skwd-20240630

Please wait

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 June 30, 2024


☐			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.


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 August 2, 2024, the registrant had 40,096,132 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 June 3 0 , 2024 and December 31, 2023 (unaudited)	3
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six-Month Periods Ended June 3 0 , 2024 and 2023 (unaudited)	4
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six-Month Periods Ended June 3 0 , 2024 and 2023 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the Six -Month Periods Ended June 3 0 , 2024 and 2023 (unaudited)	7
	Notes to Condensed Consolidated Financial Statements (unaudited)	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36
Part II
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	37
Item 4.	Mine Safety Disclosures	37
Item 5.	Other Information	37
Item 6.	Exhibits	37
Signatures		38

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	June 30, 2024		December 31, 2023
($ in thousands, except share and per share amounts)	(Unaudited)
Assets
Investments:
Fixed maturity securities, available-for-sale, at fair value (amortized cost of $1,239,724 and $1,047,713, respectively)	$	1,200,273	$	1,017,651
Fixed maturity securities, held-to-maturity, at amortized cost (net of allowance for credit losses of $225 and $329, respectively)	39,962		42,986
Equity securities, at fair value	112,823		118,249
Mortgage loans, at fair value	43,670		50,070
Equity method investments	101,903		110,653
Other long-term investments	2,665		3,852
Short-term investments, at fair value	215,041		270,226
Total investments	1,716,337		1,613,687
Cash and cash equivalents	72,989		65,891
Restricted cash	35,278		34,445
Premiums receivable, net	377,333		179,235
Reinsurance recoverables, net	667,837		596,334
Ceded unearned premium	255,138		186,121
Deferred policy acquisition costs	116,499		91,955
Deferred income taxes	25,107		21,991
Goodwill and intangible assets, net	87,868		88,435
Other assets	81,108		75,341
Total assets	$	3,435,494	$	2,953,435
Liabilities and stockholders’ equity
Liabilities:
Reserves for losses and loss adjustment expenses	$	1,470,106	$	1,314,501
Unearned premiums	711,854		552,532
Deferred ceding commission	47,948		37,057
Reinsurance and premium payables	207,638		150,156
Funds held for others	95,596		58,588
Accounts payable and accrued liabilities	59,796		50,880
Notes payable	100,000		50,000
Subordinated debt, net of debt issuance costs	18,936		78,690
Total liabilities	2,711,874		2,292,404
Stockholders’ equity

Common stock, $0.01 par value, 500,000,000 shares authorized, 40,096,132 and 39,863,756 shares issued and outstanding, respectively	401		399

Additional paid-in capital	713,542		710,855
Stock notes receivable	(5,233)		(5,562)
Accumulated other comprehensive loss	(31,136)		(22,953)
Retained earnings (accumulated deficit)	46,046		(21,708)
Total stockholders’ equity	723,620		661,031
Total liabilities and stockholders’ equity	$	3,435,494	$	2,953,435

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 (UNAUDITED)


	Three months ended June 30,				Six months ended June 30,
($ in thousands, except share and per share amounts)	2024		2023		2024		2023
Revenues:
Net earned premiums	$	257,583	$	194,347	$	493,925	$	377,178
Commission and fee income	2,053		2,240		4,079		3,732
Net investment income	22,138		8,583		40,435		13,229
Net investment (losses) gains	(1,825)		5,351		6,478		6,312

Other loss	(7)		—		(7)		—
Total revenues	279,942		210,521		544,910		400,451
Expenses:
Losses and loss adjustment expenses	159,054		124,405		302,968		239,305
Underwriting, acquisition and insurance expenses	76,679		56,683		146,453		108,338

Interest expense	2,449		2,466		5,176		4,618
Amortization expense	360		486		748		873
Other expenses	1,045		1,465		2,233		2,579
Total expenses	239,587		185,505		457,578		355,713
Income before income taxes	40,355		25,016		87,332		44,738
Income tax expense	9,385		5,564		19,578		9,730
Net income	30,970		19,452		67,754		35,008

Net income attributable to common stockholders	$	30,970	$	19,452	$	67,754	$	33,606
Comprehensive income
Net income	$	30,970	$	19,452	$	67,754	$	35,008
Other comprehensive income:
Unrealized gains and losses on investments:
Net change in unrealized (losses) gains on investments, net of tax	(1,451)		(4,375)		(6,869)		3,413
Reclassification adjustment for losses on securities no longer held, net of tax	(406)		(1,165)		(1,314)		(1,212)
Total other comprehensive (loss) income	(1,857)		(5,540)		(8,183)		2,201
Comprehensive income	$	29,113	$	13,912	$	59,571	$	37,209
Per share data:
Basic earnings per share	$	0.79	$	0.53	$	1.73	$	0.97
Diluted earnings per share	$	0.75	$	0.51	$	1.65	$	0.93
Weighted-average common shares outstanding
Basic	39,177,457		36,603,779		39,142,825		34,746,874
Diluted	41,168,082		38,143,585		41,110,384		37,503,914

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 STOCKHOLDERS’ EQUITY (UNAUDITED)


	Three months ended June 30,
($ in thousands, except share amounts)	2024		2023




Common shares:
Balance at beginning of period	39,995,027		37,658,111
Issuance of shares	101,105		15,952

Balance at June 30	40,096,132		37,674,063




Common stock:
Balance at beginning of period	$	400	$	377
Issuance of common stock	1		—


Balance at June 30	$	401	$	377




Additional paid-in capital:
Balance at beginning of period	$	711,309	$	641,368
Issuance of common stock	2,233		1,620


Balance at June 30	$	713,542	$	642,988
Stock notes receivable:
Balance at beginning of period	$	(5,234)	$	(6,718)
Employee equity transactions	1		—
Balance at June 30	$	(5,233)	$	(6,718)
Accumulated other comprehensive loss:
Balance at beginning of period	$	(29,279)	$	(35,744)
Other comprehensive loss, net of tax	(1,857)		(5,540)
Balance at June 30	$	(31,136)	$	(41,284)
Retained earnings (accumulated deficit):
Balance at beginning of period	$	15,076	$	(92,137)

Net income	30,970		19,452
Balance at June 30	$	46,046	$	(72,685)
Total stockholders’ equity	$	723,620	$	522,678

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 STOCKHOLDERS’ EQUITY (UNAUDITED)


	Six months ended June 30,
($ in thousands, except share amounts)	2024		2023
Preferred shares:
Balance at beginning of year	—		1,969,660
Preferred stock conversion to common shares	—		(1,969,660)
Balance at June 30	—		—
Common shares:
Balance at beginning of year	39,863,756		16,599,666
Issuance of shares	232,376		4,769,284
Preferred stock conversion to common shares	—		16,305,113
Balance at June 30	40,096,132		37,674,063
Preferred stock:
Balance at beginning of year	$	—	$	20
Preferred stock conversion to common shares	—		(20)
Balance at June 30	$	—	$	—
Common stock:
Balance at beginning of year	$	399	$	168
Issuance of common stock	2		—
Preferred stock conversion to common shares	—		161
Proceeds from equity offerings, net	—		48
Balance at June 30	$	401	$	377
Treasury stock:
Balance at beginning of year	$	—	$	(2)
Preferred stock conversion to common shares	—		2
Balance at June 30	$	—	$	—
Additional paid-in capital:
Balance at beginning of year	$	710,855	$	577,289
Issuance of common stock	2,687		3,875
Preferred stock conversion to common shares	—		(143)
Proceeds from equity offerings, net	—		61,967
Balance at June 30	$	713,542	$	642,988
Stock notes receivable:
Balance at beginning of year	$	(5,562)	$	(6,911)
Employee equity transactions	329		193
Balance at June 30	$	(5,233)	$	(6,718)
Accumulated other comprehensive loss:
Balance at beginning of year	$	(22,953)	$	(43,485)
Other comprehensive (loss) income, net of tax	(8,183)		2,201
Balance at June 30	$	(31,136)	$	(41,284)
Retained earnings (accumulated deficit):
Balance at beginning of year	$	(21,708)	$	(105,417)
Cumulative effect on adoption of ASU No. 2016-13	—		(2,276)
Net income	67,754		35,008
Balance at June 30	$	46,046	$	(72,685)
Total stockholders’ equity	$	723,620	$	522,678

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)


