0001519449-24-000024.txt : 20240503 0001519449-24-000024.hdr.sgml : 20240503 20240503125303 ACCESSION NUMBER: 0001519449-24-000024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 89 CONFORMED PERIOD OF REPORT: 20240331 FILED AS OF DATE: 20240503 DATE AS OF CHANGE: 20240503 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Skyward Specialty Insurance Group, Inc. CENTRAL INDEX KEY: 0001519449 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] ORGANIZATION NAME: 02 Finance IRS NUMBER: 141957288 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-41591 FILM NUMBER: 24911958 BUSINESS ADDRESS: STREET 1: 800 GESSNER STREET 2: SUITE 600 CITY: HOUSTON STATE: TX ZIP: 77024 BUSINESS PHONE: 713-935-4888 MAIL ADDRESS: STREET 1: 800 GESSNER STREET 2: SUITE 600 CITY: HOUSTON STATE: TX ZIP: 77024 FORMER COMPANY: FORMER CONFORMED NAME: Houston International Insurance Group LTD DATE OF NAME CHANGE: 20140801 FORMER COMPANY: FORMER CONFORMED NAME: Houston International Insurance Group DATE OF NAME CHANGE: 20110428 10-Q 1 skwd-20240331.htm 10-Q skwd-20240331
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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 March 31, 2024
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 April 26, 2024, the registrant had 39,995,027 shares of common stock outstanding.
1

TABLE OF CONTENTS
Form 10-QItem and DescriptionPage
2

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2024December 31, 2023
($ in thousands, except share and per share amounts)(Unaudited)
Assets
Investments:
Fixed maturity securities, available-for-sale, at fair value (amortized cost of $1,102,190 and $1,047,713, respectively)
$1,065,175 $1,017,651 
Fixed maturity securities, held-to-maturity, at amortized cost (net of allowance for credit losses of $329)
42,700 42,986 
Equity securities, at fair value117,083 118,249 
Mortgage loans, at fair value44,309 50,070 
Equity method investments103,962 110,653 
Other long-term investments2,045 3,852 
Short-term investments, at fair value297,932 270,226 
Total investments1,673,206 1,613,687 
Cash and cash equivalents85,059 65,891 
Restricted cash30,210 34,445 
Premiums receivable, net273,410 179,235 
Reinsurance recoverables, net612,043 596,334 
Ceded unearned premium204,625 186,121 
Deferred policy acquisition costs104,697 91,955 
Deferred income taxes23,607 21,991 
Goodwill and intangible assets, net88,137 88,435 
Other assets92,063 75,341 
Total assets$3,187,057 $2,953,435 
Liabilities and stockholders’ equity
Liabilities:
Reserves for losses and loss adjustment expenses$1,376,946 $1,314,501 
Unearned premiums621,794 552,532 
Deferred ceding commission41,062 37,057 
Reinsurance and premium payables193,760 150,156 
Funds held for others88,864 58,588 
Accounts payable and accrued liabilities53,443 50,880 
Notes payable100,000 50,000 
Subordinated debt, net of debt issuance costs18,916 78,690 
Total liabilities2,494,785 2,292,404 
Stockholders’ equity
Common stock, $0.01 par value, 500,000,000 shares authorized, 39,995,027 and 39,863,756 shares issued and outstanding, respectively
400 399 
Additional paid-in capital711,309 710,855 
Stock notes receivable(5,234)(5,562)
Accumulated other comprehensive loss(29,279)(22,953)
Retained earnings (accumulated deficit)15,076 (21,708)
Total stockholders’ equity692,272 661,031 
Total liabilities and stockholders’ equity$3,187,057 $2,953,435 
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 (UNAUDITED)
Three months ended March 31,
($ in thousands, except share and per share amounts)20242023
Revenues:
Net earned premiums$236,342 $182,831 
Commission and fee income2,026 1,492 
Net investment income18,297 4,646 
Net investment gains8,303 961 
Total revenues264,968 189,930 
Expenses:
Losses and loss adjustment expenses143,914 114,900 
Underwriting, acquisition and insurance expenses69,774 51,655 
Interest expense2,727 2,152 
Amortization expense388 387 
Other expenses1,188 1,114 
Total expenses217,991 170,208 
Income before income taxes46,977 19,722 
Income tax expense10,193 4,166 
Net income36,784 15,556 
Net income attributable to participating securities 1,274 
Net income attributable to common stockholders$36,784 $14,282 
Comprehensive income:
Net income$36,784 $15,556 
Other comprehensive (loss) income:
Unrealized gains and losses on investments:
Net change in unrealized (losses) gains on investments, net of tax(5,418)7,788 
Reclassification adjustment for losses on securities no longer held, net of tax(908)(47)
Total other comprehensive (loss) income(6,326)7,741 
Comprehensive income$30,458 $23,297 
Per share data:
Basic earnings per share$0.94 $0.43 
Diluted earnings per share$0.90 $0.42 
Weighted-average common shares outstanding
Basic39,108,351 32,848,243 
Diluted41,085,136 36,952,073 
The accompanying notes are an integral part of the consolidated financial statements.
4

