UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~March 31,~~June 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
			For the transition period from ____________ to ____________

Commission file number 001-41591

SKYWARD SPECIALTY INSURANCE GROUP, INC.

(Exact name of registrant as specified in its charter)


Delaware			14-1957288
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

800 Gessner Road, Suite 600 Houston, Texas			77024-4284
(Address of Principal Executive Offices)			(Zip Code)

(713) 935-4800

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.01	SKWD	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. ~~(Check one):~~


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No

As of ~~May 4,~~August 3, 2023, the registrant had ~~37,658,111~~37,674,063 shares of common stock outstanding.

Table of Contents

TABLE OF CONTENTS


Form 10-Q	Item and Description	Page
Part I
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets as of ~~March 31,~~June 30, 2023 and December 31, 2022 (unaudited)	3
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) ~~Income~~ for the ~~Three-Month~~Three and Six-Month Periods Ended ~~March 31,~~June 30, 2023 and 2022 (unaudited)	4
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the ~~Three-Month~~Three and Six-Month Periods Ended ~~March 31,~~June 30, 2023 and 2022 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the ~~Three-Month~~Six-Month Periods Ended ~~March 31,~~June 30, 2023 and 2022 (unaudited)	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	3132
Item 3.	~~Quan~~t ~~itative~~Quantitative and Qualitative Disclosures About Market Risk	4144
Item 4.	Controls and Procedures	4245
Part II
Item 1.	Legal Proceedings	4245
Item 1A.	Risk Factors	4245
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4245
Item 3.	Defaults Upon Senior Securities	4245
Item 4.	Mine Safety Disclosures	4245
Item 5.	Other Information	4245
Item 6.	Exhibits	4346
Signatures		4447

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


		March 31, 2023		December 31, 2022			June 30, 2023		December 31, 2022
($ in thousands, except share and per share amounts)	($ in thousands, except share and per share amounts)	(Unaudited)				($ in thousands, except share and per share amounts)	(Unaudited)
Assets	Assets					Assets
Investments:	Investments:					Investments:
Fixed maturity securities, available-for-sale, at fair value (amortized cost of $718,395 and $662,616, respectively)		$	673,137	$	607,572
Fixed maturity securities, held-to-maturity, at amortized cost (net of allowance for credit losses of $321 as of March 31, 2023)		48,216		52,467
Fixed maturity securities, available-for-sale, at fair value (amortized cost of $819,762 and $662,616, respectively)						Fixed maturity securities, available-for-sale, at fair value (amortized cost of $819,762 and $662,616, respectively)	$	767,491	$	607,572
Fixed maturity securities, held-to-maturity, at amortized cost (net of allowance for credit losses of $332 as of June 30, 2023)						Fixed maturity securities, held-to-maturity, at amortized cost (net of allowance for credit losses of $332 as of June 30, 2023)	47,172		52,467
Equity securities, at fair value	Equity securities, at fair value	120,465		120,169		Equity securities, at fair value	127,861		120,169
Mortgage loans (at fair value as of March 31, 2023; at amortized cost as of December 31, 2022)		42,335		51,859
Mortgage loans (at fair value as of June 30, 2023; at amortized cost as of December 31, 2022)						Mortgage loans (at fair value as of June 30, 2023; at amortized cost as of December 31, 2022)	32,762		51,859
Other long-term investments	Other long-term investments	118,784		129,142		Other long-term investments	124,845		129,142
Short-term investments, at fair value	Short-term investments, at fair value	287,351		121,158		Short-term investments, at fair value	190,670		121,158
Total investments	Total investments	1,290,288		1,082,367		Total investments	1,290,801		1,082,367
Cash and cash equivalents	Cash and cash equivalents	41,200		45,438		Cash and cash equivalents	67,506		45,438
Restricted cash	Restricted cash	64,047		79,573		Restricted cash	34,353		79,573
Premiums receivable, net	Premiums receivable, net	178,954		139,215		Premiums receivable, net	266,345		139,215
Reinsurance recoverables, net	Reinsurance recoverables, net	570,504		581,359		Reinsurance recoverables, net	582,922		581,359
Ceded unearned premium	Ceded unearned premium	197,044		157,645		Ceded unearned premium	267,672		157,645
Deferred policy acquisition costs	Deferred policy acquisition costs	80,103		68,938		Deferred policy acquisition costs	93,364		68,938
Deferred income taxes	Deferred income taxes	30,572		36,188		Deferred income taxes	32,017		36,188
Goodwill and intangible assets, net	Goodwill and intangible assets, net	89,503		89,870		Goodwill and intangible assets, net	89,181		89,870
Other assets	Other assets	79,110		82,846		Other assets	83,011		82,846
Total assets	Total assets	$	2,621,325	$	2,363,439	Total assets	$	2,807,172	$	2,363,439
Liabilities and stockholders’ equity	Liabilities and stockholders’ equity					Liabilities and stockholders’ equity
Liabilities:	Liabilities:					Liabilities:
Reserves for losses and loss adjustment expenses	Reserves for losses and loss adjustment expenses	$	1,173,176	$	1,141,757	Reserves for losses and loss adjustment expenses	$	1,224,127	$	1,141,757
Unearned premiums	Unearned premiums	501,218		442,509		Unearned premiums	591,237		442,509
Deferred ceding commission	Deferred ceding commission	40,824		29,849		Deferred ceding commission	54,191		29,849
Reinsurance and premium payables	Reinsurance and premium payables	185,748		113,696		Reinsurance and premium payables	198,948		113,696
Funds held for others	Funds held for others	44,256		36,858		Funds held for others	41,152		36,858
Accounts payable and accrued liabilities	Accounts payable and accrued liabilities	40,328		48,499		Accounts payable and accrued liabilities	46,189		48,499
Notes payable	Notes payable	50,000		50,000		Notes payable	50,000		50,000
Subordinated debt, net of debt issuance costs	Subordinated debt, net of debt issuance costs	78,629		78,609		Subordinated debt, net of debt issuance costs	78,650		78,609
Total liabilities	Total liabilities	2,114,179		1,941,777		Total liabilities	2,284,494		1,941,777
Stockholders’ equity	Stockholders’ equity					Stockholders’ equity
Series A preferred stock, $0.01 par value; 10,000,000 and 2,000,000 shares authorized, 0 and 1,969,660 shares issued and outstanding, respectively	Series A preferred stock, $0.01 par value; 10,000,000 and 2,000,000 shares authorized, 0 and 1,969,660 shares issued and outstanding, respectively	—		20		Series A preferred stock, $0.01 par value; 10,000,000 and 2,000,000 shares authorized, 0 and 1,969,660 shares issued and outstanding, respectively	—		20
Common stock, $0.01 par value, 500,000,000 and 168,000,000 shares authorized, 37,658,111 and 16,832,955 shares issued, respectively		377		168
Common stock, $0.01 par value, 500,000,000 and 168,000,000 shares authorized, 37,674,063 and 16,832,955 shares issued, respectively						Common stock, $0.01 par value, 500,000,000 and 168,000,000 shares authorized, 37,674,063 and 16,832,955 shares issued, respectively	377		168
Treasury stock, $0.01 par value, 0 and 233,289 shares, respectively	Treasury stock, $0.01 par value, 0 and 233,289 shares, respectively	—		(2)		Treasury stock, $0.01 par value, 0 and 233,289 shares, respectively	—		(2)
Additional paid-in capital	Additional paid-in capital	641,368		577,289		Additional paid-in capital	642,988		577,289
Stock notes receivable	Stock notes receivable	(6,718)		(6,911)		Stock notes receivable	(6,718)		(6,911)
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(35,744)		(43,485)		Accumulated other comprehensive loss	(41,284)		(43,485)
Accumulated deficit	Accumulated deficit	(92,137)		(105,417)		Accumulated deficit	(72,685)		(105,417)
Total stockholders’ equity	Total stockholders’ equity	507,146		421,662		Total stockholders’ equity	522,678		421,662
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	2,621,325	$	2,363,439	Total liabilities and stockholders’ equity	$	2,807,172	$	2,363,439

The accompanying notes are an integral part of the consolidated financial statements.

Table of Contents

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)


		Three months ended March 31,					Three months ended June 30,				Six months ended June 30,
($ in thousands, except share and per share amounts)	($ in thousands, except share and per share amounts)		2023		2022			($ in thousands, except share and per share amounts)	2023		2022		2023		2022
Revenues:	Revenues:							Revenues:
Net earned premiums	Net earned premiums		$	182,831	$	141,726		Net earned premiums	$	194,347	$	146,076	$	377,178	$	287,803
Commission and fee income	Commission and fee income		1,492		230			Commission and fee income	2,240		2,060		3,732		2,290
Net investment income	Net investment income		4,646		15,149			Net investment income	8,583		10,530		13,229		25,679
Net investment gains (losses)	Net investment gains (losses)		961		(4,438)			Net investment gains (losses)	5,351		(14,374)		6,312		(18,812)

Total revenues	Total revenues		189,930		152,667			Total revenues	210,521		144,292		400,451		296,960
Expenses:	Expenses:							Expenses:
Losses and loss adjustment expenses	Losses and loss adjustment expenses		114,900		89,989			Losses and loss adjustment expenses	124,405		91,801		239,305		181,790
Underwriting, acquisition and insurance expenses	Underwriting, acquisition and insurance expenses		51,655		40,534			Underwriting, acquisition and insurance expenses	56,683		44,383		108,338		84,918

Interest expense	Interest expense		2,152		1,177			Interest expense	2,466		1,365		4,618		2,542
Amortization expense	Amortization expense		387		387			Amortization expense	486		386		873		773
Other expenses	Other expenses		1,114		—			Other expenses	1,465		—		2,579		—
Total expenses	Total expenses		170,208		132,087			Total expenses	185,505		137,935		355,713		270,023
Income before income taxes	Income before income taxes		19,722		20,580			Income before income taxes	25,016		6,357		44,738		26,937
Income tax expense	Income tax expense		4,166		4,269			Income tax expense	5,564		1,292		9,730		5,561
Net income	Net income		15,556		16,311			Net income	19,452		5,065		35,008		21,376
Net income attributable to participating securities	Net income attributable to participating securities		1,274		7,823			Net income attributable to participating securities	—		2,437		1,402		10,283
Net income attributable to common shareholders			$	14,282	$	8,488
Net income attributable to common stockholders								Net income attributable to common stockholders	$	19,452	$	2,628	$	33,606	$	11,093
Comprehensive income (loss):	Comprehensive income (loss):							Comprehensive income (loss):
Net income	Net income		$	15,556	$	16,311		Net income	$	19,452	$	5,065	$	35,008	$	21,376
Other comprehensive income (loss):
Other comprehensive (loss) income:								Other comprehensive (loss) income:
Unrealized gains and losses on investments:	Unrealized gains and losses on investments:							Unrealized gains and losses on investments:
Net change in unrealized gains (losses) on investments, net of tax			7,788		(16,705)
Net change in unrealized (losses) gains on investments, net of tax								Net change in unrealized (losses) gains on investments, net of tax	(4,375)		(14,797)		3,413		(31,502)
Reclassification adjustment for (losses) gains on securities no longer held, net of tax	Reclassification adjustment for (losses) gains on securities no longer held, net of tax		(47)		301			Reclassification adjustment for (losses) gains on securities no longer held, net of tax	(1,165)		30		(1,212)		331
Total other comprehensive income (loss)			7,741		(16,404)
Total other comprehensive (loss) income								Total other comprehensive (loss) income	(5,540)		(14,767)		2,201		(31,171)
Comprehensive income (loss)	Comprehensive income (loss)		$	23,297	$	(93)		Comprehensive income (loss)	$	13,912	$	(9,702)	$	37,209	$	(9,795)
Per share data:	Per share data:							Per share data:
Basic earnings per share	Basic earnings per share		$	0.43	$	0.52		Basic earnings per share	$	0.53	$	0.16	$	0.97	$	0.67
Diluted earnings per share	Diluted earnings per share		$	0.42	$	0.50		Diluted earnings per share	$	0.51	$	0.16	$	0.93	$	0.66
Weighted-average common shares outstanding	Weighted-average common shares outstanding							Weighted-average common shares outstanding
Basic	Basic		32,848,243		16,376,720			Basic	36,603,779		16,449,810		34,746,874		16,449,810
Diluted	Diluted		36,952,073		32,412,307			Diluted	38,143,585		32,660,316		37,503,914		32,600,247

The accompanying notes are an integral part of the consolidated financial statements.

Table of Contents

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)


($ in thousands)	($ in thousands)	Preferred Stock		Common Stock		Treasury Stock		Additional Paid-in Capital		Stock Notes Receivable		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total		($ in thousands)	Preferred Stock		Common Stock		Treasury Stock		Additional Paid-in Capital		Stock Notes Receivable		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total
Balance at January 1, 2023	Balance at January 1, 2023	$	20	$	168	$	(2)	$	577,289	$	(6,911)	$	(43,485)	$	(105,417)	$	421,662	Balance at January 1, 2023	$	20	$	168	$	(2)	$	577,289	$	(6,911)	$	(43,485)	$	(105,417)	$	421,662
Cumulative effect on adoption of ASU No. 2016-13	Cumulative effect on adoption of ASU No. 2016-13	—		—		—		—		—		—		(2,276)		(2,276)		Cumulative effect on adoption of ASU No. 2016-13	—		—		—		—		—		—		(2,276)		(2,276)
Employee equity transactions	Employee equity transactions	—		—		—		1,864		193		—		—		2,057		Employee equity transactions	—		—		—		1,864		193		—		—		2,057
Preferred stock conversion to common shares	Preferred stock conversion to common shares	(20)		161		2		(143)		—		—		—		—		Preferred stock conversion to common shares	(20)		161		2		(143)		—		—		—		—
Proceeds from initial public offering, net	Proceeds from initial public offering, net	—		48		—		62,358		—		—		—		62,406		Proceeds from initial public offering, net	—		48		—		62,358		—		—		—		62,406
Net income	Net income	—		—		—		—		—		—		15,556		15,556		Net income	—		—		—		—		—		—		15,556		15,556
Other comprehensive income, net of tax	Other comprehensive income, net of tax	—		—		—		—		—		7,741		—		7,741		Other comprehensive income, net of tax	—		—		—		—		—		7,741		—		7,741
Balance at March 31, 2023	Balance at March 31, 2023	$	—	$	377	$	—	$	641,368	$	(6,718)	$	(35,744)	$	(92,137)	$	507,146	Balance at March 31, 2023	$	—	$	377	$	—	$	641,368	$	(6,718)	$	(35,744)	$	(92,137)	$	507,146
Employee equity transactions																		Employee equity transactions	—		—		—		2,011		—		—		—		2,011
Expenses from initial public offering																		Expenses from initial public offering							(391)								(391)
Net income																		Net income	—		—		—		—		—		—		19,452		19,452
Other comprehensive loss, net of tax																		Other comprehensive loss, net of tax	—		—		—		—		—		(5,540)		—		(5,540)
Balance at June 30, 2023																		Balance at June 30, 2023	$	—	$	377	$	—	$	642,988	$	(6,718)	$	(41,284)	$	(72,685)	$	522,678


($ in thousands)	($ in thousands)	Preferred Stock		Common Stock		Treasury Stock		Additional Paid-in Capital		Stock Notes Receivable		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total		($ in thousands)	Preferred Stock		Common Stock		Treasury Stock		Additional Paid-in Capital		Stock Notes Receivable		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total
Balance at January 1, 2022	Balance at January 1, 2022	$	20	$	168	$	(2)	$	575,159	$	(9,092)	$	4,640	$	(144,813)	$	426,080	Balance at January 1, 2022	$	20	$	168	$	(2)	$	575,159	$	(9,092)	$	4,640	$	(144,813)	$	426,080
Employee equity transactions	Employee equity transactions	—		—		—		502		188		—		—		690		Employee equity transactions	—		—		—		502		188		—		—		690
Reclassification of stock notes receivable to other assets	Reclassification of stock notes receivable to other assets	—		—		—		—		1,942		—		—		1,942		Reclassification of stock notes receivable to other assets	—		—		—		—		1,942		—		—		1,942
Net income	Net income	—		—		—		—		—		—		16,311		16,311		Net income	—		—		—		—		—		—		16,311		16,311
Other comprehensive loss, net of tax	Other comprehensive loss, net of tax	—		—		—		—		—		(16,404)		—		(16,404)		Other comprehensive loss, net of tax	—		—		—		—		—		(16,404)		—		(16,404)
Balance at March 31, 2022	Balance at March 31, 2022	$	20	$	168	$	(2)	$	575,661	$	(6,962)	$	(11,764)	$	(128,502)	$	428,619	Balance at March 31, 2022	$	20	$	168	$	(2)	$	575,661	$	(6,962)	$	(11,764)	$	(128,502)	$	428,619
Employee equity transactions																		Employee equity transactions	—		—		—		670		20		—		—		690
Net income																		Net income	—		—		—		—		—		—		5,065		5,065
Other comprehensive loss, net of tax																		Other comprehensive loss, net of tax	—		—		—		—		—		(14,767)		—		(14,767)
Balance at June 30, 2022																		Balance at June 30, 2022	$	20	$	168	$	(2)	$	576,331	$	(6,942)	$	(26,531)	$	(123,437)	$	419,607

The accompanying notes are an integral part of the consolidated financial statements.