	Six months ended June 30,
($ in thousands)	2024		2023
Cash flows from operating activities
Net income	$	67,754	$	35,008
Adjustments to reconcile net income to net cash provided by operating activities	47,466		73,469
Net cash provided by operating activities	115,220		108,477
Cash flows from investing activities:
Purchase of fixed maturity securities, available-for-sale	(266,800)		(192,749)
Purchase of illiquid investments	—		(885)
Purchase of equity securities	(6,293)		(19,192)
Purchase of equity method investments	(1,100)		—
Purchase of intangible assets	—		(50)
Investment in direct and indirect loans	14,224		14,032
Purchase of property and equipment	(2,769)		(1,198)
Sales and maturities of investment securities	96,419		60,075
Distributions from equity method investments	—		1,079
Proceeds from equity method and other long-term investments	7,951		—
Change in short-term investments	55,185		(69,512)
Change in receivable/payable for securities	34		2,767
Cash provided by deposit accounting	5,325		7,549

Net cash used in investment activities	(97,824)		(198,084)
Cash flows from financing activities:
Employee share purchases	—		193
Repayment of stock notes receivable	329		—
Draw on revolving line of credit	50,000		50,000
Repayment of term loan	—		(50,000)
Repayment of trust preferred	(59,794)		—
Proceeds from initial public offering	—		66,262
Net cash (used in) provided by financing activities	(9,465)		66,455
Net increase (decrease) in cash and cash equivalents and restricted cash	7,931		(23,152)
Cash and cash equivalents and restricted cash at beginning of period(1)	100,336		125,011
Cash and cash equivalents and restricted cash at end of period(1)	$	108,267	$	101,859
Supplemental disclosure of cash flow information:
Cash paid for interest	$	4,835	$	5,194
Cash paid for federal income taxes	$	13,980	$	4,200
(1)The sum of cash and cash equivalents and restricted cash from the consolidated balance sheets

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

Table of Contents

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Basis of Presentation

The unaudited condensed consolidated financial statements of Skyward Specialty Insurance Group, Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all the disclosures required by GAAP for complete consolidated financial statements. Readers are urged to review the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 for a more complete description of the Company’s business and accounting policies. In the opinion of management, all adjustments necessary for a fair statement of the condensed consolidated financial statements have been included. Such adjustments consist only of normal recurring items. Interim results are not necessarily indicative of results of operations for the full year. The consolidated balance sheet as of December 31, 2023 was derived from the Company’s audited annual consolidated financial statements.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from these estimates.

2. Investments

The following tables set forth the amortized cost and the fair value by investment category at June 30, 2024 and December 31, 2023:


($ in thousands)	Gross Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Fair Value
June 30, 2024
Fixed maturity securities, available-for-sale:
U.S. government securities	$	36,055	$	16	$	(503)	$	—	$	35,568
Corporate securities and miscellaneous	449,632		3,157		(16,407)		—		436,382
Municipal securities	101,289		266		(7,281)		—		94,274
Residential mortgage-backed securities	363,584		2,069		(18,351)		—		347,302
Commercial mortgage-backed securities	47,903		338		(1,934)		—		46,307
Other asset-backed securities	241,261		1,479		(2,300)		—		240,440
Total fixed maturity securities, available-for-sale	$	1,239,724	$	7,325	$	(46,776)	$	—	$	1,200,273
Fixed maturity securities, held-to-maturity:
Other asset-backed securities	$	40,187	$	20	$	(1,342)	$	(225)	$	38,640
Total fixed maturity securities, held-to-maturity	$	40,187	$	20	$	(1,342)	$	(225)	$	38,640

Table of Contents

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. Investments (continued)


($ in thousands)	Gross Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss		Allowance for Credit Losses		Fair Value
December 31, 2023
Fixed maturity securities, available-for-sale:
U.S. government securities	$	44,685	$	202	$	(721)	$	—	$	44,166
Corporate securities and miscellaneous	392,773		6,408		(15,761)		—		383,420
Municipal securities	98,266		655		(6,143)		—		92,778
Residential mortgage-backed securities	292,568		3,556		(14,498)		—		281,626
Commercial mortgage-backed securities	31,411		449		(1,926)		—		29,934
Other asset-backed securities	188,010		1,221		(3,504)		—		185,727
Total fixed maturity securities, available-for-sale	$	1,047,713	$	12,491	$	(42,553)	$	—	$	1,017,651
Fixed maturity securities, held-to-maturity:
Other asset-backed securities	$	43,315	$	—	$	(1,969)	$	(329)	$	41,017
Total fixed maturity securities, held-to-maturity	$	43,315	$	—	$	(1,969)	$	(329)	$	41,017

The following table sets forth the amortized cost and fair value of available-for-sale fixed maturity securities by contractual maturity at June 30, 2024:



($ in thousands)	Amortized Cost		Fair Value
Due in less than one year	$	39,839	$	39,420
Due after one year through five years	311,737		301,370
Due after five years through ten years	191,013		185,279
Due after ten years	44,387		40,155
Mortgage-backed securities	411,487		393,609
Other asset-backed securities	241,261		240,440
Total	$	1,239,724	$	1,200,273

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 June 30, 2024 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 June 30, 2024 and December 31, 2023:

Table of Contents

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. Investments (continued)


	Less than 12 Months				12 Months or More				Total
($ in thousands)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
June 30, 2024
Fixed maturity securities, available-for-sale:
U.S. government securities	$	15,880	$	(81)	$	16,039	$	(422)	$	31,919	$	(503)
Corporate securities and miscellaneous	110,151		(1,654)		179,426		(14,753)		289,577		(16,407)
Municipal securities	24,319		(464)		52,868		(6,817)		77,187		(7,281)
Residential mortgage-backed securities	111,065		(1,278)		124,446		(17,073)		235,511		(18,351)
Commercial mortgage-backed securities	19,350		(126)		15,297		(1,808)		34,647		(1,934)
Other asset-backed securities	51,137		(252)		55,351		(2,048)		106,488		(2,300)
Total fixed maturity securities, available-for-sale	331,902		(3,855)		443,427		(42,921)		775,329		(46,776)
Fixed maturity securities, held-to-maturity:
Other asset-backed securities	—		—		36,594		(1,342)		36,594		(1,342)
Total fixed maturity securities, held-to-maturity:	—		—		36,594		(1,342)		36,594		(1,342)
Total	$	331,902	$	(3,855)	$	480,021	$	(44,263)	$	811,923	$	(48,118)


	Less than 12 Months				12 Months or More				Total
($ in thousands)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
December 31, 2023
Fixed maturity securities, available-for-sale:
U.S. government securities	$	7,342	$	(25)	$	25,604	$	(696)	$	32,946	$	(721)
Corporate securities and miscellaneous	26,742		(570)		174,947		(15,191)		201,689		(15,761)
Municipal securities	16,815		(290)		47,269		(5,853)		64,084		(6,143)
Residential mortgage-backed securities	37,634		(602)		103,495		(13,896)		141,129		(14,498)
Commercial mortgage-backed securities	4,942		(74)		15,290		(1,852)		20,232		(1,926)
Other asset-backed securities	27,887		(106)		75,253		(3,398)		103,140		(3,504)
Total fixed maturity securities, available-for-sale	121,362		(1,667)		441,858		(40,886)		563,220		(42,553)
Fixed maturity securities, held-to-maturity:
Other asset-backed securities	—		—		41,017		(1,969)		41,017		(1,969)
Total fixed maturity securities, held-to-maturity:	—		—		41,017		(1,969)		41,017		(1,969)
Total	$	121,362	$	(1,667)	$	482,875	$	(42,855)	$	604,237	$	(44,522)

Table of Contents

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. Investments (continued)

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 June 30, 2024, the Company had 796 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.

