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Skyward Specialty Insurance Group
SKWD
#4759
Rank
$2.04 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$45.85
Share price
-0.46%
Change (1 day)
-14.98%
Change (1 year)
๐Ÿฆ Insurance
Categories
  1. Skyward Specialty Insurance Group
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2023 Q3

Skyward Specialty Insurance Group - 10-Q quarterly report FY2023 Q3


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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 September 30, 2023
OR
☐
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 classTrading Symbol(s)Name of each exchange on which registered
Common stock, par value $0.01SKWDThe 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 November 2, 2023, the registrant had 37,677,586 shares of common stock outstanding.
1

TABLE OF CONTENTS
Form 10-QItem and DescriptionPage
Item 1.
3
3
4
5
7
8
Item 2.
33
Item 3.
46
Item 4.
47
Item 1.
47
Item 1A.
47
Item 2.
47
Item 3.
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Item 4.
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Item 5.
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Item 6.
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2

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2023December 31, 2022
($ in thousands, except share and per share amounts)(Unaudited)
Assets
Investments:
Fixed maturity securities, available-for-sale, at fair value (amortized cost of $942,841 and $662,616, respectively)
$874,864 $607,572 
Fixed maturity securities, held-to-maturity, at amortized cost (net of allowance for credit losses of $320 as of September 30, 2023)
44,437 52,467 
Equity securities, at fair value107,387 120,169 
Mortgage loans (at fair value as of September 30, 2023; at amortized cost as of December 31, 2022)
59,318 51,859 
Other long-term investments115,823 129,142 
Short-term investments, at fair value194,049 121,158 
Total investments1,395,878 1,082,367 
Cash and cash equivalents53,730 45,438 
Restricted cash49,536 79,573 
Premiums receivable, net211,940 139,215 
Reinsurance recoverables, net615,675 581,359 
Ceded unearned premium218,784 157,645 
Deferred policy acquisition costs99,255 68,938 
Deferred income taxes35,006 36,188 
Goodwill and intangible assets, net88,808 89,870 
Other assets82,083 82,846 
Total assets$2,850,695 $2,363,439 
Liabilities and stockholders’ equity
Liabilities:
Reserves for losses and loss adjustment expenses$1,268,711 $1,141,757 
Unearned premiums596,011 442,509 
Deferred ceding commission41,704 29,849 
Reinsurance and premium payables161,832 113,696 
Funds held for others53,963 36,858 
Accounts payable and accrued liabilities64,407 48,499 
Notes payable50,000 50,000 
Subordinated debt, net of debt issuance costs78,670 78,609 
Total liabilities2,315,298 1,941,777 
Stockholders’ equity
Series A preferred stock, $0.01 par value; 10,000,000 and 2,000,000 shares authorized, 0 and 1,969,660 shares issued and outstanding, respectively
— 20 
Common stock, $0.01 par value, 500,000,000 and 168,000,000 shares authorized, 37,677,521 and 16,832,955 shares issued, respectively
377 168 
Treasury stock, $0.01 par value, 0 and 233,289 shares, respectively
— (2)
Additional paid-in capital645,292 577,289 
Stock notes receivable(5,625)(6,911)
Accumulated other comprehensive loss(53,673)(43,485)
Accumulated deficit(50,974)(105,417)
Total stockholders’ equity535,397 421,662 
Total liabilities and stockholders’ equity$2,850,695 $2,363,439 
The accompanying notes are an integral part of the consolidated financial statements.
3

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
Three months ended September 30,Nine months ended September 30,
($ in thousands, except share and per share amounts)2023202220232022
Revenues:
Net earned premiums$227,033 $158,048 $604,211 $445,851 
Commission and fee income2,085 1,362 5,817 3,652 
Net investment income13,089 5,988 26,318 31,667 
Net investment (losses) gains(2,984)(7,305)3,328 (26,117)
Total revenues239,223 158,093 639,674 455,053 
Expenses:
Losses and loss adjustment expenses138,536 111,746 377,841 293,536 
Underwriting, acquisition and insurance expenses68,315 47,340 176,653 132,258 
Interest expense2,632 1,738 7,250 4,280 
Amortization expense463 387 1,336 1,160 
Other expenses1,482 — 4,061 — 
Total expenses211,428 161,211 567,141 431,234 
Income (loss) before income taxes27,795 (3,118)72,533 23,819 
Income tax expense (benefit)6,084 (719)15,814 4,842 
Net income (loss)21,711 (2,399)56,719 18,977 
Net income attributable to participating securities— — 1,492 9,124 
Net income (loss) attributable to common stockholders$21,711 $(2,399)$55,227 $9,853 
Comprehensive income (loss):
Net income (loss)$21,711 $(2,399)$56,719 $18,977 
Other comprehensive loss:
Unrealized gains and losses on investments:
Net change in unrealized losses on investments, net of tax(8,722)(17,806)(5,309)(49,308)
Reclassification adjustment for (losses) gains on securities no longer held, net of tax(3,667)31 (4,879)362 
Total other comprehensive loss(12,389)(17,775)(10,188)(48,946)
Comprehensive income (loss)$9,322 $(20,174)$46,531 $(29,969)
Per share data:
Basic earnings (loss) per share$0.59 $(0.15)$1.56 $0.60 
Diluted earnings (loss) per share$0.57 $(0.15)$1.50 $0.58 
Weighted-average common shares outstanding
Basic36,743,393 16,465,588 35,502,843 16,464,313 
Diluted38,403,843 16,465,588 37,830,431 32,598,669 
The accompanying notes are an integral part of the consolidated financial statements.
4

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
($ in thousands)Preferred StockCommon StockTreasury StockAdditional Paid-in CapitalStock Notes ReceivableAccumulated Other Comprehensive LossAccumulated DeficitTotal
Balance at January 1, 2023$20 $168 $(2)$577,289 $(6,911)$(43,485)$(105,417)$421,662 
Cumulative effect on adoption of ASU No. 2016-13— — — — — — (2,276)(2,276)
Employee equity transactions— — — 1,864 193 — — 2,057 
Preferred stock conversion to common shares(20)161 2 (143)— — — — 
Proceeds from initial public offering, net— 48 — 62,358 — — — 62,406 
Net income— — — — — — 15,556 15,556 
Other comprehensive income, net of tax— — — — — 7,741 — 7,741 
Balance at March 31, 2023$— $377 $— $641,368 $(6,718)$(35,744)$(92,137)$507,146 
Employee equity transactions— — — 2,011 — — — 2,011 
Expenses from initial public offering— — — (391)— — — (391)
Net income— — — — — — 19,452 19,452 
Other comprehensive loss, net of tax— — — — — (5,540)— (5,540)
Balance at June 30, 2023$— $377 $— $642,988 $(6,718)$(41,284)$(72,685)$522,678 
Employee equity transactions— — — 2,304 1,093 — — 3,397 
Net income— — — — — — 21,711 21,711 
Other comprehensive loss, net of tax— — — — — (12,389)— (12,389)
Balance at September 30, 2023$— $377 $— $645,292 $(5,625)$(53,673)$(50,974)$535,397 
The accompanying notes are an integral part of the consolidated financial statements.






5

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
($ in thousands)Preferred StockCommon StockTreasury StockAdditional Paid-in CapitalStock Notes ReceivableAccumulated Other Comprehensive LossAccumulated DeficitTotal
Balance at January 1, 2022$20 $168 $(2)$575,159 $(9,092)$4,640 $(144,813)$426,080 
Employee equity transactions— — — 502 188 — — 690 
Reclassification of stock notes receivable to other assets— — — — 1,942 — — 1,942 
Net income— — — — — — 16,311 16,311 
Other comprehensive loss, net of tax— — — — — (16,404)— (16,404)
Balance at March 31, 2022$20 $168 $(2)$575,661 $(6,962)$(11,764)$(128,502)$428,619 
Employee equity transactions— — — 670 20 — — 690 
Net income— — — — — — 5,065 5,065 
Other comprehensive loss, net of tax— — — — — (14,767)— (14,767)
Balance at June 30, 2022$20 $168 $(2)$576,331 $(6,942)$(26,531)$(123,437)$419,607 
Employee equity transactions— — — 354 30 — — 384 
Net loss— — — — — — (2,399)(2,399)
Other comprehensive loss, net of tax— — — — — (17,775)— (17,775)
Balance at September 30, 2022$20 $168 $(2)$576,685 $(6,912)$(44,306)$(125,836)$399,817 
The accompanying notes are an integral part of the consolidated financial statements.
6

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended September 30,
($ in thousands)20232022
Cash flows from operating activities
Net income$56,719 $18,977 
Adjustments to reconcile net income to net cash provided by operating activities161,820 105,936 
Net cash provided by operating activities218,539 124,913 
Cash flows from investing activities:
Purchase of fixed maturity securities, available-for-sale(342,088)(211,097)
Purchase of illiquid investments(1,156)(4,431)
Purchase of equity securities(22,436)(49,018)
Investment in direct and indirect loans(3,313)(13,134)
Sales and maturities of investment securities110,695 76,765 
Distributions from equity method investments1,704 2,052 
Change in short-term investments(72,891)59,363 
Receivable for securities sold14,442 3,273 
Cash provided by deposit accounting8,631 8,780 
Other, net(1,421)(834)
Net cash used in investment activities(307,833)(128,281)
Cash flows from financing activities:
Employee share purchases1,287 2,180 
Draw on revolving line of credit50,000 — 
Repayment of term loan(50,000)— 
Proceeds from initial public offering66,262 — 
Net cash provided by financing activities67,549 2,180 
Net decrease in cash and cash equivalents and restricted cash(21,745)(1,188)
Cash and cash equivalents and restricted cash at beginning of period125,011 107,274 
Cash and cash equivalents and restricted cash at end of period$103,266 $106,086 
Supplemental disclosure of cash flow information:
Cash paid for interest$8,503 $3,860 
Cash paid for federal income taxes$10,000 $— 
The accompanying notes are an integral part of the consolidated financial statements.
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SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.Summary of Significant Accounting Policies
Basis of Presentation
The unaudited condensed consolidated financial statements of Skyward Specialty Insurance Group, Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all the disclosures required by GAAP for complete consolidated financial statements. Readers are urged to review the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for a more complete description of the Company’s business and accounting policies. In the opinion of management, all adjustments necessary for a fair statement of the condensed consolidated financial statements have been included. Such adjustments consist only of normal recurring items. Interim results are not necessarily indicative of results of operations for the full year. The consolidated balance sheet as of December 31, 2022 was derived from the Company’s audited annual consolidated financial statements.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from these estimates.
Recent Accounting Standards Adopted
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires organizations to estimate credit losses on certain types of financial instruments, including receivables and fixed maturity securities, by introducing an approach based on expected losses. The expected loss approach required entities to incorporate considerations of historical information, current information, and reasonable and supportable forecasts. The Company adopted ASU 2016-13 effective January 1, 2023 using the modified retrospective approach, by which a cumulative-effect adjustment was made to retained earnings as of the date of adoption. In connection with the adoption of ASU 2016-13, the Company elected the fair value option in accounting for mortgage loans effective January 1, 2023 as targeted transition relief. The adoption of ASU 2016-13 resulted in a $2.3 million increase in accumulated deficit, net of tax.
Updates to Significant Accounting Policies
The following accounting policies have been updated to reflect the Company's adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments as described above.
Investments
Available-for-sale
Investments in fixed maturities that are classified as available-for-sale are carried at fair value. For available-for-sale fixed maturities in an unrealized loss position, the Company first determines whether there is an intent to sell the security or if it is more likely than not that the Company will be required to sell the security before maturity or recovery of its cost basis. If either of these criteria were met, the amortized cost of the security is written down to fair value with the losses recognized in net investment (losses) gains on the consolidated statements of operations. If neither of the these criteria were met, the Company determines whether unrealized losses are due to credit-related factors. If the unrealized losses are due to credit-related factors, an allowance for credit losses is determined using a present value of cash flows compared to the amortized cost of the security.
The allowance for credit losses is limited to the amount by which fair value is below amortized cost. Changes in the allowance for credit losses are recognized in net investment income on the consolidated statements of operations. Credit losses that are limited by the fair value of the security are recognized in stockholders’ equity, net of taxes, as a component of accumulated other comprehensive (loss) income. Unrealized losses that are not credit-related continue to be recognized in stockholders’ equity, net of taxes, as a component of accumulated other comprehensive (loss) income.
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SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Held-to-maturity
Investments in fixed maturity securities that are held-to-maturity are carried at amortized cost net of an allowance for credit losses. The allowance for credit losses represents the current estimate of expected credit losses. The Company develops a historical loss rate from Moody’s table of estimated multi-year cumulative loss rates for asset backed securities. This historical loss rate is adjusted for current conditions and reasonable and supportable forecasts. Changes in the allowance for credit losses are recognized in net investment income on the consolidated statements of operations.
Mortgage loans
The Company elected the fair value option in accounting for mortgage loans effective January 1, 2023 as targeted transition relief. Under the fair value option, mortgage loans are measured at fair value, and changes in unrealized gains and losses on mortgage loans are reported in net investment (losses) gains on the condensed consolidated statements of operations. Interest income and amortization continue to be recognized in net investment income on the consolidated statements of operations.
Reinsurance
Reinsurance Recoverables

