.1 million and $15.2 million in multi-line solutions and exited lines, respectively, were related to losses previously subject to the LPT from accident years 2018 and prior.

During the year ended December 31, 2023, the Company recognized adverse development related to prior years’ loss and loss expense reserves of $10.8 million.

Adverse development of $11.7 million in multi-line solutions was driven by

greater than expected severity in auto, general, and excess liability lines of business primarily from accident years 2020 to 2022.

The adverse development was partially offset by favorable development in short-tail/monoline specialty lines.

The favorable development was in the property line of business primarily from accident years 2021 and 2022.

Expense Ratio

The following table sets forth the components of the expense ratio for the years ended December 31, 2023 and 2022:

The following tables set forth the components of the expense ratios for the years ended December 31, 2024 and 2023:

Twelve months ended December 31,

($ in thousands) Expenses % of

Expenses % of

Net Earned Premiums Expenses % of

Net Earned Premiums

Net policy acquisition expenses $ 149,975 14.2 % $ 108,514 13.0 %

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Total net expenses $ 305,054 28.9 % $ 237,380 28.6 %

The expense ratio was flat when compared to the same 2022 period.

The increase in the net policy and acquisition expense ratio, when compared to the same 2022 period, was primarily driven by the shift in our mix of business offset by an improved other operating and general expense ratio, when compared to the same 2022 period, due to the increase in earned premiums.

The expense ratio for 2024 increased 0.3 points when compared 2023, 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 consolidated statements of operations and comprehensive income.

Investment Results

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

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 years ended December 31, 2024 and 2023:

Twelve months ended December 31,

$ in thousands 2024 2023

Cash and short-term investments (1)

$ 11,353 $ 1,427

Core fixed income 32,572 16,544

Opportunistic fixed income (6,844) 16,784

Short-term investments & cash and cash equivalents $ 17,643 $ 11,677

Fixed income 57,631 36,547

Equities 2,745 2,212

Alternative and strategic investments 2,667 (10,114)

Net investment income $ 80,686 $ 40,322

Net unrealized gains on securities still held

$ 7,921 $ 11,130

Net unrealized gains (losses) on securities still held $ 11,130 $ (15,058)

Net realized losses (1,665) (58)

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

(1) excludes income from operating cash for the years ended December, 31, 2023 and 2022.

The increase in income from our core fixed income portfolio for the year ended 2023, when compared to the same 2022 period, was due to (i) a larger asset base as we continued to increase our allocation to this part of our investment portfolio and (ii) a higher book yield of 4.5% at December 31, 2023 compared to 3.7% at December 31, 2022.

The increase in income from short-term and money market investments for the year ended 2023, when compared to the same 2022 period, was due to a larger asset base and higher investment yields when compared to the same 2022 period.

The opportunistic fixed income portfolio continued to be impacted by a decline in the fair value of limited partnership investments for the year ended 2023 when compared to the same 2022 period.

Net investment gains $ 6,256 $ 11,072

Net investment income for the year ended 2024 increased $40.4 million when compared to 2023.

The increase in income from our fixed income portfolio for 2024, when compared to 2023, 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 5.2% at December 31, 2024 compared to 4.5% at December 31, 2023.

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

The fair value of our alternative and strategic investments portfolio for 2024 increased when compared to 2023 due to an increase in the fair value of limited partnership investments.

Composition of Investment Portfolio

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

($ in thousands) Fair

Short-term and money market investments $ 270,259 16.7 % $ 121,268 11.2 %

Core fixed income 1,017,651 63.1 % 607,572 56.1 %

Opportunistic fixed income 172,645 10.7 % 196,021 18.1 %

($ in thousands) Carrying Value

% of Total Carrying Value

Cash and cash equivalents $ 121,603 6.1 % $ 65,891 3.9 %

Short-term investments 274,929 13.8 % 270,259 16.1 %

Fixed income 1,318,708 66.2 % 1,067,721 63.6 %

Equities 106,254 5.3 % 118,249 7.0 %

Total investment portfolio $ 1,613,687 100.0 % $ 1,082,367 100.0 %

Our fixed maturity securities, comprised of both core fixed income and opportunistic fixed income, comprised 73.8% and 74.2% of our total investment portfolio as of December 31, 2023 and 2022, respectively, and had a weighted average effective duration of 3.2 years and 3.1 years as of December 31, 2023 and 2022, respectively, and an average core fixed income credit rating of “AA-” and “AA” (Standard & Poor’s) as of December 31, 2023 and 2022, respectively.