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
Three months ended March 31,
($ in thousands, except share amounts)20242023
Preferred shares:
Balance at beginning of period 1,969,660 
Preferred stock conversion to common shares (1,969,660)
Balance at March 31  
Common shares:
Balance at beginning of period39,863,756 16,599,666 
Issuance of shares131,271 4,753,332 
Preferred stock conversion to common shares 16,305,113 
Balance at March 3139,995,027 37,658,111 
Preferred stock:
Balance at beginning of period$ $20 
Preferred stock conversion to common shares (20)
Balance at March 31$ $ 
Common stock:
Balance at beginning of period$399 $168 
Issuance of common stock1  
Preferred stock conversion to common shares 161 
Proceeds from equity offerings, net 48 
Balance at March 31$400 $377 
Treasury stock:
Balance at beginning of period$ $(2)
Preferred stock conversion to common shares 2 
Balance at March 31$ $ 
Additional paid-in capital:
Balance at beginning of period$710,855 $577,289 
Issuance of common stock454 1,864 
Preferred stock conversion to common shares (143)
Proceeds from equity offerings, net 62,358 
Balance at March 31$711,309 $641,368 
Stock notes receivable:
Balance at beginning of period$(5,562)$(6,911)
Employee equity transactions328 193 
Balance at March 31$(5,234)$(6,718)
Accumulated other comprehensive loss:
Balance at beginning of period$(22,953)$(43,485)
Other comprehensive (loss) income, net of tax(6,326)7,741 
Balance at March 31$(29,279)$(35,744)
Retained earnings (accumulated deficit):
Balance at beginning of period$(21,708)$(105,417)
Cumulative effect on adoption of ASU No. 2016-13 (2,276)
Net income36,784 15,556 
Balance at March 31$15,076 $(92,137)
Total stockholders’ equity$692,272 $507,146 
The accompanying notes are an integral part of the consolidated financial statements.
5

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended March 31,
($ in thousands)20242023
Cash flows from operating activities
Net income$36,784 $15,556 
Adjustments to reconcile net income to net cash provided by operating activities57,481 91,651 
Net cash provided by operating activities94,265 107,207 
Cash flows from investing activities:
Purchase of fixed maturity securities, available-for-sale(97,426)(72,466)
Purchase of equity securities(2,035)(12,889)
Purchase of equity method investments(261)(286)
Investment in direct and indirect loans10,816 14,665 
Purchase of property and equipment(260)(614)
Sales and maturities of investment securities53,473 34,980 
Proceeds from equity method and other long-term investments4,871 355 
Change in short-term investments(27,706)(166,193)
Change in receivable/payable for securities(13,755)3,984 
Cash provided by deposit accounting2,417 5,038 
Net cash used in investment activities(69,866)(193,426)
Cash flows from financing activities:
Repayment of stock notes receivable328 193 
Draw on revolving line of credit50,000 50,000 
Repayment of term loan (50,000)
Repayment of trust preferred(59,794) 
Proceeds from initial public offering 66,262 
Net cash (used in) provided by financing activities(9,466)66,455 
Net increase (decrease) in cash and cash equivalents and restricted cash14,933 (19,764)
Cash and cash equivalents and restricted cash at beginning of period(1)
100,336 125,011 
Cash and cash equivalents and restricted cash at end of period(1)
$115,269 $105,247 
Supplemental disclosure of cash flow information:
Cash paid for interest$2,656 $3,145 
(1)The sum of cash and cash equivalents and restricted cash from the consolidated balance sheets
The accompanying notes are an integral part of the consolidated financial statements.
6