Reinsurance recoverables are carried net of an allowance for credit losses. The allowance for credit losses represents the current estimate of expected credit losses. The Company develops a historical loss rate using the A.M. Best impairment rate and rating transition study which provides historical loss data of similarly rated reinsurance companies based on the expected duration of the receivables. This historical loss rate is adjusted for current conditions and reasonable and supportable forecasts and consideration of current economic conditions. Changes in the allowance for credit losses are recognized in underwriting, acquisition and insurance expenses on the consolidated statements of operations.
Premiums Receivable
Premiums receivable are carried net of an allowance for credit losses. The allowance for credit losses represents the current estimate of expected credit losses. The Company develops a historical loss rate using historical write-offs and aging of receivables. This historical loss rate is adjusted for current conditions, reasonable and supportable forecasts and our ability to cancel coverage on a policy after premium is considered past due. Changes in the allowance for credit losses are recognized in underwriting, acquisition and insurance expenses on the consolidated statements of operations.



9
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SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2.Investments
The following tables set forth the amortized cost and the fair value by investment category at September 30, 2023 and December 31, 2022:
($ in thousands)Gross
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Allowance for Credit LossesFair Value
September 30, 2023
Fixed maturity securities, available-for-sale:
U.S. government securities$47,778 $— $(1,396)$— $46,382 
Corporate securities and miscellaneous357,652 228 (24,871)— 333,009 
Municipal securities93,489 8 (10,130)— 83,367 
Residential mortgage-backed securities255,083 36 (24,421)— 230,698 
Commercial mortgage-backed securities19,877 — (2,206)— 17,671 
Asset-backed securities168,962 201 (5,426)— 163,737 
Total fixed maturity securities, available-for-sale$942,841 $473 $(68,450)$— $874,864 
Fixed maturity securities, held-to-maturity:
Asset-backed securities$44,757 $— $(3,668)$(320)$40,769 
Total fixed maturity securities, held-to-maturity$44,757 $— $(3,668)$(320)$40,769 

($ in thousands)Gross
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Loss		Fair Value
December 31, 2022
Fixed maturity securities, available-for-sale:
U.S. government securities$50,416 $1 $(1,876)$48,541 
Corporate securities and miscellaneous255,116 767 (20,754)235,129 
Municipal securities65,836 24 (8,133)57,727 
Residential mortgage-backed securities134,844 218 (15,206)119,856 
Commercial mortgage-backed securities40,129 50 (3,684)36,495 
Asset-backed securities116,275 91 (6,542)109,824 
Total fixed maturity securities, available-for-sale$662,616 $1,151 $(56,195)$607,572 
Fixed maturity securities, held-to-maturity:
Asset-backed securities$52,467 $— $(5,696)$46,771 
Total fixed maturity securities, held-to-maturity$52,467 $— $(5,696)$46,771 
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SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the amortized cost and fair value of available-for-sale fixed maturity securities by contractual maturity at September 30, 2023:
($ in thousands)Amortized
Cost		Fair Value
Due in less than one year$29,963 $29,280 
Due after one year through five years256,015 240,868 
Due after five years through ten years130,724 118,893 
Due after ten years82,217 73,717 
Mortgage-backed securities274,960 248,369 
Asset-backed securities168,962 163,737 
Total$942,841 $874,864 
Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Also, changing interest rates, tax considerations or other factors may result in portfolio sales prior to maturity.
The Company’s fixed maturity securities, held-to-maturity, at September 30, 2023 consisted entirely of asset backed securities that were not due at a single maturity date.
The following tables set forth the gross unrealized losses and the corresponding fair values of investments, aggregated by length of time that individual securities had been in a continuous unrealized loss position as of September 30, 2023 and December 31, 2022:
Less than 12 Months12 Months or MoreTotal
($ in thousands)Fair ValueGross Unrealized LossesFair ValueGross Unrealized LossesFair ValueGross Unrealized Losses
September 30, 2023
Fixed maturity securities, available-for-sale:
U.S. government securities$24,001 $(524)$22,381 $(872)$46,382 $(1,396)
Corporate securities and miscellaneous143,712 (5,181)170,048 (19,690)313,760 (24,871)
Municipal securities35,518 (1,667)45,324 (8,463)80,842 (10,130)
Residential mortgage-backed securities122,385 (4,506)100,990 (19,915)223,375 (24,421)
Commercial mortgage-backed securities7,648 (352)10,023 (1,854)17,671 (2,206)
Asset-backed securities81,952 (1,317)65,329 (4,109)147,281 (5,426)
Total fixed maturity securities, available-for-sale415,216 (13,547)414,095 (54,903)829,311 (68,450)
Fixed maturity securities, held-to-maturity:
Asset-backed securities— — 40,769 (3,668)40,769 (3,668)
Total fixed maturity securities, held-to-maturity:— — 40,769 (3,668)40,769 (3,668)
Total$415,216 $(13,547)$454,864 $(58,571)$870,080 $(72,118)
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SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Less than 12 Months12 Months or MoreTotal
($ in thousands)Fair ValueGross Unrealized LossesFair ValueGross Unrealized LossesFair ValueGross Unrealized Losses
December 31, 2022
Fixed maturity securities, available-for-sale:
U.S. government securities$28,966 $(603)$18,577 $(1,273)$47,543 $(1,876)
Corporate securities and miscellaneous171,506 (16,063)34,283 (4,691)205,789 (20,754)
Municipal securities51,701 (7,236)3,689 (897)55,390 (8,133)
Residential mortgage-backed securities56,246 (4,152)52,778 (11,054)109,024 (15,206)
Commercial mortgage-backed securities25,836 (1,488)8,583 (2,196)34,419 (3,684)
Asset-backed securities74,684 (3,351)25,820 (3,191)100,504 (6,542)
Total fixed maturity securities, available-for-sale408,939 (32,893)143,730 (23,302)552,669 (56,195)
Fixed maturity securities, held-to-maturity:
Asset-backed securities46,771 (5,696)— — 46,771 (5,696)
Total fixed maturity securities, held-to-maturity:46,771 (5,696)— — 46,771 (5,696)
Total$455,710 $(38,589)$143,730 $(23,302)$599,440 $(61,891)
The Company regularly monitors its available-for-sale fixed maturity securities that have fair values less than cost or amortized cost for signs of impairment, an assessment that requires significant management judgment regarding the evidence known. Such judgments could change in the future as more information becomes known, which could negatively impact the amounts reported. Among the factors that management considers for fixed maturity securities are the financial condition of the issuer including receipt of scheduled principal and interest cash flows, and intent to sell, including if it is more likely than not that the Company will be required to sell the investments before recovery.
As of September 30, 2023, the Company had 869 lots of fixed maturity securities in an unrealized loss position. The Company does not have an intent to sell these securities and it is not more likely than not that the Company will be required to sell these securities before maturity or recovery of its cost basis. The Company determined that no credit impairment existed in the gross unrealized holding losses because the credit ratings of these securities were consistent with the credit ratings when purchased and/or at origination, there were no adverse changes in financial condition of the issuer and no adverse credit quality events in underlying assets. The Company attributed the unrealized losses to the changes in interest rates.
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SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the components of net investment (losses) gains for the three and nine months ended September 30, 2023 and 2022:
Three months ended September 30,Nine months ended September 30,
($ in thousands)2023202220232022
Gross realized gains
Fixed maturity securities, available-for sale$156 $64 $860 $174 
Equity securities3,959 605 6,000 3,481 
Other— — 1 36 
Total4,115 669 6,861 3,691 
Gross realized losses
Fixed maturity securities, available-for sale(381)(288)(837)(781)
Equity securities(245)(1,388)(5,006)(2,825)
Other(82)(1)(84)(22)
Total(708)(1,677)(5,927)(3,628)
Net unrealized (losses) gains on investments
Equity securities(6,417)(6,297)2,367 (26,180)
Mortgage loans26 — 27 — 
Net investment (losses) gains$(2,984)$(7,305)$3,328 $(26,117)
The following table sets forth the proceeds from sales of available-for-sale fixed maturity securities and equity securities for the nine months ended September 30, 2023 and 2022:
Nine months ended September 30,
($ in thousands)20232022
Fixed maturity securities, available-for sale$25,465 $9,646 
Equity securities38,581 32,356 
The following table sets forth the components of net investment income for the three and nine months ended September 30, 2023 and 2022:
Three months ended September 30,Nine months ended September 30,
($ in thousands)2023202220232022
Income:
Fixed maturity securities, available-for sale$9,180 $4,912 $23,439 $12,103 
Fixed maturity securities, held-to-maturity1,067 805 3,321 4,147 
Equity securities769 912 2,539 2,650 
Equity method investments(4)(3,861)(6,772)7,615 
Mortgage loans1,249 1,275 3,997 3,109 
Indirect loans(761)3,104 (4,009)7,783 
Short-term investments and cash3,165 505 8,140 716 
Other(115)(135)(106)(153)
Total investment income14,550 7,517 30,549 37,970 
Investment expenses(1,461)(1,529)(4,231)(6,303)
Net investment income$13,089 $5,988 $26,318 $31,667 
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SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the change in net unrealized losses on the Company’s investment portfolio, net of deferred income taxes, included in other comprehensive loss for the three and nine months ended September 30, 2023 and 2022:
Three months ended September 30,Nine months ended September 30,
($ in thousands)2023202220232022
Fixed maturity securities$(15,706)$(22,500)$(12,933)$(61,957)
Deferred income taxes3,317 4,725 2,745 13,011 
Total$(12,389)$(17,775)$(10,188)$(48,946)
3.Fair Value Measurements
The Company’s financial instruments include assets and liabilities carried at fair value, as well as assets and liabilities carried at cost or amortized cost but disclosed at fair value in its consolidated financial statements. In determining fair value, the market approach is generally applied, which uses prices and other relevant data based on market transactions involving identical or comparable assets and liabilities.
The Company uses data primarily provided by third-party investment managers or pricing vendors to determine the fair value of its investments. Periodic analyses are performed on prices received from third parties to determine whether the prices are reasonable estimates of fair value. The analyses include a review of month-to-month price fluctuations and, as needed, a comparison of pricing services’ valuations to other pricing services’ valuations for the identical security.
The Company classifies its financial instruments into the following three-level hierarchy:
Level 1 - Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement
date.
Level 2 - Inputs are other than quoted prices included in Level 1 that are observable for the asset or liability through
corroboration with market data at the measurement date.
Level 3 - Unobservable inputs that reflect management’s best estimate of what market participants would use in
pricing the asset or liability at the measurement date.
The following methods and assumptions were used in estimating the fair value disclosures for financial instruments in the accompanying consolidated financial statements and in these notes:
U.S. government securities, mutual funds and common stock
The Company uses unadjusted quoted prices for identical instruments in an active exchange to measure fair value which represent Level 1 inputs.
Preferred stocks, municipal securities, corporate securities and miscellaneous
The Company uses a pricing model that utilizes market-based inputs such as trades in an illiquid market for a particular security or trades in active markets for securities with similar characteristics. The model considers other inputs such as benchmark yields, issuer spreads, security terms and conditions, and other market data. These represent Level 2 fair value inputs.
Commercial mortgage-backed securities, residential mortgage-backed securities and asset-backed securities
The Company uses a pricing model that utilizes market-based inputs that may include dealer quotes, market spreads, and yield curves. It may evaluate individual tranches in a security by determining cash flows using the security’s terms and conditions, collateral performance, credit information benchmark yields and estimated prepayments. These represent Level 2 fair value inputs.