The following table sets forth the components of net investment (losses) gains for the three and six months ended June 30, 2024 and 2023:


	Three months ended June 30,				Six months ended June 30,
($ in thousands)	2024		2023		2024		2023
Gross realized gains
Fixed maturity securities, available-for sale	$	331	$	211	$	830	$	704
Equity securities	493		814		1,574		2,041
Other	—		—		18		1
Total	824		1,025		2,422		2,746
Gross realized losses
Fixed maturity securities, available-for sale	(466)		(218)		(860)		(456)
Equity securities	(417)		(472)		(2,291)		(4,761)
Other	(6)		(1)		(24)		(1)
Total	(889)		(691)		(3,175)		(5,218)
Net unrealized (losses) gains on investments
Equity securities	(730)		5,038		7,290		8,783
Mortgage loans	(1,030)		(21)		(59)		1
Net investment (losses) gains	$	(1,825)	$	5,351	$	6,478	$	6,312

The following table sets forth the proceeds from sales of available-for-sale fixed maturity securities and equity securities for the six months ended June 30, 2024 and 2023:


	Six months ended June 30,
($ in thousands)	2024		2023
Fixed maturity securities, available-for sale	$	17,917	$	19,363
Equity securities	17,760		17,583

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 income for the three and six months ended June 30, 2024 and 2023:


	Three months ended June 30,				Six months ended June 30,
($ in thousands)	2024		2023		2024		2023
Income:
Fixed maturity securities, available-for sale	$	13,407	$	7,583	$	25,638	$	14,259
Fixed maturity securities, held-to-maturity	1,230		1,251		2,356		2,254
Equity securities	751		1,044		1,378		1,770
Equity method investments	2,642		(2,104)		3,740		(6,768)
Mortgage loans	1,588		1,275		3,007		2,748
Indirect loans	221		(1,929)		(1,473)		(3,248)
Short-term investments and cash	3,421		3,186		7,661		4,975
Other	655		29		1,524		9
Total investment income	23,915		10,335		43,831		15,999
Investment expenses	(1,777)		(1,752)		(3,396)		(2,770)
Net investment income	$	22,138	$	8,583	$	40,435	$	13,229

The following table sets forth the change in net unrealized (losses) gains on the Company’s investment portfolio, net of deferred income taxes, included in other comprehensive loss for the three and six months ended June 30, 2024 and 2023:


	Three months ended June 30,				Six months ended June 30,
($ in thousands)	2024		2023		2024		2023
Fixed maturity securities	$	(2,370)	$	(7,013)	$	(10,359)	$	2,773
Deferred income taxes	513		1,473		2,176		(572)
Total	$	(1,857)	$	(5,540)	$	(8,183)	$	2,201

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:

Table of Contents

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3. Fair Value Measurements (continued)

U.S. government securities, mutual funds and common stock

The Company uses unadjusted quoted prices for identical instruments in an active exchange to measure fair value which represent Level 1 inputs.

Preferred stocks, municipal securities, corporate securities and miscellaneous

The Company uses a pricing model that utilizes market-based inputs such as trades in an illiquid market for a particular security or trades in active markets for securities with similar characteristics. The model considers other inputs such as benchmark yields, issuer spreads, security terms and conditions, and other market data. These represent Level 2 fair value inputs.

Commercial mortgage-backed securities, residential mortgage-backed securities and other asset-backed securities

The Company uses a pricing model that utilizes market-based inputs that may include dealer quotes, market spreads, and yield curves. It may evaluate individual tranches in a security by determining cash flows using the security’s terms and conditions, collateral performance, credit information benchmark yields and estimated prepayments. These represent Level 2 fair value inputs.

Table of Contents

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 June 30, 2024 and December 31, 2023:



	June 30, 2024		December 31, 2023
High	9.75	%	9.50	%
Low	3.60	%	3.25	%
Weighted average	7.49	%	7.05	%

The following tables set forth the Company’s investments within the fair value hierarchy at June 30, 2024 and December 31, 2023:


June 30, 2024
($ in thousands)	Level 1		Level 2		Level 3		Total
Fixed maturity securities, available-for-sale:
U.S. government securities	$	35,568	$	—	$	—	$	35,568
Corporate securities and miscellaneous	—		436,382		—		436,382
Municipal securities	—		94,274		—		94,274
Residential mortgage-backed securities	—		347,302		—		347,302
Commercial mortgage-backed securities	—		46,307		—		46,307
Other asset-backed securities	—		240,440		—		240,440
Total fixed maturity securities, available-for-sale	35,568		1,164,705		—		1,200,273
Fixed maturity securities, held-to-maturity:
Other asset-backed securities	—		—		38,640		38,640
Total fixed maturity securities, held-to-maturity	—		—		38,640		38,640
Equity securities:









Common stocks	69,439		—		—		69,439





Preferred stocks	—		3,177		—		3,177




Mutual funds	40,207		—		—		40,207
Total equity securities	109,646		3,177		—		112,823
Mortgage loans	—		—		43,670		43,670
Short-term investments	215,041		—		—		215,041
Total	$	360,255	$	1,167,882	$	82,310	$	1,610,447

Table of Contents

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3. Fair Value Measurements (continued)


December 31, 2023
($ in thousands)	Level 1		Level 2		Level 3		Total
Fixed maturity securities, available-for-sale:
U.S. government securities	$	44,166	$	—	$	—	$	44,166
Corporate securities and miscellaneous	—		383,420		—		383,420
Municipal securities	—		92,778		—		92,778
Residential mortgage-backed securities	—		281,626		—		281,626
Commercial mortgage-backed securities	—		29,934		—		29,934
Other asset-backed securities	—		185,727		—		185,727
Total fixed maturity securities, available-for-sale	44,166		973,485		—		1,017,651
Fixed maturity securities, held-to-maturity:
Other asset-backed securities	—		—		41,017		41,017
Total fixed maturity securities, held-to-maturity:	—		—		41,017		41,017
Equity securities:









Common stocks	67,425		—		—		67,425





Preferred stocks	—		7,358		—		7,358




Mutual funds	43,466		—		—		43,466
Total equity securities	110,891		7,358		—		118,249
Mortgage loans	—		—		50,070		50,070
Short-term investments	270,226		—		—		270,226
Total	$	425,283	$	980,843	$	91,087	$	1,497,213

Table of Contents

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 changes in the fair value of instruments carried at fair value with a Level 3 measurement during the six months ended June 30, 2024 and 2023:


($ in thousands)	Mortgage Loans
Balance at December 31, 2023	$	50,070
Total gains for the period recognized in net investment (losses) gains	971
Issuances	187
Settlements	(6,919)



Balance at March 31, 2024	$	44,309
Total gains for the period recognized in net investment (losses) gains attributable to the change in unrealized gains or losses relating to assets held as of period end	$	952
Total gains for the period recognized in net investment (losses) gains	(1,030)
Issuances	449
Settlements	(58)



Balance at June 30, 2024	$	43,670
Total losses for the period recognized in net investment (losses) gains attributable to the change in unrealized gains or losses relating to assets held as of period end	$	(1,031)


($ in thousands)	Mortgage Loans
Balance at December 31, 2022	$	52,842
Total gains for the period recognized in net investment (losses) gains	22
Issuances	892
Settlements	(11,421)



Balance at March 31, 2023	$	42,335
Total losses for the period recognized in net investment (losses) gains attributable to the change in unrealized gains or losses relating to assets held as of period end	$	(14)
Total losses for the period recognized in net investment (losses) gains	(21)
Issuances	30
Settlements	(9,582)



Balance at June 30, 2023	$	32,762
Total gains for the period recognized in net investment (losses) gains 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.

Table of Contents

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3. Fair Value Measurements (continued)

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 June 30, 2024, the Company determined the fair value of these instruments using the income approach utilizing inputs that are unobservable (Level 3).

Notes payable: The carrying value approximates the estimated fair value for notes payable as the notes payable accrue interest at current market rates plus a spread. The Company determines fair value using the income approach utilizing inputs that are observable (Level 2).

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

The following table sets forth the Company’s carrying and fair values of notes payable and subordinated debt as of June 30, 2024 and December 31, 2023:


	June 30, 2024				December 31, 2023
($ in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Notes payable

Revolving credit facility	$	100,000	$	100,000	$	50,000	$	50,000
Notes payable	$	100,000	$	100,000	$	50,000	$	50,000
Subordinated debt
Junior subordinated interest debentures	$	—	$	—	$	59,186	$	59,794
Unsecured subordinated notes	18,936		20,731		19,504		21,378
Subordinated debt, net of debt issuance costs	$	18,936	$	20,731	$	78,690	$	81,172

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

4. Mortgage Loans

The Company has invested in Separately Managed Accounts (“SMA1” and “SMA2”). As of June 30, 2024 and December 31, 2023, the Company held direct investments in mortgage loans from various creditors through SMA1 and SMA2.

The Company’s mortgage loan portfolios are primarily senior loans on real estate across the U.S. The loans earn interest at a fixed spread above a prime rate, mature in approximately 2 to 3 years from loan origination and the principal amounts of the loans range between 64% to 90% property’s appraised value at the time the loans were made.

The carrying value of the Company’s mortgage loans as of June 30, 2024 and December 31, 2023 were as follows:


($ in thousands)	June 30, 2024		December 31, 2023
Commercial	$	15,244	$	14,469
Retail	14,127		16,072
Hospitality	7,916		12,744
Industrial	6,383		6,785


	$	43,670	$	50,070

Table of Contents

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

4. Mortgage Loans (continued)

The following table sets forth the Company’s gross investment income for mortgage loans for the three and six months ended June 30, 2024 and 2023:


	Three months ended June 30,				Six months ended June 30,
($ in thousands)	2024		2023		2024		2023
Commercial	$	851	$	555	$	1,309	$	1,049
Retail	470		416		960		1,011
Hospitality	269		132		739		293
Office	—		97		—		203
Multi-family	—		75		—		192


	$	1,590	$	1,275	$	3,008	$	2,748

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 June 30, 2024 and 2023.