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.Summary of Significant Accounting Policies
Basis of Presentation
The unaudited condensed consolidated financial statements of Skyward Specialty Insurance Group, Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all the disclosures required by GAAP for complete consolidated financial statements. Readers are urged to review the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 for a more complete description of the Company’s business and accounting policies. In the opinion of management, all adjustments necessary for a fair statement of the condensed consolidated financial statements have been included. Such adjustments consist only of normal recurring items. Interim results are not necessarily indicative of results of operations for the full year. The consolidated balance sheet as of December 31, 2023 was derived from the Company’s audited annual consolidated financial statements.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from these estimates.
2.Investments
The following tables set forth the amortized cost and the fair value by investment category at March 31, 2024 and December 31, 2023:
($ in thousands)Gross
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Allowance for Credit LossesFair Value
March 31, 2024
Fixed maturity securities, available-for-sale:
U.S. government securities$36,109 $30 $(573)$ $35,566 
Corporate securities and miscellaneous428,985 4,016 (17,245) 415,756 
Municipal securities101,697 586 (6,466) 95,817 
Residential mortgage-backed securities297,164 2,446 (16,596) 283,014 
Commercial mortgage-backed securities31,878 502 (1,854) 30,526 
Other asset-backed securities206,357 1,416 (3,277) 204,496 
Total fixed maturity securities, available-for-sale$1,102,190 $8,996 $(46,011)$ $1,065,175 
Fixed maturity securities, held-to-maturity:
Other asset-backed securities$43,029 $25 $(1,324)$(329)$41,401 
Total fixed maturity securities, held-to-maturity$43,029 $25 $(1,324)$(329)$41,401 

7

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands)Gross
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Loss
Allowance for Credit LossesFair Value
December 31, 2023
Fixed maturity securities, available-for-sale:
U.S. government securities$44,685 $202 $(721)$ $44,166 
Corporate securities and miscellaneous392,773 6,408 (15,761) 383,420 
Municipal securities98,266 655 (6,143) 92,778 
Residential mortgage-backed securities292,568 3,556 (14,498) 281,626 
Commercial mortgage-backed securities31,411 449 (1,926) 29,934 
Other asset-backed securities188,010 1,221 (3,504) 185,727 
Total fixed maturity securities, available-for-sale$1,047,713 $12,491 $(42,553)$ $1,017,651 
Fixed maturity securities, held-to-maturity:
Other asset-backed securities$43,315 $ $(1,969)$(329)$41,017 
Total fixed maturity securities, held-to-maturity$43,315 $ $(1,969)$(329)$41,017 
The following table sets forth the amortized cost and fair value of available-for-sale fixed maturity securities by contractual maturity at March 31, 2024:
($ in thousands)Amortized
Cost
Fair Value
Due in less than one year$32,270 $31,793 
Due after one year through five years297,619 286,500 
Due after five years through ten years187,841 183,251 
Due after ten years49,061 45,595 
Mortgage-backed securities329,042 313,540 
Other asset-backed securities206,357 204,496 
Total$1,102,190 $1,065,175 
Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Also, changing interest rates, tax considerations or other factors may result in portfolio sales prior to maturity.
The Company’s fixed maturity securities, held-to-maturity, at March 31, 2024 consisted entirely of asset backed securities that were not due at a single maturity date.
8