Table of Contents

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


		Three months ended March 31,					Six months ended June 30,
($ in thousands)	($ in thousands)	2023		2022		($ in thousands)	2023		2022
Cash flows from operating activities	Cash flows from operating activities					Cash flows from operating activities
Net income	Net income	$	15,556	$	16,311	Net income	$	35,008	$	21,376
Adjustments to reconcile net income to net cash provided by operating activities	Adjustments to reconcile net income to net cash provided by operating activities	91,651		29,571		Adjustments to reconcile net income to net cash provided by operating activities	73,469		42,640
Net cash provided by operating activities	Net cash provided by operating activities	107,207		45,882		Net cash provided by operating activities	108,477		64,016
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Purchase of fixed maturity securities, available-for-sale	Purchase of fixed maturity securities, available-for-sale	(72,466)		(23,370)		Purchase of fixed maturity securities, available-for-sale	(192,749)		(129,636)
Purchase of illiquid investments	Purchase of illiquid investments	(286)		(2,376)		Purchase of illiquid investments	(885)		(2,560)
Purchase of equity securities	Purchase of equity securities	(12,889)		(25,221)		Purchase of equity securities	(19,192)		(33,899)
Purchase of intangible assets						Purchase of intangible assets	(50)		—
Proceeds from (investment in) direct and indirect loans	Proceeds from (investment in) direct and indirect loans	14,665		(8,019)		Proceeds from (investment in) direct and indirect loans	14,032		(14,411)
Purchase of property and equipment	Purchase of property and equipment	(614)		(431)		Purchase of property and equipment	(1,198)		(564)
Sales and maturities of investment securities	Sales and maturities of investment securities	34,980		33,935		Sales and maturities of investment securities	60,075		51,891
Distributions from equity method investments	Distributions from equity method investments	355		1,326		Distributions from equity method investments	1,079		1,689
Change in short-term investments	Change in short-term investments	(166,193)		(38,631)		Change in short-term investments	(69,512)		45,251
Receivable for securities sold	Receivable for securities sold	3,984		5,671		Receivable for securities sold	2,767		2,992
Cash provided by deposit accounting	Cash provided by deposit accounting	5,038		1,518		Cash provided by deposit accounting	7,549		3,571
Other, net		—		2

Net cash used in investment activities	Net cash used in investment activities	(193,426)		(55,596)		Net cash used in investment activities	(198,084)		(75,676)
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Repayment of stock notes receivable		193		186
Employee share purchases						Employee share purchases	193		2,150

Draw on revolving line of credit	Draw on revolving line of credit	50,000		—		Draw on revolving line of credit	50,000		—
Repayment of term loan	Repayment of term loan	(50,000)		—		Repayment of term loan	(50,000)		—
Proceeds from initial public offering	Proceeds from initial public offering	66,262		—		Proceeds from initial public offering	66,262		—
Net cash provided by financing activities	Net cash provided by financing activities	66,455		186		Net cash provided by financing activities	66,455		2,150
Net decrease in cash and cash equivalents and restricted cash	Net decrease in cash and cash equivalents and restricted cash	(19,764)		(9,528)		Net decrease in cash and cash equivalents and restricted cash	(23,152)		(9,510)
Cash and cash equivalents and restricted cash at beginning of period	Cash and cash equivalents and restricted cash at beginning of period	125,011		107,274		Cash and cash equivalents and restricted cash at beginning of period	125,011		107,274
Cash and cash equivalents and restricted cash at end of period	Cash and cash equivalents and restricted cash at end of period	$	105,247	$	97,746	Cash and cash equivalents and restricted cash at end of period	$	101,859	$	97,764
Supplemental disclosure of cash flow information:	Supplemental disclosure of cash flow information:					Supplemental disclosure of cash flow information:
Cash paid for interest	Cash paid for interest	$	3,145	$	1,124	Cash paid for interest	$	5,194	$	2,366
Cash paid for federal income taxes						Cash paid for federal income taxes	$	4,200	$	—

The accompanying notes are an integral part of the consolidated financial statements.

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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, 2022 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, 2022 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.

Recent Accounting Standards Adopted

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires organizations to estimate credit losses on certain types of financial instruments, including receivables and fixed maturity securities, by introducing an approach based on expected losses. The expected loss approach required 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 a $2.3 million increase in accumulated deficit, net of tax.

Updates to Significant Accounting Policies

The following accounting policies have been updated to reflect the Company's adoption of ASU 2016-13, ~~Financial Instruments - Credit Losses (ASC 326):~~ Measurement of Credit Losses on Financial Instruments as described above.

Investments

Available-for-sale

Investments in fixed maturities that are classified as available-for-sale ~~and~~ are carried at fair value. For available-for-sale fixed maturities in an unrealized loss position, the Company first determines whether there is an intent to sell the security or if it is more likely than not that the Company will be required to sell the security before maturity or recovery of its cost basis. If either of these criteria were met, the amortized cost of the security is written down to fair value with the losses recognized in net investment gains (losses) on the consolidated statements of operations. If neither of the these criteria were met, the Company determines whether unrealized losses are due to credit-related factors. If the unrealized losses are due to credit-related factors, an allowance for credit losses is determined using a present value of cash flows compared to the amortized cost of the security. The allowance for credit losses is limited to the amount by which fair value is below amortized cost. Changes in the allowance for credit losses are recognized in net investment ~~gains (losses)~~income on the consolidated statements of operations. Credit losses that are limited by the fair value of the security are recognized in stockholders’ equity, net of taxes, as a component of accumulated other comprehensive ~~income~~ (loss). income. Unrealized losses that are not credit-related continue to be recognized in stockholders’ equity, net of taxes, as a component of accumulated other comprehensive ~~income~~ (loss). income.

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SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.~~Summary of Significant Accounting Policies(continued)~~

Held-to-maturity

Investments in fixed maturity securities that are held-to-maturity are carried at amortized cost net of an allowance for credit losses. The allowance for credit losses represents the current estimate of expected credit losses. The Company develops a historical loss rate from Moody’s table of estimated multi-year cumulative loss rates for asset backed securities. This historical loss rate is adjusted for current conditions and reasonable and supportable forecasts. Changes in the allowance for credit losses are recognized in net investment ~~gains (losses)~~income on the consolidated statements of operations.

Mortgage loans

The Company elected the fair value option in accounting for mortgage loans effective January 1, 2023 as targeted transition relief. Under the fair value option, mortgage loans are measured at fair value, and changes in unrealized gains and losses on mortgage loans are reported in net investment gains (losses) on the condensed consolidated statements of operations. Interest income and amortization continue to be recognized in net investment income on the consolidated statements of operations.

Reinsurance

Reinsurance Recoverables

Reinsurance recoverables are carried net of an allowance for credit losses. The allowance for credit losses represents the current estimate of expected credit losses. The Company develops a historical loss rate using the A.M. Best impairment rate and rating transition study which provides historical loss data of similarly rated reinsurance companies based on the expected duration of the receivables. This historical loss rate is adjusted for current conditions and reasonable and supportable forecasts and consideration of current economic conditions. Changes in the allowance for credit losses are recognized in underwriting, acquisition and insurance expenses on the consolidated statements of operations.

Premiums

Premium receivables are carried net of an allowance for credit losses. The allowance for credit losses represents the current estimate of expected credit losses. The Company develops a historical loss rate using historical write-offs and aging of receivables. This historical loss rate is adjusted for current conditions, reasonable and supportable forecasts and our ability to cancel coverage on a policy after premium is considered past due. Changes in the allowance for credit losses are recognized in underwriting, acquisition and insurance expenses on the consolidated statements of operations.

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SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2.Investments

The following tables set forth the amortized cost and the fair value by investment category at ~~March 31,~~June 30, 2023 and December 31, 2022:


($ in thousands)	($ in thousands)	Gross Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Fair Value		($ in thousands)	Gross Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Fair Value
March 31, 2023
June 30, 2023												June 30, 2023
Fixed maturity securities, available-for-sale:	Fixed maturity securities, available-for-sale:											Fixed maturity securities, available-for-sale:
U.S. government securities	U.S. government securities	$	46,347	$	35	$	(1,464)	$	—	$	44,918	U.S. government securities	$	45,979	$	—	$	(1,496)	$	—	$	44,483
Corporate securities and miscellaneous	Corporate securities and miscellaneous	278,980		1,571		(18,117)		—		262,434		Corporate securities and miscellaneous	313,127		800		(20,367)		—		293,560
Municipal securities	Municipal securities	73,232		152		(6,045)		—		67,339		Municipal securities	77,469		88		(6,584)		—		70,973
Residential mortgage-backed securities	Residential mortgage-backed securities	146,830		458		(13,398)		—		133,890		Residential mortgage-backed securities	214,187		144		(17,385)		—		196,946
Commercial mortgage-backed securities	Commercial mortgage-backed securities	55,183		228		(3,229)		—		52,182		Commercial mortgage-backed securities	19,805		—		(1,826)		—		17,979
Asset-backed securities	Asset-backed securities	117,823		213		(5,662)		—		112,374		Asset-backed securities	149,195		121		(5,766)		—		143,550
Total fixed maturity securities, available-for-sale	Total fixed maturity securities, available-for-sale	$	718,395	$	2,657	$	(47,915)	$	—	$	673,137	Total fixed maturity securities, available-for-sale	$	819,762	$	1,153	$	(53,424)	$	—	$	767,491
Fixed maturity securities, held-to-maturity:	Fixed maturity securities, held-to-maturity:											Fixed maturity securities, held-to-maturity:
Asset-backed securities	Asset-backed securities	$	48,537	$	—	$	(3,724)	$	(321)	$	44,492	Asset-backed securities	$	47,504	$	—	$	(4,585)	$	(332)	$	42,587
Total fixed maturity securities, held-to-maturity	Total fixed maturity securities, held-to-maturity	$	48,537	$	—	$	(3,724)	$	(321)	$	44,492	Total fixed maturity securities, held-to-maturity	$	47,504	$	—	$	(4,585)	$	(332)	$	42,587


($ in thousands)	Gross Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss		Fair Value
December 31, 2022
Fixed maturity securities, available-for-sale:
U.S. government securities	$	50,416	$	1	$	(1,876)	$	48,541
Corporate securities and miscellaneous	255,116		767		(20,754)		235,129
Municipal securities	65,836		24		(8,133)		57,727
Residential mortgage-backed securities	134,844		218		(15,206)		119,856
Commercial mortgage-backed securities	40,129		50		(3,684)		36,495
Asset-backed securities	116,275		91		(6,542)		109,824
Total fixed maturity securities, available-for-sale	$	662,616	$	1,151	$	(56,195)	$	607,572
Fixed maturity securities, held-to-maturity:
Asset-backed securities	$	52,467	$	—	$	(5,696)	$	46,771
Total fixed maturity securities, held-to-maturity	$	52,467	$	—	$	(5,696)	$	46,771

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SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2.~~Investments(continued)~~

The following table sets forth the amortized cost and fair value of available-for-sale fixed maturity securities by contractual maturity at ~~March 31,~~June 30, 2023:


($ in thousands)	($ in thousands)	Amortized Cost		Fair Value		($ in thousands)	Amortized Cost		Fair Value
Due in less than one year	Due in less than one year	$	27,656	$	26,956	Due in less than one year	$	27,565	$	26,980
Due after one year through five years	Due after one year through five years	214,722		205,835		Due after one year through five years	233,387		221,664
Due after five years through ten years	Due after five years through ten years	108,566		99,254		Due after five years through ten years	125,247		114,920
Due after ten years	Due after ten years	47,615		42,646		Due after ten years	50,376		45,452
Mortgage-backed securities	Mortgage-backed securities	202,013		186,072		Mortgage-backed securities	233,992		214,925
Asset-backed securities	Asset-backed securities	117,823		112,374		Asset-backed securities	149,195		143,550
Total	Total	$	718,395	$	673,137	Total	$	819,762	$	767,491

Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Also, changing interest rates, tax considerations or other factors may result in portfolio sales prior to maturity.

The Company’s fixed maturity securities, held-to-maturity, at ~~March 31,~~June 30, 2023 consisted entirely of asset backed securities that were not due at a single maturity date.

The following tables set forth the gross unrealized losses and the corresponding fair values of investments, aggregated by length of time that individual securities had been in a continuous unrealized loss position as of ~~March 31,~~June 30, 2023 and December 31, 2022:


		Less than 12 Months				12 Months or More				Total					Less than 12 Months				12 Months or More				Total
($ in thousands)	($ in thousands)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		($ in thousands)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
March 31, 2023
June 30, 2023														June 30, 2023
Fixed maturity securities, available-for-sale:	Fixed maturity securities, available-for-sale:													Fixed maturity securities, available-for-sale:
U.S. government securities	U.S. government securities	$	19,722	$	(443)	$	18,777	$	(1,021)	$	38,499	$	(1,464)	U.S. government securities	$	18,718	$	(428)	$	25,765	$	(1,068)	$	44,483	$	(1,496)
Corporate securities and miscellaneous	Corporate securities and miscellaneous	107,567		(4,059)		98,368		(14,058)		205,935		(18,117)		Corporate securities and miscellaneous	126,693		(3,796)		130,980		(16,571)		257,673		(20,367)
Municipal securities	Municipal securities	35,247		(1,764)		22,752		(4,281)		57,999		(6,045)		Municipal securities	30,290		(1,079)		34,000		(5,505)		64,290		(6,584)
Residential mortgage-backed securities	Residential mortgage-backed securities	41,507		(1,919)		65,869		(11,479)		107,376		(13,398)		Residential mortgage-backed securities	111,829		(3,663)		76,276		(13,722)		188,105		(17,385)
Commercial mortgage-backed securities	Commercial mortgage-backed securities	28,658		(869)		11,393		(2,360)		40,051		(3,229)		Commercial mortgage-backed securities	7,688		(206)		10,291		(1,620)		17,979		(1,826)
Asset-backed securities	Asset-backed securities	62,813		(2,636)		35,681		(3,026)		98,494		(5,662)		Asset-backed securities	72,084		(1,367)		62,502		(4,399)		134,586		(5,766)
Total fixed maturity securities, available-for-sale	Total fixed maturity securities, available-for-sale	295,514		(11,690)		252,840		(36,225)		548,354		(47,915)		Total fixed maturity securities, available-for-sale	367,302		(10,539)		339,814		(42,885)		707,116		(53,424)
Fixed maturity securities, held-to-maturity:	Fixed maturity securities, held-to-maturity:													Fixed maturity securities, held-to-maturity:
Asset-backed securities	Asset-backed securities	1,624		(19)		42,868		(3,705)		44,492		(3,724)		Asset-backed securities	1,845		(22)		40,742		(4,563)		42,587		(4,585)
Total fixed maturity securities, held-to-maturity:	Total fixed maturity securities, held-to-maturity:	1,624		(19)		42,868		(3,705)		44,492		(3,724)		Total fixed maturity securities, held-to-maturity:	1,845		(22)		40,742		(4,563)		42,587		(4,585)
Total	Total	$	297,138	$	(11,709)	$	295,708	$	(39,930)	$	592,846	$	(51,639)	Total	$	369,147	$	(10,561)	$	380,556	$	(47,448)	$	749,703	$	(58,009)

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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, 2022
Fixed maturity securities, available-for-sale:
U.S. government securities	$	28,966	$	(603)	$	18,577	$	(1,273)	$	47,543	$	(1,876)
Corporate securities and miscellaneous	171,506		(16,063)		34,283		(4,691)		205,789		(20,754)
Municipal securities	51,701		(7,236)		3,689		(897)		55,390		(8,133)
Residential mortgage-backed securities	56,246		(4,152)		52,778		(11,054)		109,024		(15,206)
Commercial mortgage-backed securities	25,836		(1,488)		8,583		(2,196)		34,419		(3,684)
Asset-backed securities	74,684		(3,351)		25,820		(3,191)		100,504		(6,542)
Total fixed maturity securities, available-for-sale	408,939		(32,893)		143,730		(23,302)		552,669		(56,195)
Fixed maturity securities, held-to-maturity:
Asset-backed securities	46,771		(5,696)		—		—		46,771		(5,696)
Total fixed maturity securities, held-to-maturity:	46,771		(5,696)		—		—		46,771		(5,696)
Total	$	455,710	$	(38,589)	$	143,730	$	(23,302)	$	599,440	$	(61,891)

The Company regularly monitors its available-for-sale fixed maturity securities that have fair values less than cost or amortized cost for signs of impairment, an assessment that requires significant management judgment regarding the evidence known. Such judgments could change in the future as more information becomes known, which could negatively impact the amounts reported. Among the factors that management considers for fixed maturity securities are the financial condition of the issuer including receipt of scheduled principal and interest cash flows, and intent to sell, including if it is more likely than not that the Company will be required to sell the investments before recovery.

As of ~~March 31,~~June 30, 2023, the Company had ~~551~~735 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.

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 six months ended ~~March 31,~~June 30, 2023 and 2022:


				Three months ended June 30,				Six months ended June 30,
($ in thousands)	($ in thousands)	2023			2022		($ in thousands)	2023		2022		2023		2022
Gross realized gains	Gross realized gains						Gross realized gains
Fixed maturity securities, available-for sale	Fixed maturity securities, available-for sale	$	493		$	16	Fixed maturity securities, available-for sale	$	211	$	94	$	704	$	110
Equity securities	Equity securities	1,227			1,830		Equity securities	814		1,046		2,041		2,877
Other	Other	1			31		Other	—		5		1		36
Total	Total	1,721			1,877		Total	1,025		1,145		2,746		3,023
Gross realized losses	Gross realized losses						Gross realized losses
Fixed maturity securities, available-for sale	Fixed maturity securities, available-for sale	(237)			(276)		Fixed maturity securities, available-for sale	(218)		(217)		(456)		(492)
Equity securities	Equity securities	(4,289)			(654)		Equity securities	(472)		(783)		(4,761)		(1,438)
Other	Other	(1)			(16)		Other	(1)		(5)		(1)		(22)
Total	Total	(4,527)			(946)		Total	(691)		(1,005)		(5,218)		(1,952)
Net unrealized gains (losses) on investments	Net unrealized gains (losses) on investments						Net unrealized gains (losses) on investments
Equity securities	Equity securities	3,745			(5,369)		Equity securities	5,038		(14,514)		8,783		(19,883)
Mortgage loans	Mortgage loans	22			—		Mortgage loans	(21)		—		1		—
Net investment gains (losses)	Net investment gains (losses)	$	961		$	(4,438)	Net investment gains (losses)	$	5,351	$	(14,374)	$	6,312	$	(18,812)

The following table sets forth the proceeds from sales of available-for-sale fixed maturity securities and equity securities for the ~~three~~six months ended ~~March 31,~~June 30, 2023 and 2022:


($ in thousands)	($ in thousands)	2023		2022		($ in thousands)	2023		2022
Fixed maturity securities, available-for sale	Fixed maturity securities, available-for sale	$	8,392	$	7,575	Fixed maturity securities, available-for sale	$	19,363	$	7,590
Equity securities	Equity securities	13,325		11,966		Equity securities	17,583		19,981

The following table sets forth the components of net investment income for the three and six months ended ~~March 31,~~June 30, 2023 and 2022:


				Three months ended June 30,				Six months ended June 30,
($ in thousands)	($ in thousands)	2023			2022		($ in thousands)	2023		2022		2023		2022
Income:	Income:						Income:
Fixed maturity securities, available-for sale	Fixed maturity securities, available-for sale	$	6,676		$	3,224	Fixed maturity securities, available-for sale	$	7,583	$	3,967	$	14,259	$	7,191
Fixed maturity securities, held-to-maturity	Fixed maturity securities, held-to-maturity	1,003			1,937		Fixed maturity securities, held-to-maturity	1,251		1,405		2,254		3,342
Equity securities	Equity securities	726			738		Equity securities	1,044		1,001		1,770		1,739
Equity method investments	Equity method investments	(4,664)			9,210		Equity method investments	(2,104)		2,243		(6,768)		11,475
Mortgage loans	Mortgage loans	1,473			818		Mortgage loans	1,275		964		2,748		1,782
Indirect loans	Indirect loans	(1,319)			1,657		Indirect loans	(1,929)		3,074		(3,248)		4,732
Short-term investments and cash	Short-term investments and cash	1,789			27		Short-term investments and cash	3,186		183		4,975		210
Other	Other	(20)			7		Other	29		(2)		9		(18)
Total investment income	Total investment income	5,664			17,618		Total investment income	10,335		12,835		15,999		30,453
Investment expenses	Investment expenses	(1,018)			(2,469)		Investment expenses	(1,752)		(2,305)		(2,770)		(4,774)
Net investment income	Net investment income	$	4,646		$	15,149	Net investment income	$	8,583	$	10,530	$	13,229	$	25,679

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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 (losses) gains ~~(losses)~~ on the Company’s investment portfolio, net of deferred income taxes, included in other comprehensive (loss) income ~~(loss)~~ for the three and six months ended ~~March 31,~~June 30, 2023 and 2022:


				Three months ended June 30,				Six months ended June 30,
($ in thousands)	($ in thousands)	2023			2022		($ in thousands)	2023		2022		2023		2022
Fixed maturity securities	Fixed maturity securities	$	9,786		$	(20,764)	Fixed maturity securities	$	(7,013)	$	(18,692)	$	2,773	$	(39,457)
Deferred income taxes	Deferred income taxes	(2,045)			4,360		Deferred income taxes	1,473		3,925		(572)		8,286
Total	Total	$	7,741		$	(16,404)	Total	$	(5,540)	$	(14,767)	$	2,201	$	(31,171)

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 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.

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SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3.~~Fair Value Measurements(continued)~~

Mortgage loans

Mortgage loans have variable interest rates and are collateralized by real property. The Company determines fair value of mortgage loans using the income approach utilizing inputs that are observable and unobservable (Level 3). The unobservable input consists of the spread applied to a prime rate used to discount cash flows. The spread represents the incremental cost of capital based on the borrower’s ability to make future payments and the value of the collateral relative to the loan balance and is subject to judgement and uncertainty.

The following table sets forth the range and weighted average, weighted by relative fair value, of the spread as of ~~March 31,~~June 30, 2023:



	~~March 31,~~June 30, 2023
High	~~9.50~~14.53	%
Low	~~2.05~~5.15	%
Weighted average	~~5.85~~7.14	%

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SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3.~~Fair Value Measurements(continued)~~

The following tables set forth the Company’s investments within the fair value hierarchy at ~~March 31,~~June 30, 2023 and December 31, 2022:


March 31, 2023
June 30, 2023										June 30, 2023
($ in thousands)	($ in thousands)	Level 1		Level 2		Level 3		Total		($ in thousands)	Level 1		Level 2		Level 3		Total
Fixed maturity securities, available-for-sale:	Fixed maturity securities, available-for-sale:									Fixed maturity securities, available-for-sale:
U.S. government securities	U.S. government securities	$	44,918	$	—	$	—	$	44,918	U.S. government securities	$	44,483	$	—	$	—	$	44,483
Corporate securities and miscellaneous	Corporate securities and miscellaneous	—		262,434		—		262,434		Corporate securities and miscellaneous	—		293,560		—		293,560
Municipal securities	Municipal securities	—		67,339		—		67,339		Municipal securities	—		70,973		—		70,973
Residential mortgage-backed securities	Residential mortgage-backed securities	—		133,890		—		133,890		Residential mortgage-backed securities	—		196,946		—		196,946
Commercial mortgage-backed securities	Commercial mortgage-backed securities	—		52,182		—		52,182		Commercial mortgage-backed securities	—		17,979		—		17,979
Asset-backed securities	Asset-backed securities	—		112,374		—		112,374		Asset-backed securities	—		143,550		—		143,550
Total fixed maturity securities, available-for-sale	Total fixed maturity securities, available-for-sale	44,918		628,219		—		673,137		Total fixed maturity securities, available-for-sale	44,483		723,008		—		767,491
Fixed maturity securities, held-to-maturity:	Fixed maturity securities, held-to-maturity:									Fixed maturity securities, held-to-maturity:
Asset-backed securities	Asset-backed securities	—		—		44,492		44,492		Asset-backed securities	—		—		42,587		42,587
Total fixed maturity securities, held-to-maturity	Total fixed maturity securities, held-to-maturity	—		—		44,492		44,492		Total fixed maturity securities, held-to-maturity	—		—		42,587		42,587
Common stocks:	Common stocks:									Common stocks:
Consumer discretionary	Consumer discretionary	1,965		—		—		1,965		Consumer discretionary	1,963		—		—		1,963
Consumer staples	Consumer staples	13,116		—		—		13,116		Consumer staples	14,792		—		—		14,792
Energy	Energy	2,947		—		—		2,947		Energy	3,008		—		—		3,008
Finance	Finance	19,088		—		—		19,088		Finance	20,890		—		—		20,890
Industrial	Industrial	11,244		—		—		11,244		Industrial	11,501		—		—		11,501
Information technology	Information technology	2,912		—		—		2,912		Information technology	3,599		—		—		3,599
Materials	Materials	3,253		—		—		3,253		Materials	3,706		—		—		3,706
Other	Other	2,292		—		—		2,292		Other	2,215		—		—		2,215
Total common stocks	Total common stocks	56,817		—		—		56,817		Total common stocks	61,674		—		—		61,674
Preferred stocks:	Preferred stocks:									Preferred stocks:
Consumer staples	Consumer staples			473		—		473		Consumer staples	—		423		—		423
Finance	Finance			3,979		—		3,979		Finance	—		4,746		—		4,746
Industrial	Industrial	—		1,135		—		1,135		Industrial	—		1,067		—		1,067
Other	Other	—		735		—		735		Other	—		711		—		711
Total preferred stocks	Total preferred stocks	—		6,322		—		6,322		Total preferred stocks	—		6,947		—		6,947
Mutual funds:	Mutual funds:									Mutual funds:
Fixed income	Fixed income	5,191		—		—		5,191		Fixed income	5,218		—		—		5,218
Equity	Equity	51,615		—		—		51,615		Equity	53,549		—		—		53,549
Commodity	Commodity	520		—		—		520		Commodity	473		—		—		473
Total mutual funds	Total mutual funds	57,326		—		—		57,326		Total mutual funds	59,240		—		—		59,240
Total equity securities	Total equity securities	114,143		6,322		—		120,465		Total equity securities	120,914		6,947		—		127,861
Mortgage loans	Mortgage loans	—		—		42,335		42,335		Mortgage loans	—		—		32,762		32,762
Short-term investments	Short-term investments	287,351		—		—		287,351		Short-term investments	190,670		—		—		190,670
Total investments	Total investments	$	446,412	$	634,541	$	86,827	$	1,167,780	Total investments	$	356,067	$	729,955	$	75,349	$	1,161,371

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SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3.~~Fair Value Measurements(continued)~~


December 31, 2022
($ in thousands)	Level 1		Level 2		Level 3		Total
Fixed maturity securities, available-for-sale:
U.S. government securities	$	48,541	$	—	$	—	$	48,541
Corporate securities and miscellaneous	—		235,129		—		235,129
Municipal securities	—		57,727		—		57,727
Residential mortgage-backed securities	—		119,856		—		119,856
Commercial mortgage-backed securities	—		36,495		—		36,495
Asset-backed securities	—		109,824		—		109,824
Total fixed maturity securities, available-for-sale	48,541		559,031		—		607,572
Fixed maturity securities, held-to-maturity:
Asset-backed securities	—		—		46,771		46,771
Total fixed maturity securities, held-to-maturity:	—		—		46,771		46,771
Common stocks:
Consumer discretionary	1,948		—		—		1,948
Consumer staples	12,036		—		—		12,036
Energy	3,241		—		—		3,241
Finance	22,636		—		—		22,636
Industrial	9,452		—		—		9,452
Information technology	2,284		—		—		2,284
Materials	2,820		—		—		2,820
Other	1,579		—		—		1,579
Total common stocks	55,996		—		—		55,996
Preferred stocks:
Consumer staples	—		117		—		117
Finance	—		7,085		—		7,085
Industrial	—		1,020		—		1,020
Other	—		549		—		549
Total preferred stocks	—		8,771		—		8,771
Mutual funds:
Fixed income	5,068		—		—		5,068
Equity	49,773		—		—		49,773
Commodity	561		—		—		561
Total mutual funds	55,402		—		—		55,402
Total equity securities	111,398		8,771		—		120,169
Mortgage loans	—		—		52,842		52,842
Short-term investments	121,158		—		—		121,158
Total investments	$	281,097	$	567,802	$	99,613	$	948,512

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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 changes in the fair value of instruments carried at fair value with a Level 3 measurement during the three months ended ~~March 31,~~June 30, 2023:


($ 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 gains for the period recognized in net investment gains (losses)	$	(21)
Issuances	$	30
Settlements	$	(9,582)
Balance at June 30, 2023	$	32,762
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	$	3

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 ~~March 31,~~June 30, 2023, 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 available (Level 2).

Subordinated debt: Subordinated debt consists of two debt instruments, the Junior Subordinated Interest Debentures, due September 15, 2036, and Unsecured Subordinated Notes, due May 24, 2039. The carrying value of the Junior Subordinated Interest Debentures approximates the estimated fair value as the instrument accrues interest at current market rates plus a spread. Unsecured Subordinated Notes have a fixed interest rate. The Company determines the fair value of these instruments using the income approach utilizing inputs that are observable (Level 2).

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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 ~~March 31,~~June 30, 2023 and December 31, 2022:


		March 31, 2023				December 31, 2022					June 30, 2023				December 31, 2022
($ in thousands)	($ in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value		($ in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Notes Payable	Notes Payable									Notes Payable
Term loan, due December 31, 2024	Term loan, due December 31, 2024	$	—	$	—	$	50,000	$	50,000	Term loan, due December 31, 2024	$	—	$	—	$	50,000	$	50,000
Revolving credit facility	Revolving credit facility	50,000		50,000		—		—		Revolving credit facility	50,000		50,000		—		—
Notes payable	Notes payable	$	50,000	$	50,000	$	50,000	$	50,000	Notes payable	$	50,000	$	50,000	$	50,000	$	50,000
Subordinated Debt	Subordinated Debt									Subordinated Debt
Junior subordinated interest debentures	Junior subordinated interest debentures	$	59,149	$	59,794	$	59,137	$	59,794	Junior subordinated interest debentures	$	59,162	$	59,794	$	59,137	$	59,794
Unsecured subordinated notes	Unsecured subordinated notes	19,480		18,622		19,472		18,934		Unsecured subordinated notes	19,488		18,278		19,472		18,934
Subordinated debt, net of debt issuance costs	Subordinated debt, net of debt issuance costs	$	78,629	$	78,416	$	78,609	$	78,728	Subordinated debt, net of debt issuance costs	$	78,650	$	78,072	$	78,609	$	78,728

Other financial instruments qualify as insurance-related products and are specifically exempted from fair value disclosure requirements.

4.Mortgage Loans

The Company has invested in Separately Managed Accounts (“SMA1” and “SMA2”), managed by Arena Investors, LP (“Arena”), which is affiliated with The Westaim Corporation (“Westaim”) who, directly and through Westaim HIIG LP (a limited partnership controlled by Westaim), is the Company’s largest ~~shareholder.~~stockholder. As of ~~March 31,~~June 30, 2023 and December 31, 2022, 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 ~~rate~~spread above a prime rate, mature in approximately 1 to 2 years from loan origination and the principal amounts of the loans range between ~~40%~~61% to 80% property’s appraised value at the time the loans were made. Mortgage loan participations are carried at fair value as of June 30, 2023 and cost adjusted for unamortized premiums, discounts, and loan ~~fees.~~fees as of December 31, 2022.

The carrying value of the Company’s mortgage loans as of ~~March 31,~~June 30, 2023 and December 31, 2022 were as follows:


($ in thousands)	($ in thousands)	March 31, 2023		December 31, 2022		($ in thousands)	June 30, 2023		December 31, 2022
Commercial						Commercial	$	16,075	$	15,309
Retail	Retail	$	15,568	$	16,516	Retail	9,201		16,516
Industrial		—		6,329
Commercial		16,086		15,309
Hospitality						Hospitality	4,845		4,915
Multi-family	Multi-family	2,596		5,593		Multi-family	2,641		5,593
Office	Office	3,210		3,197		Office	—		3,197
Hospitality		4,875		4,915
Industrial						Industrial	—		6,329
		$	42,335	$	51,859		$	32,762	$	51,859

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SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

4.~~Mortgage Loans(continued)~~

The Company’s gross investment income for mortgage loans for the three months ended ~~March 31,~~June 30, 2023 and 2022 were as follows:


				Three months ended June 30,				Six months ended June 30,
($ in thousands)	($ in thousands)	2023			2022		($ in thousands)	2023		2022		2023		2022
Commercial							Commercial	$	555	$	155	$	1,049	$	365
Retail	Retail	$	595		$	359	Retail	416		235		1,011		479
Hospitality							Hospitality	132		103		293		148
Office							Office	97		134		203		222
Multi-family							Multi-family	75		199		192		316

Commercial		494			210
Multi-family		117			69
Office		106			166

Hospitality		161			14
Industrial							Industrial	—		138		—		252
		$	1,473		$	818		$	1,275	$	964	$	2,748	$	1,782

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 six months ended ~~March 31,~~June 30, 2023 and 2022.

As of ~~March 31,~~June 30, 2023 and December 31, 2022, approximately $0.0 million and $6.4 million of mortgage loans, respectively, were in the process of foreclosure. The carrying value of the mortgage loans in foreclosure is the lower of cost adjusted for unamortized premiums, discounts, and loan fees or the fair value of the collateral less costs to sell.

5.Other Long-Term Investments

Equity Method Investments

The Company’s ownership interests in most of its equity method investments range from approximately 3% to less than 50% where the Company has significant influence but not control.

The carrying value of the Company’s equity method investments as of ~~March 31,~~June 30, 2023 and December 31, 2022 were as follows:


($ in thousands)	($ in thousands)	March 31, 2023		December 31, 2022		($ in thousands)	June 30, 2023		December 31, 2022
Arena Special Opportunities Fund, LP units						Arena Special Opportunities Fund, LP units	$	41,364	$	44,504
JVM Funds LLC units						JVM Funds LLC units	21,190		22,473
Arena SOP LP units	Arena SOP LP units	$	6,683	$	8,734	Arena SOP LP units	5,956		8,734
Arena Special Opportunities Fund, LP units		42,701		44,504
RISCOM						RISCOM	4,342		4,037
Hudson Ventures Fund 2 LP units						Hudson Ventures Fund 2 LP units	3,623		3,551
Dowling Capital Partners LP units						Dowling Capital Partners LP units	2,133		1,965
Universa Black Swan LP units						Universa Black Swan LP units	421		1,325
Brewer Lane Ventures Fund II LP units	Brewer Lane Ventures Fund II LP units	390		200		Brewer Lane Ventures Fund II LP units	361		200
Dowling Capital Partners LP units		2,231		1,965
Hudson Ventures Fund 2 LP units		3,391		3,551
JVM Funds LLC units		21,698		22,473
RISCOM		4,118		4,037
Universa Black Swan LP units		770		1,325
		$	81,982	$	86,789		$	79,390	$	86,789

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SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5.~~Other Long-Term Investments(continued)~~

The following table sets forth the components of net investment (loss) income from equity method investments for the three and six months ended ~~March 31,~~June 30, 2023 and 2022:


				Three months ended June 30,				Six months ended June 30,
($ in thousands)	($ in thousands)	2023			2022		($ in thousands)	2023		2022		2023		2022
Dowling Capital Partners LP units							Dowling Capital Partners LP units	$	338	$	41	$	605	$	555
RISCOM							RISCOM	224		808		305		826
Brewer Lane Ventures Fund II LP							Brewer Lane Ventures Fund II LP	(29)		—		(29)		—
Hudson Ventures Fund II LP units							Hudson Ventures Fund II LP units	(158)		332		(413)		396
JVM Funds LLC							JVM Funds LLC	(221)		(955)		(641)		(768)
Universa Black Swan LP units							Universa Black Swan LP units	(348)		(1,057)		(904)		(1,550)
Arena SOP LP units	Arena SOP LP units	$	(2,051)		$	6,117	Arena SOP LP units	(727)		1,631		(2,778)		7,771
Arena Special Opportunities Fund, LP units	Arena Special Opportunities Fund, LP units	(1,730)			2,804		Arena Special Opportunities Fund, LP units	(1,183)		1,443		(2,913)		4,245
Dowling Capital Partners LP units		267			514
Hudson Ventures Fund 2 LP units		(255)			64
JVM Funds LLC		(420)			186
RISCOM		81			18
Universa Black Swan LP units		(556)			(493)
		$	(4,664)		$	9,210		$	(2,104)	$	2,243	$	(6,768)	$	11,475

The following table sets forth the unfunded commitment of equity method investments as of ~~March 31,~~June 30, 2023 and December 31, 2022:


($ in thousands)	($ in thousands)	March 31, 2023		December 31, 2022		($ in thousands)	June 30, 2023		December 31, 2022
Brewer Lane Ventures Fund II LP units	Brewer Lane Ventures Fund II LP units	$	4,610	$	4,800	Brewer Lane Ventures Fund II LP units	$	4,610	$	4,800
Hudson Ventures Fund 2 LP units						Hudson Ventures Fund 2 LP units	1,311		1,796
Dowling Capital Partners LP units	Dowling Capital Partners LP units	386		386		Dowling Capital Partners LP units	386		386
Hudson Ventures Fund 2 LP units		1,701		1,796
		$	6,697	$	6,982		$	6,307	$	6,982

The difference between the cost of an investment and its proportionate share of the underlying equity in net assets is allocated to the various assets and liabilities of the equity method investment. The Company amortizes the difference in net assets over the same useful life of a similar asset as the underlying equity method investment. For investment in RISCOM, a similar asset would be agent relationships. The Company amortizes this difference over a 15-year useful life.

The following table sets forth the Company’s recorded investment in RISCOM compared to its share of underlying equity as of ~~March 31,~~June 30, 2023 and December 31, 2022:


($ in thousands)	($ in thousands)	March 31, 2023		December 31, 2022		($ in thousands)	June 30, 2023		December 31, 2022
Investment in RISCOM:	Investment in RISCOM:					Investment in RISCOM:
Underlying equity	Underlying equity	$	2,434	$	2,292	Underlying equity	$	2,719	$	2,292
Difference	Difference	1,684		1,745		Difference	1,623		1,745
Recorded investment balance	Recorded investment balance	$	4,118	$	4,037	Recorded investment balance	$	4,342	$	4,037

The following table sets forth the Company’s recorded investment in JVM Funds LLC compared to its share of underlying equity as of ~~March 31,~~June 30, 2023 and December 31, 2022:


($ in thousands)	($ in thousands)	March 31, 2023		December 31, 2022		($ in thousands)	June 30, 2023		December 31, 2022
Investment in JVM Funds LLC:	Investment in JVM Funds LLC:					Investment in JVM Funds LLC:
Underlying equity	Underlying equity	$	20,828	$	21,565	Underlying equity	$	20,358	$	21,565
Difference	Difference	870		908		Difference	832		908
Recorded investment balance	Recorded investment balance	$	21,698	$	22,473	Recorded investment balance	$	21,190	$	22,473

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SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5.~~Other Long-Term Investments(continued)~~

Investment in Bank Holding Company

The Company carries its investment in Captex Bancshares at cost, less impairment or observable changes in price. The Company reviews ~~these investments~~this investment for impairment or observable changes in price during each reporting period. There were no impairments or observable changes in price during the ~~three~~six months ended ~~March 31,~~June 30, 2023 and the year ended December 31, 2022.

Investment in Indirect Loans and Loan Collateral

As of ~~March 31,~~June 30, 2023 and December 31, 2022, the Company held indirect investments in collateralized loans and loan collateral through SMA1 and SMA2.

The carrying value and unfunded commitment of the SMA1 and SMA2 as of ~~March 31,~~June 30, 2023 and December 31, 2022 were as follows:


		March 31, 2023				December 31, 2022					June 30, 2023				December 31, 2022
($ in thousands)	($ in thousands)	Carrying Value		Unfunded Commitment		Carrying Value		Unfunded Commitment		($ in thousands)	Carrying Value		Unfunded Commitment		Carrying Value		Unfunded Commitment
SMA1	SMA1	$	34,654	$	—	$	36,426	$	—	SMA1	$	32,867	$	—	$	36,426	$	—
SMA2~~(1)~~	SMA2~~(1)~~	(1,652)		—		2,010		—		SMA2~~(1)~~	8,779		—		2,010		—
Investment in indirect loans and loan collateral	Investment in indirect loans and loan collateral	$	33,002	$	—	$	38,436	$	—	Investment in indirect loans and loan collateral	$	41,646	$	—	$	38,436	$	—

(1)The carrying value of SMA2 is negative as of March 31, 2023 due to distribution in-transit.

Investment in Trust

The Company carries its investment in the common stock of the Delos Capital Trust n/k/a HIIG Capital Trust I (“Trust”) at cost. There were no impairments or observable changes in price during the ~~three~~six months ended ~~March 31,~~June 30, 2023 and 2022.

6.Allowance for Credit Losses

Premiums Receivable

The following table sets forth the changes in the allowance for expected credit losses on premiums receivable for the ~~three~~six months ended ~~March 31,~~June 30, 2023.


($ in thousands)	Allowance for Credit Losses
Balance at December 31, 2022	$	629
Cumulative effect of adoption of ASU 2016-13 at January 1, 2023	—
Current period change for estimated uncollectible premiums	409
Write-offs of uncollectible premiums receivable	(56)
Balance at March 31, 2023	$	982
Current period change for estimated uncollectible premiums	37
Write-offs of uncollectible premiums receivable	(96)
Recoveries of amounts previously written off	18
Balance at June 30, 2023	$	941

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SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6.~~Allowance for Credit Losses(continued)~~

Reinsurance Recoverables

The Company analyzes the credit risk associated with its reinsurance recoverables by monitoring the financial strength rating of its reinsurers from A.M. Best, a widely recognized rating agency with an exclusive insurance industry focus. The Company assesses the financial strength rating annually and updated throughout the year as A.M. Best provides updates on ratings and outlooks. The Company assesses the adequacy of various forms of credit enhancements such as reinsurance payables, letters of credit and funds held. A summary of the Company’s reinsurance recoverables net of credit enhancements by A.M. Best rating as of ~~March 31,~~June 30, 2023 was as follows:


A.M. Best Rating	~~March 31,~~June 30, 2023
A- and above	~~98.5~~98.6	%
B++ to B+	1.4

Not rated	~~0.1~~—

The Company considers reinsurance balances to be past due when ~~it is~~they are 90 days past due. The following table sets forth the changes in the allowance for estimated uncollectible reinsurance for the ~~three~~six months ended ~~March 31,~~June 30, 2023:


($ in thousands)	Allowance for Credit Losses
Balance at December 31, 2022	$	—
Cumulative effect of adoption of ASU 2016-13 at January 1, 2023	2,295
Current period change for estimated uncollectible reinsurance	—
Write-offs of uncollectible reinsurance recoverables	—
Balance at March 31, 2023	$	2,295
Current period change for estimated uncollectible reinsurance	—
Write-offs of uncollectible reinsurance recoverables	—
Balance at June 30, 2023	$	2,295

7.Notes Payable

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 ~~three~~six months ended ~~March 31,~~June 30, 2023. The Revolving Credit Facility provided the Company with up to a $150.0 million revolving credit facility, with an accordion that can increase the capacity by $50.0 million, and a letter of credit sub-facility of up to $30.0 million.

During the ~~three~~six months ended ~~March 31,~~June 30, 2023, the Company drew $50.0 million on the Revolving Credit Facility and used the proceeds to pay off the principal on its existing term loan. The Company subsequently terminated the existing term loan and revolving line of credit.

Interest on the Revolving Credit Facility is payable quarterly. The interest rate on the Revolving Credit Facility ~~was~~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 June 30, 2023, the six-month SOFR on the Revolving Credit Facility was 4.66%, 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 ~~March 31,~~June 30, 2023, the Company was in compliance with all covenants.

8.Stockholders’ Equity

Reverse Stock Split

On September 23, 2022, the Board of Directors approved a 4-for-1 reverse stock split of the Company’s common stock. The reverse stock split became effective January 3, 2023. All share and per share information included in the accompanying consolidated financial statements and notes to the consolidated financial statements have been retroactively adjusted to reflect the reverse stock split of common stock for all periods presented.

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SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

8.~~Stockholders’ Equity(continued)~~

Initial Public Offering

On January 4, 2023, the Company announced the launch of its initial public offering (“IPO”) of its common stock. On January 12, 2023, the Company priced its IPO of 8,952,383 shares of its common stock, with 4,750,000 shares offered by the Company and 4,202,383 shares sold by selling stockholders, at a public price of $15.00 per share. The shares began trading on January 13, 2023 on the Nasdaq Global Select Market under the ticker symbol “SKWD.”

The Company completed its IPO on January 18, 2023. The underwriters exercised in full their option to purchase 1,342,857 additional shares of common stock from the selling stockholders, at a price per share of $15.00. The Company’s net proceeds from the IPO were approximately ~~$62.4~~$62.0 million, after deducting underwriting discounts and specific incremental expenses directly attributable to the IPO.

Upon the closing of its IPO, the Company filed an amended and restated certificate of incorporation which, among other things, increased the number of authorized shares consisting of 500,000,000 shares of common stock, par value $0.01 per share, and 10,000,000 shares of preferred stock, par value $0.01 per share.

Preferred Shares Conversion

The Preferred Shares had preference in liquidation over common stock in the amount of the face value of $50.00 per share and any declared but unpaid dividends to related common shares at the applicable conversion rate. The Preferred Shares provided the holder the option at any time to convert the Preferred Shares into common stock based on the Option Conversion Rate. At December 31, 2022, the Company had 1,969,660 Preferred Shares that could be converted to 16,305,113 common shares based on a conversion price equal to $6.04 per common share.

The Preferred Shares were subject to mandatory conversion upon the closing of an IPO at the Mandatory Conversion Rate. At December 31, 2022, the Mandatory Conversion Rate allowed the holder of the Preferred Shares the right to convert into common stock based on a conversion price equal to $6.04 per common share. On January 18, 2023, the 1,969,660 Preferred Shares converted to 16,305,113 shares of common stock upon the Company’s closing of its IPO.

9.Income Taxes

The following table ~~set~~sets forth the Company’s income tax expense and effective tax rates for the three and six months ended ~~March 31,~~June 30, 2023 and 2022:


				Three months ended June 30,					Six months ended June 30,
($ in thousands	($ in thousands	2023			2022			($ in thousands	2023			2022			2023			2022
Income tax expense	Income tax expense	$	4,166		$	4,269		Income tax expense	$	5,564		$	1,292		$	9,730		$	5,561
Effective tax rate	Effective tax rate	21.1		%	20.7		%	Effective tax rate	22.2		%	20.3		%	21.7		%	20.6		%

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 and dividends-received deduction.

The Company paid federal income taxes of $4.2 million during the three and six months ended June 30, 2023.

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SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

10.Losses and Loss Adjustment Expenses

The following table sets forth the reconciliation of unpaid losses and loss adjustment expenses (“LAE”) as reported in the condensed consolidated balance sheets as of and for the ~~three~~six months ended ~~March 31,~~June 30, 2023 and 2022:


($ in thousands)	($ in thousands)	2023		2022		($ in thousands)	2023		2022
Reserves for losses and LAE, beginning of period	Reserves for losses and LAE, beginning of period	$	1,141,757	$	979,549	Reserves for losses and LAE, beginning of period	$	1,141,757	$	979,549
Less: reinsurance recoverable on unpaid claims, beginning of period	Less: reinsurance recoverable on unpaid claims, beginning of period	(435,986)		(381,338)		Less: reinsurance recoverable on unpaid claims, beginning of period	(435,986)		(381,338)
Reserves for losses and LAE, beginning of period, net of reinsurance	Reserves for losses and LAE, beginning of period, net of reinsurance	705,771		598,211		Reserves for losses and LAE, beginning of period, net of reinsurance	705,771		598,211
Incurred, net of reinsurance, related to:	Incurred, net of reinsurance, related to:					Incurred, net of reinsurance, related to:
Current period	Current period	115,142		89,989		Current period	240,010		181,790
Prior years	Prior years	—		—		Prior years	—		—
Total incurred, net of reinsurance	Total incurred, net of reinsurance	115,142		89,989		Total incurred, net of reinsurance	240,010		181,790
Paid, net of reinsurance, related to:	Paid, net of reinsurance, related to:					Paid, net of reinsurance, related to:
Current period	Current period	8,744		10,605		Current period	29,124		30,865
Prior years	Prior years	68,745		62,959		Prior years	133,757		110,318
Total paid	Total paid	77,489		73,564		Total paid	162,881		141,183
Net reserves for losses and LAE, end of period	Net reserves for losses and LAE, end of period	743,424		614,636		Net reserves for losses and LAE, end of period	782,900		638,818
Plus: reinsurance recoverable on unpaid claims, end of period	Plus: reinsurance recoverable on unpaid claims, end of period	429,752		385,146		Plus: reinsurance recoverable on unpaid claims, end of period	441,227		397,567
Reserves for losses and LAE, end of period	Reserves for losses and LAE, end of period	$	1,173,176	$	999,782	Reserves for losses and LAE, end of period	$	1,224,127	$	1,036,385

11.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 six months ended ~~March 31,~~June 30, 2023 and 2022:


				Three months ended June 30,				Six months ended June 30,
($ in thousands)	($ in thousands)	2023			2022		($ in thousands)	2023		2022		2023		2022
SUA commission revenue	SUA commission revenue	$	857		$	624	SUA commission revenue	$	1,385	$	1,361	$	2,242	$	1,503
SUA fee income	SUA fee income	456			(159)		SUA fee income	805		664		1,261		505
Other	Other	179			(235)		Other	50		35		229		282
Total commission and fee income	Total commission and fee income	$	1,492		$	230	Total commission and fee income	$	2,240	$	2,060	$	3,732	$	2,290

The Company’s contract assets from commission and fee income as of ~~March 31,~~June 30, 2023 and December 31, 2022 were ~~$1.3~~$1.7 million and $1.3 million, respectively. Contract assets were ~~$0.8~~$1.5 million and $1.2 million as of ~~March 31,~~June 30, 2022 and December 31, 2021, respectively.

~~12.Underwriting, Acquisition and Insurance Expenses~~

~~The following table sets forth the components of underwriting, acquisition and insurance expenses for the three months ended March 31, 2023 and 2022:~~

($ in thousands) 2023 2022
Amortization of policy acquisition costs $ 21,235 $ 13,421
Other operating and general expenses 30,420 27,113
Total underwriting, acquisition and insurance expenses $ 51,655 $ 40,534

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SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

12.Underwriting, Acquisition and Insurance Expenses

The following table sets forth the components of underwriting, acquisition and insurance expenses for the three and six months ended June 30, 2023 and 2022:


	Three months ended June 30,				Six months ended June 30,
($ in thousands)	2023		2022		2023		2022
Amortization of policy acquisition costs	$	23,136	$	14,714	$	44,371	$	28,135
Other operating and general expenses	33,547		29,669		63,967		56,783
Total underwriting, acquisition and insurance expenses	$	56,683	$	44,383	$	108,338	$	84,918

13.Reinsurance

Certain premiums and benefits are assumed from and ceded to other insurance companies under various reinsurance agreements. The reinsurance agreements provide the Company with increased capacity to write larger risks and maintain its exposure to loss within its capital resources. The Company remains obligated for amounts ceded in the event that the reinsurers do not meet their obligations.

The following table sets forth the effects of reinsurance on ~~premiums~~ written and earned premiums and losses and loss adjustment expenses for the three and six months ended ~~March 31,~~June 30, 2023 and 2022:


	Three months ended June 30,
	2023				2022
($ in thousands)	Written		Earned		Written		Earned
Direct premiums	$	332,062	$	283,762	$	276,694	$	230,203
Assumed premiums	89,932		48,213		49,533		25,933
Ceded premiums	(208,257)		(137,628)		(137,496)		(110,060)
Net premiums	$	213,737	$	194,347	$	188,731	$	146,076
Ceded losses and LAE incurred			$	99,981			$	68,060


						Six months ended June 30,
		2023					2022					2023				2022
($ in thousands)	($ in thousands)	Written		Earned			Written		Earned		($ in thousands)	Written		Earned		Written		Earned
Direct premiums	Direct premiums	$	308,213	$	262,658		$	248,635	$	222,637	Direct premiums	$	640,275	$	546,419	$	525,329	$	452,840
Assumed premiums	Assumed premiums	52,285		39,131			34,007		26,595		Assumed premiums	142,217		87,345		83,540		52,529
Ceded premiums	Ceded premiums	(158,357)		(118,958)			(147,241)		(107,506)		Ceded premiums	(366,614)		(256,586)		(284,737)		(217,566)
Net premiums	Net premiums	$	202,141	$	182,831		$	135,401	$	141,726	Net premiums	$	415,878	$	377,178	$	324,132	$	287,803
Ceded losses and LAE incurred	Ceded losses and LAE incurred			$	64,794				$	61,527	Ceded losses and LAE incurred			$	164,775			$	129,587

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SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table sets forth the components of reinsurance recoverables and ceded unearned premium as of ~~March 31,~~June 30, 2023 and December 31, 2022:


($ in thousands)	($ in thousands)	March 31, 2023		December 31, 2022		($ in thousands)	June 30, 2023		December 31, 2022
Unpaid losses and loss adjustment expenses ceded		$	429,752	$	435,986
Paid losses and loss adjustment expense ceded		107,463		107,228
Ceded unpaid losses and LAE						Ceded unpaid losses and LAE	$	441,227	$	435,986
Ceded paid losses and LAE						Ceded paid losses and LAE	115,672		107,228
Loss portfolio transfer	Loss portfolio transfer	35,584		38,145		Loss portfolio transfer	28,318		38,145
Allowance for credit losses	Allowance for credit losses	(2,295)		—		Allowance for credit losses	(2,295)		—
Reinsurance recoverables	Reinsurance recoverables	$	570,504	$	581,359	Reinsurance recoverables	$	582,922	$	581,359
Ceded unearned premium	Ceded unearned premium	$	197,044	$	157,645	Ceded unearned premium	$	267,672	$	157,645

The Company entered into agreements with several of its reinsurers, whereby the reinsurer established funded trust accounts with the Company as the sole beneficiary. These trust accounts provide the Company additional security to collect claim recoverables under reinsurance contracts and the Company does not carry these on the balance sheet because the Company will only have custody over these accounts upon the failure of the reinsurer to pay amounts due. At ~~March 31,~~June 30, 2023, the market value of these accounts was approximately ~~$127.1~~$134.2 million. The agreements provide that, as was customary in the past, the reinsurer will continue claim payment reimbursements without disturbing the trust balances. The trust amount will be adjusted periodically, by mutual agreement, based on loss reserve recoverables.

Certain ceded reinsurance contracts that transfer only significant timing risk and do not transfer sufficient underwriting risk are accounted for using the deposit method of accounting. The Company’s deposit asset at ~~March 31,~~June 30, 2023 and December 31, 2022 was ~~$36.8~~$34.3 million and $41.8 million, respectively, and was included in other assets on the condensed consolidated balance sheets.

14.Stock Based Compensation

On September 23, 2022, the Compensation Committee of the Company’s Board of Directors (“Compensation Committee”) approved the Company’s 2022 Long-Term Incentive Plan (the “2022 Plan”), which became effective on January 12, 2023. The 2022 Plan provides for the granting of restricted stock, restricted stock units, performance stock units, stock options as well as cash-based performance awards, to select employees and non-employee directors of the Company. The 2022 Plan stated that 3,200,516 shares of common stock were available for issuance.

~~Table~~On September 23, 2022, the Compensation Committee approved the Company’s 2022 Employee Stock Purchase Plan (the “ESPP”), which became effective on May 15, 2023. Under the ESPP, employees are granted options to purchase shares at the lower of ~~Contents~~

~~SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~14.Stock Based Compensation(continued)~~

85% of the fair market value at the time of grant or 85% of the fair market value at the time of exercise through payroll withholding. Options to purchase shares are granted twice yearly or on or about June 1 and December 1, and are exercisable on or about the succeeding November 30 and May 31, respectively. The ESPP stated that 376,531 shares of common stock were available for issuance.

In December 2020, the Compensation Committee approved a Long Term Incentive Plan (the “2021 Plan”). The 2021 Plan provides for the granting of restricted stock, restricted stock units and performance stock units (collectively “restricted stock units” or “stock units”), as well as cash-based performance awards, to select employees and non-employee directors of the Company.

The Compensation Committee granted ~~1,073,494~~1,092,554 and ~~191,691~~192,411 restricted stock and restricted stock units during the ~~three~~six months ended ~~March 31,~~June 30, 2023 and 2022, under the 2022 Plan and 2021 Plans, respectively. Members of the Board of Directors were granted ~~3,332~~19,284 and 15,196 restricted stock during the ~~three~~six months ended ~~March 31,~~June 30, 2023 and 2022, respectively, with a service period of 1 year. The fair value of restricted stock and restricted stock units under the 2022 Plan for awards granted at the time of the Company’s IPO were granted at the IPO price of $15.00 per share. The fair value of subsequent grants were equal to the closing stock price on the date the restricted stock units were granted.

The Compensation Committee granted 759,990 stock options during the ~~three~~six months ended ~~March 31,~~June 30, 2023. The grant date fair value of the options under the 2022 Plan was determined using the Black-Scholes model where the term was the contractual term of 10 years less the weighted average service period. The volatility was determined based on the historical volatility of comparable publicly traded insurance companies.

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SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The grant date fair value of options under the ESPP was determined using the Black-Scholes model where the term was the length of time between the grant date and the date the options are exercisable of 6 months. The volatility was determined based on the historical volatility of comparable publicly traded insurance companies.

The restricted stock and restricted stock units granted to employees and the Board of Directors during the ~~three~~six months ended ~~March 31,~~June 30, 2023 and 2022 were valued at approximately ~~$17.0~~$17.5 million and $2.5 million, respectively, based on the grant date fair value. The stock options granted to employees during the ~~three~~six months ended ~~March 31,~~June 30, 2023 were valued at approximately $4.4 million based on the grant date fair value.

The following table sets forth the Company’s equity awards, target payout ranges and authorized target restricted stock and stock units for the ~~three~~six months ended ~~March 31,~~June 30, 2023 and 2022:

Award
Payout Range

Requisite
Service Period

Target
Stock and Stock Units

~~Three~~Six months ended ~~March 31,~~June 30, 2023

Market condition awards

0%–150%

3 years

37,622

Performance condition awards

0%–150%

3 years

~~91,350~~92,904

Service condition awards

N/A

1–4 years

~~944,522~~962,028

Stock options

N/A

3–4 years

759,990

~~1,833,484~~1,852,544

~~Three~~Six months ended ~~March 31,~~June 30, 2022

Market condition awards

0%–150%

3 years

28,495

Performance condition awards

0%–150%

3 years

~~26,214~~26,210

Service condition awards

N/A

1–3 years

~~136,982~~137,706

~~191,691~~192,411

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~~SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~14.Stock Based Compensation(continued)~~

The following table sets forth option activity for the ~~three~~six months ended ~~March 31,~~June 30, 2023:


		Weighted-Average Exercise Price		Stock		Weighted-Average Exercise Price		Stock
Outstanding at January 1, 2023	Outstanding at January 1, 2023			—	Outstanding at January 1, 2023			—
Granted	Granted	$	15.00	759,990	Granted	$	15.00	759,990
Exercised	Exercised			—	Exercised			—
Forfeited	Forfeited			—	Forfeited			—
Outstanding at March 31, 2023		$	15.00	759,990
Outstanding at June 30, 2023					Outstanding at June 30, 2023			759,990

The intrinsic value of each option is determined based on the difference between the fair value of the underlying share and the exercise price of the underlying option. The aggregate intrinsic value of options outstanding at ~~March 31,~~June 30, 2023 was ~~$5.2~~$7.9 million. The weighted-average remaining contractual life of the options outstanding at ~~March 31,~~June 30, 2023 was ~~9.8~~9.5 years.

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SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table sets forth the Company’s restricted stock and restricted stock units activity for the ~~three~~six months ended ~~March 31,~~June 30, 2023 and 2022:


		Weighted-Average Grant-Date Fair Value		Stock and Stock Units		Weighted-Average Grant-Date Fair Value		Stock and Stock Units
Non-vested at January 1, 2023	Non-vested at January 1, 2023	$	12.55	419,896	Non-vested at January 1, 2023	$	12.55	419,896
Granted	Granted	15.85		1,073,494	Granted	16.00		1,092,554
Vested	Vested	12.91		(32,496)	Vested	12.91		(32,496)
Forfeited	Forfeited	15.10		(7,459)	Forfeited	15.07		(25,176)
Non-vested at March 31, 2023		$	14.97	1,453,435
Non-vested at June 30, 2023					Non-vested at June 30, 2023	$	15.08	1,454,778

Non-vested at January 1, 2022	Non-vested at January 1, 2022	$	13.23	375,643	Non-vested at January 1, 2022	$	13.23	375,643
Granted	Granted	13.16		191,691	Granted	13.16		192,411
Vested	Vested	12.47		(55,851)	Vested	15.87		(113,625)
Forfeited	Forfeited	$	—	—	Forfeited	12.69		(1,950)
Non-vested at March 31, 2022		$	13.28	511,483
Non-vested at June 30, 2022					Non-vested at June 30, 2022	$	12.54	452,479

The total fair value of shares vested at ~~March 31,~~June 30, 2023 and 2022 were ~~$0.7~~$0.8 million and ~~$0.7~~$1.8 million, respectively.

As of ~~March 31,~~June 30, 2023 the total unrecognized compensation cost related to non-vested, share-based compensation awards was ~~$22.2~~$20.3 million and the weighted average period over which that cost is expected to be recognized is ~~2.1~~1.9 years. For the three and six months ended ~~March 31,~~June 30, 2023, the Company recognized $2.0 million and $3.9 million of stock based compensation expense, respectively. For the three and six months ended June 30, 2022, the Company recognized ~~$1.9~~$0.7 million and ~~$0.5~~$1.2 million, ~~respectively,~~ of stock based compensation ~~expense.~~expense, respectively.

2728

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

15.Earnings Per Share

The following table sets forth a reconciliation of the numerator and denominator of basic and diluted earnings per share computations contained in the period-ended consolidated financial statements for the three and six months ended ~~March 31,~~June 30, 2023 and 2022:


				Three months ended June 30,				Six months ended June 30,
($ in thousands, except for share and per share amounts)	($ in thousands, except for share and per share amounts)	2023			2022		($ in thousands, except for share and per share amounts)	2023		2022		2023		2022
Numerator	Numerator						Numerator
Net income	Net income	$	15,556		$	16,311	Net income	$	19,452	$	5,065	$	35,008	$	21,376
Less: Undistributed income allocated to participating securities	Less: Undistributed income allocated to participating securities	(1,274)			(7,823)		Less: Undistributed income allocated to participating securities	—		(2,437)		(1,402)		(10,283)
Net income attributable to common shareholders (numerator for basic earnings per share)		14,282			8,488
Net income attributable to common stockholders (numerator for basic earnings per share)							Net income attributable to common stockholders (numerator for basic earnings per share)	19,452		2,628		33,606		11,093
Add back: Undistributed income allocated to participating securities	Add back: Undistributed income allocated to participating securities	1,274			7,823		Add back: Undistributed income allocated to participating securities	—		2,437		1,402		10,283
Net income (numerator for diluted earnings per share under the two-class method)	Net income (numerator for diluted earnings per share under the two-class method)	$	15,556		$	16,311	Net income (numerator for diluted earnings per share under the two-class method)	$	19,452	$	5,065	$	35,008	$	21,376
Denominator	Denominator						Denominator
Basic weighted-average common shares	Basic weighted-average common shares	32,848,243			16,376,720		Basic weighted-average common shares	36,603,779		16,449,810		34,746,874		16,449,810

Preferred shares (if converted method)	Preferred shares (if converted method)	2,931,256			15,092,585		Preferred shares (if converted method)	—		15,249,373		1,449,343		15,249,373
Contingently issuable instruments (treasury stock method)	Contingently issuable instruments (treasury stock method)	708,746			714,185		Contingently issuable instruments (treasury stock method)	763,590		524,165		740,396		527,525
Market condition awards (contingently issuable)	Market condition awards (contingently issuable)	87,750			40,460		Market condition awards (contingently issuable)	85,979		112,454		73,033		99,393
Performance awards (contingently issuable)	Performance awards (contingently issuable)	38,441			32,362		Performance awards (contingently issuable)	73,087		58,184		41,348		49,375
Restricted stock units (treasury stock method)	Restricted stock units (treasury stock method)	318,421			155,995		Restricted stock units (treasury stock method)	525,999		266,330		397,950		224,771
Options (treasury stock method)	Options (treasury stock method)	19,216			—		Options (treasury stock method)	91,151		—		54,970		—
Diluted weighted-average common share equivalents	Diluted weighted-average common share equivalents	36,952,073			32,412,307		Diluted weighted-average common share equivalents	38,143,585		32,660,316		37,503,914		32,600,247
Basic earnings per share	Basic earnings per share	$	0.43		$	0.52	Basic earnings per share	$	0.53	$	0.16	$	0.97	$	0.67
Diluted earnings per share	Diluted earnings per share	$	0.42		$	0.50	Diluted earnings per share	$	0.51	$	0.16	$	0.93	$	0.66

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.

Anti-dilutive instruments are excluded from the calculation of diluted weighted-average common share equivalents as they would have an anti-dilutive impact. The following table sets forth the weighted-average instruments that were ~~excluded from the calculation of diluted weighted-average common share equivalents during the three months ended March 31, 2023 and 2022.~~

2023 2022
Contingently issuable instruments (treasury stock method) 345,764 —
Market condition awards (contingently issuable) 13,795 —
Performance awards (contingently issuable) 40,080 —
Restricted stock units (treasury stock method) 390,076 —
Options (treasury stock method) 333,551 —

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SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~15.Earnings Per Share(continued)~~excluded from the calculation of diluted weighted-average common share equivalents during the three and six months ended June 30, 2023 and 2022:


	Three months ended June 30,		Six months ended June 30,
	2023	2022	2023	2022

Contingently issuable instruments (treasury stock method)	—	58	—	—
Market condition awards (contingently issuable)	—	—	25,774	—
Performance awards (contingently issuable)	1,014	—	68,585	—
Restricted stock units (treasury stock method)	922	—	237,125	—
Options (treasury stock method)	315	—	357,059	—

The Company’s common and preferred shares financed by stock notes are contingently issuable instruments where the holder must return, all or part of, the shares if the stock notes are not paid off. The following table sets forth common share equivalents of contingently issuable instruments (in shares) that were excluded from basic earnings per share for the three and six months ended ~~March 31,~~June 30, 2023 and 2022:


			Three months ended June 30,			Six months ended June 30,
		2023		2022		2023	2022	2023	2022
Common shares	Common shares	1,054,510		183,604	Common shares	1,054,510	83,811	1,054,510	83,811
Preferred shares, if converted	Preferred shares, if converted	—		1,216,389	Preferred shares, if converted	—	1,059,601	—	1,059,601
Total	Total	1,054,510		1,399,993	Total	1,054,510	1,143,412	1,054,510	1,143,412

The impact of the contingently issuable instruments on diluted earnings per share was calculated using the treasury stock method and included in the reconciliation of the denominator of the basic and diluted earnings per share computations for the three and six months ended ~~March 31,~~June 30, 2023 and 2022.

16.Related Party Transactions

Westaim

As of ~~March 31,~~June 30, 2023 and December 31, 2022, Westaim and Westaim HIIG LP owned ~~39.0%~~28.4% and 44.5%, respectively, of the Company’s common stock. The changes in ownership percentage were primarily due to the IPO, ~~and~~ conversion of preferred stock to common ~~stock.~~stock, and secondary offering.

The Company’s investment in Westaim iswas included in equity securities on the consolidated balance sheets. The unrealized loss on this investment as of ~~March 31,~~June 30, 2023 and December 31, 2022 were ~~$1.5~~$1.1 million and $2.3 million, respectively.

Prior to the closing of the IPO, Westaim performed consulting and certain other services for the Company pursuant to a Management Services Agreement. This agreement terminated pursuant to its terms upon the closing of the IPO.

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 six months ended ~~March 31,~~June 30, 2023 and 2022 were as follows:


				Three months ended June 30,				Six months ended June 30,
($ in thousands)	($ in thousands)	2023			2022		($ in thousands)	2023		2022		2023		2022
Net earned premium	Net earned premium	$	22,185		$	21,018	Net earned premium	$	19,916	$	22,508	$	42,101	$	43,526
Commissions	Commissions	6,853			7,348		Commissions	6,149		5,759		13,002		13,107

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SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Premiums receivable as of ~~March 31,~~June 30, 2023 and December 31, 2022 were ~~$17.6~~$17.0 million and $9.9 million, respectively.

Reinsurance

The Company has reinsurance agreements with Everest Re, an affiliate of Mt. Whitney Securities, LLC, which was a limited partner of Westaim HIIG LP through November 30, 2022, and holder of preferred shares. During the three and six months ended ~~March 31,~~June 30, 2023, Mt. Whitney Securities divested their entire ownership of the Company’s equity securities. Reinsurance premiums ceded during the three and six months ended ~~March 31,~~June 30, 2022 related to the agreement were ~~$19.6 million.~~$22.6 million and $42.2 million, respectively. Reinsurance recoverable from Everest Re, net of premium payables at December 31, 2022 were $177.5 million.

Other

Advisory and professional services fees and expense reimbursements paid to various affiliated ~~shareholders~~stockholders and directors for the three and six months ended ~~March 31,~~June 30, 2023 ~~and 2022~~ were ~~$2.1~~$0.5 million and ~~$0.7~~$2.6 million, ~~respectively.~~respectively, compared to $1.5 million and $2.2 million, respectively, for the three and six months ended June 30, 2022.

See Note 4 and 5 for investments involving affiliated companies and additional related party transactions.

~~Table of Contents~~

~~SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

17.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’s management~~Company believes the resolution of any such matters will not, individually or in the aggregate, have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Indemnification

In conjunction with the sale of business assets and subsidiaries, the Company has provided indemnifications to certain of the buyers. Certain indemnifications cover typical representations and warranties related to the responsibilities to perform under the sales contracts. The amount of potential exposure covered by the indemnifications is difficult to determine because the indemnifications cover a variety of matters, operations and scenarios. Certain of these indemnifications have no time limit. At this time, the Company does not have reason to believe any such significant claims exist.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The term “Skyward Specialty” as used below refers only to Skyward Specialty Insurance Group, Inc. and the terms “our Company,” “we,” “us,” and “our” as used below refer to Skyward Specialty Insurance Group and its consolidated subsidiaries. The term ~~“first~~“second quarter” as used below refers to the three and six months ended ~~March 31~~June 30 for the time period then ended. Select insurance and accounting terms for Skyward Specialty are defined in the section entitled “Select Insurance and Financial Terms” included in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”).

The discussion and analysis below include certain forward-looking statements that are subject to risks, uncertainties and other factors described in "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2022. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors.

The results of operations for the three and six months ended ~~March 31,~~June 30, 2023 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2023, or for any other future period. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report, and in conjunction with our audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022.

The accompanying condensed consolidated financial statements and related notes have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”).

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Overview

Founded in 2006, Skyward Specialty is a specialty insurance holding company incorporated in Delaware. We have one reportable segment through which we offer a broad array of commercial property and casualty products and solutions on a non-admitted (or E&S) and admitted basis, predominantly in the United States. We focus our business on markets that are underserved, dislocated and/or for which standard insurance coverages are insufficient or inadequate to meet the needs of businesses, including our customers and prospective customers operating in these markets. Our customers typically require highly specialized, customized underwriting solutions and claims capabilities. As such, we develop and deliver tailored insurance products and services to address each of the niche markets we serve.

Each of our eight distinct underwriting divisions has dedicated underwriting leadership supported by high-quality technical staff with deep experience in their respective niches. We believe this structure and expertise allows us to serve the needs of our customers effectively and be a value-add partner to our distributors, while earning attractive risk-adjusted returns.

All of our insurance company subsidiaries are group rated and have financial strength ratings of “A-” (Excellent) from the A.M. Best Company.

Key Operating and Financial Metrics

We discuss certain key metrics, described below, which provide useful information about our business and the operational factors underlying our financial performance. These metrics are generally standard among insurance companies and help to provide comparability with our peers.

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

Underwriting income (loss) is a non-GAAP financial measure defined as income (loss) before income taxes excluding net investment income, net realized and unrealized gains and losses on investments, impairment charges, interest expense, amortization expense and other income and expenses. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of underwriting income (loss) to net income, which is the most directly comparable financial metric prepared in accordance with GAAP.

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

Expense ratio, expressed as a percentage, is the ratio of underwriting, acquisition and insurance expenses less commission and fee income to net earned premiums. In certain instances, fee income relates to business placed with other insurers as part of our packaged solution.

Combined ratio is the sum of loss ratio and expense ratio. A combined ratio under 100% indicates an underwriting profit. A combined ratio over 100% indicates an underwriting loss.

Adjusted loss and LAE ratio, expressed as a percentage, is a non-GAAP financial measure defined as the ratio of losses and LAE, excluding losses and LAE related to the loss portfolio transfer (“LPT”) and all development on reserves fully or partially covered by the LPT, to net earned premiums. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of adjusted loss ratio to loss ratio, which is the most directly comparable financial metric prepared in accordance with GAAP.

Adjusted combined ratio is a non-GAAP financial measure defined as the sum of the adjusted loss ratio and the expense ratio. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of adjusted combined ratio to combined ratio, which is the most directly comparable financial metric prepared in accordance with GAAP.

Adjusted operating income (loss) is a non-GAAP financial measure defined as net income excluding the net impact of the LPT, net realized and unrealized gains or losses on investments, goodwill impairment charges and other income and expenses. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of adjusted operating income (loss) to net income (loss), which is the most directly comparable financial metric prepared in accordance with GAAP.

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

Adjusted return on equity is a non-GAAP financial measure defined as annualized adjusted operating income as a percentage of average beginning and ending stockholders’ equity during the applicable period. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of adjusted return on equity to return on equity, which is the most directly comparable financial metric prepared in accordance with GAAP.

Tangible stockholders’ equity is a non-GAAP financial measure defined as stockholders’ equity less goodwill and intangible assets. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of tangible stockholders’ equity to stockholders’ equity, which is the most directly comparable financial metric prepared in accordance with GAAP.

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Return on tangible equity is a non-GAAP financial measure defined as annualized net income as a percentage of average beginning and ending tangible stockholders’ equity during the applicable period. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of return on tangible equity to return on equity, which is the most comparable financial metric prepared in accordance with GAAP.

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

Results of Operations

The following table summarizes our results for the three and six months ended ~~March 31,~~June 30, 2023 and 2022:


										Three months ended June 30,						Six months ended June 30,
($ in thousands)	($ in thousands)	2023			2022				($ in thousands)	2023			2022			2023			2022
Gross written premiums	Gross written premiums	$	360,498		$	282,642			Gross written premiums	$	421,994		$	326,227		$	782,492		$	608,869
Ceded written premiums	Ceded written premiums	(158,357)			(147,241)				Ceded written premiums	(208,257)			(137,496)			(366,614)			(284,737)
Net written premiums	Net written premiums	202,141			135,401				Net written premiums	$	213,737		$	188,731		$	415,878		$	324,132
Net earned premiums	Net earned premiums	182,831			141,726				Net earned premiums	$	194,347		$	146,076		$	377,178		$	287,803
Commission and fee income	Commission and fee income	1,492			230				Commission and fee income	2,240			2,060			3,732			2,290
Losses and LAE	Losses and LAE	114,900			89,989				Losses and LAE	124,405			91,801			239,305			181,790
Underwriting, acquisition and insurance expenses	Underwriting, acquisition and insurance expenses	51,655			40,534				Underwriting, acquisition and insurance expenses	56,683			44,383			108,338			84,918
Underwriting income(1)	Underwriting income(1)	$	17,768		$	11,433			Underwriting income(1)	$	15,499		$	11,952		$	33,267		$	23,385

Net investment income	Net investment income	$	4,646		$	15,149			Net investment income	$	8,583		$	10,530		$	13,229		$	25,679
Net investment gains (losses)	Net investment gains (losses)	$	961		$	(4,438)			Net investment gains (losses)	$	5,351		$	(14,374)		$	6,312		$	(18,812)
Income before federal income tax		$	19,722		$	20,580
Income before income taxes									Income before income taxes	$	25,016		$	6,357		$	44,738		$	26,937
Net income	Net income	$	15,556		$	16,311			Net income	$	19,452		$	5,065		$	35,008		$	21,376
Adjusted operating income(1)	Adjusted operating income(1)	$	15,486		$	19,817			Adjusted operating income(1)	$	16,017		$	16,420		$	31,503		$	36,237

Loss and LAE ratio	Loss and LAE ratio	62.8		%	63.5		%		Loss and LAE ratio	64.0		%	62.8		%	63.4		%	63.2		%
Expense ratio	Expense ratio	27.4		%	28.4		%		Expense ratio	28.0		%	29.0		%	27.7		%	28.7		%
Combined ratio	Combined ratio	90.2		%	91.9		%		Combined ratio	92.0		%	91.8		%	91.1		%	91.9		%

Adjusted loss and LAE ratio(1)	Adjusted loss and LAE ratio(1)	62.9		%	63.5		%		Adjusted loss and LAE ratio(1)	64.2		%	62.8		%	63.6		%	63.2		%
Expense ratio	Expense ratio	27.4		%	28.4		%		Expense ratio	28.0		%	29.0		%	27.7		%	28.7		%
Adjusted combined ratio(1)	Adjusted combined ratio(1)	90.3		%	91.9		%		Adjusted combined ratio(1)	92.2		%	91.8		%	91.3		%	91.9		%

Annualized return on equity	Annualized return on equity	13.4		%	15.3		%		Annualized return on equity	15.1		%	4.8		%	14.8		%	10.1		%
Annualized return on tangible equity(1)	Annualized return on tangible equity(1)	16.6		%	19.4		%		Annualized return on tangible equity(1)	18.3		%	6.1		%	18.3		%	12.9		%
Annualized adjusted return on equity(1)	Annualized adjusted return on equity(1)	13.3		%	18.5		%		Annualized adjusted return on equity(1)	12.4		%	15.5		%	13.3		%	17.1		%
Annualized adjusted return on tangible equity(1)	Annualized adjusted return on tangible equity(1)	16.5		%	23.6		%		Annualized adjusted return on tangible equity(1)	15.1		%	19.7		%	16.5		%	21.8		%

(1) See “Reconciliation of Non-GAAP Financial Measures” in this Item 2	(1) See “Reconciliation of Non-GAAP Financial Measures” in this Item 2							(1) See “Reconciliation of Non-GAAP Financial Measures” in this Item 2

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Reconciliation of Non-GAAP Financial Measures

Adjusted Operating Income (Loss)

The following table provides a reconciliation of adjusted operating income to net income for the three and six months ended ~~March 31,~~June 30, 2023 and 2022:

($ in thousands) 2023 2022
Pre-tax After-tax Pre-tax After-tax
Income as reported $ 19,722 $ 15,556 $ 20,580 $ 16,311
Add:
Other expenses 1,114 880 — —
Less:
Net impact of loss portfolio transfer 242 191 — —
Net investment gains (losses) 961 759 (4,438) (3,506)
Adjusted operating income $ 19,633 $ 15,486 $ 25,018 $ 19,817

~~Table of Contents~~


	Three months ended June 30,								Six months ended June 30,
	2023				2022				2023				2022
($ in thousands)	Pre-tax		After-tax		Pre-tax		After-tax		Pre-tax		After-tax		Pre-tax		After-tax
Income as reported	$	25,016	$	19,452	$	6,357	$	5,065	$	44,738	$	35,008	$	26,937	$	21,376
Add:
Other expenses	1,465		1,157		—		—		2,579		2,037		—		—
Less:
Net impact of loss portfolio transfer	462		365		—		—		704		556		—		—
Net investment gains (losses)	5,351		4,227		(14,374)		(11,355)		6,312		4,986		(18,812)		(14,861)
Adjusted operating income	$	20,668	$	16,017	$	20,731	16,420		$	40,301	$	31,503	$	45,749	$	36,237

Underwriting ~~income (loss)~~Income (Loss)

The following table provides a reconciliation of underwriting income (loss) to income (loss) before federal income tax for the three and six months ended ~~March 31,~~June 30, 2023 and 2022:


							Three months ended June 30,				Six months ended June 30,
($ in thousands)	($ in thousands)	2023		2022		($ in thousands)	2023		2022		2023		2022
Income before federal income tax		$	19,722	$	20,580
Income before income taxes						Income before income taxes	$	25,016	$	6,357	$	44,738	$	26,937
Add:	Add:					Add:
Interest expense	Interest expense	2,152		1,177		Interest expense	2,466		1,365		4,618		2,542
Amortization expense	Amortization expense	387		387		Amortization expense	486		386		873		773
Other expenses	Other expenses	1,114		—		Other expenses	1,465		—		2,579		—
Less:	Less:					Less:
Net investment income	Net investment income	4,646		15,149		Net investment income	8,583		10,530		13,229		25,679
Net investment gains (losses)	Net investment gains (losses)	961		(4,438)		Net investment gains (losses)	5,351		(14,374)		6,312		(18,812)
Underwriting income	Underwriting income	$	17,768	$	11,433	Underwriting income	$	15,499	$	11,952	$	33,267	$	23,385

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Adjusted Loss Ratio / Adjusted Combined Ratio

The following table provides a reconciliation of the adjusted loss and LAE ratio and adjusted combined ratio to the loss and LAE ratio and combined ratio for the three and six months ended ~~March 31,~~June 30, 2023 and 2022:


									Three months ended June 30,						Six months ended June 30,
($ in thousands)	($ in thousands)	2023			2022			($ in thousands)	2023			2022			2023			2022
Net earned premiums	Net earned premiums	$	182,831		$	141,726		Net earned premiums	$	194,347		$	146,076		$	377,178		$	287,803

Losses and LAE	Losses and LAE	114,900			89,989			Losses and LAE	124,405			91,801			239,305			181,790
Less: Pre-tax net impact of loss portfolio transfer	Less: Pre-tax net impact of loss portfolio transfer	242			—			Less: Pre-tax net impact of loss portfolio transfer	462			—			704			—
Adjusted losses and LAE	Adjusted losses and LAE	$	115,142		$	89,989		Adjusted losses and LAE	$	124,867		$	91,801		$	240,009		$	181,790

Loss ratio	Loss ratio	62.8		%	63.5		%	Loss ratio	64.0		%	62.8%			63.4		%	63.2		%
Less: Net impact of LPT	Less: Net impact of LPT	(0.1)		%	0.0%			Less: Net impact of LPT	(0.2)		%	—%			(0.2)		%	—%
Adjusted Loss Ratio	Adjusted Loss Ratio	62.9		%	63.5		%	Adjusted Loss Ratio	64.2		%	62.8		%	63.6		%	63.2		%

Combined ratio	Combined ratio	90.2		%	91.9		%	Combined ratio	92.0		%	91.8		%	91.1		%	91.9		%
Less: Net impact of LPT	Less: Net impact of LPT	(0.1)		%	0.0%			Less: Net impact of LPT	(0.2)		%	—%			(0.2)		%	—%
Adjusted Combined Ratio	Adjusted Combined Ratio	90.3		%	91.9		%	Adjusted Combined Ratio	92.2		%	91.8		%	91.3		%	91.9		%

Tangible Stockholders’ Equity

The following table provides a reconciliation of tangible stockholders’ equity to stockholders’ equity for the periods ended ~~March 31,~~June 30, 2023 and 2022:


($ in thousands)	($ in thousands)	2023		2022		($ in thousands)	2023		2022
Stockholders' equity	Stockholders' equity	$	507,146	$	428,619	Stockholders' equity	$	522,678	$	419,607

Less: Goodwill and intangible assets	Less: Goodwill and intangible assets	89,503		90,970		Less: Goodwill and intangible assets	89,181		90,603
Tangible stockholders' equity	Tangible stockholders' equity	$	417,643	$	337,649	Tangible stockholders' equity	$	433,497	$	329,004

Adjusted Return on Equity

The following table provides a reconciliation of annualized adjusted return on equity to annualized return on equity for the ~~periods~~three and six months ended ~~March 31,~~June 30, 2023 and 2022:


									Three months ended June 30,						Six months ended June 30,
($ in thousands)	($ in thousands)	2023			2022			($ in thousands)	2023			2022			2023			2022
Numerator: adjusted operating income		$	15,486		$	19,817
Numerator: annualized adjusted operating income								Numerator: annualized adjusted operating income	$	64,068		$	65,682		$	63,006		$	72,475
Denominator: average stockholders’ equity	Denominator: average stockholders’ equity	$	467,883		$	427,350		Denominator: average stockholders’ equity	$	514,912		$	424,113		$	471,143		$	422,844
Adjusted return on equity		13.3		%	18.5		%
Annualized adjusted return on equity								Annualized adjusted return on equity	12.4		%	15.5		%	13.3		%	17.1		%

Return on Tangible Equity

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


	Three months ended June 30,						Six months ended June 30,
($ in thousands)	2023			2022			2023			2022
Numerator: annualized net income	$	77,808		$	20,260		$	70,016		$	42,752
Denominator: average tangible stockholders’ equity	$	425,570		$	333,327		$	381,251		$	331,874
Annualized return on tangible equity	18.3		%	6.1		%	18.3		%	12.9		%

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~~Return on Tangible Equity~~

~~Return on tangible equity for the periods ended March 31, 2023 and 2022 reconciles to return on equity as follows:~~

($ in thousands) 2023 2022
Numerator: net income $ 15,556 $ 16,311
Denominator: average tangible stockholders’ equity $ 377,646 $ 336,197
Return on tangible equity 16.6 % 19.4 %

Adjusted Return on Tangible Equity

~~Adjusted~~Annualized adjusted return on tangible equity for the ~~periods~~three and six months ended ~~March 31,~~June 30, 2023 and 2022 reconciles to annualized return on equity as follows:


									Three months ended June 30,						Six months ended June 30,
($ in thousands)	($ in thousands)	2023			2022			($ in thousands)	2023			2022			2023			2022
Numerator: adjusted operating income		$	15,486		$	19,817
Numerator: annualized adjusted operating income								Numerator: annualized adjusted operating income	$	64,068		$	65,682		$	63,006		$	72,475
Denominator: average tangible stockholders’ equity	Denominator: average tangible stockholders’ equity	$	377,646		$	336,197		Denominator: average tangible stockholders’ equity	$	425,570		$	333,327		$	381,251		$	331,874
Adjusted return on tangible equity		16.5		%	23.6		%
Annualized adjusted return on tangible equity								Annualized adjusted return on tangible equity	15.1		%	19.7		%	16.5		%	21.8		%
									15.1		%

Underwriting Results

Premiums

The following table presents gross written premiums by underwriting division for the three months ended ~~March 31,~~June 30, 2023 and 2022:


($ in thousands)	($ in thousands)	2023		2022		Change		% Change		($ in thousands)	2023		2022		Change		% Change
Global Property & Agriculture	Global Property & Agriculture	$	74,340	$	53,192	$	21,148	39.8	%	Global Property & Agriculture	$	124,080	$	83,565	$	40,515	48.5	%
Industry Solutions	Industry Solutions	67,633		63,530		4,103		6.5	%	Industry Solutions	79,249		73,841		5,408		7.3	%
Programs	Programs	48,699		47,510		1,189		2.5	%	Programs	52,598		47,003		5,595		11.9	%
Captives	Captives	46,080		38,045		8,035		21.1	%	Captives	39,283		32,121		7,162		22.3	%
Accident & Health	Accident & Health	36,013		32,583		3,430		10.5	%	Accident & Health	37,252		31,156		6,096		19.6	%
Professional Lines	Professional Lines	33,172		16,867		16,305		96.7	%	Professional Lines	32,989		18,045		14,944		82.8	%
Transactional E&S	Transactional E&S	29,617		11,870		17,747		149.5	%	Transactional E&S	30,632		19,464		11,168		57.4	%
Surety	Surety	24,701		16,252		8,449		52.0	%	Surety	26,221		19,276		6,945		36.0	%
Total continuing business	Total continuing business	$	360,255	$	279,849	$	80,406	28.7	%	Total continuing business	$	422,304	$	324,471	$	97,833	30.2	%
Exited business	Exited business	243		2,793		(2,550)		(91.3	%)	Exited business	(310)		1,756		(2,066)		(117.7	%)
Total gross written premiums	Total gross written premiums	$	360,498	$	282,642	$	77,856	27.5	%	Total gross written premiums	$	421,994	$	326,227	$	95,767	29.4	%

The following table presents gross written premiums by underwriting division for the six months ended June 30, 2023 and 2022:


($ in thousands)	2023		2022		Change		% Change
Global Property & Agriculture	$	198,420	$	136,757	$	61,663	45.1	%
Industry Solutions	146,882		137,371		9,511		6.9	%
Programs	101,297		94,513		6,784		7.2	%
Captives	85,363		70,166		15,197		21.7	%
Accident & Health	73,265		63,739		9,526		14.9	%
Professional Lines	66,161		34,912		31,249		89.5	%
Transactional E&S	60,249		31,334		28,915		92.3	%
Surety	50,922		35,528		15,394		43.3	%
Total continuing business	$	782,559	$	604,320	$	178,239	29.5	%
Exited business	(67)		4,549		(4,616)		(101.5	%)
Total gross written premiums	$	782,492	$	608,869	$	173,623	28.5	%

The second quarter ~~to date~~and first half of 2023 increase in gross written premiums, when compared to the same 2022 ~~period,~~periods, was primarily driven by double-digit premium growth in our transactional E&S, global property and agriculture, ~~transactional E&S,~~

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professional lines, surety and captives underwriting ~~divisions.~~ divisions. The gross written premium increases were primarily driven by ~~(i)~~ new business ~~(ii)~~and rate ~~increases,~~increases. During the first half of 2023, we added new teams and ~~(iii) the addition of new~~ products in our surety, captives, professional lines and ~~units in~~ global property and agriculture ~~professional lines and captives.~~underwriting divisions.

Net earned premiums ~~were $182.8 million~~ for the ~~three months ended March 31,~~second quarter of 2023 were $194.3 million compared to ~~$141.7~~$146.1 million for the same 2022 period, an increase of ~~$41.1~~$48.2 million or ~~29.0%~~33.0%. Net earned premiums for the first half of 2023 were $377.2 million compared to $287.8 million for the same 2022 period, an increase of $89.4 million or 31.1%. The increase in net earned premiums was primarily driven by the same reasons that drove the ~~increase~~increases in gross written premiums discussed above. For additional information regarding our reinsurance programs, see the “Reinsurance” discussion included in in this Item 2.

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Losses and LAE

The following table sets forth the components of the loss and LAE ratio and adjusted loss and LAE ratio for the three months ended ~~March 31,~~June 30, 2023 and 2022:


		2023				2022					2023				2022
($ in thousands)	($ in thousands)	Losses and LAE		% of Net Earned Premiums		Losses and LAE		% of Net Earned Premiums		($ in thousands)	Losses and LAE		% of Net Earned Premiums		Losses and LAE		% of Net Earned Premiums
Losses and LAE:	Losses and LAE:									Losses and LAE:
Non-cat loss and LAE(1)	Non-cat loss and LAE(1)	$	111,902	61.1	%	$	89,989	63.5	%	Non-cat loss and LAE(1)	$	118,062	60.7	%	$	91,801	62.8	%
Cat loss and LAE(1)	Cat loss and LAE(1)	3,240		1.8	%	—		0.0	%	Cat loss and LAE(1)	6,805		3.5	%	—		0.0	%

Prior accident year development - LPT	Prior accident year development - LPT	(242)		(0.1)	%	—		0.0%		Prior accident year development - LPT	(462)		(0.2)	%	—		0.0%
Total losses and LAE	Total losses and LAE	$	114,900	62.8	%	$	89,989	63.5	%	Total losses and LAE	$	124,405	64.0	%	$	91,801	62.8	%
Adjusted losses and LAE(2):	Adjusted losses and LAE(2):									Adjusted losses and LAE(2):
Non-cat loss and LAE(1)	Non-cat loss and LAE(1)	$	111,902	61.1	%	$	89,989	63.5	%	Non-cat loss and LAE(1)	$	118,062	60.7	%	$	91,801	62.8	%
Cat loss and LAE(1)	Cat loss and LAE(1)	3,240		1.8	%	—		—	%	Cat loss and LAE(1)	6,805		3.5	%	—		—	%

Total adjusted losses and LAE(2)	Total adjusted losses and LAE(2)	$	115,142	62.9	%	$	89,989	63.5	%	Total adjusted losses and LAE(2)	$	124,867	64.2	%	$	91,801	62.8	%

(1) Current accident year	(1) Current accident year									(1) Current accident year
(2) See "Reconciliation of Non-GAAP Financial Measures" included in this Item 2	(2) See "Reconciliation of Non-GAAP Financial Measures" included in this Item 2									(2) See "Reconciliation of Non-GAAP Financial Measures" included in this Item 2

The following table sets forth the components of the loss and LAE ratio ~~improved 0.7~~and adjusted loss and LAE ratio for the six months ended June 30, 2023 and 2022:


	2023				2022
($ in thousands)	Losses and LAE		% of Net Earned Premiums		Losses and LAE		% of Net Earned Premiums
Losses and LAE:
Non-cat loss and LAE(1)	$	229,964	60.9	%	$	181,790	63.2	%
Cat loss and LAE(1)	10,045		2.7	%	—		0.0	%

Prior accident year development - LPT	(704)		(0.2)	%	—		0.0%
Total losses and LAE	$	239,305	63.4	%	$	181,790	63.2	%
Adjusted losses and LAE(2):
Non-cat loss and LAE(1)	$	229,964	60.9	%	$	181,790	63.2	%
Cat loss and LAE(1)	10,045		2.7	%	—		—	%

Total adjusted losses and LAE(2)	$	240,009	63.6	%	$	181,790	63.2	%

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

The loss ratio for the second quarter of 2023 increased 1.2 points when compared to the same 2022 period. Catastrophe losses from ~~wind~~three large convective storm losses in the South in our global property and ~~hail events, including tornadoes,~~transactional E&S divisions added ~~1.8~~3.5 points to the current quarter loss ratio, compared to the second quarter of 2022 which was not impacted

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by catastrophe losses. The non-cat loss and LAE ratio improved 2.1 points when compared to the same 2022 period primarily driven by the shift in the mix of business and continued run-off of exited business.

The loss ratio for the first half of 2023 increased 0.2 points when compared to the same 2022 period. Catastrophe losses from second quarter convective storms and first quarter wind and hail events, including tornadoes, added 2.7 points to the loss ratio compared to the first half of 2022, which was not impacted by catastrophe losses. The non-cat loss and LAE ratio improved ~~2.4~~2.3 points when compared to the same 2022 period primarily driven by the ~~continued run-off of exited business and the~~ shift in the mix of business and continued run-off of exited business.

Expense Ratio

The following table sets forth the components of the expense ratio for the three months ended ~~March 31,~~June 30, 2023 and 2022:


	2023				2022
($ in thousands)	Expenses		% of Net Earned Premiums		Expenses		% of Net Earned Premiums
Net policy acquisition expenses	$	23,136	11.9	%	$	14,714	10.1	%
Other operating and general expenses	33,547		17.3	%	29,669		20.3	%
Underwriting, acquisition and insurance expenses	56,683		29.2	%	44,383		30.4	%
Less: commission and fee income	(2,240)		(1.2	%)	(2,060)		(1.4	%)
Total net expenses	$	54,443	28.0	%	$	42,323	29.0	%

The following table sets forth the components of the expense ratio for the six months ended June 30, 2023 and 2022:


		2023				2022					2023				2022
($ in thousands)	($ in thousands)	Expenses		% of Net Earned Premiums		Expenses		% of Net Earned Premiums		($ in thousands)	Expenses		% of Net Earned Premiums		Expenses		% of Net Earned Premiums
Net policy acquisition expenses	Net policy acquisition expenses	$	21,235	11.6	%	$	13,421	9.5	%	Net policy acquisition expenses	$	44,371	11.7	%	$	28,135	9.8	%
Other operating and general expenses	Other operating and general expenses	30,420		16.6	%	27,113		19.1	%	Other operating and general expenses	63,967		17.0	%	56,783		19.7	%
Underwriting, acquisition and insurance expenses	Underwriting, acquisition and insurance expenses	51,655		28.2	%	40,534		28.6	%	Underwriting, acquisition and insurance expenses	108,338		28.7	%	84,918		29.5	%
Less: commission and fee income	Less: commission and fee income	1,492		(0.8	%)	230		(0.2	%)	Less: commission and fee income	(3,732)		(1.0	%)	(2,290)		(0.8	%)
Total net expenses	Total net expenses	$	50,163	27.4	%	$	40,304	28.4	%	Total net expenses	$	104,606	27.7	%	$	82,628	28.7	%

The expense ~~ratio~~ratios for the second quarter and first half of 2023 improved 1.0 point, respectively, when compared to the same 2022 ~~period. The improvement was~~periods, primarily driven by ~~(i) improvement~~improvements in the other operating and general expenses ~~ratio~~ratios due to the increase in earned ~~premiums and (ii) an increase in commission and fee income when compared to the same 2022 period.~~premiums. Partially offsetting the ~~improvement was an increase~~improvements were increases in the net policy acquisition expense ~~ratio~~ratios due to the shift in our mix of business.

The expense ~~ratio~~ratios for the second quarter and first ~~quarter~~half of 2023 ~~excludes~~exclude the impact of ~~our initial public offering (“IPO”)~~IPO related stock compensation and secondary offering expenses, which isare reported in other expenses in our condensed consolidated statements of operations and comprehensive income (loss) ~~income.~~.

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Investment Results

The following table sets forth the components of net investment income and net investment gains (losses) for the three months ended ~~March 31,~~June 30 and 2022:


	2023				2022
($ in thousands)	Net Investment Income		Annualized Net Yield		Net Investment Income		Annualized Net Yield
Short-term and money market investments	$	3,142	5.3	%	$	143	0.4	%
Core fixed income	6,967		3.6	%	3,409		2.7	%
Opportunistic fixed income	(2,429)		(5.7)	%	7,026		14.4	%
Equities	902		2.3	%	(53)		(0.2)	%
Net investment income(1)	$	8,582	2.6	%	$	10,525	4.2	%
Net unrealized gains (losses) on securities still held	$	5,017			$	(14,514)
Net realized gains	334				140
Net investment gains (losses)	$	5,351			$	(14,374)

(1) Excludes operating cash of $1 and $5, respectively.

The following table sets forth the components of net investment income and net investment gains (losses) for the six months ended June 30, 2023 and 2022:


		2023				2022					2023				2022
($ in thousands)	($ in thousands)	Net Investment Income		Annualized Net Yield		Net Investment Income		Annualized Net Yield		($ in thousands)	Net Investment Income		Annualized Net Yield		Net Investment Income		Annualized Net Yield
Short-term and money market investments	Short-term and money market investments	$	1,780	3.5	%	$	3	—	%	Short-term and money market investments	$	4,922	6.4	%	$	146	0.2	%
Core fixed income	Core fixed income	6,339		3.7	%	2,987		2.7	%	Core fixed income	13,306		3.6	%	6,396		2.6	%
Opportunistic fixed income	Opportunistic fixed income	(3,141)		(6.8)	%	11,447		25.7	%	Opportunistic fixed income	(5,570)		(6.1)	%	18,473		25.7	%
Equities	Equities	(333)		(0.8)	%	710		1.7	%	Equities	569		0.7	%	657		1.7	%
Net investment income(1)	Net investment income(1)	$	4,645	1.5	%	$	15,147	6.2	%	Net investment income(1)	$	13,227	2.1	%	$	25,672	6.2	%
Net unrealized gains (losses) on securities still held	Net unrealized gains (losses) on securities still held	$	3,767			$	(5,369)			Net unrealized gains (losses) on securities still held	$	8,784			$	(19,883)
Net realized (losses) gains	Net realized (losses) gains	(2,806)				931				Net realized (losses) gains	(2,472)				1,071
Net investment gains (losses)	Net investment gains (losses)	$	961			$	(4,438)			Net investment gains (losses)	$	6,312			$	(18,812)

(1) Excludes operating cash of $1 and $2, respectively.
(1) Excludes operating cash of $2 and $7, respectively.										(1) Excludes operating cash of $2 and $7, respectively.

Net investment income for the second quarter and first ~~quarter~~half of 2023 decreased ~~$10.5~~$1.9 million and $12.5 million, respectively, when compared to the same 2022 ~~period. Increased~~periods. For the second quarter and first half of 2023, increased income from ~~our~~ core fixed income ~~portfolio~~ and short-term and money market investments was offset by losses in ~~our~~ opportunistic fixed ~~income portfolio.~~ income.

The increase in income from our core fixed income portfolio for the second quarter and first half of 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) higher net investment book yields of ~~3.7%~~3.6%, respectively, compared to 2.7% and 2.6%, respectively, for the same 2022 ~~period.~~periods. The increase in income from short-term and money market investments for the second quarter and first half of 2023 was due to ~~(i) a larger asset base driven by the addition of the net IPO proceeds and (ii)~~ higher ~~net~~ investment yields of ~~3.5%~~5.3% and 6.4%, respectively, compared to ~~0.0%~~0.4% and 0.2%, respectively, for the same 2022 ~~period.~~periods. The opportunistic fixed income portfolio was impacted by a decline in the fair value of ~~certain~~ limited partnership ~~investments.~~investments for the second quarter and first half of 2023 when compared to the same 2022 periods.

When a fixed maturity has been determined to have an impairment, the impairment charge is separated into an amount representing the credit loss, which is recognized in earnings as a realized loss and on the balance sheet as an allowance for credit losses netted with the amortized cost of fixed maturities. Future increases in fair value, if related to credit factors, are recognized through earnings limited to the amount previously recognized as an allowance for credit losses. The amount related to non-credit factors is recognized in accumulated other comprehensive income and future increases or decreases in fair value, if not credit losses, are included in accumulated other comprehensive (loss) income. We reviewed our available-for-sale fixed maturities at ~~March 31,~~June 30, 2023 and determined that no credit impairment existed in the gross unrealized holding losses. See Note 2, “Investments” to our condensed consolidated financial statements included in Item 1 of this Form 10-Q for additional information.

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Investments

Composition of Investment Portfolio

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


		2023				2022					2023				2022
($ in thousands)	($ in thousands)	Fair value		% of total		Fair value		% of total		($ in thousands)	Fair value		% of total		Fair value		% of total
Short-term and money market investments	Short-term and money market investments	$	287,350	22.3	%	$	121,268	11.2	%	Short-term and money market investments	$	190,674	14.8	%	$	121,268	11.2	%
Core fixed income	Core fixed income	673,137		52.2	%	607,572		56.1	%	Core fixed income	767,491		59.5	%	607,572		56.1	%
Opportunistic fixed income	Opportunistic fixed income	172,951		13.3	%	196,021		18.1	%	Opportunistic fixed income	168,921		13.0	%	196,021		18.1	%
Equities	Equities	156,850		12.2	%	157,506		14.6	%	Equities	163,715		12.7	%	157,506		14.6	%
Total investment portfolio	Total investment portfolio	$	1,290,288	100.0	%	$	1,082,367	100.0	%	Total investment portfolio	$	1,290,801	100.0	%	$	1,082,367	100.0	%

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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 4.2 years and 4.3 years, respectively, as of ~~March 31,~~June 30, 2023 and December 31, 2022.

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


		2023				2022					2023				2022
($ in thousands)	($ in thousands)	Fair value		% of total fair value		Fair value		% of total fair value		($ in thousands)	Fair value		% of total fair value		Fair value		% of total fair value
U.S. government securities	U.S. government securities	$	44,918	6.7	%	$	48,541	8.0	%	U.S. government securities	$	44,483	5.8	%	$	48,541	8.0	%
Corporate securities and miscellaneous	Corporate securities and miscellaneous	262,434		39.0	%	235,129		38.7	%	Corporate securities and miscellaneous	293,560		38.3	%	235,129		38.7	%
Municipal securities	Municipal securities	67,339		10.0	%	57,727		9.5	%	Municipal securities	70,973		9.2	%	57,727		9.5	%
Residential mortgage-backed securities	Residential mortgage-backed securities	133,890		19.8	%	119,856		19.7	%	Residential mortgage-backed securities	196,946		25.7	%	119,856		19.7	%
Commercial mortgage-backed securities	Commercial mortgage-backed securities	52,182		7.8	%	36,495		6.0	%	Commercial mortgage-backed securities	17,979		2.3	%	36,495		6.0	%
Asset-backed securities	Asset-backed securities	112,374		16.7	%	109,824		18.1	%	Asset-backed securities	143,550		18.7	%	109,824		18.1	%
Core fixed income securities, available-for-sale	Core fixed income securities, available-for-sale	$	673,137	100.0	%	$	607,572	100.0	%	Core fixed income securities, available-for-sale	$	767,491	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 ~~March 31,~~June 30, 2023 and December 31, 2022. The following table sets forth the credit quality of our core fixed income portfolio at ~~March 31,~~June 30, 2023 and December 31, 2022, as rated by Standard & Poor’s or equivalent designation:


		2023				2022					2023				2022
($ in thousands)	($ in thousands)	Fair value		% of total		Fair value		% of total		($ in thousands)	Fair value		% of total		Fair value		% of total
AAA	AAA	$	312,144	46.4	%	$	283,733	46.7	%	AAA	$	371,530	48.4	%	$	283,733	46.7	%
AA	AA	87,064		12.9	%	74,604		12.3	%	AA	91,586		11.9	%	74,604		12.3	%
A	A	153,167		22.8	%	134,175		22.1	%	A	183,654		23.9	%	134,175		22.1	%
BBB	BBB	93,087		13.8	%	88,369		14.5	%	BBB	91,621		12.0	%	88,369		14.5	%
BB and Lower	BB and Lower	27,675		4.1	%	26,691		4.4	%	BB and Lower	29,100		3.8	%	26,691		4.4	%
Total core fixed income	Total core fixed income	$	673,137	100.0	%	$	607,572	100.0	%	Total core fixed income	$	767,491	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.~~stockholder. The opportunistic fixed income portfolio consists of separately managed accounts, limited partnerships, promissory notes and equity interests. The underlying securities are primarily floating rate senior secured loans, comprised of short duration, collateralized, asset-oriented credit investments designed to generate attractive risk-adjusted returns. The limited partnerships are subject to future increases or decreases in asset value as asset values are monetized and the income

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is distributed. As of ~~March 31,~~June 30, 2023, the opportunistic fixed income portfolio consisted of three components: diversified asset based lending ~~(54.5%~~(55.6%), commercial mortgage loans ~~(24.6%~~(27.9%) and cash and cash equivalents ~~(20.9%~~(16.5%).

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


		2023				2022					2023				2022
($ in thousands)	($ in thousands)	Fair Value		% of Total		Fair Value		% of Total		($ in thousands)	Fair Value		% of Total		Fair Value		% of Total
Real Estate	Real Estate	$	91,457	52.9	%	$	90,370	46.1	%	Real Estate	$	78,973	46.8	%	$	90,370	46.1	%
Oil & Gas	Oil & Gas	20,444		11.8	%	20,725		10.6	%	Oil & Gas	18,585		11.0	%	20,725		10.6	%
Banking, Finance & Insurance	Banking, Finance & Insurance	14,110		8.2	%	13,870		7.1	%	Banking, Finance & Insurance	14,121		8.4	%	13,870		7.1	%
Other sectors(1)	Other sectors(1)	10,779		6.2	%	34,072		17.4	%	Other sectors(1)	29,471		17.4	%	34,072		17.4	%
Cash and cash equivalents(2)	Cash and cash equivalents(2)	36,161		20.9	%	36,984		18.8	%	Cash and cash equivalents(2)	27,771		16.4	%	36,984		18.8	%
Opportunistic fixed income	Opportunistic fixed income	$	172,951	100.0	%	$	196,021	100.0	%	Opportunistic fixed income	$	168,921	100.0	%	$	196,021	100.0	%

(1) Other sectors primarily includes Aerospace & Defense, Business Services, Retail, Commercial & Industrial and Environmental.	(1) Other sectors primarily includes Aerospace & Defense, Business Services, Retail, Commercial & Industrial and Environmental.									(1) Other sectors primarily includes Aerospace & Defense, Business Services, Retail, Commercial & Industrial and Environmental.
(2) Includes cash on settlements that have not yet been reinvested.	(2) Includes cash on settlements that have not yet been reinvested.									(2) Includes cash on settlements that have not yet been reinvested.

The average duration of the direct loans in the portfolio is approximately ~~1.5~~1.4 years and 1.4 years as of ~~March 31,~~June 30, 2023 and December 31, 2022, respectively.

Equities

The equities portfolio primarily consists of domestic preferred stocks, common equities, exchange traded funds, limited partnerships, limited liability corporations and other types of equity interests, ~~76.8%~~78.1% of which are publicly traded. The portfolio is directed internally and includes both self-managed investments and portfolios managed by third-party investment management firms.

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


		2023				2022					2023				2022
($ in thousands)	($ in thousands)	Fair value		% of total fair value		Fair value		% of total fair value		($ in thousands)	Fair value		% of total fair value		Fair value		% of total fair value
Domestic common equities	Domestic common equities	$	77,247	49.3	%	$	76,929	48.8	%	Domestic common equities	$	81,723	50.0	%	$	76,929	48.8	%
International common equities	International common equities	36,896		23.5	%	34,468		21.9	%	International common equities	39,190		23.9	%	34,468		21.9	%
Preferred stock	Preferred stock	6,322		4.0	%	8,772		5.6	%	Preferred stock	6,948		4.2	%	8,772		5.6	%
Other(1)	Other(1)	36,385		23.2	%	37,337		23.7	%	Other(1)	35,854		21.9	%	37,337		23.7	%
Equities	Equities	$	156,850	100.0	%	$	157,506	100.0	%	Equities	$	163,715	100.0	%	$	157,506	100.0	%

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

Other Items

Income Taxes

Income tax expense for the three and six months ended June 30, 2023 was ~~$4.2~~$5.6 million and ~~$4.3~~$9.7 million, respectively, compared to $1.3 million and $5.6 million, respectively, for the ~~three months ended March 31, 2023 and 2022.~~same 2022 periods. Our effective tax rate for the three and six months ended June 30, 2023 was ~~21.1%~~22.2% and ~~20.7%~~21.7%, respectively, compared to 20.3% and 20.6%, respectively, for the ~~three months ended March 31, 2023 and 2022.~~same 2022 periods. For additional information, see Note 9 of our condensed consolidated financial statements included in Item 1 of this Form 10-Q.

Liquidity and Capital Resources

Sources and Uses of Funds

Our most significant source of cash is from premiums received from our insureds, which, for most policies, we receive at the beginning of the coverage period, net of the related commission amount for the policies. Our most significant cash outflow is for claims that arise when a policyholder incurs an insured loss. Because the payment of claims occurs after the receipt of the premium, often years later, we invest the cash in various investment securities that generally earn interest and dividends. We also use cash to pay for operating expenses such as salaries, rent and taxes and capital expenditures such as

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technology systems. We use reinsurance to manage the risk that we take on our policies. We cede, or pay out, part of the premiums we receive to our reinsurers and collect cash back when losses subject to our reinsurance coverage are paid.

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The timing of our cash flows from operating activities can vary among periods due to the timing by which payments are made or received. Some of our payments and receipts, including loss settlements and subsequent reinsurance receipts, can be significant, and as a result their timing can influence cash flows from operating activities in any given period. Management believes that cash receipts from premiums and proceeds from investment income are sufficient to cover cash outflows in the foreseeable future.

Our cash flows for the ~~three~~six months ended ~~March 31,~~June 30, 2023 and 2022 were:


($ in thousands)	($ in thousands)	2023		2022		($ in thousands)	2023		2022
Cash and cash equivalents provided by (used in):	Cash and cash equivalents provided by (used in):					Cash and cash equivalents provided by (used in):
Operating activities	Operating activities	$	107,207	$	45,882	Operating activities	$	108,477	$	64,016
Investing activities	Investing activities	(193,426)		(55,596)		Investing activities	(198,084)		(75,676)
Financing activities	Financing activities	66,455		186		Financing activities	66,455		2,150
Change in cash and cash equivalents and restricted cash	Change in cash and cash equivalents and restricted cash	$	(19,764)	$	(9,528)	Change in cash and cash equivalents and restricted cash	$	(23,152)	$	(9,510)

The increase in cash provided by operating activities in 2023 and 2022 was primarily due to positive cash flow from our insurance operations. Cash from operations can vary from period to period due to the timing of premium receipts, claim payments and reinsurance activity. Cash flows from operations in each of the past two years were used primarily to fund investing activities.

Net cash used in investing activities in 2023 and 2022 was primarily driven by purchases of ~~short-term investments and~~ fixed maturity ~~securities.~~securities and short-term investments.

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

Credit Agreements

Revolving Credit Facility

On March 29, 2023, we entered into an ~~agreement to obtain a new~~ 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 ~~three months ended March 31,~~first quarter of 2023, we drew $50.0 million on the Revolving Credit Facility and used the proceeds to pay off the principal on our existing term loan. In connection with our entry into the Revolving Credit Facility, we terminated the existing term loan and revolving line of credit pursuant to our Credit Agreement dated as of December 11, 2019, with Prosperity Bank.

Interest on the Revolving Credit Facility is payable quarterly. The interest rate on the Revolving Credit Facility ~~was~~is the Secured Overnight Financing Rate (“SOFR”) plus a margin of between 0150 and 0190 basis points based on the ratio of debt to total capital and a credit spread adjustment of 010 basis points. At June 30, 2023, the six-month SOFR on the Revolving Credit Facility was 4.66%, plus a margin of 1.60%.

We are subject to covenants on the Revolving Credit Facility based on minimum net worth, maximum debt to capital ratio, minimum A.M. Best Rating and minimum liquidity. As of ~~March 31,~~June 30, 2023, we are in compliance with all covenants.

Trust Preferred

In August 2006, we received $58.0 million of proceeds from a debenture offering through a statutory trust, Delos Capital Trust (the “Trust”). The sole asset of the Trust consists of Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Trust Preferred”) with a principal amount of $59.8 million issued by us and cash of $1.8 million from the issuance of Trust common shares purchased by us equal to 3% of the Trust capitalization. The Trust Preferred are an unsecured obligation, are redeemable, and have a maturity date of September 15, 2036. Interest on the Trust Preferred is payable quarterly at an annual rate based on the three-month LIBOR ~~(5.19%~~(5.55% and 4.77% ~~on March 31,~~at June 30, 2023 and December 31, 2022, respectively), plus 3.4%.

Subordinated Debt

In May 2019, we issued unsecured subordinated notes (the “Notes”) with an aggregate principal amount of $20.0 million. Interest on the subordinated notes is 7.25% fixed for the first eight years and 8.25% fixed thereafter. Early

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retirement of the debt ahead of the ~~eight year~~eight-year commitment requires all interest payments to be paid in full, as well as the return of all capital. Principal payment is due at maturity on May 24, 2039 and interest is payable quarterly.

At ~~March 31,~~June 30, 2023 the ratio of total debt outstanding, including the Revolving Credit Facility, the Trust Preferred and the Notes, to total capitalization (defined as total debt plus stockholders’ equity) was ~~20.2%~~19.8% and at December 31, 2022, the

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ratio of total debt outstanding, including the Term Loan, the Revolver, the Trust Preferred and the Notes, to total capitalization was 23.4%.

Reinsurance

We strategically purchase reinsurance from third parties which enhances our business by protecting capital from severity events (either large single event losses or catastrophes) and reducing volatility in our earnings. Our reinsurance contracts are predominantly one year in length and renew annually throughout the year. At each annual renewal, we consider several factors that influence any changes to our reinsurance purchases, including any plans to change the underlying insurance coverage we offer, updated loss activity, the level of our capital and surplus, changes in our risk appetite and the cost and availability of reinsurance treaties.

We purchase quota share reinsurance, excess of loss reinsurance, and facultative reinsurance coverage to limit our exposure from losses on any one occurrence. The mix of reinsurance purchased considers efficiency, cost, our risk appetite and specific factors of the underlying risks we underwrite.

•Quota share reinsurance refers to a reinsurance contract whereby the reinsurer agrees to assume a specified percentage of the ceding company’s losses arising out of a defined class of business in exchange for a corresponding percentage of premiums, net of a ceding commission.

•Excess of loss reinsurance refers to a reinsurance contract whereby the reinsurer agrees to assume all or a portion of the ceding company’s losses for an individual claim or an event in excess of a specified amount in exchange for a premium payable amount negotiated between the parties, which includes our catastrophe reinsurance program.

•Facultative coverage refers to a reinsurance contract on individual risks as opposed to a group or class of business. It is used for a variety of reasons, including supplementing the limits provided by the treaty coverage or covering risks or perils excluded from treaty reinsurance.

For the three and six months ended ~~March 31,~~June 30, 2023 ~~and 2022,~~ our net retention on a written basis (calculated as net written premiums as a percentage of gross written premiums) was ~~56.1%~~50.6% and ~~47.9%~~53.1%, ~~respectively.~~respectively, compared to 57.9% and 53.2%, respectively, for the same 2022 periods.

The following is a summary of our reinsurance programs as of ~~March 31,~~June 30, 2023:


Line of Business						Maximum Company Retention
Accident & Health						$0.88 million per occurrence
Commercial Auto(1)						$~~0.6~~0.60 million per occurrence
Excess Casualty(1)(2)						$1.24 million per occurrence
General Liability(1)						$1.25 million per occurrence
Professional Lines(2)						$~~2.7~~2.70 million per occurrence
Property(3)						$~~2.0~~2.80 million per occurrence
Surety(2)						$~~3.0~~3.00 million per occurrence
Workers’ Compensation(2)						$1.55 million per occurrence
Cyber						$2.69 million per occurrence
Representation and Warranty						$2.50 million per occurrence

(1) Legal defense expenses can force exposure above the maximum company retention for Excess Casualty, Commercial Auto and General Liability.
(2) Reinsurance is subject to a loss ratio cap or aggregate level of loss cover that exceeds a modeled 1:250-year PML event.
(3) Catastrophe loss protection is purchased up to ~~$25.0~~$28.0 million in excess of ~~$10.0~~$12.0 million retention, which provides cover for a 1:250-year PML event.

Credit and Financial Strength Ratings

On September 30, 2022, A.M. Best affirmed Skyward Specialty’s financial strength rating of A- (Excellent) with a stable outlook.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in market risk from the information provided in our Annual Report on Form 10-K for the year ended December 31, 2022.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports we file under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required financial disclosure. In connection with the preparation of this quarterly report on Form 10-Q, our management carried out an evaluation, under the supervision and with the participation of our management, including the CEO and CFO, as of ~~March 31,~~June 30, 2023, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of ~~March 31,~~June 30, 2023.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the ~~three months ended March 31, 2023,~~last fiscal quarter that ~~has~~have materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are party to legal proceedings which arise in the ordinary course of business. We believe that the outcome of such matters, individually and in the aggregate, will not have a material adverse effect on our consolidated financial position.

Item 1A. Risk Factors

There have been no material changes in our risk factors in the quarter ended ~~March 31,~~June 30, 2023 from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

~~None.~~During the quarter ended June 30, 2023, none of our directors or officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934) adopted, terminated or modified a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K).

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Item 6. Exhibits

(a)Exhibits.


Exhibit Number						Exhibit Description
3.1						Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on January 18, 2023).
3.2						Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the Commission on January 18, 2023).
4.1						Amended and Restated Stockholders’ Agreement, by and among the Company and the stockholders listed therein (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1, filed with the SEC on November 14, 2022).
~~10.1~~						Credit Agreement, dated March 29, 2023, by and among Skyward Specialty Insurance Group, Inc., the lenders from time to time party thereto and Truist Bank, as administrative agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 3, 2023).
~~10.2~~						Guaranty Agreement, dated March 29, 2023, by and among Skyward Service Company, Skyward Underwriters Agency, Inc., the loan parties identified on the signature pages thereto and Truist Bank (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on April 3, 2023).
31.1						Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2						Certification of Principal Financial and Accounting Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1						Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS						Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.
101.SCH						Inline XBRL Taxonomy Extension Schema Document
101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document
104						Cover Page Interactive Data File (embedded within the Inline XBRL document)

*~~To be filed by amendment.~~

~~+ Management contract or compensatory plan or arrangement.~~

†~~Portions of this exhibit have been omitted for confidentiality purposes.~~

(b)Financial Statement Schedules. All financial statement schedules are omitted because the information called for is not required or is shown either in the consolidated financial statements or in the notes thereto.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Skyward Specialty Insurance Group, Inc.

Date: ~~May 11,~~August 10, 2023

By:

/s/ Andrew Robinson

Andrew Robinson

Chief Executive Officer

(Principal Executive Officer)

Date: ~~May 11,~~August 10, 2023

By:

/s/ Mark Haushill

Mark Haushill

Chief Financial Officer

(Principal Financial and Accounting Officer)

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