Core fixed income

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

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

The portfolio is managed by third party managers.

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

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

($ in thousands) Fair Value % of Total

Fair Value % of Total

Alternative and strategic investments 170,929 8.6 % 157,458 9.4 %

Total portfolio $ 1,992,423 100.0 % $ 1,679,578 100.0 %

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

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

($ in thousands) Carrying Value % of Total

Carrying Value % of Total

government securities $ 26,486 2.0 % $ 44,166 4.1 %

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Other asset-backed securities 292,191 22.2 % 185,727 17.4 %

Core fixed income securities, available for sale $ 1,017,651 100.0 % $ 607,572 100.0 %

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

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

Total fixed income portfolio, available-for-sale 1,292,218 98.0 % 1,017,651 95.3 %

Commercial mortgage loans $ 26,490 2.0 % $ 50,070 4.7 %

Total fixed income portfolio $ 1,318,708 100.0 % $ 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 December 31, 2024 and 2023.

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

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

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BB and Lower 21,637 1.7 % 30,910 3.0 %

Total core fixed income $ 1,017,651 100.0 % $ 607,572 100.0 %

Opportunistic fixed income

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

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

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

Investments contain strong covenants and are backed by a significant amount of collateral with a weighted average loan-to-value of 74%.

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

As of December 31, 2023, the opportunistic fixed income portfolio consisted of three components:

diversified asset based lending (55.1%), commercial mortgage loans (29.0%) and cash and cash equivalents (15.9%).

The diversified asset based lending portfolio includes floating rate senior secured asset-based loans with significant amounts of collateral and strong covenants.

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

($ in thousands) Fair

Real Estate $ 88,964 51.5 % $ 90,370 46.1 %

Oil & Gas 15,991 9.3 % 20,725 10.6 %

Banking, Finance & Insurance 11,425 6.6 % 13,870 7.1 %

Other sectors (1)

28,747 16.7 % 34,072 17.4 %

Cash and cash equivalents (2)

27,518 15.9 % 36,984 18.8 %

Opportunistic fixed income $ 172,645 100.0 % $ 196,021 100.0 %

(1) Other sectors primarily includes Aerospace & Defense, Business Services, Retail, Commercial & Industrial and Environmental.

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

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

Total fixed income portfolio, available-for-sale $ 1,292,218 100.0 % $ 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 4.34 years and 4.24 years, respectively, as of December 31, 2024 and 2023.

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

During 2021, we initiated a tail-risk management strategy that is designed to provide some protection for the equity portfolio if there is a significant decline in the S&P 500 within a 30 day period.

We continued this strategy in 2023 and as of December 31, 2023, the annual cost of the strategy was approximately $1.0 million.

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

The following table sets forth the components of our equities portfolio by security type at December 31, 2024 and 2023:

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Preferred stock 1,164 1.1 % 7,358 6.2 %

34,883 22.8 % 37,337 23.7 %

Equities $ 106,254 100.0 % $ 118,249 100.0 %

(1) Other includes limited partnerships, limited liability companies and other equity interests

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.

Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial instrument as the result of changes in interest rates, equity prices, foreign currency exchange rates and commodity prices.

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Our policy is to invest in investment grade fixed income securities which are high quality and liquid, providing a stable income stream, supplemented by opportunistic fixed income and equity securities, with the objective of further enhancing the portfolio’s diversification and risk-adjusted returns.

At December 31, 2023, approximately 3.0% of our core fixed income portfolio

was unrated or rated below investment-grade.

At December 31, 2024, approximately 1.7% of our core fixed income portfolio was unrated or rated below investment-grade.

Through our investment managers, we monitor the financial condition of all of the issuers of securities in our portfolio.