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following tables set forth the gross unrealized losses and the corresponding fair values of investments, aggregated by length of time that individual securities had been in a continuous unrealized loss position as of March 31, 2024 and December 31, 2023:
Less than 12 Months12 Months or MoreTotal
($ in thousands)Fair ValueGross Unrealized LossesFair ValueGross Unrealized LossesFair ValueGross Unrealized Losses
March 31, 2024
Fixed maturity securities, available-for-sale:
U.S. government securities$19,473 $(79)$11,240 $(494)$30,713 $(573)
Corporate securities and miscellaneous95,105 (1,049)177,017 (16,196)272,122 (17,245)
Municipal securities18,761 (369)49,031 (6,097)67,792 (6,466)
Residential mortgage-backed securities80,072 (1,351)103,169 (15,245)183,241 (16,596)
Commercial mortgage-backed securities3,765 (27)15,426 (1,827)19,191 (1,854)
Other asset-backed securities36,528 (258)60,458 (3,019)96,986 (3,277)
Total fixed maturity securities, available-for-sale253,704 (3,133)416,341 (42,878)670,045 (46,011)
Fixed maturity securities, held-to-maturity:
Other asset-backed securities  39,371 (1,324)39,371 (1,324)
Total fixed maturity securities, held-to-maturity:  39,371 (1,324)39,371 (1,324)
Total$253,704 $(3,133)$455,712 $(44,202)$709,416 $(47,335)
9

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, 2023
Fixed maturity securities, available-for-sale:
U.S. government securities$7,342 $(25)$25,604 $(696)$32,946 $(721)
Corporate securities and miscellaneous26,742 (570)174,947 (15,191)201,689 (15,761)
Municipal securities16,815 (290)47,269 (5,853)64,084 (6,143)
Residential mortgage-backed securities37,634 (602)103,495 (13,896)141,129 (14,498)
Commercial mortgage-backed securities4,942 (74)15,290 (1,852)20,232 (1,926)
Other asset-backed securities27,887 (106)75,253 (3,398)103,140 (3,504)
Total fixed maturity securities, available-for-sale121,362 (1,667)441,858 (40,886)563,220 (42,553)
Fixed maturity securities, held-to-maturity:
Other asset-backed securities  41,017 (1,969)41,017 (1,969)
Total fixed maturity securities, held-to-maturity:  41,017 (1,969)41,017 (1,969)
Total$121,362 $(1,667)$482,875 $(42,855)$604,237 $(44,522)
The Company regularly monitors its available-for-sale fixed maturity securities that have fair values less than cost or amortized cost for signs of impairment, an assessment that requires significant management judgment regarding the evidence known. Such judgments could change in the future as more information becomes known, which could negatively impact the amounts reported. Among the factors that management considers for fixed maturity securities are the financial condition of the issuer including receipt of scheduled principal and interest cash flows, and intent to sell, including if it is more likely than not that the Company will be required to sell the investments before recovery.
As of March 31, 2024, the Company had 692 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.
10

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the components of net investment gains for the three months ended March 31, 2024 and 2023:
Three months ended March 31,
($ in thousands)20242023
Gross realized gains
Fixed maturity securities, available-for sale$499 $493 
Equity securities1,081 1,227 
Other18 1 
Total1,598 1,721 
Gross realized losses
Fixed maturity securities, available-for sale(394)(237)
Equity securities(1,874)(4,289)
Other(18)(1)
Total(2,286)(4,527)
Net unrealized gains on investments
Equity securities8,020 3,745 
Mortgage loans971 22 
Net investment gains$8,303 $961 
The following table sets forth the proceeds from sales of available-for-sale fixed maturity securities and equity securities for the three months ended March 31, 2024 and 2023:
Three months ended March 31,
($ in thousands)20242023
Fixed maturity securities, available-for sale$12,093 $8,392 
Equity securities10,458 13,325 
The following table sets forth the components of net investment income for the three months ended March 31, 2024 and 2023:
Three months ended March 31,
($ in thousands)20242023
Income:
Fixed maturity securities, available-for sale$12,231 $6,676 
Fixed maturity securities, held-to-maturity1,126 1,003 
Equity securities627 726 
Equity method investments1,098 (4,664)
Mortgage loans1,419 1,473 
Indirect loans(1,694)(1,319)
Short-term investments and cash4,240 1,789 
Other869 (20)
Total investment income19,916 5,664 
Investment expenses(1,619)(1,018)
Net investment income$18,297 $4,646 
11