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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Mortgage loans
Mortgage loans have variable interest rates and are collateralized by real property. The Company determines fair value of mortgage loans using the income approach utilizing inputs that are observable and unobservable (Level 3). The unobservable input consists of the spread applied to a prime rate used to discount cash flows. The spread represents the incremental cost of capital based on the borrower’s ability to make future payments and the value of the collateral relative to the loan balance and is subject to judgement and uncertainty.
The following table sets forth the range and weighted average, weighted by relative fair value, of the spread as of September 30, 2023:
September 30, 2023
High15.28 %
Low4.50 %
Weighted average6.82 %
























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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following tables set forth the Company’s investments within the fair value hierarchy at September 30, 2023 and December 31, 2022:
September 30, 2023
($ in thousands)Level 1Level 2Level 3Total
Fixed maturity securities, available-for-sale:
U.S. government securities$46,382 $— $— $46,382 
Corporate securities and miscellaneous— 333,009 — 333,009 
Municipal securities— 83,367 — 83,367 
Residential mortgage-backed securities— 230,698 — 230,698 
Commercial mortgage-backed securities— 17,671 — 17,671 
Asset-backed securities— 163,737 — 163,737 
Total fixed maturity securities, available-for-sale46,382 828,482 — 874,864 
Fixed maturity securities, held-to-maturity:
Asset-backed securities— — 40,769 40,769 
Total fixed maturity securities, held-to-maturity— — 40,769 40,769 
Common stocks:
Consumer discretionary1,687 — — 1,687 
Consumer staples13,345 — — 13,345 
Energy3,434 — — 3,434 
Finance21,556 — — 21,556 
Industrial10,681 — — 10,681 
Information technology3,974 — — 3,974 
Materials3,173 — — 3,173 
Other2,291 — — 2,291 
Total common stocks60,141 — — 60,141 
Preferred stocks:
Consumer staples— 404 — 404 
Finance— 4,756 — 4,756 
Industrial— 1,025 — 1,025 
Other— 714 — 714 
Total preferred stocks— 6,899 — 6,899 
Mutual funds:
Fixed income5,197 — — 5,197 
Equity34,678 — — 34,678 
Commodity472 — — 472 
Total mutual funds40,347 — — 40,347 
Total equity securities100,488 6,899 — 107,387 
Mortgage loans— — 59,318 59,318 
Short-term investments194,049 — — 194,049 
Total investments$340,919 $835,381 $100,087 $1,276,387 
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
($ in thousands)Level 1Level 2Level 3Total
Fixed maturity securities, available-for-sale:
U.S. government securities$48,541 $— $— $48,541 
Corporate securities and miscellaneous— 235,129 — 235,129 
Municipal securities— 57,727 — 57,727 
Residential mortgage-backed securities— 119,856 — 119,856 
Commercial mortgage-backed securities— 36,495 — 36,495 
Asset-backed securities— 109,824 — 109,824 
Total fixed maturity securities, available-for-sale48,541 559,031 — 607,572 
Fixed maturity securities, held-to-maturity:
Asset-backed securities— — 46,771 46,771 
Total fixed maturity securities, held-to-maturity:— — 46,771 46,771 
Common stocks:
Consumer discretionary1,948 — — 1,948 
Consumer staples12,036 — — 12,036 
Energy3,241 — — 3,241 
Finance22,636 — — 22,636 
Industrial9,452 — — 9,452 
Information technology2,284 — — 2,284 
Materials2,820 — — 2,820 
Other1,579 — — 1,579 
Total common stocks55,996 — — 55,996 
Preferred stocks:
Consumer staples— 117 — 117 
Finance— 7,085 — 7,085 
Industrial— 1,020 — 1,020 
Other— 549 — 549 
Total preferred stocks— 8,771 — 8,771 
Mutual funds:
Fixed income5,068 — — 5,068 
Equity49,773 — — 49,773 
Commodity561 — — 561 
Total mutual funds55,402 — — 55,402 
Total equity securities111,398 8,771 — 120,169 
Mortgage loans— — 52,842 52,842 
Short-term investments121,158 — — 121,158 
Total investments$281,097 $567,802 $99,613 $948,512 