As of June 30, 2024 and December 31, 2023, approximately $6.4 million and $7.1 million of mortgage loans, respectively, were in the process of foreclosure. As of June 30, 2024, $6.4 million of mortgage loans were not producing income for the previous 12 months.

5. Equity Method Investments and Other

The following table sets forth the carrying value and ownership percentage of the Company’s equity method investments as of June 30, 2024 and December 31, 2023:


($ in thousands)	June 30, 2024				December 31, 2023
	Carrying Value		Ownership %		Carrying Value		Ownership %
Arena Special Opportunities Fund, LP units	$	39,421	16.0	%	$	41,046	16.2	%
JVM Funds LLC units	18,425		10.1	%	20,061		10.1	%
Arena SOP LP units	3,142		12.1	%	2,463		12.3	%
RISCOM	4,196		20.0	%	4,121		20.0	%
Hudson Ventures Fund 2 LP units	5,003		2.5	%	4,669		2.5	%
Dowling Capital Partners LP units	684		5.0	%	1,708		6.2	%

Brewer Lane Ventures Fund II LP units	639		2.4	%	560		2.5	%
	$	71,510			$	74,628

Table of Contents

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5. Equity Method Investments and Other (continued)

The following table sets forth the components of net investment income (loss) from equity method investments for the three and six months ended June 30, 2024 and 2023:


	Three months ended June 30,				Six months ended June 30,
($ in thousands)	2024		2023		2024		2023
Dowling Capital Partners LP units	$	40	$	338	$	1,382	$	605
RISCOM	389		224		675		305
Brewer Lane Ventures Fund II LP	(24)		(29)		(56)		(29)
Hudson Ventures Fund II LP units	210		(158)		158		(413)
JVM Funds LLC	(535)		(221)		(1,019)		(641)
Universa Black Swan LP units	—		(348)		—		(904)
Arena SOP LP units	390		(727)		679		(2,778)
Arena Special Opportunities Fund, LP units	2,172		(1,183)		1,921		(2,913)
	$	2,642	$	(2,104)	$	3,740	$	(6,768)

The following table sets forth the unfunded commitment of equity method investments as of June 30, 2024 and December 31, 2023:


($ in thousands)	June 30, 2024		December 31, 2023
Brewer Lane Ventures Fund II LP units	$	4,227	$	4,610
Hudson Ventures Fund 2 LP units	722		848
Dowling Capital Partners LP units	678		386
	$	5,627	$	5,844

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

The following table sets forth the Company’s recorded investment in RISCOM compared to its share of underlying equity as of June 30, 2024 and December 31, 2023:


($ in thousands)	June 30, 2024		December 31, 2023
Investment in RISCOM:
Underlying equity	$	2,816	$	2,620
Difference	1,380		1,501
Recorded investment balance	$	4,196	$	4,121

The following table sets forth the Company’s recorded investment in JVM Funds LLC compared to its share of underlying equity as of June 30, 2024 and December 31, 2023:


($ in thousands)	June 30, 2024		December 31, 2023
Investment in JVM Funds LLC:
Underlying equity	$	17,744	$	19,304
Difference	681		757
Recorded investment balance	$	18,425	$	20,061

Table of Contents

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5. Equity Method Investments and Other (continued)

Investment in Indirect Loans and Loan Collateral

As of June 30, 2024 and December 31, 2023, the Company held indirect investments in collateralized loans and loan collateral through SMA1 and SMA2.

The carrying value of the SMA1 and SMA2 as of June 30, 2024 and December 31, 2023 were as follows:


($ in thousands)	June 30, 2024		December 31, 2023

SMA1	$	23,311	$	30,816
SMA2	7,082		5,209
Investment in indirect loans and loan collateral	$	30,393	$	36,025

6. Notes Payable & Subordinated Debt

Revolving Credit Facility

The Company entered into an agreement to obtain a new unsecured revolving credit facility (the “Revolving Credit Facility”) with a syndicate of participating banks during the first quarter of 2023. The Revolving Credit Facility provided the Company with up to a $150.0 million revolving credit facility, with an accordion that can increase the capacity by $50.0 million, and a letter of credit sub-facility of up to $30.0 million. As of December 31, 2023, the Company drew $50.0 million on the Revolving Credit Facility. During the six months ended June 30, 2024, the Company drew an additional $50.0 million on the Revolving Credit Facility and used the proceeds to pay off the principal on its existing Debentures (defined below).

Interest on the Revolving Credit Facility is payable quarterly. The interest rate on the Revolving Credit Facility is the Secured Overnight Financing Rate (“SOFR”) plus a margin of between 150 and 190 basis points based on the ratio of debt to total capital and a credit spread adjustment of 10 basis points. The following table sets forth the outstanding draws on the Revolving Credit Facility as of June 30, 2024:


($ in thousands)					June 30, 2024
	Amount		Margin		Six-month SOFR		Net interest rate
March 15, 2024	$	50,000	1.60	%	5.25	%	6.85	%
March 29, 2023	$	50,000	1.60	%	5.23	%	6.83	%

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 June 30, 2024, the Company was in compliance with all covenants.

Debentures

In August 2006, the Company received $58.0 million of proceeds from a debenture offering through a statutory trust, Delos Capital Trust (the “Trust”). The sole asset of the Trust consists of Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Debentures”) with a principal amount of $59.8 million issued by the Company and cash of $1.8 million from the issuance of Trust common shares purchased by the Company equal to 3% of the Trust capitalization. On March 15, 2024, the Company redeemed the Debentures and paid $1.4 million of accrued interest.

Table of Contents

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7. Income Taxes

The following table sets forth the Company’s income tax expense and effective tax rates for the three and six months ended June 30, 2024 and 2023:


	Three months ended June 30,						Six months ended June 30,
($ in thousands)	2024			2023			2024			2023
Income tax expense	$	9,385		$	5,564		$	19,578		$	9,730
Effective tax rate	23.3		%	22.2		%	22.4		%	21.7		%

The effective tax rate will differ from the statutory rate of 21 percent due to permanent differences for disallowed expenses for tax and beneficial adjustments for tax-exempt income, dividends-received deduction and non-deductible expenses.

The Company paid federal income taxes of $14.0 million during the three and six months ended June 30, 2024 and $4.2 million during the three and six months ended June 30, 2023.

8. Losses and Loss Adjustment Expenses

The following table sets forth the reconciliation of unpaid losses and loss adjustment expenses (“LAE”) as reported in the condensed consolidated balance sheets as of and for the six months ended June 30, 2024 and 2023:


	Six months ended June 30,
($ in thousands)	2024		2023
Reserves for losses and LAE, beginning of period	$	1,314,501	$	1,141,757
Less: reinsurance recoverable on unpaid claims, beginning of period	(455,484)		(435,986)
Reserves for losses and LAE, beginning of period, net of reinsurance	859,017		705,771
Incurred, net of reinsurance, related to:
Current period	303,450		240,010
Prior years	—		—
Total incurred, net of reinsurance	303,450		240,010
Paid, net of reinsurance, related to:
Current period	39,202		29,124
Prior years	158,857		133,757
Total paid	198,059		162,881
Net reserves for losses and LAE, end of period	964,408		782,900
Plus: reinsurance recoverable on unpaid claims, end of period	505,698		441,227
Reserves for losses and LAE, end of period	$	1,470,106	$	1,224,127

Table of Contents

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

9. Commission and Fee Income

Skyward Underwriters Agency, Inc. (“SUA”), a subsidiary of the Company, is a managing general insurance agent and reinsurance broker for property and casualty and accident and health risks in specialty niche markets. Commission and fee income is primarily generated from SUA for the placement of insurance policies on either a third-party insurance or reinsurance company.

The following table sets forth the Company’s disaggregated revenues from contracts with customers for the three and six months ended June 30, 2024 and 2023:


	Three months ended June 30,				Six months ended June 30,
($ in thousands)	2024		2023		2024		2023
SUA commission revenue	$	699	$	1,385	$	1,689	$	2,242
SUA fee income	564		805		1,410		1,261
Other	790		50		980		229
Total commission and fee income	$	2,053	$	2,240	$	4,079	$	3,732

The Company’s contract assets from commission and fee income as of June 30, 2024 and December 31, 2023 were $1.7 million and $1.0 million, respectively.