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)/gains on the Company’s investment portfolio, net of deferred income taxes, included in other comprehensive loss for the three months ended March 31, 2024 and 2023:
Three months ended March 31,
($ in thousands)20242023
Fixed maturity securities$(7,989)$9,786 
Deferred income taxes1,663 (2,045)
Total$(6,326)$7,741 
3.Fair Value Measurements
The Company’s financial instruments include assets and liabilities carried at fair value, as well as assets and liabilities carried at cost or amortized cost but disclosed at fair value in its consolidated financial statements. In determining fair value, the market approach is generally applied, which uses prices and other relevant data based on market transactions involving identical or comparable assets and liabilities.
The Company uses data primarily provided by third-party investment managers or pricing vendors to determine the fair value of its investments. Periodic analyses are performed on prices received from third parties to determine whether the prices are reasonable estimates of fair value. The analyses include a review of month-to-month price fluctuations and, as needed, a comparison of pricing services’ valuations to other pricing services’ valuations for the identical security.
The Company classifies its financial instruments into the following three-level hierarchy:
Level 1 - Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement
date.
Level 2 - Inputs are other than quoted prices included in Level 1 that are observable for the asset or liability through
corroboration with market data at the measurement date.
Level 3 - Unobservable inputs that reflect management’s best estimate of what market participants would use in
pricing the asset or liability at the measurement date.
The following methods and assumptions were used in estimating the fair value disclosures for financial instruments in the accompanying consolidated financial statements and in these notes:
U.S. government securities, mutual funds and common stock
The Company uses unadjusted quoted prices for identical instruments in an active exchange to measure fair value which represent Level 1 inputs.
Preferred stocks, municipal securities, corporate securities and miscellaneous
The Company uses a pricing model that utilizes market-based inputs such as trades in an illiquid market for a particular security or trades in active markets for securities with similar characteristics. The model considers other inputs such as benchmark yields, issuer spreads, security terms and conditions, and other market data. These represent Level 2 fair value inputs.
Commercial mortgage-backed securities, residential mortgage-backed securities and other asset-backed securities
The Company uses a pricing model that utilizes market-based inputs that may include dealer quotes, market spreads, and yield curves. It may evaluate individual tranches in a security by determining cash flows using the security’s terms and conditions, collateral performance, credit information benchmark yields and estimated prepayments. These represent Level 2 fair value inputs.
12

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES
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 March 31, 2024 and December 31, 2023:
March 31, 2024December 31, 2023
High9.75 %9.50 %
Low4.27 %3.25 %
Weighted average7.39 %7.05 %
The following tables set forth the Company’s investments within the fair value hierarchy at March 31, 2024 and December 31, 2023:
March 31, 2024
($ in thousands)Level 1Level 2Level 3Total
Fixed maturity securities, available-for-sale:
U.S. government securities$35,566 $ $ $35,566 
Corporate securities and miscellaneous 415,756  415,756 
Municipal securities 95,817  95,817 
Residential mortgage-backed securities 283,014  283,014 
Commercial mortgage-backed securities 30,526  30,526 
Other asset-backed securities 204,496  204,496 
Total fixed maturity securities, available-for-sale35,566 1,029,609  1,065,175 
Fixed maturity securities, held-to-maturity:
Other asset-backed securities  41,401 41,401 
Total fixed maturity securities, held-to-maturity  41,401 41,401 
Equity securities:
Common stocks70,378   70,378 
Preferred stocks 1,189  1,189 
Mutual funds45,516   45,516 
Total equity securities115,894 1,189  117,083 
Mortgage loans  44,309 44,309 
Short-term investments297,932   297,932 
Total$449,392 $1,030,798 $85,710 $1,565,900 
13