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Conversely, as interest rates fall, the fair value of our securities increases.

We manage this interest rate risk by investing in securities with varied maturity dates and by managing the duration of our investment portfolio in directional relation to the duration of our reserves.

manage this interest rate risk by investing in securities with varied maturity dates and by managing the duration of our investment portfolio in directional relation to the duration of our reserves.

Expressed in years, duration is the weighted average payment period of cash flows, where the weighting is based on the present value of the cash flows.

21 unchanged sentences

We manage equity price risk through portfolio diversification and maintain a tail-risk management strategy that is designed to provide some protection for the equity portfolio if there is a significant decline in the S&P 500 within a 30 day period.

Income tax expense was $24.1 million for the year ended December 31, 2023 compared to $10.4 million for the year ended December 31, 2022.

Our effective tax rate was 21.9% for the year ended December 31, 2023, compared to 20.9% for the year ended December 31, 2022.

The change in our effective tax rate in 2023, when compared to 2022, was primarily due to the relationship of taxable to non-taxable income.

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

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

Income tax expense for the year ended December 31, 2024 was $33.9 million, compared to $24.1 million, for the year ended December 31, 2023.

Our effective tax rate for the year ended December 31, 2024 was 22.2%, compared to 21.9%, for the year ended December 31, 2023.

See Note 13, “Income Taxes” to our consolidated financial statements included in Item 8 of this Form 10-K for a reconciliation between our actual federal income tax expense and the amount computed at the indicated statutory rate for the years ended December 31, 2024 and 2023.

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Sources and Uses of Funds

We are organized as a holding company with our operations primarily conducted by our wholly-owned insurance subsidiaries, HSIC, IIC, and GMIC, which are domiciled in Texas, and OSIC, which is domiciled in Oklahoma.

We are organized as a holding company with our operations primarily conducted by our wholly-owned insurance subsidiaries, GMIC, HSIC, and IIC, which are domiciled in Texas, and OSIC, which is domiciled in Oklahoma.

Accordingly, the holding company may receive cash through (1) corporate service fees from our operating subsidiaries, (2) payments pursuant to our consolidated tax allocation agreement, (3) dividends from our subsidiaries, subject to certain limitations discussed below regarding dividends from our insurance subsidiaries, (4) loans from banks, (5) draws on a revolving loan agreement, and (6) issuance of equity and debt securities.

We also may use the proceeds from these sources to contribute funds to insurance subsidiaries in order to support premium growth, pay dividends and taxes and for other business purposes.

We also may use the proceeds from these sources

to contribute funds to insurance subsidiaries in order to support premium growth, pay dividends and taxes and for other business purposes.

Skyward Service Company receives corporate service fees from the operating subsidiaries to reimburse it for most of the operating expenses that it incurs.

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State insurance regulatory authorities that have jurisdiction over the payment of dividends by our insurance subsidiaries may in the future adopt statutory provisions more restrictive than those currently in effect.

Our insurance subsidiaries did not pay dividends to us for the years ended December 31, 2023 or 2022.

Our insurance subsidiaries did not pay dividends to us for the years ended December 31, 2024 and 2023.

See Note 23, “Statutory Accounting Principles and Regulatory Matters” to our consolidated financial statements included in Item 8 of this Form 10-K for additional information regarding our insurance companies.

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Financing activities (4,232) 130,947

Change in cash and cash equivalents $ (24,675) $ 17,737

The increase in cash provided by operating activities in 2023 and 2022 was primarily due to the growth of the business, timing of premium receipts, claim payments and reinsurance activity.

Change in cash and cash equivalents and restricted cash $ 57,189 $ (24,675)

The decrease in cash provided by operating activities in 2024 when compared to 2023 was primarily due an increase in cash outflows from our net reinsurance recoverables and net premiums receivables.

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.

The change in net cash used in investing activities from 2023 to 2022 was primarily driven by an increase in the purchases of fixed maturity securities and short-term investments.

The change in net cash provided by financing activities from 2023 to 2022 was primarily driven by proceeds received from the IPO and the November follow-on offering.