10. 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, 2024 and 2023:


	Three months ended June 30,				Six months ended June 30,
($ in thousands)	2024		2023		2024		2023
Amortization of policy acquisition costs	$	35,931	$	23,136	$	67,908	$	44,371
Other operating and general expenses	40,748		33,547		78,545		63,967
Total underwriting, acquisition and insurance expenses	$	76,679	$	56,683	$	146,453	$	108,338

11. Reinsurance

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

The following tables set forth the effects of reinsurance on written and earned premiums and losses and loss adjustment expenses for the three and six months ended June 30, 2024 and 2023:


	Three months ended June 30,
	2024				2023
($ in thousands)	Written		Earned		Written		Earned
Direct premiums	$	404,443	$	335,398	$	332,062	$	283,762
Assumed premiums	91,800		70,786		89,932		48,213
Ceded premiums	(199,114)		(148,601)		(208,257)		(137,628)
Net premiums	$	297,129	$	257,583	$	213,737	$	194,347
Ceded losses and LAE incurred			$	106,954			$	99,981

Table of Contents

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

11. Reinsurance (continued)


	Six months ended June 30,
	2024				2023
($ in thousands)	Written		Earned		Written		Earned
Direct premiums	$	771,239	$	662,570	$	640,275	$	546,419
Assumed premiums	183,624		132,972		142,217		87,345
Ceded premiums	(370,634)		(301,617)		(366,614)		(256,586)
Net premiums	$	584,229	$	493,925	$	415,878	$	377,178
Ceded losses and LAE incurred			$	192,573			$	164,775

The following table sets forth the components of reinsurance recoverables and ceded unearned premium as of June 30, 2024 and December 31, 2023:


($ in thousands)	June 30, 2024		December 31, 2023
Ceded unpaid losses and LAE	$	505,698	$	455,484
Ceded paid losses and LAE	143,576		122,287
Loss portfolio transfer	20,858		20,858
Allowance for credit losses	(2,295)		(2,295)
Reinsurance recoverables	$	667,837	$	596,334
Ceded unearned premium	$	255,138	$	186,121

The Company entered into agreements with several of its reinsurers, whereby the reinsurer established funded trust accounts with the Company as the sole beneficiary. These trust accounts provide the Company additional security to collect claim recoverables under reinsurance contracts and the Company does not carry these on the balance sheet because the Company will only have custody over these accounts upon the failure of the reinsurer to pay amounts due. At June 30, 2024, the market value of these accounts was approximately $196.9 million. The trust amount will be adjusted periodically, by mutual agreement, based on claim payments and loss reserve recoverables.

Certain ceded reinsurance contracts that transfer only significant timing risk and do not transfer sufficient underwriting risk are accounted for using the deposit method of accounting. The Company’s deposit asset at June 30, 2024 and December 31, 2023 was $24.6 million and $29.9 million, respectively, and was included in other assets on the condensed consolidated balance sheets.

Table of Contents

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

12. Earnings Per Share

The following table sets forth the compilation of basic and diluted net earnings per share for the three and six months ended June 30, 2024 and 2023:


	Three months ended June 30,				Six months ended June 30,
($ in thousands, except for share and per share amounts)	2024		2023		2024		2023
Numerator
Net income	$	30,970	$	19,452	$	67,754	$	35,008
Less: Undistributed income allocated to participating securities	—		—		—		(1,402)
Net income attributable to common stockholders (numerator for basic earnings per share)	30,970		19,452		67,754		33,606
Add back: Undistributed income allocated to participating securities	—		—		—		1,402
Net income (numerator for diluted earnings per share under the two-class method)	$	30,970	$	19,452	$	67,754	$	35,008
Denominator
Basic weighted-average common shares	39,177,457		36,603,779		39,142,825		34,746,874

Dilutive effect of preferred shares	—		—		—		1,449,343
Dilutive effect of stock notes	722,153		763,590		717,217		740,396
Dilutive effect of stock units	900,119		685,065		900,565		512,331
Dilutive effect of options	368,353		91,151		349,777		54,970
Diluted weighted-average common share equivalents	41,168,082		38,143,585		41,110,384		37,503,914

Basic earnings per share	$	0.79	$	0.53	$	1.73	$	0.97
Diluted earnings per share	$	0.75	$	0.51	$	1.65	$	0.93

The Company’s preferred shares participate in dividends and distributions with common stock on an as-converted basis and represent a participating security. Instruments awarded to employees that provide the holder the right to purchase common stock at a fixed price were included as potential common shares, weighted for the portion of the period they were granted, if dilutive.

The following table presents anti-dilutive instruments that were excluded from the calculation of diluted weighted-average common share equivalents during the three and six months ended June 30, 2024 and 2023:


	Three months ended June 30,		Six months ended June 30,
	2024	2023	2024	2023

Stock units	21,813	1,936	135,027	331,484
Options	1,134	315	706	357,059

The following table presents common share equivalents of contingently issuable instruments that were excluded from basic earnings per share in the three and six months ended June 30, 2024 and 2023:


	Three months ended June 30,		Six months ended June 30,
	2024	2023	2024	2023
Common shares	866,428	1,054,510	866,428	1,054,510

Table of Contents

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

13. Related Party Transactions

RISCOM

RISCOM provides the Company with wholesale brokerage services. RISCOM and the Company also have a managing general agency agreement. The Company holds a 20% ownership interest in RISCOM.

Net earned premium and gross commission expense related to these agreements for the three and six months ended June 30, 2024 and 2023 were as follows:


	Three months ended June 30,				Six months ended June 30,
($ in thousands)	2024		2023		2024		2023
Net earned premium	$	26,161	$	19,916	$	52,055	$	42,101
Commissions	6,347		6,149		13,234		13,002

Premiums receivable as of June 30, 2024 and December 31, 2023 were $14.5 million and $10.6 million, respectively.

Other

Advisory and professional services fees and expense reimbursements paid to various affiliated stockholders and directors for the three and six months ended June 30, 2024 were $0.1 million and $0.2 million, compared to $0.5 million and $2.6 million, respectively, for the three and six months ended June 30, 2023.

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

14. Commitments and Contingencies

Litigation

The Company is named as a defendant in various legal actions arising from claims made under insurance policies and contracts. Those actions are considered by the Company in estimating the losses and loss adjustment expense reserves. Also, from time to time, the Company is a defendant in various legal actions that relate to bad faith claims, disputes with third parties or that involve alleged errors and omissions. The Company records accruals for these items to the extent the losses are probable and reasonably estimable. Although the ultimate outcome of these matters cannot be determined at this time, based on present information, the availability of insurance coverage and advice received from outside legal counsel, the Company believes the resolution of any such matters will not, individually or in the aggregate, have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Indemnification

In conjunction with the sale of business assets and subsidiaries, the Company has provided indemnifications to certain 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.

Table of Contents

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

The term “Skyward Specialty” as used below refers only to Skyward Specialty Insurance Group, Inc. and the terms “our Company,” “we,” “us,” and “our” as used below refer to Skyward Specialty Insurance Group and its consolidated subsidiaries. The term “second quarter” as used below refers to the three and six months ended June 30 for the time period then ended. We discuss certain key metrics which provide useful information about our business and the operational factors underlying our financial performance. Many of these metrics are generally standard among insurance companies and help to provide comparability with our peers. Select insurance, accounting, operating and financial terms for Skyward Specialty are defined in the sections entitled “Select Insurance and Financial Terms” and “Key Operating and Financial Metrics” included in our 2023 Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”).

The discussion and analysis below include certain forward-looking statements that are subject to risks, uncertainties and other factors described in "Risk Factors" in our 2023 Form 10-K. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors.

The results of operations for the three and six months ended June 30, 2024 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2024, or for any other future period. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report, and in conjunction with our audited consolidated financial statements and the notes thereto included in our 2023 Form 10-K.