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2023
($ in thousands)Level 1Level 2Level 3Total
Fixed maturity securities, available-for-sale:
U.S. government securities$44,166 $ $ $44,166 
Corporate securities and miscellaneous 383,420  383,420 
Municipal securities 92,778  92,778 
Residential mortgage-backed securities 281,626  281,626 
Commercial mortgage-backed securities 29,934  29,934 
Other asset-backed securities 185,727  185,727 
Total fixed maturity securities, available-for-sale44,166 973,485  1,017,651 
Fixed maturity securities, held-to-maturity:
Other asset-backed securities  41,017 41,017 
Total fixed maturity securities, held-to-maturity:  41,017 41,017 
Equity securities:
Common stocks67,425   67,425 
Preferred stocks 7,358  7,358 
Mutual funds43,466   43,466 
Total equity securities110,891 7,358  118,249 
Mortgage loans  50,070 50,070 
Short-term investments270,226   270,226 
Total$425,283 $980,843 $91,087 $1,497,213 
The following tables set forth the changes in the fair value of instruments carried at fair value with a Level 3 measurement during the three months ended March 31, 2024 and 2023:
($ in thousands)Mortgage Loans
Balance at December 31, 2023$50,070 
Total gains for the period recognized in net investment gains (losses)971 
Issuances187 
Settlements(6,919)
Balance at March 31, 2024$44,309 
Total gains for the period recognized in net investment gains (losses) attributable to the change in unrealized gains or losses relating to assets held as of period end$952 
($ in thousands)Mortgage Loans
Balance at December 31, 2022$52,842 
Total losses 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)
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.
14

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In addition to the preceding disclosures on assets and liabilities recorded at fair value in the consolidated balance sheets, the Company is also required to disclose the fair values of certain other financial instruments for which it is practicable to estimate fair value. Estimated fair value amounts, defined as the quoted market price of a financial instrument, have been determined using available market information and other appropriate valuation methodologies. However, considerable judgements are required in developing the estimates of fair value where quoted market prices are not available. Accordingly, these estimates are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions or estimating methodologies may have an effect on the estimated fair value amounts.
The following methods and assumptions were used in estimating the fair value disclosures of other financial instruments:
Fixed maturity securities, held-to-maturity: Fixed maturity securities, held-to-maturity consists of senior and junior notes with target rates of return. As of March 31, 2024, the Company determined the fair value of these instruments using the income approach utilizing inputs that are unobservable (Level 3).
Notes payable: The carrying value approximates the estimated fair value for notes payable as the notes payable accrue interest at current market rates plus a spread. The Company determines fair value using the income approach utilizing inputs that are observable (Level 2).
Subordinated debt: Subordinated debt consists of two debt instruments, the Junior Subordinated Interest Debentures, due September 15, 2036, and Unsecured Subordinated Notes, due May 24, 2039. The carrying value of the Junior Subordinated Interest Debentures approximates the estimated fair value as the instrument accrues interest at current market rates plus a spread. Unsecured Subordinated Notes have a fixed interest rate. The Company determines the fair value of these instruments using the income approach utilizing inputs that are observable (Level 2).
The following table sets forth the Company’s carrying and fair values of notes payable and subordinated debt as of March 31, 2024 and December 31, 2023:
March 31, 2024December 31, 2023
($ in thousands)Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
Notes payable
Revolving credit facility100,000 100,000 50,000 50,000 
Notes payable$100,000 $100,000 $50,000 $50,000 
Subordinated debt
Junior subordinated interest debentures$ $ $59,186 $59,794 
Unsecured subordinated notes18,916 21,168 19,504 21,378 
Subordinated debt, net of debt issuance costs$18,916 $21,168 $78,690 $81,172 
Other financial instruments qualify as insurance-related products and are specifically exempted from fair value disclosure requirements.
4.Mortgage Loans
The Company has invested in Separately Managed Accounts (“SMA1” and “SMA2”), managed by Arena Investors, LP (“Arena”), which is affiliated with The Westaim Corporation (“Westaim”) who, directly and through Westaim HIIG GP Inc. (a general partnership controlled by Westaim), is the Company’s largest stockholder. As of March 31, 2024 and December 31, 2023, the Company held direct investments in mortgage loans from various creditors through SMA1 and SMA2.
The Company’s mortgage loan portfolios are primarily senior loans on real estate across the U.S. The loans earn interest at a fixed spread above a prime rate, mature in approximately 1 year to 3 years from loan origination and the principal amounts of the loans range between 64% to 90% property’s appraised value at the time the loans were made.
15