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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the changes in the fair value of instruments carried at fair value with a Level 3 measurement during the nine months ended September 30, 2023:
($ in thousands)Mortgage Loans
Balance at December 31, 2022$52,842 
Total gains for the period recognized in net investment gains (losses)22 
Issuances892 
Settlements(11,421)
Balance at March 31, 2023$42,335 
Total losses for the period recognized in net investment gains (losses) attributable to the change in unrealized gains or losses relating to assets held as of period end$(14)
Total gains for the period recognized in net investment gains (losses)(21)
Issuances30 
Settlements(9,582)
Balance at June 30, 2023$32,762 
Total losses for the period recognized in net investment gains (losses) attributable to the change in unrealized gains or losses relating to assets held as of period end$3 
Total gains for the period recognized in net investment gains (losses)26 
Issuances26,530 
Settlements— 
Balance at September 30, 2023$59,318 
Total losses for the period recognized in net investment gains (losses) attributable to the change in unrealized gains or losses relating to assets held as of period end$26 
The Company measures certain assets, including investments in indirect loans and loan collateral, equity method investments and other invested assets, at fair value on a nonrecurring basis only when they are deemed to be impaired.
In addition to the preceding disclosures on assets and liabilities recorded at fair value in the consolidated balance sheets, the Company is also required to disclose the fair values of certain other financial instruments for which it is practicable to estimate fair value. Estimated fair value amounts, defined as the quoted market price of a financial instrument, have been determined using available market information and other appropriate valuation methodologies. However, considerable judgements are required in developing the estimates of fair value where quoted market prices are not available. Accordingly, these estimates are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions or estimating methodologies may have an effect on the estimated fair value amounts.
The following methods and assumptions were used in estimating the fair value disclosures of other financial instruments:
Fixed maturity securities, held-to-maturity: Fixed maturity securities, held-to-maturity consists of senior and junior notes with target rates of return. As of September 30, 2023, the Company determined the fair value of these instruments using the income approach utilizing inputs that are unobservable (Level 3).
Notes payable: The carrying value approximates the estimated fair value for notes payable as the notes payable accrue interest at current market rates plus a spread. The Company determines fair value using the income approach utilizing inputs that are observable (Level 2).
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 September 30, 2023 and December 31, 2022:
September 30, 2023December 31, 2022
($ in thousands)Carrying
Value		Fair
Value		Carrying
Value		Fair
Value
Notes Payable
Term loan, due December 31, 2024$— $— $50,000 $50,000 
Revolving credit facility50,000 50,000 — — 
Notes payable$50,000 $50,000 $50,000 $50,000 
Subordinated Debt
Junior subordinated interest debentures$59,174 $59,794 $59,137 $59,794 
Unsecured subordinated notes19,496 19,326 19,472 18,934 
Subordinated debt, net of debt issuance costs$78,670 $79,120 $78,609 $78,728 
Other financial instruments qualify as insurance-related products and are specifically exempted from fair value disclosure requirements.
4.Mortgage Loans
The Company has invested in Separately Managed Accounts (“SMA1” and “SMA2”), managed by Arena Investors, LP (“Arena”), which is affiliated with The Westaim Corporation (“Westaim”) who, directly and through Westaim HIIG LP (a limited partnership controlled by Westaim), is the Company’s largest stockholder. As of September 30, 2023 and December 31, 2022, the Company held direct investments in mortgage loans from various creditors through SMA1 and SMA2.
The Company’s mortgage loan portfolios are primarily senior loans on real estate across the U.S. The loans earn interest at a fixed spread above a prime rate, mature in approximately 1 to 2 years from loan origination and the principal amounts of the loans range between 61% to 90% property’s appraised value at the time the loans were made. Mortgage loan participations are carried at fair value as of September 30, 2023 and cost adjusted for unamortized premiums, discounts, and loan fees as of December 31, 2022.
The carrying value of the Company’s mortgage loans as of September 30, 2023 and December 31, 2022 were as follows:
($ in thousands)September 30, 2023December 31, 2022
Commercial$16,469 $15,309 
Retail16,262 16,516 
Hospitality17,846 4,915 
Industrial6,117 6,329 
Multi-family2,624 5,593 
Office— 3,197 
$59,318 $51,859 
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company’s gross investment income for mortgage loans for the three and nine months ended September 30, 2023 and 2022 were as follows:
Three months ended September 30,Nine months ended September 30,
($ in thousands)2023202220232022
Commercial$588 $320 $1,637 $707 
Retail364 337 1,375 846 
Hospitality204 116 497 264 
Office— 84 203 306 
Multi-family93 237 285 553 
Industrial— 181 — 433 
$1,249 $1,275 $3,997 $3,109 
The uncollectible amounts on loans, on an individual loan basis, are determined based upon consultations and advice from the Company’s specialized investment manager and consideration of any adverse situations that could affect the borrower’s ability to repay, the estimated value of underlying collateral, and other relevant factors. The Company writes off the uncollectible amount in the period it was determined to be uncollectible. There was no write-off for uncollectible amounts during the three and nine months ended September 30, 2023 and 2022.
As of September 30, 2023 and December 31, 2022, approximately $6.7 million and $6.4 million of mortgage loans, respectively, were in the process of foreclosure. The carrying value of the mortgage loans in foreclosure is the lower of cost adjusted for unamortized premiums, discounts, and loan fees or the fair value of the collateral less costs to sell.
5.Other Long-Term Investments
Equity Method Investments
The Company’s ownership interests in most of its equity method investments range from approximately 3% to less than 50% where the Company has significant influence but not control.
The carrying value of the Company’s equity method investments as of September 30, 2023 and December 31, 2022 were as follows:
($ in thousands)September 30, 2023December 31, 2022
Arena Special Opportunities Fund, LP units$41,531 $44,504 
JVM Funds LLC units20,651 22,473 
Arena SOP LP units4,797 8,734 
RISCOM4,810 4,037 
Hudson Ventures Fund 2 LP units4,365 3,551 
Dowling Capital Partners LP units2,305 1,965 
Universa Black Swan LP units— 1,325 
Brewer Lane Ventures Fund II LP units336 200 
$78,795 $86,789 
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the components of net investment (loss) income from equity method investments for the three and nine months ended September 30, 2023 and 2022:
Three months ended September 30,Nine months ended September 30,
($ in thousands)2023202220232022
Dowling Capital Partners LP units$172 $(31)$777 $524 
RISCOM468 373 773 1,199 
Brewer Lane Ventures Fund II LP(25)— (54)— 
Hudson Ventures Fund II LP units551 (26)138 371 
JVM Funds LLC(252)220 (893)(548)
Universa Black Swan LP units(84)(812)(988)(2,362)
Arena SOP LP units(1,160)(4,068)(3,938)3,702 
Arena Special Opportunities Fund, LP units326 483 (2,587)4,729 
$(4)$(3,861)$(6,772)$7,615 
The following table sets forth the unfunded commitment of equity method investments as of September 30, 2023 and December 31, 2022:
($ in thousands)September 30, 2023December 31, 2022
Brewer Lane Ventures Fund II LP units$4,610 $4,800 
Hudson Ventures Fund 2 LP units1,120 1,796 
Dowling Capital Partners LP units386 386 
$6,116 $6,982 
The difference between the cost of an investment and its proportionate share of the underlying equity in net assets is allocated to the various assets and liabilities of the equity method investment. The Company amortizes the difference in net assets over the same useful life of a similar asset as the underlying equity method investment. For investment in RISCOM, a similar asset would be agent relationships. The Company amortizes this difference over a 15-year useful life.
The following table sets forth the Company’s recorded investment in RISCOM compared to its share of underlying equity as of September 30, 2023 and December 31, 2022:
($ in thousands)September 30, 2023December 31, 2022
Investment in RISCOM:
Underlying equity$3,248 $2,292 
Difference1,562 1,745 
Recorded investment balance$4,810 $4,037 
The following table sets forth the Company’s recorded investment in JVM Funds LLC compared to its share of underlying equity as of September 30, 2023 and December 31, 2022:
($ in thousands)September 30, 2023December 31, 2022
Investment in JVM Funds LLC:
Underlying equity$19,856 $21,565 
Difference795 908 
Recorded investment balance$20,651 $22,473 
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Investment in Indirect Loans and Loan Collateral
As of September 30, 2023 and December 31, 2022, the Company held indirect investments in collateralized loans and loan collateral through SMA1 and SMA2.
The carrying value and unfunded commitment of the SMA1 and SMA2 as of September 30, 2023 and December 31, 2022 were as follows:
September 30, 2023December 31, 2022
($ in thousands)Carrying ValueUnfunded CommitmentCarrying ValueUnfunded Commitment
SMA1$31,958 $— $36,426 $— 
SMA2444 — 2,010 — 
Investment in indirect loans and loan collateral$32,402 $— $38,436 $— 
Investment in Trust
The Company carries its investment in the common stock of the Delos Capital Trust n/k/a HIIG Capital Trust I (“Trust”) at cost. There were no impairments or observable changes in price during the nine months ended September 30, 2023 and 2022.
6.Allowance for Credit Losses
Premiums Receivable
The following table sets forth the changes in the allowance for expected credit losses on premiums receivable for the nine months ended September 30, 2023.
($ in thousands)Allowance for Credit Losses
Balance at December 31, 2022$629 
Cumulative effect of adoption of ASU 2016-13 at January 1, 2023— 
Current period change for estimated uncollectible premiums409 
Write-offs of uncollectible premiums receivable(56)
Balance at March 31, 2023$982 
Current period change for estimated uncollectible premiums37 
Write-offs of uncollectible premiums receivable(96)
Recoveries of amounts previously written off 18 
Balance at June 30, 2023$941 
Current period change for estimated uncollectible premiums277 
Write-offs of uncollectible premiums receivable(228)
Recoveries of amounts previously written off17 
Balance at September 30, 2023$1,007 
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Reinsurance Recoverables
The Company analyzes the credit risk associated with its reinsurance recoverables by monitoring the financial strength rating of its reinsurers from A.M. Best, a widely recognized rating agency with an exclusive insurance industry focus. The Company assesses the financial strength rating annually and updated throughout the year as A.M. Best provides updates on ratings and outlooks. The Company assesses the adequacy of various forms of credit enhancements such as reinsurance payables, letters of credit and funds held. The Company’s reinsurance recoverables net of credit enhancements by A.M. Best rating as of September 30, 2023 was as follows:
A.M. Best RatingSeptember 30, 2023
A- and above98.0 %
B++ to B+2.0 
Not rated— 
The Company considers reinsurance balances to be past due when they are 90 days past due. The following table sets forth the changes in the allowance for estimated uncollectible reinsurance for the nine months ended September 30, 2023:
($ in thousands)Allowance for Credit Losses
Balance at December 31, 2022$— 
Cumulative effect of adoption of ASU 2016-13 at January 1, 20232,295 
Current period change for estimated uncollectible reinsurance— 
Write-offs of uncollectible reinsurance recoverables— 
Balance at March 31, 2023$2,295 
Current period change for estimated uncollectible reinsurance— 
Write-offs of uncollectible reinsurance recoverables— 
Balance at June 30, 2023$2,295 
Current period change for estimated uncollectible reinsurance— 
Write-offs of uncollectible reinsurance recoverables— 
Balance at September 30, 2023$2,295 
7.Notes Payable
The Company entered into an agreement to obtain a new unsecured revolving credit facility (the “Revolving Credit Facility”) with a syndicate of participating banks during the 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.
During the nine months ended September 30, 2023, the Company drew $50.0 million on the Revolving Credit Facility and used the proceeds to pay off the principal on its existing term loan. The Company subsequently terminated the existing term loan and revolving line of credit.
Interest on the Revolving Credit Facility is payable quarterly. The interest rate on the Revolving Credit Facility is the Secured Overnight Financing Rate (“SOFR”) plus a margin of between 150 and 190 basis points based on the ratio of debt to total capital and a credit spread adjustment of 10 basis points. At September 30, 2023, the six-month SOFR on the Revolving Credit Facility was 5.47%, plus a margin of 1.60%.
The Company was subject to covenants on the Revolving Credit Facility based on minimum net worth, maximum debt to capital ratio, minimum A.M. Best Rating and minimum liquidity. As of September 30, 2023, the Company was in compliance with all covenants.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8.Stockholders’ Equity
Reverse Stock Split
On September 23, 2022, the Board of Directors approved a 4-for-1 reverse stock split of the Company’s common stock. The reverse stock split became effective January 3, 2023. All share and per share information included in the accompanying consolidated financial statements and notes to the consolidated financial statements have been retroactively adjusted to reflect the reverse stock split of common stock for all periods presented.
Initial Public Offering
On January 4, 2023, the Company announced the launch of its initial public offering (“IPO”) of its common stock. On January 12, 2023, the Company priced its IPO of 8,952,383 shares of its common stock, with 4,750,000 shares offered by the Company and 4,202,383 shares sold by selling stockholders, at a price of $15.00 per share. The shares began trading on January 13, 2023 on the Nasdaq Global Select Market under the ticker symbol “SKWD.”
The Company completed its IPO on January 18, 2023. The underwriters exercised in full their option to purchase 1,342,857 additional shares of common stock from the selling stockholders, at a price per share of $15.00. The Company’s net proceeds from the IPO were approximately $62.0 million, after deducting underwriting discounts and specific incremental expenses directly attributable to the IPO.
Upon the closing of its IPO, the Company filed an amended and restated certificate of incorporation which, among other things, increased the number of authorized shares consisting of 500,000,000 shares of common stock, par value $0.01 per share, and 10,000,000 shares of preferred stock, par value $0.01 per share.
Preferred Shares Conversion