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

Overview

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

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

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

Table of Contents

Results of Operations

The following table summarizes our results for the three and six months ended June 30, 2024 and 2023:


	Three months ended June 30,						Six months ended June 30,
($ in thousands)	2024			2023			2024			2023
Gross written premiums	$	496,243		$	421,994		$	954,863		$	782,492
Ceded written premiums	(199,114)			(208,257)			(370,634)			(366,614)
Net written premiums	$	297,129		$	213,737		$	584,229		$	415,878
Net earned premiums	$	257,583		$	194,347		$	493,925		$	377,178
Commission and fee income	2,053			2,240			4,079			3,732
Losses and LAE	159,054			124,405			302,968			239,305
Underwriting, acquisition and insurance expenses	76,679			56,683			146,453			108,338
Underwriting income(1)	$	23,903		$	15,499		$	48,583		$	33,267

Net investment income	$	22,138		$	8,583		$	40,435		$	13,229
Net investment (losses) gains	$	(1,825)		$	5,351		$	6,478		$	6,312
Income before income taxes	$	40,355		$	25,016		$	87,332		$	44,738
Net income	$	30,970		$	19,452		$	67,754		$	35,008
Adjusted operating income(1)	$	33,054		$	16,017		$	64,025		$	31,503

Loss and LAE ratio	61.7		%	64.0		%	61.3		%	63.4		%
Expense ratio	29.0		%	28.0		%	28.8		%	27.7		%
Combined ratio	90.7		%	92.0		%	90.1		%	91.1		%

Adjusted loss and LAE ratio(1)	61.8		%	64.2		%	61.4		%	63.6		%
Expense ratio	29.0		%	28.0		%	28.8		%	27.7		%
Adjusted combined ratio(1)	90.8		%	92.2		%	90.2		%	91.3		%

Annualized return on equity	17.5		%	15.1		%	19.6		%	14.8		%
Annualized return on tangible equity(1)	20.0		%	18.3		%	22.4		%	18.3		%
Annualized adjusted return on equity(1)	18.7		%	12.4		%	18.5		%	13.3		%
Annualized adjusted return on tangible equity(1)	21.3		%	15.1		%	21.2		%	16.5		%

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

Reconciliation of Non-GAAP Financial Measures

Adjusted Operating Income

The following table provides a reconciliation of adjusted operating income to net income for the three and six months ended June 30, 2024 and 2023:


	Three months ended June 30,								Six months ended June 30,
	2024				2023				2024				2023
($ in thousands)	Pre-tax		After-tax		Pre-tax		After-tax		Pre-tax		After-tax		Pre-tax		After-tax
Income as reported	$	40,355	$	30,970	$	25,016	$	19,452	$	87,332	$	67,754	$	44,738	$	35,008
Less (add):
Net investment (losses) gains	(1,825)		(1,442)		5,351		4,227		6,478		5,118		6,312		4,986
Net impact of LPT	241		190		462		365		482		381		704		556
Other loss	(7)		(6)		—		—		(7)		(6)		—		—
Other expenses	(1,045)		(826)		(1,465)		(1,157)		(2,233)		(1,764)		(2,579)		(2,037)
Adjusted operating income	$	42,991	$	33,054	$	20,668	$	16,017	$	82,612	$	64,025	$	40,301	$	31,503

Table of Contents

Underwriting Income

The following table provides a reconciliation of underwriting income to income before federal income tax for the three and six months ended June 30, 2024 and 2023:


	Three months ended June 30,				Six months ended June 30,
($ in thousands)	2024		2023		2024		2023
Income before federal income tax expense	$	40,355	$	25,016	$	87,332	$	44,738
Add:
Interest expense	2,449		2,466		5,176		4,618
Amortization expense	360		486		748		873
Other expenses	1,045		1,465		2,233		2,579
Less:
Net investment income	22,138		8,583		40,435		13,229
Net investment (losses) gains	(1,825)		5,351		6,478		6,312
Other loss	(7)		—		(7)		—
Underwriting income	$	23,903	$	15,499	$	48,583	$	33,267

Adjusted Loss Ratio / Adjusted Combined Ratio

The following table provides a reconciliation of the adjusted loss and LAE ratio and adjusted combined ratio to the loss and LAE ratio and combined ratio for the three and six months ended June 30, 2024 and 2023:


	Three months ended June 30,						Six months ended June 30,
($ in thousands)	2024			2023			2024			2023
Net earned premiums	$	257,583		$	194,347		$	493,925		$	377,178

Losses and LAE	159,054			124,405			302,968			239,305
Pre-tax net impact of loss portfolio transfer	241			462			482			704
Adjusted losses and LAE	$	159,295		$	124,867		$	303,450		$	240,009

Loss ratio	61.7		%	64.0%			61.3		%	63.4		%
Less: Net impact of LPT	(0.1)		%	(0.2)%			(0.1)		%	(0.2)%
Adjusted loss ratio	61.8		%	64.2		%	61.4		%	63.6		%

Combined ratio	90.7		%	92.0		%	90.1		%	91.1		%
Less: Net impact of LPT	(0.1)		%	(0.2)%			(0.1)		%	(0.2)%
Adjusted combined ratio	90.8		%	92.2		%	90.2		%	91.3		%

Tangible Stockholders’ Equity

The following table provides a reconciliation of tangible stockholders’ equity to stockholders’ equity for the periods ended June 30, 2024 and 2023:


($ in thousands)	2024		2023
Stockholders’ equity	$	723,620	$	522,678

Less: Goodwill and intangible assets	87,868		89,181
Tangible stockholders’ equity	$	635,752	$	433,497

Table of Contents

Annualized Adjusted Return on Equity

The following table provides a reconciliation of annualized adjusted return on equity to annualized return on equity for the three and six months ended June 30, 2024 and 2023:


	Three months ended June 30,						Six months ended June 30,
($ in thousands)	2024			2023			2024			2023
Numerator: annualized adjusted operating income	$	132,214		$	64,068		$	128,050		$	63,006
Denominator: average stockholders’ equity	$	707,946		$	514,912		$	692,326		$	472,170
Annualized adjusted return on equity	18.7		%	12.4		%	18.5		%	13.3		%

Annualized Return on Tangible Equity

Annualized return on tangible equity for the three and six months ended June 30, 2024 and 2023 reconciles to annualized return on equity as follows:


	Three months ended June 30,						Six months ended June 30,
($ in thousands)	2024			2023			2024			2023
Numerator: annualized net income	$	123,880		$	77,808		$	135,508		$	70,016
Denominator: average tangible stockholders’ equity	$	619,944		$	425,570		$	604,174		$	382,645
Annualized return on tangible equity	20.0		%	18.3		%	22.4		%	18.3		%

Annualized Adjusted Return on Tangible Equity

Annualized adjusted return on tangible equity for the three and six months ended June 30, 2024 and 2023 reconciles to annualized return on equity as follows:


	Three months ended June 30,						Six months ended June 30,
($ in thousands)	2024			2023			2024			2023
Numerator: annualized adjusted operating income	$	132,214		$	64,068		$	128,050		$	63,006
Denominator: average tangible stockholders’ equity	$	619,944		$	425,570		$	604,174		$	382,645
Annualized adjusted return on tangible equity	21.3		%	15.1		%	21.2		%	16.5		%

Underwriting Results

Premiums

The following tables present gross written premiums by underwriting division for the three and six months ended June 30, 2024 and 2023:


	Three months ended June 30,
($ in thousands)	2024		2023		Change		% Change
Global Property & Agriculture	$	124,728	$	124,080	$	648	0.5	%
Industry Solutions	84,112		79,249		4,863		6.1	%
Captives	62,099		39,283		22,816		58.1	%
Programs	59,644		52,598		7,046		13.4	%
Transactional E&S	45,711		30,632		15,079		49.2	%
Accident & Health	44,088		37,252		6,836		18.4	%
Professional Lines	38,106		32,989		5,117		15.5	%
Surety	37,737		26,221		11,516		43.9	%
Total gross written premiums(1)	$	496,225	$	422,304	$	73,921	17.5	%


(1) Excludes exited business

Table of Contents


	Six months ended June 30,
($ in thousands)	2024		2023		Change		% Change
Global Property & Agriculture	$	225,361	$	198,420	$	26,941	13.6	%
Industry Solutions	162,371		146,882		15,489		10.5	%
Captives	130,507		85,363		45,144		52.9	%
Programs	111,822		101,297		10,525		10.4	%
Transactional E&S	87,906		60,249		27,657		45.9	%
Accident & Health	84,989		73,265		11,724		16.0	%
Professional Lines	80,345		66,161		14,184		21.4	%
Surety	71,579		50,922		20,657		40.6	%
Total gross written premiums(1)	$	954,880	$	782,559	$	172,321	22.0	%


(1) Excludes exited business

The increase in gross written premiums for the second quarter and first half of 2024, when compared to the same 2023 periods, was driven by double-digit premium growth primarily from our captives, transactional E&S and surety underwriting divisions. The double-digit premium growth was due to new business and increased rates. Our global property & agriculture division contributed double digit premium growth in the first half of 2024, when compared to the same 2023 period, primarily driven by new business in agriculture.

Net written premiums for the second quarter of 2024 were $297.1 million compared to $213.7 million for the same 2023 period, an increase of $83.4 million or 39.0%. Net written premiums for the first half of 2024 were $584.2 million compared to $415.9 million for the same 2023 period, an increase of $168.3 million or 40.5%. The increases in net written premiums were primarily driven by the same reasons that drove the increases in gross written premiums discussed above.