See note 12, “Stockholders’ Equity”, to our consolidated financial statements included in Item 8 of this Form 10-K for additional information regarding the IPO and November follow-on offering.

Net cash used in investing activities in 2024 was primarily driven by purchases of fixed maturity securities, partially offset by sales and maturities of investment securities and sales of short-term investments.

Net cash used in investing activities in 2023 was primarily driven by purchases of fixed maturity securities.

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

Credit Agreements

On August 30, 2024, we entered into a loan (the “FHLB Loan”) with the Federal Home Loan Bank of Dallas (the “FHLB”) pursuant to its 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.

We used the proceeds to fund the redemption of the March 15, 2024 draw on the Revolving Credit Facility and redeemed $7.0 million of the March 29, 2023 draw on the Revolving Credit Facility (see “Revolving Credit Facility” below for additional information regarding the redemption).

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.

During the year ended December 31, 2023, we drew $50.0 million on the Revolving Credit Facility and used the proceeds to pay off the principal on our Term Loan (defined below).

We subsequently terminated the Term loan and the Revolver (defined below).

The Revolving Credit Facility provides us with up to a $150.0 million revolving credit facility 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).

On August 30, 2024, we fully redeemed the March 15, 2024 draw on the Revolving Credit Facility and redeemed $7.0 million of the March 29, 2023 draw on the Revolving Credit Facility.

As of December 31, 2024, we had $43.0 million outstanding under the Revolving Credit Facility with another $107.0 million of undrawn capacity.

Interest on the Revolving Credit Facility is payable quarterly.

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

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.

At December 31, 2024, the six-month SOFR on the Revolving Credit Facility was 4.25%, plus a margin of 1.60%.

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

After the draw, we had $100.0 million outstanding under the Revolving Credit Facility with another $50.0 million of undrawn capacity.

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 “Debentures”) with a principal amount of $59.8 million issued by us and cash of $1.8 million from the issuance of Trust common shares purchased by us equal to 3% of the Trust capitalization.

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

Interest on the Trust Preferred is payable quarterly at an annual rate based on the three-month LIBOR (5.59% and 4.77% at December 31, 2023 and 2022,

respectively), plus 3.4%.

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.

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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 8 years and 8.25% fixed thereafter.

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.

On December 11, 2019, we entered into a credit agreement with Prosperity Bank which provided us with a $50.0 million term loan (the “Term Loan”) and a $50.0 million revolving line of credit (the “Revolver”) with additional capacity up to $75.0 million.

At December 31, 2022, the interest rate on the Term Loan was the one-month LIBOR (4.39% on December 31, 2022) plus the “Applicable Margin,” which was defined as 1.65%.

In connection with our entry into the Revolving Credit Facility, we terminated the existing term loan and revolving line of credit.

At December 31, 2023 the ratio of total debt outstanding, including the Revolving Credit Facility, the Trust Preferred and the Notes, to total capitalization (defined as total debt plus stockholders’ equity) was 16.3% and at December 31, 2022, the ratio of total debt outstanding, including the Term Loan, the Revolver, the Trust Preferred and the Notes, to total capitalization was 23.4%.

At March 15, 2024, capitalization remained unchanged as a result of the draw on the Revolving Credit Facility and subsequent redemption of the Debentures.

At December 31, 2024 the ratio of total debt outstanding, including the FHLB Loan, the Revolving Credit Facility and the Notes, to total capitalization (defined as total debt plus stockholders’ equity) was 13.1% 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%.

Share Repurchase Program

In October 2024, the Board of Directors approved a share repurchase program authorizing the repurchase of up to $50.0 million of our common stock.

The shares may be repurchased from time to time in open market purchases, privately-negotiated transactions, block purchases, accelerated share repurchase agreements or a combination of methods, including through Rule 10b5-1 trading plans.

The timing, manner, price and amount of any repurchases under the share repurchase program will be determined by us in our discretion.

The share repurchase program does not require us to repurchase any specific number of shares, and may be modified, suspended or terminated at any time.

As of December 31, 2024, no shares have been repurchased under this plan.