The Preferred Shares had preference in liquidation over common stock in the amount of the face value of $50.00 per share and any declared but unpaid dividends to related common shares at the applicable conversion rate. The Preferred Shares provided the holder the option at any time to convert the Preferred Shares into common stock based on the Option Conversion Rate. At December 31, 2022, the Company had 1,969,660 Preferred Shares that could be converted to 16,305,113 common shares based on a conversion price equal to $6.04 per common share.
The Preferred Shares were subject to mandatory conversion upon the closing of an IPO at the Mandatory Conversion Rate. At December 31, 2022, the Mandatory Conversion Rate allowed the holder of the Preferred Shares the right to convert into common stock based on a conversion price equal to $6.04 per common share. On January 18, 2023, the 1,969,660 Preferred Shares converted to 16,305,113 shares of common stock upon the Company’s closing of its IPO.
9.Income Taxes
The following table sets forth the Company’s income tax expense (benefit) and effective tax rates for the three and nine months ended September 30, 2023 and 2022:
Three months ended September 30,Nine months ended September 30,
($ in thousands2023202220232022
Income tax expense (benefit)$6,084 $(719)$15,814 $4,842 
Effective tax rate21.9 %23.1 %21.8 %20.3 %
The effective tax rate will differ from the statutory rate of 21 percent due to permanent differences for disallowed expenses for tax and beneficial adjustments for tax-exempt income and dividends-received deduction.
The Company paid federal income taxes of $10.0 million during the nine months ended September 30, 2023.
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10.Losses and Loss Adjustment Expenses
The following table sets forth the reconciliation of unpaid losses and loss adjustment expenses (“LAE”) as reported in the condensed consolidated balance sheets as of and for the nine months ended September 30, 2023 and 2022:
Nine months ended September 30,
($ in thousands)20232022
Reserves for losses and LAE, beginning of period$1,141,757 $979,549 
Less: reinsurance recoverable on unpaid claims, beginning of period(435,986)(381,338)
Reserves for losses and LAE, beginning of period, net of reinsurance705,771 598,211 
Incurred, net of reinsurance, related to:
Current period378,811 284,265 
Prior years— 14,385 
Total incurred, net of reinsurance378,811 298,650 
Paid, net of reinsurance, related to:
Current period67,267 62,864 
Prior years187,256 158,749 
Total paid254,523 221,613 
Net reserves for losses and LAE, end of period830,059 675,248 
Plus: reinsurance recoverable on unpaid claims, end of period438,652 386,752 
Reserves for losses and LAE, end of period$1,268,711 $1,062,000 
11.Commission and Fee Income
Skyward Underwriters Agency, Inc. (“SUA”), a subsidiary of the Company, is a managing general insurance agent and reinsurance broker for property and casualty and accident and health risks in specialty niche markets. Commission and fee income is primarily generated from SUA for the placement of insurance policies on either a third-party insurance or reinsurance company.
The following table sets forth the Company’s disaggregated revenues from contracts with customers for the three and nine months ended September 30, 2023 and 2022:
Three months ended September 30,Nine months ended September 30,
($ in thousands)2023202220232022
SUA commission revenue$1,357 $967 $3,599 $2,626 
SUA fee income672 280 1,933 785 
Other56 115 285 241 
Total commission and fee income$2,085 $1,362 $5,817 $3,652 
The Company’s contract assets from commission and fee income as of September 30, 2023 and December 31, 2022 were $2.3 million and $1.3 million, respectively. Contract assets were $1.7 million and $1.2 million as of September 30, 2022 and December 31, 2021, respectively.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12.Underwriting, Acquisition and Insurance Expenses
The following table sets forth the components of underwriting, acquisition and insurance expenses for the three and nine months ended September 30, 2023 and 2022:
Three months ended September 30,Nine months ended September 30,
($ in thousands)2023202220232022
Amortization of policy acquisition costs$34,071 $17,379 $78,442 $45,514 
Other operating and general expenses34,244 29,961 98,211 86,744 
Total underwriting, acquisition and insurance expenses$68,315 $47,340 $176,653 $132,258 
13.Reinsurance
Certain premiums and benefits are assumed from and ceded to other insurance companies under various reinsurance agreements. The reinsurance agreements provide the Company with increased capacity to write larger risks and maintain its exposure to loss within its capital resources. The Company remains obligated for amounts ceded in the event that the reinsurers do not meet their obligations.
The following table sets forth the effects of reinsurance on written and earned premiums and losses and loss adjustment expenses for the three and nine months ended September 30, 2023 and 2022:
Three months ended September 30,
20232022
($ in thousands)WrittenEarnedWrittenEarned
Direct premiums$308,215 $299,294 $246,339 $242,727 
Assumed premiums47,517 51,665 23,911 30,020 
Ceded premiums(75,036)(123,926)(98,795)(114,699)
Net premiums$280,696 $227,033 $171,455 $158,048 
Ceded losses and LAE incurred$103,753 $60,878 
Nine months ended September 30,
20232022
($ in thousands)WrittenEarnedWrittenEarned
Direct premiums$947,977 $845,200 $771,668 $695,567 
Assumed premiums190,247 139,522 107,451 82,549 
Ceded premiums(441,650)(380,511)(383,532)(332,265)
Net premiums$696,574 $604,211 $495,587 $445,851 
Ceded losses and LAE incurred$255,855 $190,465 
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the components of reinsurance recoverables and ceded unearned premium as of September 30, 2023 and December 31, 2022:
($ in thousands)September 30, 2023December 31, 2022
Ceded unpaid losses and LAE$438,652 $435,986 
Ceded paid losses and LAE153,735 107,228 
Loss portfolio transfer25,583 38,145 
Allowance for credit losses(2,295)— 
Reinsurance recoverables$615,675 $581,359 
Ceded unearned premium$218,784 $157,645 
The Company entered into agreements with several of its reinsurers, whereby the reinsurer established funded trust accounts with the Company as the sole beneficiary. These trust accounts provide the Company additional security to collect claim recoverables under reinsurance contracts and the Company does not carry these on the balance sheet because the Company will only have custody over these accounts upon the failure of the reinsurer to pay amounts due. At September 30, 2023, the market value of these accounts was approximately $137.4 million. The agreements provide that, as was customary in the past, the reinsurer will continue claim payment reimbursements without disturbing the trust balances. The trust amount will be adjusted periodically, by mutual agreement, based on loss reserve recoverables.
Certain ceded reinsurance contracts that transfer only significant timing risk and do not transfer sufficient underwriting risk are accounted for using the deposit method of accounting. The Company’s deposit asset at September 30, 2023 and December 31, 2022 was $33.2 million and $41.8 million, respectively, and was included in other assets on the condensed consolidated balance sheets.
14.Stock Based Compensation
On September 23, 2022, the Compensation Committee of the Company’s Board of Directors (“Compensation Committee”) approved the Company’s 2022 Long-Term Incentive Plan (the “2022 Plan”), which became effective on January 12, 2023. The 2022 Plan provides for the granting of restricted stock, restricted stock units, performance stock units, stock options as well as cash-based performance awards, to select employees and non-employee directors of the Company. The 2022 Plan stated that 3,200,516 shares of common stock were available for issuance.
On September 23, 2022, the Compensation Committee approved the Company’s 2022 Employee Stock Purchase Plan (the “ESPP”), which became effective on May 15, 2023. Under the ESPP, all employees of the Company may choose, at two different specified time intervals each year, to have a percentage of their annual base earnings withheld to purchase the Company’s common stock. The purchase price of the common stock is 85% of the lower of its beginning-of-interval or end-of-interval market price. As of September 30, 2023, 376,531 common stock were available for purchase under this plan.
In December 2020, the Compensation Committee approved a Long Term Incentive Plan (the “2021 Plan”). The 2021 Plan provides for the granting of restricted stock, restricted stock units and performance stock units (collectively “restricted stock units” or “stock units”), as well as cash-based performance awards, to select employees and non-employee directors of the Company.
The Compensation Committee granted 1,101,116 and 198,842 shares of restricted stock and restricted stock units during the nine months ended September 30, 2023 and 2022, under the 2022 Plan and 2021 Plan, respectively. Members of the Board of Directors were granted 22,742 and 15,196 shares of restricted stock during the nine months ended September 30, 2023 and 2022, respectively, with a service period of 1 year. The fair value of restricted stock and restricted stock units under the 2022 Plan for awards granted at the time of the Company’s IPO were granted at the IPO price of $15.00 per share. The fair value of subsequent grants were equal to the closing stock price on the date the restricted stock units were granted.
The Compensation Committee granted 759,990 stock options during the nine months ended September 30, 2023. The grant date fair value of the options under the 2022 Plan was determined using the Black-Scholes model where the term was
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
the contractual term of 10 years less the weighted average service period. The volatility was determined based on the historical volatility of comparable publicly traded insurance companies.
The grant date fair value of options under the ESPP was determined using the Black-Scholes model where the term was the length of time between the grant date and the date the options are exercisable of 6 months. The volatility was determined based on the historical volatility of comparable publicly traded insurance companies.
The restricted stock and restricted stock units granted to employees and the Board of Directors during the nine months ended September 30, 2023 and 2022 were valued at approximately $17.7 million and $2.6 million, respectively, based on the grant date fair value. The stock options granted to employees during the nine months ended September 30, 2023 were valued at approximately $4.4 million based on the grant date fair value.
The following table sets forth the Company’s equity awards, target payout ranges and authorized target restricted stock and stock units for the nine months ended September 30, 2023 and 2022:
Award
Payout Range		Requisite
Service Period		Target
Stock and Stock Units
Nine months ended September 30, 2023
Market condition awards
0%–150%
3 years37,622
Performance condition awards
0%–150%
3 years95,456
Service condition awardsN/A
1–4 years
968,038
Stock optionsN/A
3–4 years
759,990
1,861,106
Nine months ended September 30, 2022
Market condition awards
0%–150%
3 years28,495
Performance condition awards
0%–150%
3 years26,210
Service condition awardsN/A
1–3 years
144,137
198,842
The following table sets forth option activity for the nine months ended September 30, 2023:
Weighted-Average
Exercise Price		Stock
Outstanding at January 1, 2023— 
Granted$15.00 759,990 
Exercised— 
Forfeited— 
Outstanding at September 30, 2023759,990 
The intrinsic value of each option is determined based on the difference between the fair value of the underlying share and the exercise price of the underlying option. The aggregate intrinsic value of options outstanding at September 30, 2023 was $9.4 million. The weighted-average remaining contractual life of the options outstanding at September 30, 2023 was 9.3 years.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the Company’s restricted stock and restricted stock units activity for the nine months ended September 30, 2023 and 2022:
Weighted-Average
Grant-Date
Fair Value		Stock and Stock Units
Non-vested at January 1, 2023$12.55 419,896 
Granted16.06 1,101,116 
Vested13.21 (35,954)
Forfeited15.30 (36,354)
Non-vested at September 30, 2023$15.12 1,448,704 
Non-vested at January 1, 2022$13.23 375,643 
Granted14.17 198,842 
Vested15.55 (126,978)
Forfeited12.51 (10,547)
Non-vested at September 30, 2022$12.54 436,960 
The total fair value of shares vested at September 30, 2023 and 2022 were $1.0 million and $2.0 million, respectively.
As of September 30, 2023 the total unrecognized compensation cost related to non-vested, stock-based compensation awards was $18.1 million and the weighted average period over which that cost is expected to be recognized is 1.7 years. For the three and nine months ended September 30, 2023, the Company recognized $2.3 million and $6.2 million of stock-based compensation expense, respectively. For the three and nine months ended September 30, 2022, the Company recognized $0.5 million and $1.7 million, of stock-based compensation expense, respectively.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
15.Earnings Per Share
The following table sets forth a reconciliation of the numerator and denominator of basic and diluted earnings (loss) per share computations contained in the period-ended consolidated financial statements for the three and nine months ended September 30, 2023 and 2022:
Three months ended September 30,Nine months ended September 30,
($ in thousands, except for share and per share amounts)2023202220232022
Numerator
Net income (loss)$21,711 $(2,399)$56,719 $18,977 
Less: Undistributed income allocated to participating securities— — (1,492)(9,124)
Net income (loss) attributable to common stockholders (numerator for basic earnings per share)21,711 (2,399)55,227 9,853 
Add back: Undistributed income allocated to participating securities— — 1,492 9,124 
Net income (loss) (numerator for diluted earnings per share under the two-class method)$21,711 $(2,399)$56,719 $18,977 
Denominator
Basic weighted-average common shares36,743,39316,465,58835,502,84316,464,313
Preferred shares (if converted method)——959,12415,245,533
Contingently issuable instruments (treasury stock method)706,794—684,017518,727
Market condition awards (contingently issuable)93,935—89,467103,811
Performance awards (contingently issuable)87,297—52,22339,231
Restricted stock units (treasury stock method)618,750—467,911227,054
Options (treasury stock method)153,674—74,846—
Diluted weighted-average common share equivalents38,403,84316,465,58837,830,43132,598,669
Basic earnings (loss) per share$0.59 $(0.15)$1.56 $0.60 
Diluted earnings (loss) per share$0.57 $(0.15)$1.50 $0.58 
The Company’s preferred shares participate in dividends and distributions with common stock on an as-converted basis and represent a participating security. Instruments awarded to employees that provide the holder the right to purchase common stock at a fixed price were included as potential common shares, weighted for the portion of the period they were granted, if dilutive.
Anti-dilutive instruments are excluded from the calculation of diluted weighted-average common share equivalents as they would have an anti-dilutive impact. The following table sets forth the weighted-average instruments that were
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
excluded from the calculation of diluted weighted-average common share equivalents during the three and nine months ended September 30, 2023 and 2022:
Three months ended September 30,Nine months ended September 30,
2023202220232022
Preferred shares (if converted method)—15,247,437——
Contingently issuable instruments (treasury stock method)—510,577—3,024
Market condition awards (contingently issuable)1,881112,4541,488—
Performance awards (contingently issuable)1,67042,4111,391—
Restricted stock units (treasury stock method)1,518252,1801,667—
Options (treasury stock method)2—364,714—
The Company’s common and preferred shares financed by stock notes are contingently issuable instruments where the holder must return, all or part of, the shares if the stock notes are not paid off. The following table sets forth common share equivalents of contingently issuable instruments (in shares) that were excluded from basic earnings (loss) per share for the three and nine months ended September 30, 2023 and 2022:
Three months ended September 30,Nine months ended September 30,
2023202220232022
Common shares932,58880,526932,588 80,526
Preferred shares, if converted— 1,059,602— 1,059,602
Total932,5881,140,128932,5881,140,128
The impact of the contingently issuable instruments on diluted earnings (loss) per share was calculated using the treasury stock method and included in the reconciliation of the denominator of the basic and diluted earnings (loss) per share computations for the three and nine months ended September 30, 2023 and 2022.
16.Related Party Transactions
Westaim
In July 2023, Westaim dissolved Westaim HIIG LP and obtained direct ownership of the Company’s common stock held by the partnership. As of September 30, 2023, Westaim owned 28.1% of the Company’s common stock. As of December 31, 2022, Westaim, including shares beneficially owned through Westaim HIIG LP, owned 44.5% of the Company’s common stock. The changes in ownership percentage were primarily due to the IPO, conversion of preferred stock to common stock, distribution of shares controlled by Westaim through a limited partnership, and secondary offering.
The Company’s investment in Westaim was included in equity securities on the consolidated balance sheets. The unrealized loss on this investment as of September 30, 2023 and December 31, 2022 was $1.3 million and $2.3 million, respectively.
Prior to the closing of the IPO, Westaim performed consulting and certain other services for the Company pursuant to a Management Services Agreement. This agreement terminated pursuant to its terms upon the closing of the IPO.
RISCOM
RISCOM provides the Company with wholesale brokerage services. RISCOM and the Company also have a managing general agency agreement. The Company holds a 20% ownership interest in RISCOM.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Net earned premium and gross commission expense related to these agreements for the three and nine months ended September 30, 2023 and 2022 were as follows:
Three months ended September 30,Nine months ended September 30,
($ in thousands)2023202220232022
Net earned premium$31,649 $23,712 $73,750 $67,239 
Commissions6,119 5,558 19,122 18,666 
Premiums receivable as of September 30, 2023 and December 31, 2022 were $14.8 million and $9.9 million, respectively.
Reinsurance
The Company has reinsurance agreements with Everest Re, an affiliate of Mt. Whitney Securities, LLC, which was a limited partner of Westaim HIIG LP through November 30, 2022, and holder of preferred shares. During the nine months ended September 30, 2023, Mt. Whitney Securities divested their entire ownership of the Company’s equity securities. Reinsurance premiums ceded during the three and nine months ended September 30, 2022 related to the agreement were $11.0 million and $53.2 million, respectively. Reinsurance recoverable from Everest Re, net of premium payables at December 31, 2022 were $177.5 million.
Other
Advisory and professional services fees and expense reimbursements paid to various affiliated stockholders and directors for the three and nine months ended September 30, 2023 were $0.5 million and $3.1 million, respectively, compared to $0.6 million and $2.8 million for the three and nine months ended September 30, 2022, respectively.
See Note 4 and 5 for investments involving affiliated companies and additional related party transactions.
17.Commitments and Contingencies
Litigation
The Company is named as a defendant in various legal actions arising from claims made under insurance policies and contracts. Those actions are considered by the Company in estimating the losses and loss adjustment expense reserves. Also, from time to time, the Company is a defendant in various legal actions that relate to bad faith claims, disputes with third parties or that involve alleged errors and omissions. The Company records accruals for these items to the extent the losses are probable and reasonably estimable. Although the ultimate outcome of these matters cannot be determined at this time, based on present information, the availability of insurance coverage and advice received from outside legal counsel, the Company believes the resolution of any such matters will not, individually or in the aggregate, have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
Indemnification
In conjunction with the sale of business assets and subsidiaries, the Company has provided indemnifications to certain of the buyers. Certain indemnifications cover typical representations and warranties related to the responsibilities to perform under the sales contracts. The amount of potential exposure covered by the indemnifications is difficult to determine because the indemnifications cover a variety of matters, operations and scenarios. Certain of these indemnifications have no time limit. At this time, the Company does not have reason to believe any such significant claims exist.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The term “Skyward Specialty” as used below refers only to Skyward Specialty Insurance Group, Inc. and the terms “our Company,” “we,” “us,” and “our” as used below refer to Skyward Specialty Insurance Group and its consolidated subsidiaries. The term “third quarter” as used below refers to the three and nine months ended September 30 for the time period then ended. Select insurance and accounting terms for Skyward Specialty are defined in the section entitled “Select Insurance and Financial Terms” included in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”).
The discussion and analysis below include certain forward-looking statements that are subject to risks, uncertainties and other factors described in "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2022. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors.
The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2023, or for any other future period. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report, and in conjunction with our audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022.
The accompanying condensed consolidated financial statements and related notes have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”).
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Overview
Founded in 2006, Skyward Specialty is a specialty insurance holding company incorporated in Delaware. We have one reportable segment through which we offer a broad array of commercial property and casualty products and solutions on a non-admitted (or E&S) and admitted basis, predominantly in the United States. We focus our business on markets that are underserved, dislocated and/or for which standard insurance coverages are insufficient or inadequate to meet the needs of businesses, including our customers and prospective customers operating in these markets. Our customers typically require highly specialized, customized underwriting solutions and claims capabilities. As such, we develop and deliver tailored insurance products and services to address each of the niche markets we serve.
Each of our eight distinct underwriting divisions has dedicated underwriting leadership supported by high-quality technical staff with deep experience in their respective niches. We believe this structure and expertise allows us to serve the needs of our customers effectively and be a value-add partner to our distributors, while earning attractive risk-adjusted returns.
All of our insurance company subsidiaries are group rated and have financial strength ratings of “A-” (Excellent) with positive outlook from the A.M. Best Company.
Key Operating and Financial Metrics
We discuss certain key metrics, described below, which provide useful information about our business and the operational factors underlying our financial performance. These metrics are generally standard among insurance companies and help to provide comparability with our peers.
Net retention, expressed as a percentage, is the ratio of net written premiums to gross written premiums.
Underwriting income (loss) is a non-GAAP financial measure defined as income (loss) before income taxes excluding net investment income, net realized and unrealized gains and losses on investments, impairment charges, interest expense, amortization expense and other income and expenses. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of underwriting income (loss) to net income, which is the most directly comparable financial metric prepared in accordance with GAAP.
Loss and LAE ratio, expressed as a percentage, is the ratio of losses and LAE to net earned premiums.
Expense ratio, expressed as a percentage, is the ratio of underwriting, acquisition and insurance expenses less commission and fee income to net earned premiums.
Combined ratio is the sum of loss ratio and expense ratio. A combined ratio under 100% indicates an underwriting profit. A combined ratio over 100% indicates an underwriting loss.
Adjusted loss and LAE ratio, expressed as a percentage, is a non-GAAP financial measure defined as the ratio of losses and LAE, excluding losses and LAE related to the loss portfolio transfer (“LPT”) and all development on reserves fully or partially covered by the LPT, to net earned premiums. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of adjusted loss ratio to loss ratio, which is the most directly comparable financial metric prepared in accordance with GAAP.
Adjusted combined ratio is a non-GAAP financial measure defined as the sum of the adjusted loss ratio and the expense ratio. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of adjusted combined ratio to combined ratio, which is the most directly comparable financial metric prepared in accordance with GAAP.
Adjusted operating income (loss) is a non-GAAP financial measure defined as net income excluding the net impact of the LPT, net realized and unrealized gains or losses on investments, goodwill impairment charges and other income and expenses. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of adjusted operating income (loss) to net income (loss), which is the most directly comparable financial metric prepared in accordance with GAAP.
Return on equity is annualized net income as a percentage of average beginning and ending stockholders’ equity.
Adjusted return on equity is a non-GAAP financial measure defined as annualized adjusted operating income as a percentage of average beginning and ending stockholders’ equity during the applicable period. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of adjusted return on equity to return on equity, which is the most directly comparable financial metric prepared in accordance with GAAP.
Tangible stockholders’ equity is a non-GAAP financial measure defined as stockholders’ equity less goodwill and intangible assets. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of tangible stockholders’ equity to stockholders’ equity, which is the most directly comparable financial metric prepared in accordance with GAAP.
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Return on tangible equity is a non-GAAP financial measure defined as annualized net income as a percentage of average beginning and ending tangible stockholders’ equity during the applicable period. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of return on tangible equity to return on equity, which is the most comparable financial metric prepared in accordance with GAAP.
Adjusted return on tangible equity is a non-GAAP financial measure defined as annualized adjusted operating income as a percentage of average beginning and ending tangible stockholders’ equity during the applicable period.
Results of Operations
The following table summarizes our results for the three and nine months ended September 30, 2023 and 2022:
Three months ended September 30,Nine months ended September 30,
($ in thousands)2023202220232022
Gross written premiums$355,732 $270,250 $1,138,224 $879,119 
Ceded written premiums(75,036)(98,795)(441,650)(383,532)
Net written premiums$280,696 $171,455 $696,574 $495,587 
Net earned premiums$227,033 $158,048 $604,211 $445,851 
Commission and fee income2,085 1,362 5,817 3,652 
Losses and LAE138,536 111,746 377,841 293,536 
Underwriting, acquisition and insurance expenses68,315 47,340 176,653 132,258 
Underwriting income(1)
$22,267 $324 $55,534 $23,709 
Net investment income$13,089 $5,988 $26,318 $31,667 
Net investment (losses) gains$(2,984)$(7,305)$3,328 $(26,117)
Income (loss) before income taxes$27,795 $(3,118)$72,533 $23,819 
Net income (loss)$21,711 $(2,399)$56,719 $18,977 
Adjusted operating income(1)
$25,029 $10,696 $56,532 $46,934 
Loss and LAE ratio61.0 %70.7 %62.5 %65.9 %
Expense ratio29.2 %29.1 %28.3 %28.8 %
Combined ratio90.2 %99.8 %90.8 %94.7 %
Adjusted loss and LAE ratio(1)
61.1 %64.8 %62.7 %63.8 %
Expense ratio29.2 %29.1 %28.3 %28.8 %
Adjusted combined ratio(1)
90.3 %93.9 %91.0 %92.6 %
Annualized return on equity16.4 %(2.3)%15.8 %6.1 %
Annualized return on tangible equity(1)
19.7 %(3.0)%19.4 %7.9 %
Annualized adjusted return on equity(1)
18.9 %10.4 %15.8 %15.2 %
Annualized adjusted return on tangible equity(1)
22.8 %13.4 %19.4 %19.4 %
(1) See “Reconciliation of Non-GAAP Financial Measures” in this Item 2
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Reconciliation of Non-GAAP Financial Measures
Adjusted Operating Income (Loss)
The following table provides a reconciliation of adjusted operating income to net income for the three and nine months ended September 30, 2023 and 2022:
Three months ended September 30,Nine months ended September 30,
2023202220232022
($ in thousands)Pre-taxAfter-taxPre-taxAfter-taxPre-taxAfter-taxPre-taxAfter-tax
Income (loss) as reported$27,795 $21,711 $(3,118)$(2,399)$72,533 $56,719 $23,819 $18,977 
Add:
Other expenses1,482 1,171 — — 4,061 3,208 — — 
Less:    
Net impact of loss portfolio transfer266 210 (9,271)(7,324)970 766 (9,271)(7,324)
Net investment (losses) gains(2,984)(2,357)(7,305)(5,771)3,328 2,629 (26,117)(20,633)
Adjusted operating income$31,995 $25,029 $13,458 10,696 $72,296 $56,532 $59,207 $46,934 
Underwriting Income (Loss)
The following table provides a reconciliation of underwriting income (loss) to income (loss) before federal income tax for the three and nine months ended September 30, 2023 and 2022:
Three months ended September 30,Nine months ended September 30,
($ in thousands)2023202220232022
Income (loss) before federal income tax expense (benefit)$27,795 $(3,118)$72,533$23,819
Add:
Interest expense2,632 1,738 7,2504,280 
Amortization expense463 387 1,3361,160
Other expenses1,482 — 4,061—
Less:  
Net investment income13,089 5,988 26,31831,667
Net investment (losses) gains(2,984)(7,305)3,328(26,117)
Underwriting income$22,267 $324 $55,534$23,709
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Adjusted Loss Ratio / Adjusted Combined Ratio
The following table provides a reconciliation of the adjusted loss and LAE ratio and adjusted combined ratio to the loss and LAE ratio and combined ratio for the three and nine months ended September 30, 2023 and 2022:
Three months ended September 30,Nine months ended September 30,
($ in thousands)2023202220232022
Net earned premiums$227,033$158,048$604,211$445,851
    
Losses and LAE138,536111,746377,841293,536
Pre-tax net impact of loss portfolio transfer(266)9,271(970)9,271
Adjusted losses and LAE$138,802$102,475$378,811$284,265
Loss ratio61.0 %70.7%62.5 %65.9 %
Net impact of LPT(0.1)%5.9%(0.2)%2.1%
Adjusted Loss Ratio61.1 %64.8 %62.7 %63.8 %
Combined ratio90.2 %99.8 %90.8 %94.7 %
Less: Net impact of LPT(0.1)%5.9%(0.2)%2.1%
Adjusted Combined Ratio90.3 %93.9 %91.0 %92.6 %
Tangible Stockholders’ Equity
The following table provides a reconciliation of tangible stockholders’ equity to stockholders’ equity for the periods ended September 30, 2023 and 2022:
($ in thousands)20232022
Stockholders' equity$535,397$399,817
Less: Goodwill and intangible assets88,80890,237
Tangible stockholders' equity$446,589$309,580
Adjusted Return on Equity
The following table provides a reconciliation of annualized adjusted return on equity to annualized return on equity for the three and nine months ended September 30, 2023 and 2022:
Three months ended September 30,Nine months ended September 30,
($ in thousands)2023202220232022
Numerator: annualized adjusted operating income$100,116 $42,784 $75,376 $62,579 
Denominator: average stockholders’ equity$529,038 $409,712 $478,530 $412,949 
Annualized adjusted return on equity
18.9 %10.4 %15.8 %15.2 %
Return on Tangible Equity
Annualized return on tangible equity for the three and nine months ended September 30, 2023 and 2022 reconciles to annualized return on equity as follows:
Three months ended September 30,Nine months ended September 30,
($ in thousands)2023202220232022
Numerator: annualized net income$86,844 $(9,596)$75,625 $25,303 
Denominator: average tangible stockholders’ equity$440,043 $319,292 $389,191 $322,162 
Annualized return on tangible equity
19.7 %(3.0)%19.4 %7.9 %
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Adjusted Return on Tangible Equity
Annualized adjusted return on tangible equity for the three and nine months ended September 30, 2023 and 2022 reconciles to annualized return on equity as follows:
Three months ended September 30,Nine months ended September 30,
($ in thousands)2023202220232022
Numerator: annualized adjusted operating income$100,116 $42,784 $75,376 $62,579 
Denominator: average tangible stockholders’ equity$440,043 $319,292 $389,191 $322,162 
Annualized adjusted return on tangible equity
22.8 %13.4 %19.4 %19.4 %
Underwriting Results
Premiums
The following tables presents gross written premiums by underwriting division for the three and nine months ended September 30, 2023 and 2022:
Three months ended September 30,
($ in thousands)20232022Change% Change
Global Property & Agriculture$48,775 $40,808 $7,967 19.5 %
Industry Solutions79,798 64,866 14,932 23.0 %
Programs41,735 37,239 4,496 12.1 %
Captives41,886 27,413 14,473 52.8 %
Professional Lines48,259 27,215 21,044 77.3 %
Accident & Health39,554 33,368 6,186 18.5 %
Transactional E&S30,699 21,311 9,388 44.1 %
Surety24,977 18,206 6,771 37.2 %
Total continuing business$355,683 $270,426 $85,257 31.5 %
Exited business49 (176)225 
N/M(1)
Total gross written premiums$355,732 $270,250 $85,482 31.6 %
(1) N/M = Not Meaningful
Nine months ended September 30,
($ in thousands)20232022Change% Change
Global Property & Agriculture$247,195 $177,565 $69,630 39.2 %
Industry Solutions226,680 202,237 24,443 12.1 %
Programs143,032 131,752 11,280 8.6 %
Captives127,249 97,579 29,670 30.4 %
Professional Lines114,420 62,127 52,293 84.2 %
Accident & Health112,819 97,107 15,712 16.2 %
Transactional E&S90,948 52,645 38,303 72.8 %
Surety75,899 53,734 22,165 41.2 %
Total continuing business$1,138,242 $874,746 $263,496 30.1 %
Exited business(18)4,373 (4,391)
N/M(1)
Total gross written premiums$1,138,224 $879,119 $259,105 29.5 %
(1) N/M = Not Meaningful
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The increase in gross written premiums for the third quarter of 2023, when compared to the same 2022 period, was driven by double-digit premium growth from all eight of our underwriting divisions. The double-digit premium growth was due to (i) new business across all of our underwriting divisions, and (ii) increased rates, primarily in industry solutions, captives and transactional E&S.
The increase in gross written premiums for the first nine months of 2023, when compared to the same 2022 period, was primarily driven by double-digit premium growth in our professional lines, transactional E&S, global property and agriculture, surety and captives underwriting divisions. The gross written premium increases were primarily driven by new business and rate increases. During the first nine months of 2023, we added new teams and products in our surety, captives, professional lines and global property and agriculture underwriting divisions.
Net written premiums for the third quarter of 2023 were $280.7 million, an increase of $109.2 million, or 63.7%, when compared to the same 2022 period. Net written premiums for the nine months ended September 30, 2023 were $696.6 million, an increase of $201.0 million or 40.6%. During the third quarter of 2023, the Company rescinded a quota share reinsurance contract, the impact of which increased net written premiums by $50.5 million, respectively, for the third quarter and first nine months of 2023, that had previously been ceded under the contract through the first six months of 2023.
Net earned premiums for the third quarter of 2023 were $227.0 million, an increase of $69.0 million, or 43.6%, when compared to the same 2022 period. Net earned premiums for the nine months ended September 30, 2023 were $604.2 million, an increase of $158.3 million, or 35.5%, when compared to the same 2022 period. The increases in net earned premiums were primarily driven by the same reasons that drove the increases in gross written premiums discussed above. Net earned premiums for the third quarter and first nine months of 2023 were also impacted by the Company’s decision to rescind a quota share reinsurance contract, the impact of which increased net earned premiums by $13.1 million, respectively, that had previously been ceded under the contract through the first six months of 2023.
For additional information regarding our reinsurance programs, see the “Reinsurance” discussion included in this Item 2.
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Losses and LAE
The following tables set forth the components of the loss and LAE ratios and adjusted loss and LAE ratios for the three and nine months ended September 30, 2023 and 2022:
Three months ended September 30,
20232022
($ 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)
$137,802 60.7 %$97,975 62.0 %
Cat loss and LAE(1)
1,000 0.4 %4,500 2.8 %
Prior accident year development - LPT
(266)(0.1)%9,271 5.9%
Total losses and LAE$138,536 61.0 %$111,746 70.7 %
Adjusted losses and LAE(2):
Non-cat loss and LAE(1)
$137,802 60.7 %$97,975 62.0 %
Cat loss and LAE(1)
1,000 0.4 %4,500 2.8 %
Total adjusted losses and LAE(2)
$138,802 61.1 %$102,475 64.8 %
(1) Current accident year
(2) See "Reconciliation of Non-GAAP Financial Measures" included in this Item 2
Nine months ended September 30,
20232022
($ 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)
$367,767 60.9 %$279,765 62.8 %
Cat loss and LAE(1)
11,044 1.8 %4,500 1.0 %
Prior accident year development - LPT
(970)(0.2)%9,271 2.1%
Total losses and LAE$377,841 62.5 %$293,536 65.9 %
Adjusted losses and LAE(2):
Non-cat loss and LAE(1)
$367,767 60.9 %$279,765 62.8 %
Cat loss and LAE(1)
11,044 1.8 %4,500 1.0 %
Total adjusted losses and LAE(2)
$378,811 62.7 %$284,265 63.8 %
(1) Current accident year
(2) See "Reconciliation of Non-GAAP Financial Measures" included in this Item 2
The loss ratio for the third quarter of 2023 improved 9.7 points when compared to the same 2022 period. The non-cat loss and LAE ratio improved 1.3 points when compared to the same 2022 period, primarily driven by the shift in the mix of business and continued run-off of exited business. Catastrophe losses only added 0.4 points to the current quarter loss ratio compared to the third quarter of 2022, which was impacted by 2.8 points of catastrophe losses from Hurricane Ian. The third quarter of 2022 was impacted by strengthening LPT reserves by $14.4 million partially offset by reinsurance recoveries of $5.1 million, which added 5.9 points to the 2022 loss ratio.
The loss ratio for the first nine months of 2023 improved 3.4 points when compared to the same 2022 period. The non-cat loss and LAE ratio improved 1.9 points when compared to the same 2022 period, primarily driven by the shift in the mix of business and continued run-off of exited business. Catastrophe losses from second and third quarter convective storms and first quarter wind and hail events, including tornadoes, added 1.8 points to the loss ratio compared to the first nine months of 2022, which was impacted by 1.0 point of catastrophe losses from Hurricane Ian. The loss ratio for the first nine months of 2022 included 2.1 points from the net impact of LPT reserve strengthening.
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Expense Ratio
The following tables set forth the components of the expense ratios for the three and nine months ended September 30, 2023 and 2022:
Three months ended September 30,
20232022
($ in thousands)Expenses% of
Net Earned Premiums		Expenses% of
Net Earned Premiums
Net policy acquisition expenses $34,071 15.0 %$17,379 11.0 %
Other operating and general expenses 34,244 15.1 %29,961 19.0 %
Underwriting, acquisition and insurance expenses 68,315 30.1 %47,340 30.0 %
Less: commission and fee income (2,085)(0.9 %)(1,362)(0.9 %)
Total net expenses $66,230 29.2 %$45,978 29.1 %
Nine months ended September 30,
20232022
($ in thousands)Expenses% of
Net Earned Premiums		Expenses% of
Net Earned Premiums
Net policy acquisition expenses $78,442 13.0 %$45,514 10.2 %
Other operating and general expenses 98,211 16.3 %86,744 19.5 %
Underwriting, acquisition and insurance expenses 176,653 29.3 %132,258 29.7 %
Less: commission and fee income (5,817)(1.0 %)(3,652)(0.9 %)
Total net expenses $170,836 28.3 %$128,606 28.8 %
The expense ratios for the third quarter and first nine months of 2023 increased slightly and improved 0.5 points, respectively, when compared to the same 2022 periods. The increase in the net policy acquisition cost ratios for the third quarter and first nine months of 2023, when compared to the same 2022 periods, was primarily driven by the (i) shift in the mix of business, and (ii) impact of the cancellation of the quota share reinsurance contract. The improvement in the other operating and general expenses ratios for the third quarter and first nine months of 2023, when compared to the same 2022 periods, was primarily due to the increase in earned premiums.
The expense ratios for the third quarter and first nine months of 2023 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 (loss).

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Investment Results
The following tables set forth the components of net investment income and net investment gains (losses) for the three and nine months ended September 30, 2023 and 2022:
Three months ended September 30,Nine months ended September 30,
$ in thousands2023202220232022
Short-term and money market investments
 $3,148 $496 $8,070 $631 
Core fixed income
8,549 4,68221,85510,637
Opportunistic fixed income(47)632(5,617)19,106
Equities1,438 1712,0071,279
     Net investment income(1)
$13,088 $5,981 $26,315 $31,653 
Net unrealized (losses) gains on securities still held
$(6,391)$(6,297)$2,394$(26,180)
Net realized gains (losses)
3,407(1,008)93463
Net investment (losses) gains$(2,984)$(7,305)$3,328 $(26,117)
(1) excludes income from operating cash for the third quarter and first nine months ended September, 30, 2023 and 2022.
Net investment income for the third quarter and first nine months of 2023 increased $7.1 million and decreased $5.3 million, respectively, when compared to the same 2022 periods.
The increase in income from our core fixed income portfolio for the third quarter and first nine months of 2023, when compared to the same 2022 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 4.2% at September 30, 2023 compared to 3.3% at September 30, 2022. The increase in income from short-term and money market investments for the third quarter and first nine months of 2023, when compared to the same 2022 periods, was due to a larger asset base and higher investment yields when compared to the same 2022 periods. The opportunistic fixed income portfolio was impacted by a decline in the fair value of limited partnership investments for the third quarter and first nine months of 2023 when compared to the same 2022 periods.
When a fixed maturity has been determined to have an impairment, the impairment charge is separated into an amount representing the credit loss, which is recognized in earnings as a realized loss and on the balance sheet as an allowance for credit losses netted with the amortized cost of fixed maturities. Future increases in fair value, if related to credit factors, are recognized through earnings limited to the amount previously recognized as an allowance for credit losses. The amount related to non-credit factors is recognized in accumulated other comprehensive income and future increases or decreases in fair value, if not credit losses, are included in accumulated other comprehensive (loss) income. We reviewed our available-for-sale fixed maturities at September 30, 2023 and determined that no credit impairment existed in the gross unrealized holding losses. See Note 2, “Investments” to our condensed consolidated financial statements included in Item 1 of this Form 10-Q for additional information.  
Investments
Composition of Investment Portfolio
The following table sets forth the components of our investment portfolio at carrying value at September 30, 2023 and December 31, 2022:
20232022
($ in thousands)
Fair Value
% of TotalFair Value% of Total
Short-term and money market investments$194,844 14.0 %$121,268 11.2 %
Core fixed income874,864 62.7 %607,572 56.1 %
Opportunistic fixed income182,533 13.0 %196,021 18.1 %
Equities143,637 10.3 %157,506 14.6 %
Total investment portfolio$1,395,878 100.0 %$1,082,367 100.0 %
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Core fixed income
The core fixed income portfolio consists primarily of investment grade fixed income securities which are predominantly highly-rated and liquid bonds. Our objective is to earn attractive risk-adjusted returns with a low risk of loss of principal. The portfolio is managed by third party managers. The average duration of the portfolio was approximately 4.4 years and 4.3 years, respectively, as of September 30, 2023 and December 31, 2022.
The following table sets forth the components of our core fixed income portfolio at September 30, 2023 and December 31, 2022:
20232022
($ in thousands)Fair Value
% of Total
Fair Value
% of Total
U.S. government securities$46,382 5.3 %$48,541 8.0 %
Corporate securities and miscellaneous333,009 38.1 %235,129 38.7 %
Municipal securities83,367 9.5 %57,727 9.5 %
Residential mortgage-backed securities230,698 26.4 %119,856 19.7 %
Commercial mortgage-backed securities17,671 2.0 %36,495 6.0 %
Asset-backed securities163,737 18.7 %109,824 18.1 %
Core fixed income securities, available-for-sale$874,864 100.0 %$607,572 100.0 %
The weighted average credit rating of the portfolio was “AA-” by Standard & Poor’s Financial Services, LLC (“Standard & Poor’s”) at September 30, 2023 and “AA” by Standard & Poor’s at December 31, 2022. The following table sets forth the credit quality of our core fixed income portfolio at September 30, 2023 and December 31, 2022, as rated by Standard & Poor’s or equivalent designation:
20232022
($ in thousands)Fair Value% of TotalFair Value% of Total
AAA$420,240 48.0 %$283,733 46.7 %
AA102,939 11.8 %74,604 12.3 %
A194,438 22.2 %134,175 22.1 %
BBB126,493 14.5 %88,369 14.5 %
BB and Lower30,754 3.5 %26,691 4.4 %
Total core fixed income$874,864 100.0 %$607,572 100.0 %
Opportunistic fixed income
The opportunistic fixed income portfolio is managed by Arena which is affiliated with Westaim, our largest stockholder. The opportunistic fixed income portfolio consists of separately managed accounts, limited partnerships, promissory notes and equity interests. The underlying securities are primarily floating rate senior secured loans, comprised of short duration, collateralized, asset-oriented credit investments designed to generate attractive risk-adjusted returns. The limited partnerships are subject to future increases or decreases in asset value as asset values are monetized and the income is distributed. As of September 30, 2023, the opportunistic fixed income portfolio consisted of three components: diversified asset based lending (54.3%), commercial mortgage loans (32.5%) and cash and cash equivalents (13.2%).
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The following table sets forth the components of our opportunistic fixed income portfolio by industry sector at September 30, 2023 and December 31, 2022:
20232022
($ in thousands)Fair Value% of TotalFair Value% of Total
Real Estate$96,353 52.8 %$90,370 46.1 %
Oil & Gas16,902 9.3 %20,725 10.6 %
Banking, Finance & Insurance13,254 7.3 %13,870 7.1 %
Other sectors(1)
31,943 17.4 %34,072 17.4 %
Cash and cash equivalents(2)
24,081 13.2 %36,984 18.8 %
Opportunistic fixed income$182,533 100.0 %$196,021 100.0 %
(1) Other sectors primarily includes Financial Services and Commercial & Industrial.
(2) Includes cash on settlements that have not yet been reinvested.
The average duration of the debt instruments in the portfolio is approximately 1.3 years and 1.4 years as of September 30, 2023 and December 31, 2022, respectively. During the third quarter of 2023, we provided Arena with notice to withdraw from our investment in the Arena Special Opportunities Fund, LP.
Equities
The equities portfolio primarily consists of domestic preferred stocks, common equities, exchange traded funds, limited partnerships, limited liability corporations and other types of equity interests, 74.8% of which are publicly traded. The portfolio is directed internally and includes both self-managed investments and portfolios managed by third-party investment management firms.
The following table sets forth the components of our equities portfolio by security type at September 30, 2023 and December 31, 2022:
20232022
($ in thousands)Fair Value% of TotalFair Value% of Total
Domestic common equities$62,889 43.8 %$76,929 48.8 %
International common equities37,599 26.2 %34,468 21.9 %
Preferred stock6,899 4.8 %8,772 5.6 %
Other(1)
36,250 25.2 %37,337 23.7 %
Equities$143,637 100.0 %$157,506 100.0 %
(1) Other includes limited partnerships, limited liability companies and other equity investments in unconsolidated subsidiaries.
Other Items
Income Taxes
Income tax expense for the three and nine months ended September 30, 2023 was $6.1 million and $15.8 million, respectively, compared to an income tax benefit of $0.7 million and income tax expense of $4.8 million, respectively, for the same 2022 periods. Our effective tax rate for the three and nine months ended September 30, 2023 was 21.9% and 21.8%, respectively, compared to 23.1% and 20.3%, respectively, for the same 2022 periods. For additional information, see Note 9 of our condensed consolidated financial statements included in Item 1 of this Form 10-Q.
Liquidity and Capital Resources
Sources and Uses of Funds
Our most significant source of cash is from premiums received from our insureds, which, for most policies, we receive at the beginning of the coverage period, net of the related commission amount for the policies. Our most significant cash outflow is for claims that arise when a policyholder incurs an insured loss. Because the payment of claims occurs after the receipt of the premium, often years later, we invest the cash in various investment securities that generally earn interest and dividends. We also use cash to pay for operating expenses such as salaries, rent and taxes and capital expenditures such as technology systems. We use reinsurance to manage the risk that we take on our policies. We cede, or pay out, part of the premiums we receive to our reinsurers and collect cash back when losses subject to our reinsurance coverage are paid.
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The timing of our cash flows from operating activities can vary among periods due to the timing by which payments are made or received. Some of our payments and receipts, including loss settlements and subsequent reinsurance receipts, can be significant, and as a result their timing can influence cash flows from operating activities in any given period. Management believes that cash receipts from premiums and proceeds from investment income are sufficient to cover cash outflows in the foreseeable future.
Our cash flows for the nine months ended September 30, 2023 and 2022 were:
($ in thousands)20232022
Cash and cash equivalents provided by (used in):
Operating activities $218,539 $124,913 
Investing activities (307,833)(128,281)
Financing activities 67,549 2,180 
Change in cash and cash equivalents and restricted cash$(21,745)$(1,188)
The increase in cash provided by operating activities in 2023 and 2022 was primarily due to positive cash flow from our insurance operations. Cash from operations can vary from period to period due to the timing of premium receipts, claim payments and reinsurance activity. Cash flows from operations in each of the past two years were used primarily to fund investing activities.
Net cash used in investing activities in 2023 and 2022 was primarily driven by purchases of fixed maturity securities and short-term investments.
Net cash provided by financing activities in 2023 was primarily from proceeds of $66.3 million from our IPO.
Credit Agreements
Revolving Credit Facility
On March 29, 2023, we entered into an unsecured revolving credit facility (the “Revolving Credit Facility”) with a syndicate of participating banks. The Revolving Credit Facility provides us with up to a $150.0 million revolving credit facility, with an accordion that can increase the capacity by $50.0 million, and a letter of credit sub-facility of up to $30.0 million.
During the nine months ended September 30, 2023, we drew $50.0 million on the Revolving Credit Facility and used the proceeds to pay off the principal on our existing term loan. In connection with our entry into the Revolving Credit Facility, we terminated the existing term loan and revolving line of credit pursuant to our Credit Agreement dated as of December 11, 2019, with Prosperity Bank.
Interest on the Revolving Credit Facility is payable quarterly. The interest rate on the Revolving Credit Facility is the Secured Overnight Financing Rate (“SOFR”) plus a margin of between 150 and 190 basis points based on the ratio of debt to total capital and a credit spread adjustment of 10 basis points. At September 30, 2023, the six-month SOFR on the Revolving Credit Facility was 5.47%, plus a margin of 1.60%.
We are subject to covenants on the Revolving Credit Facility based on minimum net worth, maximum debt to capital ratio, minimum A.M. Best Rating and minimum liquidity. As of September 30, 2023, we are in compliance with all covenants.
Trust Preferred
In August 2006, we received $58.0 million of proceeds from a debenture offering through a statutory trust, Delos Capital Trust (the “Trust”). The sole asset of the Trust consists of Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Trust Preferred”) with a principal amount of $59.8 million issued by us and cash of $1.8 million from the issuance of Trust common shares purchased by us equal to 3% of the Trust capitalization. The Trust Preferred are an unsecured obligation, are redeemable, and have a maturity date of September 15, 2036. Interest on the Trust Preferred is payable quarterly at an annual rate based on the three-month LIBOR (5.66% and 4.77% at September 30, 2023 and December 31, 2022, respectively), plus 3.4%.
Subordinated Debt
In May 2019, we issued unsecured subordinated notes (the “Notes”) with an aggregate principal amount of $20.0 million. Interest on the subordinated notes is 7.25% fixed for the first eight years and 8.25% fixed thereafter. Early 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.
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At September 30, 2023 the ratio of total debt outstanding, including the Revolving Credit Facility, the Trust Preferred and the Notes, to total capitalization (defined as total debt plus stockholders’ equity) was 19.4% and at December 31, 2022, the ratio of total debt outstanding, including the Term Loan, the Revolver, the Trust Preferred and the Notes, to total capitalization was 23.4%.
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 nine months ended September 30, 2023 our net retention on a written basis (calculated as net written premiums as a percentage of gross written premiums) was 78.9% and 61.2%, respectively, compared to 63.4% and 56.4%, respectively, for the same 2022 periods. Net retention for the three and nine months ended September 30, 2023 was impacted by the cancellation of a quota share reinsurance arrangement, the impact of which increased net written premiums by $50.5 million, respectively, that had previously been ceded under the contract through the first six months of 2023.
The following is a summary of our reinsurance programs as of September 30, 2023:
Line of BusinessMaximum Company Retention
Accident & Health$0.88 million per occurrence
Commercial Auto(1)
$1.00 million per occurrence
Excess Casualty(1)(2)
$1.24 million per occurrence
General Liability(1)
$1.25 million per occurrence
Professional Lines(2)
$2.70 million per occurrence
Property(3)
$2.80 million per occurrence
Surety(2)
$3.00 million per occurrence
Workers’ Compensation(2)
$1.55 million per occurrence
Cyber$2.69 million per occurrence
Representation and Warranty$2.50 million per occurrence
(1) Legal defense expenses can force exposure above the maximum company retention for Excess Casualty, Commercial Auto and General Liability.
(2) Reinsurance is subject to a loss ratio cap or aggregate level of loss cover that exceeds a modeled 1:250-year PML event.
(3) Catastrophe loss protection is purchased up to $28.0 million in excess of $12.0 million retention, which provides cover for a 1:250-year PML event.
Credit and Financial Strength Ratings
On August 25, 2023, A.M. Best affirmed Skyward Specialty’s financial strength rating of A- (Excellent) and revised the outlooks to positive from stable.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in market risk from the information provided in our Annual Report on Form 10-K for the year ended December 31, 2022.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports we file under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required financial disclosure. In connection with the preparation of this quarterly report on Form 10-Q, our management carried out an evaluation, under the supervision and with the participation of our management, including the CEO and CFO, as of September 30, 2023, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2023.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are party to legal proceedings which arise in the ordinary course of business. We believe that the outcome of such matters, individually and in the aggregate, will not have a material adverse effect on our consolidated financial position.
Item 1A. Risk Factors
There have been no material changes in our risk factors in the quarter ended September 30, 2023 from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
During the quarter ended September 30, 2023, none of our directors or officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934) adopted, terminated or modified a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K).
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Item 6. Exhibits
(a)Exhibits.
Exhibit NumberExhibit Description
3.1
3.2
4.1
31.1
31.2
32.1
101.INSInline 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.SCHInline XBRL Taxonomy Extension Schema Document
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document
101.LABInline XBRL Taxonomy Extension Label Linkbase Document
104Cover 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.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Skyward Specialty Insurance Group, Inc.
Date: November 9, 2023
By:/s/ Andrew Robinson
Andrew Robinson
Chief Executive Officer
(Principal Executive Officer)
Date: November 9, 2023
By:/s/ Mark Haushill
Mark Haushill
Chief Financial Officer
(Principal Financial and Accounting Officer)
49

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