Net earned premiums for the second quarter of 2024 were $257.6 million compared to $194.3 million for the same 2023 period, an increase of $63.3 million, or 32.5%. Net earned premiums for the first half of 2024 were $493.9 million compared to $377.2 million for the same 2023 period, an increase of $116.7 million or 31.0%. The increases in net earned premiums were primarily driven by the same reasons that drove the increases in gross written premiums discussed above.

For additional information regarding our reinsurance programs, see the “Reinsurance” discussion included in this Item 2.

Losses and LAE

The following tables set forth the components of the loss and LAE ratios and adjusted loss and LAE ratios for the three and six months ended June 30, 2024 and 2023:


	Three months ended June 30,
	2024				2023
($ in thousands)	Losses and LAE		% of Net Earned Premiums		Losses and LAE		% of Net Earned Premiums
Losses and LAE:
Non-cat loss and LAE(1)	$	156,295	60.6	%	$	118,062	60.7	%
Cat loss and LAE(1)	3,000		1.2	%	6,805		3.5	%

Prior accident year development - LPT	(241)		(0.1)	%	(462)		(0.2)%
Total losses and LAE	$	159,054	61.7	%	$	124,405	64.0	%
Adjusted losses and LAE(2):
Non-cat loss and LAE(1)	$	156,295	60.6	%	$	118,062	60.7	%
Cat loss and LAE(1)	3,000		1.2	%	6,805		3.5	%

Total adjusted losses and LAE(2)	$	159,295	61.8	%	$	124,867	64.2	%

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

Table of Contents


	Six months ended June 30,
	2024				2023
($ in thousands)	Losses and LAE		% of Net Earned Premiums		Losses and LAE		% of Net Earned Premiums
Losses and LAE:
Non-cat loss and LAE(1)	$	299,450	60.6	%	$	229,964	60.9	%
Cat loss and LAE(1)	4,000		0.8	%	10,045		2.7	%

Prior accident year development - LPT	(482)		(0.1)	%	(704)		(0.2)%
Total losses and LAE	$	302,968	61.3	%	$	239,305	63.4	%
Adjusted losses and LAE(2):
Non-cat loss and LAE(1)	$	299,450	60.6	%	$	229,964	60.9	%
Cat loss and LAE(1)	4,000		0.8	%	10,045		2.7	%

Total adjusted losses and LAE(2)	$	303,450	61.4	%	$	240,009	63.6	%

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

The loss ratios for the second quarter and first half of 2024 improved 2.3 points and 2.1 points, respectively, when compared to the same 2023 periods, driven by less severity of convective storms. The non-cat loss and LAE ratio for the second quarter of 2024 was comparable to the same 2023 period. The non-cat loss and LAE ratio for the first half of 2024 improved 0.3 points when compared to the same 2023 period, primarily driven by the shift in the mix of business.

Expense Ratio

The following tables set forth the components of the expense ratios for the three and six months ended June 30, 2024 and 2023:


	Three months ended June 30,
	2024				2023
($ in thousands)	Expenses		% of Net Earned Premiums		Expenses		% of Net Earned Premiums
Net policy acquisition expenses	$	35,931	14.0	%	$	23,136	11.9	%
Other operating and general expenses	40,748		15.8	%	33,547		17.3	%
Underwriting, acquisition and insurance expenses	76,679		29.8	%	56,683		29.2	%
Less: commission and fee income	(2,053)		(0.8	%)	(2,240)		(1.2	%)
Total net expenses	$	74,626	29.0	%	$	54,443	28.0	%


	Six months ended June 30,
	2024				2023
($ in thousands)	Expenses		% of Net Earned Premiums		Expenses		% of Net Earned Premiums
Net policy acquisition expenses	$	67,908	13.7	%	$	44,371	11.7	%
Other operating and general expenses	78,545		15.9	%	63,967		17.0	%
Underwriting, acquisition and insurance expenses	146,453		29.6	%	108,338		28.7	%
Less: commission and fee income	(4,079)		(0.8	%)	(3,732)		(1.0	%)
Total net expenses	$	142,374	28.8	%	$	104,606	27.7	%

The expense ratio for the second quarter and first half of 2024 increased 1.0 point and 1.1 points, respectively, when compared to the same 2023 periods, primarily driven by the business mix shift partially offset by earnings leverage.

The expense ratios for the periods presented exclude the impact of IPO related stock compensation and secondary offering expenses, which are reported in other expenses in our condensed consolidated statements of operations and comprehensive income.

Table of Contents

Investment Results

Beginning January 1, 2024 we simplified the investment portfolio classifications to align with our strategy and the underlying risk characteristics of the portfolio. The prior period has been reclassified to conform to the current period presentation.

The following table sets forth the components of net investment income and net investment gains (losses) for the three and six months ended June 30, 2024 and 2023:


	Three months ended June 30,				Six months ended June 30,
$ in thousands	2024		2023		2024		2023
Short-term investments & cash and cash equivalents	$	4,021	$	3,206	$	9,108	$	4,985
Fixed income	13,786		7,919		26,264		15,380
Equities	751		684		1,378		682
Alternative and strategic investments	3,580		(3,226)		3,685		(7,818)
Net investment income	$	22,138	$	8,583	$	40,435	$	13,229

Net unrealized (losses) gains on securities still held	$	(1,760)	$	5,017	$	7,231	$	8,784
Net realized (losses) gains	(65)		334		(753)		(2,472)
Net investment (losses) gains	$	(1,825)	$	5,351	$	6,478	$	6,312

Net investment income for the second quarter and first half of 2024 increased $13.6 million and $27.2 million, respectively when compared to the same 2023 periods.

The increase in income from our fixed income portfolio for the second quarter and first half of 2024, when compared to the same 2023 periods, was due to (i) a larger asset base as we continued to increase our allocation to this part of our investment portfolio and (ii) a higher book yield of 4.4% at June 30, 2024 compared to 3.9% at June 30, 2023. The increases in income from short-term investments & cash and cash equivalents for the second quarter and first half of 2024 when compared to the same 2023 periods, were due to higher investment yields and a larger asset base. The fair value of our alternative and strategic investments portfolio for the second quarter and first half of 2024 increased when compared to the same 2023 period, due to an increase in the fair value of limited partnership investments.

When a fixed maturity has been determined to have an impairment, the impairment charge is separated into an amount representing the credit loss, which is recognized in earnings as a realized loss and on the balance sheet as an allowance for credit losses netted with the amortized cost of fixed maturities. Future increases in fair value, if related to credit factors, are recognized through earnings limited to the amount previously recognized as an allowance for credit losses. The amount related to non-credit factors is recognized in accumulated other comprehensive income and future increases or decreases in fair value, if not credit losses, are included in accumulated other comprehensive (loss) income. We reviewed our available-for-sale fixed maturities at June 30, 2024 and determined that no credit impairment existed in the gross unrealized holding losses. See Note 2, “Investments” to our condensed consolidated financial statements included in Item 1 of this Form 10-Q for additional information.

Investments

Composition of Investment Portfolio

The following table sets forth the components of our investment portfolio at carrying value at June 30, 2024 and December 31, 2023:


	2024				2023
($ in thousands)	Carrying Value		% of Total		Carrying Value		% of Total
Cash and cash equivalents	$	72,989	4.1	%	$	65,891	3.9	%
Short-term investments	215,041		12.0	%	270,259		16.1	%
Fixed income	1,243,943		69.5	%	1,067,721		63.6	%
Equities	112,823		6.3	%	118,249		7.0	%
Alternative and strategic investments	144,530		8.1	%	157,458		9.4	%
Total portfolio	$	1,789,326	100.0	%	$	1,679,578	100.0	%

Table of Contents

Fixed income

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

The following table sets forth the components of our fixed income securities at June 30, 2024 and December 31, 2023:


	2024				2023
($ in thousands)	Carrying Value		% of Total		Carrying Value		% of Total
U.S. government securities	$	35,568	2.9	%	$	44,166	4.1	%
Corporate securities and miscellaneous	436,382		35.1	%	383,420		35.9	%
Municipal securities	94,274		7.6	%	92,778		8.7	%
Residential mortgage-backed securities	347,302		27.9	%	281,626		26.4	%
Commercial mortgage-backed securities	46,307		3.7	%	29,934		2.8	%
Other asset-backed securities	240,440		19.3	%	185,727		17.4	%
Total fixed income portfolio, available-for-sale	1,200,273		96.5	%	1,017,651		95.3	%
Commercial mortgage loans	$	43,670	3.5	%	$	50,070	4.7	%
Total fixed income portfolio	$	1,243,943	100.0	%	$	1,067,721	100.0	%

The weighted average credit rating of our available-for-sale fixed income portfolio was “AA-” by Standard & Poor’s Financial Services, LLC (“Standard & Poor’s”) at June 30, 2024 and December 31, 2023. The following table sets forth the credit quality of our available-for-sale fixed income portfolio at June 30, 2024 and December 31, 2023, as rated by Standard & Poor’s or equivalent designation:


	2024				2023
($ in thousands)	Fair Value		% of Total		Fair Value		% of Total
AAA	$	534,283	44.5	%	$	493,252	48.6	%
AA	137,565		11.5	%	105,906		10.4	%
A	302,740		25.2	%	233,487		22.9	%
BBB	201,579		16.8	%	154,096		15.1	%
BB and Lower	24,106		2.0	%	30,910		3.0	%
Total fixed income portfolio, available-for-sale	$	1,200,273	100.0	%	$	1,017,651	100.0	%

Our commercial mortgage loans are primarily senior loans on real estate across the U.S.

The average duration of our fixed income portfolio was approximately 4.19 years and 4.24 years, respectively, as of June 30, 2024 and December 31, 2023.

Equities

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

Alternative and strategic investments

Alternative investments consists of promissory notes, limited partnerships, joint ventures and equity interests. The underlying investments are primarily floating rate senior secured loans, comprised of short duration, collateralized, asset-oriented credit investments. The limited partnerships and joint ventures are subject to future increases or decreases in asset value as asset values are monetized and the income is distributed. Strategic investments consists of equity interests in private entities within the insurance industry.

Other Items

Income Taxes

Income tax expense for the three and six months ended June 30, 2024 was $9.4 million and $19.6 million, respectively, compared to $5.6 million and $9.7 million, respectively, for the same 2023 periods. Our effective tax rates for the three and six months ended June 30, 2024 were 23.3% and 22.4%, respectively, compared to 22.2% and 21.7%, respectively, for the same 2023 periods. For additional information, see Note 7 of our condensed consolidated financial statements included in Item 1 of this Form 10-Q.

Table of Contents

Liquidity and Capital Resources

Sources and Uses of Funds

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

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

Our cash flows for the six months ended June 30, 2024 and 2023 were:


($ in thousands)	2024		2023
Cash and cash equivalents provided by (used in):
Operating activities	$	115,220	$	108,477
Investing activities	(97,824)		(198,084)
Financing activities	(9,465)		66,455
Change in cash and cash equivalents and restricted cash	$	7,931	$	(23,152)

The increase in cash provided by operating activities in 2024 and 2023 was primarily due to positive cash flow from our insurance operations. Cash from operations can vary from period to period due to the timing of premium receipts, claim payments and reinsurance activity. Cash flows from operations in each of the past two years were used primarily to fund investing activities.

Net cash used in investing activities in 2024 and 2023 was primarily driven by purchases of fixed maturity securities and short-term investments.

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

Credit Agreements

Revolving Credit Facility

On March 29, 2023, we entered into an unsecured revolving credit facility (the “Revolving Credit Facility”) with a syndicate of participating banks. The Revolving Credit Facility provides us with up to a $150.0 million revolving credit facility, with an accordion that can increase the capacity by $50.0 million, and a letter of credit sub-facility of up to $30.0 million.

On March 14, 2024, we drew $50.0 million on the Revolving Credit Facility and used the proceeds and existing cash to fund the redemption of the Debentures (see “Debentures” below for additional information regarding the redemption). As of March 31, 2024, we had $100.0 million outstanding under the Revolving Credit Facility with another $50.0 million of undrawn capacity.

Interest on the Revolving Credit Facility is payable quarterly. The interest rate on the Revolving Credit Facility is the SOFR plus a margin of between 150 and 190 basis points based on the ratio of debt to total capital and a credit spread adjustment of 10 basis points. The following table sets forth the outstanding draws on the Revolving Credit Facility as of June 30, 2024:


($ in thousands)					June 30, 2024
	Amount		Margin		Six-month SOFR		Net interest rate
March 15, 2024	$	50,000	1.60	%	5.25	%	6.85	%
March 29, 2023	$	50,000	1.60	%	5.23	%	6.83	%

Table of Contents

We are subject to covenants on the Revolving Credit Facility based on minimum net worth, maximum debt to capital ratio, minimum A.M. Best Rating and minimum liquidity. As of June 30, 2024, we are in compliance with all covenants.

Debentures

In August 2006, we received $58.0 million of proceeds from a debenture offering through a statutory trust, Delos Capital Trust (the “Trust”). The sole asset of the Trust consists of Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Trust Preferred”) with a principal amount of $59.8 million issued by us and cash of $1.8 million from the issuance of Trust common shares purchased by us equal to 3% of the Trust capitalization. On March 15, 2024, the Company redeemed the Debentures and paid $1.4 million of accrued interest.

Subordinated Debt

In May 2019, we issued unsecured subordinated notes (the “Notes”) with an aggregate principal amount of $20.0 million. Interest on the subordinated notes is 7.25% fixed for the first eight years and 8.25% fixed thereafter. Early retirement of the debt ahead of the eight-year commitment requires all interest payments to be paid in full, as well as the return of all capital. Principal payment is due at maturity on May 24, 2039 and interest is payable quarterly.

At June 30, 2024 the ratio of total debt outstanding, including the Revolving Credit Facility, the Trust Preferred and the Notes, to total capitalization (defined as total debt plus stockholders’ equity) was 14.1% and at December 31, 2023, the ratio of total debt outstanding, including the Term Loan, the Revolver, the Trust Preferred and the Notes, to total capitalization was 16.3%.

Reinsurance

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

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

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

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

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

For the three and six months ended June 30, 2024 our net retention on a written basis (calculated as net written premiums as a percentage of gross written premiums) was 59.9% and 61.2%, respectively, compared to 50.6% and 53.1%, respectively, for the same 2023 periods.

Table of Contents

The following is a summary of our reinsurance programs as of June 30, 2024:


Line of Business						Maximum Company Retention
Accident & Health						$0.90 million per occurrence

Commercial Auto(1)						$1.00 million per occurrence
Excess Casualty(1)(2)						$1.25 million per occurrence
General Liability(1)						$1.50 million per occurrence
Professional Lines(2)						$5.21 million per occurrence
Property(3)						$3.00 million per occurrence
Representation and Warranty						$3.25 million per occurrence
Surety(2)						$4.00 million per occurrence
Workers’ Compensation(2)						$2.33 million per occurrence

(1) Legal defense expenses can force exposure above the maximum company retention for Excess Casualty, Commercial Auto and General Liability.
(2) Reinsurance is subject to a loss ratio cap or aggregate level of loss cover that exceeds a modeled 1:250-year PML event.
(3) Catastrophe loss protection is purchased up to $36.0 million in excess of $15.0 million retention, which provides cover for a 1:250-year PML event.

On June 21, 2024, R&Q Insurance Holdings Ltd, (“R&Q”) the parent company of Randall & Quilter (R&Q Bermuda (SAC) Ltd or “R&Q SAC Ltd”) the third-party reinsurer domiciled in Bermuda that is the counterparty for our loss portfolio transfer (“LPT”), filed for provisional liquidation with the Bermuda authorities. Due to the complexity of the legal structure of R&Q SAC Ltd and uncertainty relative to the situation, management continues to evaluate the potential financial impact, if any.

Credit and Financial Strength Ratings

On August 1, 2024, A.M. Best upgraded Skyward Specialty’s financial strength rating to A (Excellent) from A- (Excellent) and revised the outlook to stable from positive.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in market risk from the information provided in our Annual Report on Form 10-K for the year ended December 31, 2023.

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 June 30, 2024, 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 June 30, 2024.

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 last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

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 June 30, 2024 from those disclosed in our 2023 Form 10-K.

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

During the quarter ended June 30, 2024, 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).

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						Form of Restricted Stock Units Agreement for Nonemployee Directors and form of notice under the Company's 2022 Long-Term Incentive Plan.
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 with Embedded Linkbase Documents
104						Cover Page Interactive Data File (embedded within the Inline XBRL document)

(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.

Table of Contents

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: August 8, 2024

By:

/s/ Andrew Robinson

Andrew Robinson

Chairman and Chief Executive Officer

(Principal Executive Officer)


Date: August 8, 2024	By:	/s/ Mark Haushill
		Mark Haushill
		Chief Financial Officer
		(Principal Financial and Accounting Officer)