Contractual Obligations and Commitments

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Actual results may differ materially from the estimates and assumptions used in preparing the consolidated financial statements.

We evaluate our estimates regularly

using information that we believe to be relevant.

We evaluate our estimates regularly using information that we believe to be relevant.

For a detailed discussion of our accounting policies, see Note 1, “Summary of Significant Accounting Policies” to our consolidated financial statements included in Item 8 of this Form 10-K.

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Our internal claims managers oversee TPA activities and monitor their individual claim handling activities to our prescribed standards.

Our IBNR reserves are developed in accordance with Actuarial Standards of Practice promulgated by the American Academy of Actuaries.

Our reserve review is performed by our Reserve Committee that utilizes several accepted loss reserving methods to arrive at our best estimate of loss reserves.

We give consideration to the relative strengths and weaknesses of each of the methods in deriving our actuarial best estimate of the liabilities.

Where we have limited years of loss experience compared to the period over which we expect losses to be reported, we use industry and/or peer-group data in addition to our own data as a basis for selecting the parameters underlying our reserving methods.

We monitor loss emergence daily.

We carefully consider other internal or external factors such as underwriting, claims handling, economic, or environmental changes that could adversely affect the accuracy of the assumptions underlying our standard actuarial methods and when necessary we will adjust these assumptions, methods, and/or procedures to ensure that they appropriately reflect these changing conditions.

The duration of loss reserves was 2.3 years as of December 31, 2023.

Our Reserve Committee includes our Chief Actuary, Chief Risk Officer, Chief Financial Officer and Chief Claims Officer.

The Reserve Committee meets quarterly to review the actuarial reserving recommendations made by the Chief Actuary and uses their best judgment to determine the best estimate to be recorded for the reserve for losses and LAE on our balance sheet.

The incurred but not reported (“IBNR”) reserve is derived by estimating the ultimate unpaid reserve liability and subtracting case reserves.

Management’s best estimate of the ultimate unpaid liability is set by our Reserve Committee, who consider the actuarial indications along with other factors such as underwriting, claims handling, economic, legal and environmental changes.

Our Reserve Committee includes our Chief Actuary, Chief Financial Officer and Chief Claims Officer.

The Reserve Committee meets quarterly to review the actuarial reserving recommendations made by the Chief Actuary and uses their judgment to determine the best estimate to be recorded for the reserve for losses and LAE on our balance sheet.

In establishing the quarterly actuarial recommendation for the reserves for losses and LAE, our actuary estimates an initial expected ultimate loss ratio for each of our underwriting divisions.

Input from our underwriting and claims departments, including premium pricing assumptions and historical experience, is considered by our actuary in estimating the initial expected loss ratios.

Multiple actuarial methods are used to estimate the reserve for losses and LAE.

These methods utilize, to varying degrees, the initial expected loss ratio, detailed statistical analysis of past claims reporting

and payment patterns, claims frequency and severity, paid loss experience, industry loss experience, and changes in market conditions, policy forms, exclusions, and exposures.

The actuarial methods used to estimate losses and LAE reserves are:

• Reported and/or Paid Loss Development Methods — Ultimate losses are estimated based on historical reported and/or paid loss reporting patterns.

Reported losses are the sum of paid and case losses.

Industry development patterns are substituted for historical development patterns when sufficient historical data is not available.

• Reported Bornhuetter-Ferguson Methods — Ultimate losses are estimated as the sum of cumulative reported losses and estimated IBNR losses.

IBNR losses are estimated based on historical development patterns and one or more of the following:

expected average severity and estimated ultimate claims counts, expected pure premium, and expected loss ratios underlying our loss cost multipliers.

• Paid Bornhuetter-Ferguson Method — Under this method, ultimate losses are estimated as the sum of cumulative paid losses and estimated unpaid losses.

Unpaid losses are estimated based on the expected loss ratios underlying our loss cost multipliers, and selected industry development patterns of paid losses.

We utilize each of these methods in our comprehensive review of reserves.

When evaluating reserves related to less mature policy years, we utilize the Bornhuetter-Ferguson Method as the primary method for our ultimate loss indications.

As we move to more mature policy years, we transition to the Reported and/or Paid Loss Development Methods.

We primarily rely on reported methods where case reserving is consistently applied across policy years, however, when there is a change in reserving philosophy we will blend both reported and paid methods in our evaluation of ultimate loss indications.

Input from our underwriting and claims departments, including premium pricing assumptions and historical experience, is considered in setting our reserves.

Our reserves are driven by several important factors, including litigation and regulatory trends, legislative activity, climate change, social and economic patterns and claims inflation assumptions.

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In the event of significant new regulation or legislation, we will attempt to quantify its impact on our business, but no assurance can be given that our attempt to quantify such inputs will be accurate or successful.

The actuarial review considers multiple actuarial methods are used to estimate the reserve for losses and LAE.

These methods utilize, to varying degrees, the initial expected loss ratio, detailed statistical analysis of past claims reporting and payment patterns, claims frequency and severity, paid loss experience, industry loss experience, and changes in market conditions, policy forms, exclusions, and exposures.

The actuarial methods used to estimate losses and LAE reserves are:

• Reported and/or Paid Loss Development Methods

• Reported Bornhuetter-Ferguson Methods

• Paid Bornhuetter-Ferguson Method

When evaluating reserves related to less mature policy years, our actuaries rely on the Bornhuetter-Ferguson Method as the primary method for our ultimate loss indications.

As we move to more mature policy years, we transition to the Reported and/or Paid Loss Development Methods.

Although we believe that our reserve estimates are reasonable, it is possible that our actual loss experience may not conform to our assumptions.

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Recent Accounting Pronouncements

We currently qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act.

Accordingly, we are provided the option to adopt new or revised accounting guidance either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies.

We have elected to avail ourselves of this extended transition period and, as a result, we will not be required to adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.235 billion or more;

(ii) the last day of our fiscal year following the fifth anniversary of the date of the completion of this offering;

(iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years;

and (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

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

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

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

The Company adopted ASU 2016-13 effective January 1, 2023 using the modified retrospective approach, by which a cumulative-effect adjustment was made to retained earnings as of the date of adoption.

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

The adoption of ASU 2016-13 resulted in the Company recognizing an increase in the allowance for uncollectible reinsurance of $2.3 million an d an increase, net of tax, in accumulated deficit of $2.3 million.

In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures (Topic 280).

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This update states that entities with a single reportable segment are required to provide full segment disclosures.

The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.

The guidance became effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.

This update is applied retrospectively to all prior periods presented.

We are evaluating the effect of the amendments on our consolidated financial statements.

We have added additional segment disclosures as required by ASU 2023-07.

There was no impact to the consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures (Topic 740).

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The guidance is effective for fiscal years beginning after December 15, 2024.

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

We do not expect the amendments will have a material impact on our consolidated financial statements.

In November 2024, the FASB issued ASU 2024-03, which requires disaggregated disclosure of income statement expenses for public business entities (“PBEs”).

The ASU does not change the expense captions an entity presents on the face of the income statement;

rather, it requires disaggregation of certain expense captions into specified categories in disclosures within the footnotes to the financial statements.

ASU 2024-03 require a footnote disclosure about specific expenses by requiring PBEs to disaggregate, in a tabular presentation, each relevant expense caption on the face of the income statement that includes any of the following natural expenses:

(1) purchases of inventory, (2) employee compensation, (3) depreciation, (4) intangible asset amortization, and (5) depreciation, depletion, and amortization recognized as part of oil- and gas-producing activities or other types of depletion expenses.

The tabular disclosure would also include certain other expenses, when applicable.

In January 2025, the FASB issued ASU 2025-01 to clarify the effective date of ASU 2024-03 as the first annual reporting period beginning after December 15, 2026, and interim reporting periods within annual reporting periods beginning after December 15, 2027.

We are evaluating the effect of the amendments on our consolidated financial statements.

Quantitative and Qualitative Disclosures About Market Risk

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

What changed 10-K

Item 7. Management’s Discussion and Analysis