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The carrying value of the Company’s mortgage loans as of March 31, 2024 and December 31, 2023 were as follows:
($ in thousands)March 31, 2024December 31, 2023
Commercial$15,322 $14,469 
Retail14,123 16,072 
Hospitality7,928 12,744 
Industrial6,936 6,785 
$44,309 $50,070 
The following table sets forth the Company’s gross investment income for mortgage loans for the three months ended March 31, 2024 and 2023:
Three months ended March 31,
($ in thousands)20242023
Commercial$458 $494 
Retail490 595 
Hospitality471 161 
Office 106 
Multi-family 117 
$1,419 $1,473 
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 months ended March 31, 2024 and 2023.
As of March 31, 2024 and December 31, 2023, approximately $6.9 million and $7.1 million of mortgage loans, respectively, were in the process of foreclosure. As of March 31, 2024, $6.9 million of mortgage loans were not producing income for the previous 12 months.
5.Equity Method Investments and Other
The Company’s ownership interests in most of its equity method investments range from approximately 3% to less than 5% where the Company has significant influence but not control.
The following table sets forth the carrying value of the Company’s equity method investments as of March 31, 2024 and December 31, 2023:
($ in thousands)March 31, 2024December 31, 2023
Arena Special Opportunities Fund, LP units$40,643 $41,046 
JVM Funds LLC units19,293 20,061 
Arena SOP LP units2,752 2,463 
RISCOM3,807 4,121 
Hudson Ventures Fund 2 LP units4,742 4,669 
Dowling Capital Partners LP units858 1,708 
Brewer Lane Ventures Fund II LP units663 560 
$72,758 $74,628 
16

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the components of net investment income (loss) from equity method investments for the three months ended March 31, 2024 and 2023:
Three months ended March 31,
($ in thousands)20242023
Dowling Capital Partners LP units$1,342 $267 
RISCOM286 81 
Brewer Lane Ventures Fund II LP(32) 
Hudson Ventures Fund II LP units(52)(255)
JVM Funds LLC(484)(420)
Universa Black Swan LP units (556)
Arena SOP LP units289 (2,051)
Arena Special Opportunities Fund, LP units(251)(1,730)
$1,098 $(4,664)
The following table sets forth the unfunded commitment of equity method investments as of March 31, 2024 and December 31, 2023:
($ in thousands)March 31, 2024December 31, 2023
Brewer Lane Ventures Fund II LP units$4,227 $4,610 
Hudson Ventures Fund 2 LP units722 848 
Dowling Capital Partners LP units386 386 
$5,335 $5,844 
The difference between the cost of an investment and its proportionate share of the underlying equity in net assets is allocated to the various assets and liabilities of the equity method investment. The Company amortizes the difference in net assets over the same useful life of a similar asset as the underlying equity method investment. For investment in RISCOM, a similar asset would be agent relationships. The Company amortizes this difference over a 15-year useful life.
The following table sets forth the Company’s recorded investment in RISCOM compared to its share of underlying equity as of March 31, 2024 and December 31, 2023:
($ in thousands)March 31, 2024December 31, 2023
Investment in RISCOM:
Underlying equity$2,367 $2,620 
Difference1,440 1,501 
Recorded investment balance$3,807 $4,121 
The following table sets forth the Company’s recorded investment in JVM Funds LLC compared to its share of underlying equity as of March 31, 2024 and December 31, 2023:
($ in thousands)March 31, 2024December 31, 2023
Investment in JVM Funds LLC:
Underlying equity$18,574 $19,304 
Difference719 757 
Recorded investment balance$19,293 $20,061 
17

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Investment in Indirect Loans and Loan Collateral
As of March 31, 2024 and December 31, 2023, the Company held indirect investments in collateralized loans and loan collateral through SMA1 and SMA2.
The carrying value of the SMA1 and SMA2 as of March 31, 2024 and December 31, 2023 were as follows:
($ in thousands)March 31, 2024December 31, 2023
SMA1$24,883 $30,816 
SMA26,321 5,209 
Investment in indirect loans and loan collateral$31,204 $36,025 
6.Notes Payable & Subordinated Debt
Revolving Credit Facility
The Company entered into an agreement to obtain a new unsecured revolving credit facility (the “Revolving Credit Facility”) with a syndicate of participating banks during the first quarter of 2023. The Revolving Credit Facility provided the Company with up to a $150.0 million revolving credit facility, with an accordion that can increase the capacity by $50.0 million, and a letter of credit sub-facility of up to $30.0 million. As of December 31, 2023, the Company drew $50.0 million on the Revolving Credit Facility. During the three months ended March 31, 2024, the Company drew an additional $50.0 million on the Revolving Credit Facility and used the proceeds to pay off the principal on its existing Debentures (defined below).
Interest on the Revolving Credit Facility is payable quarterly. The interest rate on the Revolving Credit Facility is the Secured Overnight Financing Rate (“SOFR”) plus a margin of between 150 and 190 basis points based on the ratio of debt to total capital and a credit spread adjustment of 10 basis points. The following table sets forth the outstanding draws on the Revolving Credit Facility as of March 31, 2024:
($ in thousands)March 31, 2024
AmountMarginSix-month SOFRNet interest rate
March 15, 2024$50,000 1.60 %5.25 %6.85 %
March 29, 2023$50,000 1.60 %5.23 %6.83 %
The Company was subject to covenants on the Revolving Credit Facility based on minimum net worth, maximum debt to capital ratio, minimum A.M. Best Rating and minimum liquidity. As of March 31, 2024, the Company was in compliance with all covenants.
Debentures
In August 2006, the Company received $58.0 million of proceeds from a debenture offering through a statutory trust, Delos Capital Trust (the “Trust”). The sole asset of the Trust consists of Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Debentures”) with a principal amount of $59.8 million issued by the Company and cash of $1.8 million from the issuance of Trust common shares purchased by the Company equal to 3% of the Trust capitalization. On March 15, 2024, the Company redeemed the Debentures and paid $1.4 million of accrued interest.
18

SKYWARD SPECIALTY INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7.Income Taxes
The following table sets forth the Company’s income tax expense and effective tax rates for the three months ended March 31, 2024 and 2023:
Three months ended March 31,
($ in thousands)20242023
Income tax expense$10,193 $4,166 
Effective tax rate21.7 %21.1 %
The effective tax rate will differ from the statutory rate of 21 percent due to permanent differences for disallowed expenses for tax and beneficial adjustments for tax-exempt income, dividends-received deduction and non-deductible expenses.
8.Losses and Loss Adjustment Expenses
The following table sets forth the reconciliation of unpaid losses and loss adjustment expenses (“LAE”) as reported in the condensed consolidated balance sheets as of and for the three months ended March 31, 2024 and 2023: