Skyward/2022/FY/Annual report: Difference between revisions

''This article presents Skyward's FY 2022 annual report — the narrative Items (each summarized into a factsheet), primary financial statements, and note schedules from its SEC Form 10-K.''

 

 

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== Business ==

 

 

* ''Skyward Specialty'' was formed as a Delaware corporation on January 3, 2006, as an insurance holding company ^{p. 1}.

* ''Net proceeds to the company'' from the IPO were approximately $62.3 million, after deducting underwriting discounts and specific incremental expenses ^{p. 1}.

 

 

* The company operates with one reportable segment, offering a broad range of insurance coverages across various market niches ^{p. 2}.

[[File:Skyward-2022-FY-Annual report-skwd-20221231_g4.jpg|thumb|Our Business and Our Strategy]]

 

 

* The company focuses on profitable niches in the commercial lines P&C markets that require technical underwriting and claims management, acting as barriers to entry ^{p. 3}.

* Select executive leadership team members have additional long-term incentive targets tied to growth in book value per share ^{p. 3}.

 

 

* The company's "Rule Our Niche" strategy is based on selecting underserved market niches with attractive risk-adjusted returns where commoditized products are inadequate, and building sustainable competitive positions in these markets using talent and technology ^{p. 4}.

* The company believes its reserve position is the strongest in its history, positioning it for consistently strong underwriting profitability in the future ^{p. 4}.

 

 

* The company's marketing and distribution approach aligns with its underwriting strategy and "Rule Our Niche" strategy ^{p. 5}.

* Close partnership on nearly all functions is crucial for the successful construction and delivery of group captive solutions ^{p. 5}.

 

 

* The underwriting approach is central to the "Rule Our Niche" strategy and market success ^{p. 6}.

* The combination of underwriting talent, advanced technology and analytics, and functional support is considered a unique capability to "Rule Our Niche" ^{p. 6}.

 

 

* ''Claims handled in-house'': 72.5% of gross reported losses were handled in-house during the year ended December 31, 2022 ^{p. 7}.

* Artificial intelligence is being piloted to signal fraud, identify early indicators of third-party claimants' propensity for legal representation, and route claims based on potential severity at first notice of loss ^{p. 7}.

 

 

* Technology is central to Skyward Specialty Insurance Group's operations and decision-making, driving competitive advantages ^{p. 8}.

* The company continuously reviews its security breach posture and implements updated processes, best practices, and tools ^{p. 8}.

 

 

* Reinsurance is strategically purchased from third parties to protect capital from severity events (large single event losses or catastrophes) and reduce earnings volatility ^{p. 9}.

* There was ''no allowance for uncollectible reinsurance'' at December 31, 2022, and 2021 ^{p. 9}.

 

 

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(3) Catastrophe loss protection is purchased up to $25.0 million in excess of $10.0 million retention, which provides cover for a 1:250-year PML event.

 

 

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(2) This reinsurer facilitates our LPT reinsurance agreement; we maintain the right of offset of our recoverables for premiums we owe to the reinsurer, we held collateral in a statutory trust of $39.2 million on our net reinsurance recoverables.

 

 

* ''Enterprise risk management (ERM)'' is integrated into nearly every aspect of the company and guides daily activities ^{p. 10}.

* ''Enterprise Risk Management'' is central to decision-making and daily activities, and a core component of the strategy to achieve market-leading risk-adjusted returns for shareholders ^{p. 10}.

 

 

* Reserves are maintained for specific claims incurred and reported, IBNR reserves, and uncollectible reinsurance ^{p. 11}.

* The one-year development information on changes in loss reserves for the years ended December 31, 2022 and 2021 is presented in a table ^{p. 11}.

 

 

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(1) This line item shows changes in the current calendar year in the provision for losses and loss expenses attributable to claims occurring in prior years. See discussion regarding the calendar year developments at Item 7 of this Form 10-K Management’s Discussion and Analysis section at “Results of Operations—Losses and LAE Development.”.

 

 

* The company maintains a balanced investment portfolio primarily composed of investments that generate predictable and stable returns, supplemented by strategic investments for attractive risk-adjusted returns ^{p. 12}.

* Additional discussion on investments and market risks is available in Item 7 of Form 10-K, "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Investments" ^{p. 12}.

 

 

* The specialty lines property & casualty insurance market includes many distinct markets and sub-markets ^{p. 13}.

* Notable competitors include Markel Corporation, W.R. Berkley Corporation, American Financial Group Inc., Tokio Marine Holdings, Inc., CNA Financial Corporation, Hiscox, Ltd., RLI Corp., Intact Finance Corporation, Kinsale Capital Group, Inc., and James River Group Holdings, Ltd. ^{p. 13}.

 

 

* Skyward Specialty Insurance Group, Inc. holds an ''"A-" (Excellent) rating'' with a stable outlook from A.M. Best ^{p. 14}.

* These ratings are based on factors relevant to policyholders, agents, insurance brokers, and intermediaries, and are not specifically related to securities issued by the company ^{p. 14}.

 

 

* As of December 31, 2022, the company had approximately ''448 employees'' ^{p. 15}.

* Emphasis is placed on ''employee training and development'', providing opportunities for further education and professional growth ^{p. 15}.

 

 

* The company has applied for various ''trademark registrations'' at both federal and state levels in the United States ^{p. 16}.

* The company monitors its ''trademarks and service marks'' and protects them from unauthorized use as necessary ^{p. 16}.

 

 

* Skyward Specialty Insurance Group conducts operations principally through four insurance companies ^{p. 17}.

* Each entity in the organizational structure is wholly-owned by its immediate parent ^{p. 17}.

 

 

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* Such events could lead to a decline in the price of the common stock, potentially resulting in a loss of part or all of an investment ^{p. 18}.

 

 

* ''Financial condition and results of operations'' could be materially adversely affected if underwriting risk is not accurately assessed ^{p. 19}.

* ''Costs will increase significantly'' as a public company, requiring substantial management time for compliance with public company regulations ^{p. 19}.

 

 

* ''Underwriting success'' depends on accurately assessing risks associated with the business written and retained ^{p. 20}.

* It is unpredictable whether reforms will be enacted, and if so, their positive or negative effect on the company ^{p. 20}.

 

 

* Adverse economic factors like recession, inflation, high unemployment, or lower economic activity can reduce policy sales, increase claim frequency and premium defaults, or lead to falsified claims, impacting growth and profitability ^{p. 21}.

* Investments may not be sold at favorable prices or at all, potentially resulting in significant realized losses depending on general market conditions, interest rates, and credit issues with individual securities ^{p. 21}.

 

 

* ''Extensive regulation'' may adversely affect business objectives and lead to penalties like fines and suspensions for non-compliance ^{p. 22}.

* These requirements may ''discourage acquisition proposals'' and delay, deter, or prevent a change of control, even if desirable to stockholders ^{p. 22}.

 

 

* Future capital requirements depend on factors such as the ability to write new business successfully and establish sufficient premium rates and reserves to cover losses ^{p. 23}.

* Future debt agreements may contain similar or more burdensome terms and covenants, including financial covenants ^{p. 23}.

 

 

* The company's ability to attract and retain experienced personnel is crucial for its business ^{p. 24}.

* Litigation related to intellectual property could be costly, time-consuming, and divert management attention ^{p. 24}.

 

 

* Operating as a public company incurs increased costs and requires substantial management time for compliance initiatives ^{p. 25}.

* The number of holders of record does not represent the total number of stockholders due to shares being held by brokers and institutions on behalf of stockholders ^{p. 29}.

 

 

* Information regarding equity compensation plans will be included in the definitive proxy statement filed with the SEC for the 2023 Annual Meeting of Stockholders and is incorporated by reference ^{p. 30}.

 

 

* Information regarding securities issued or granted during the period covered by this Annual Report on Form 10-K that were not registered under the Securities Act is presented, giving effect to a 4-for-1 reverse stock split effective January 3, 2023 ^{p. 31}.

* All recipients either received adequate information about the company or had access to such information through employment or other relationships ^{p. 31}.

 

 

* The ''IPO'' closed on January 18, 2023 ^{p. 32}.

* There has been ''no material change'' in the planned use of proceeds from the IPO as described in the prospectus dated January 12, 2023, and filed with the SEC on January 13, 2023 ^{p. 32}.

 

 

* The company did not purchase any of its equity securities during the period covered by this Annual Report on Form 10-K ^{p. 33}.

 

 

* The company does not currently intend to pay any cash dividends on its common stock in the foreseeable future ^{p. 34}.

== Management's Discussion and Analysis of Financial Condition and Results of Operations ==

 

 

* Skyward Specialty Insurance Group is a growing specialty insurance company providing commercial P&C products and solutions ^{p. 35}.

* The company strives for excellence in risk selection, pricing, and claims outcomes, amplified by advanced technology and analytics ^{p. 35}.

 

 

* ''Net premiums earned'' were USD 1,000.0m for the year ended December 31, 2022, compared to USD 700.0m for the year ended December 31, 2021 ^{p. 36}.

* ''Weighted average common shares outstanding (diluted)'' were 37.0m for the year ended December 31, 2022, compared to 37.0m for the year ended December 31, 2021 ^{p. 36}.

 

 

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(1) See “Reconciliation of Non-GAAP Financial Measures” in this Item 7.

 

 

* ''Adjusted operating income'' is a non-GAAP financial measure that management uses to evaluate the company's financial performance ^{p. 37}.

* ''Adjusted operating income'' may not be comparable to similarly titled measures used by other companies ^{p. 37}.

 

 

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* ''Underwriting income (loss)'' was USD 10.9m in 2022, compared to USD (10.0)m in 2021 ^{p. 38}.

* ''Income (loss) before federal income tax'' was USD 50.9m in 2022, compared to USD 35.0m in 2021 ^{p. 38}.

 

 

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* ''Adjusted loss and LAE ratio'' and ''adjusted combined ratio'' are reconciled to the loss and LAE ratio and combined ratio for the years ended December 31, 2022 and 2021 ^{p. 39}.

 

 

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* ''Tangible stockholders’ equity'' reconciliation to stockholders’ equity is provided for the years ended December 31, 2022 and 2021 ^{p. 40}.

 

 

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* ''Adjusted return on equity'' is a non-GAAP financial measure calculated by dividing adjusted net income by average adjusted common shareholders’ equity ^{p. 41}.

* Management uses adjusted return on equity to evaluate the company's financial performance and believes it provides a useful metric for investors to assess profitability ^{p. 41}.

 

 

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* ''Return on tangible equity'' for the years ended December 31, 2022 and 2021 reconciles to return on equity ^{p. 42}.

 

 

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* ''Net income'' for the year ended December 31, 2022 was USD 100,000 ^{p. 43}.

* ''Adjusted return on tangible equity'' for the year ended December 31, 2021 was 24.4% ^{p. 43}.

 

 

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* ''Net earned premiums'' were USD 616.0m for the year ended December 31, 2022, compared to USD 499.8m for the same 2021 period, a ''+USD 116.2m'' or ''+23.2%'' increase ^{p. 44}.

* ''Open Claims'' for Section B were ''2,260'' at the Valuation Date and ''582'' at December 31, 2022 ^{p. 44}.

 

 

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(2) See "Reconciliation of Non-GAAP Financial Measures" included in this Item 7.

 

 

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[[File:Skyward-2022-FY-Annual report-skwd-20221231_g9.jpg|thumb|Underwriting Results]]

 

 

* ''Fixed maturity securities'' comprised 71.2% of the total investment portfolio as of December 31, 2022, and 63.2% as of December 31, 2021 ^{p. 45}.

* The ''tail-risk management strategy'' is designed to provide protection for the equity portfolio if there is a significant decline in the S&P 500 within a 30-day period ^{p. 45}.

 

 

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(1) Excludes restricted cash.

 

 

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

 

 

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

 

 

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* ''Income tax expense'' was USD 10.4m for the year ended December 31, 2022, compared to USD 10.0m for the year ended December 31, 2021 ^{p. 46}.

* For a reconciliation between actual federal income tax expense and the amount computed at the indicated statutory rate for the years ended December 31, 2022 and 2021, refer to Note 14, "Income Taxes" in the consolidated financial statements included in Item 8 of this Form 10-K ^{p. 46}.

 

 

* The company is organized as a holding company, with operations primarily conducted by wholly-owned insurance subsidiaries: HSIC, IIC, and GMIC (domiciled in Texas), and OSIC (domiciled in Oklahoma) ^{p. 47}.

* The company believes it has sufficient liquidity to meet operating cash needs, obligations, and committed capital expenditures for the next 12 months ^{p. 47}.

 

 

* ''Primary cash source'' is premiums from insureds, typically received at the beginning of the coverage period, net of commission ^{p. 48}.

* ''Change in net cash used in investing activities (2022 to 2021)'' was primarily driven by increased purchases of fixed maturities ^{p. 48}.

 

 

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* On December 11, 2019, a credit agreement was entered into with Prosperity Bank, providing a ''Term Loan'' of USD 50.0m and a ''Revolver'' of USD 50.0m, with additional capacity up to USD 75.0m ^{p. 49}.

* The ''ratio of total debt outstanding'' (including Term Loan, Revolver, Trust Preferred, and Notes) to total capitalization was 23.4% at December 31, 2022, and 23.2% at December 31, 2021 ^{p. 49}.

 

 

* ''Reserves for losses and LAE'' represent the best estimate of the ultimate cost of settling reported and unreported claims and related expenses ^{p. 50}.

* ''Reinsurance balances recoverable'' on reserves for paid and unpaid losses and LAE totaled ''$536.3m'' at December 31, 2021 ^{p. 50}.

 

 

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* Critical accounting estimates are those important to financial condition and results of operations, requiring significant judgment ^{p. 51}.

* Fair value estimates are based on assumptions believed to be reasonable, but actual results may differ ^{p. 51}.

 

 

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(1) The effective rate was consistent with the U.S. corporate income tax rate of 21% and is used to estimate the potential impact to stockholders’ equity.

 

 

* The company qualifies as an "emerging growth company" under the Jumpstart Our Business Startups Act of 2012 (JOBS Act) ^{p. 52}.

== Financial Statements ==

 

 

* We have audited the accompanying consolidated financial statements of Skyward Specialty Insurance Group, Inc. and its subsidiaries, which include the consolidated balance sheets as of December 31, 2022 and 2021, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”) ^{p. 54}.

** We evaluated the adequacy of the Company’s disclosures related to the liability for unpaid losses and LAE ^{p. 54}.

 

 

* The consolidated financial statements of Skyward Specialty Insurance Group, Inc. and subsidiaries (the Company) as of December 31, 2022 and 2021, and for each of the two years ended December 31, 2022, have been audited ^{p. 55}.

* The financial statements conform with U.S. generally accepted accounting principles ^{p. 55}.

 

 

* The Company's management is responsible for the financial statements ^{p. 56}.

| March 28, 2023 |

 

 

* The accompanying notes are an integral part of these consolidated financial statements ^{p. 57}.

 

 

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* The accompanying notes are an integral part of these consolidated financial statements ^{p. 58}.

 

 

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* The accompanying notes are an integral part of these consolidated financial statements ^{p. 59}.

 

 

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* The accompanying notes are an integral part of these consolidated financial statements ^{p. 60}.

 

 

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* The Company, Skyward Specialty Insurance Group, Inc., is a Delaware corporation organized in 2006 ^{p. 61}.

* ''Skyward Service Company'', also a subsidiary of the Company, provides various administrative services to the Company’s subsidiaries ^{p. 61}.

 

 

* The Company's consolidated financial statements were prepared according to ''GAAP'' in the United States of America ^{p. 62}.

* All ''intercompany transactions and balances'' have been eliminated in consolidation ^{p. 62}.

 

 

* The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions ^{p. 63}.

* Actual results could differ materially from these estimates ^{p. 63}.

 

 

* ''Cash and cash equivalents'' include cash on hand and highly liquid short-term investments ^{p. 64}.

* The ''carrying value'' of the Company’s cash and cash equivalents approximates fair value ^{p. 64}.

 

 

* ''Restricted cash'' is defined as cash with legal restrictions on withdrawal or use by the consolidated group ^{p. 65}.

* Cash held in a depository account for others or restricted by a state is recorded as ''restricted cash'' ^{p. 65}.

 

 

* ''Fixed maturity securities'' classified as available for sale are reported at fair value using quoted market prices or dealer quotes ^{p. 66}.

* ''Net realized gains and losses on investments'' are recognized in net income using the specific identification method ^{p. 66}.

 

 

* The Company purchases prospective reinsurance for certain lines of business on a proportional, excess of loss, and facultative basis ^{p. 67}.

* As of December 31, 2022, and 2021, no allowance for uncollectible reinsurance recoverables was required ^{p. 67}.

 

 

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* ''Financial instruments'' potentially subject to credit risk concentrations include cash and cash equivalents, restricted cash, investments, and premiums receivable, excluding reinsurance recoverables ^{p. 68}.

* Failure by distribution sources to remit premiums could lead to premium write-offs and a loss of income ^{p. 68}.

 

 

* ''Policy acquisition costs'' include commissions and premium taxes that are directly tied to the successful generation of new or renewal business ^{p. 69}.

* Management concluded that no premium deficiency existed as of December 31, 2022, and 2021 ^{p. 69}.

 

 

* ''Goodwill and intangible assets'' are recorded following a business combination ^{p. 70}.

* ''Goodwill impairment'' is reported under "impairment charges" in the Consolidated Statements of Operations and Comprehensive (Loss) Income ^{p. 70}.

 

 

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* ''Property and equipment'' is recorded at cost less accumulated depreciation and is included in other assets on the consolidated balance sheets ^{p. 71}.

* ''Depreciation expense'' is recognized on a straight-line basis for financial statement purposes over periods ranging from three to seven years ^{p. 71}.

 

 

* ''Right-of-use (ROU) assets'' are included in other assets on the balance sheet ^{p. 72}.

* ''Sublease income'' is recognized on a straight-line basis over the sublease term ^{p. 72}.

 

 

* ''Reserves for losses and loss adjustment expenses (LAE)'' represent the Company's best estimate of the ultimate net cost of all reported and unreported unpaid losses as of the balance sheet dates ^{p. 73}.

* Management believes the Company has limited exposure to environmental and other toxic tort type claim liabilities due to the nature of its historically written business ^{p. 73}.

 

 

* The Company earns and recognizes property and casualty and surety premiums on a pro-rata basis over the terms of the policies ^{p. 74}.

* Unearned premiums are calculated on a pro-rata basis over the terms of the policies for both direct and ceded amounts ^{p. 74}.

 

 

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* ''SUA commission revenue'' is generated from placing insurance policies on reinsurance programs via a reinsurance broker ^{p. 75}.

* Changes in the estimate of variable consideration for SUA fee income are recognized in the month they occur ^{p. 75}.

 

 

* ''Income tax expense'' is accrued for tax effects of transactions reported on consolidated financial statements ^{p. 76}.

* ''Premium tax expense'' is recognized within underwriting, acquisition, and insurance expense on the Consolidated Statement of Operations ^{p. 76}.

 

 

* ''Fair value'' for each class of financial instrument is estimated based on the framework established in fair value accounting guidance ^{p. 77}.

* Further details regarding fair value disclosures can be found in Note 6 ^{p. 77}.

 

 

* The Company granted common stock to employees and non-employee directors through its ''Legacy Programs'' (Stock Purchase Program and Equity Incentive Program) ^{p. 78}.

* ''Compensation costs'' for service condition awards are recognized over the service period based on the fair value of common stock on the grant date ^{p. 78}.

 

 

* ''Basic earnings per share'' is calculated using the two-class method ^{p. 79}.

* ''Common share adjustments'' that increase earnings per share or reduce loss per share are considered anti-dilutive, and diluted net earnings or net loss per share is computed excluding these common share equivalents ^{p. 79}.

 

 

* The Company qualifies as an "emerging growth company" under the Jumpstart Our Business Startups Act of 2012 (JOBS Act) ^{p. 80}.

* The Company expects an increase, net of tax, in accumulated deficit of approximately $2.3 million due to ASU 2016-13 adoption ^{p. 80}.

 

 

* ''Aegis Surety Acquisition'': In January 2021, the Company acquired the surety business of Aegis Surety Bonds and Insurance Services, LLC ("Aegis") for $10.0 million in cash and the disposal of its Exterminator Pro business ^{p. 81}.

* Its finite-lived intangible assets, such as policy renewals, agency relationships, and non-compete/exclusivity agreements, had a weighted average useful life of approximately 14 years as of December 31, 2022 ^{p. 81}.

 

 

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* The amortized cost and fair value of the Company's investments are summarized ^{p. 82}.

* At December 31, 2021, cash and investment securities on deposit had fair values of approximately ''$63.2 million'' ^{p. 82}.

 

 

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* The Company's financial instruments include assets and liabilities carried at fair value, and those carried at cost or amortized cost but disclosed at fair value in consolidated financial statements ^{p. 83}.

* ''Other financial instruments'' that qualify as insurance-related products are specifically exempted from fair value disclosure requirements ^{p. 83}.

 

 

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* The Company invests in ''Separately Managed Accounts'' ("SMA1" and "SMA2") managed by Arena Investors, LP ("Arena"), an affiliate of The Westaim Corporation ("Westaim") ^{p. 84}.

* The ''carrying value of 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 ^{p. 84}.

 

 

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* The Company's ownership interests in most equity method investments range from approximately 3% to less than 50%, indicating significant influence but not control ^{p. 85}.

* Note 11 provides information on common stock acquired from an entity providing the Company’s subordinated debt ^{p. 85}.

 

 

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* ''Property and equipment components'' for the years ended December 31, 2022 and 2021 are included within other assets on the consolidated balance sheets ^{p. 86}.

* ''Depreciation expense'' is presented for December 31, 2022 and 2021 ^{p. 86}.

 

 

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* The Company determines if a contract contains a lease at inception ^{p. 87}.

* ''Lease expense'' for the year ended December 31, 2021, was USD 2.7 million ^{p. 87}.

 

 

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* In May 2019, the Company agreed to issue ''unsecured subordinated notes'' with an aggregate principal amount of USD 20.0m ^{p. 88}.

* These ''deferred financing costs'' are presented as a direct deduction from the carrying amount of the subordinated debt ^{p. 88}.

 

 

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* The ''interest rate on the USD 50.0 million term loan'' is the lesser of one-month LIBOR (4.39% on December 31, 2022) plus an Applicable Margin of 1.65%, or the highest lawful rate ^{p. 89}.

* As of December 31, 2022, the ''Company was in compliance'' with all covenants in its credit agreement ^{p. 89}.

 

 

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* On April 24, 2020, the Company closed a private preferred share rights offering, allowing existing common stock holders to subscribe for Series A Convertible Preferred Stock (Preferred Shares) with a face value of $50.00 per share ^{p. 90}.

* The Preferred Shares have ''liquidation preference'' over common stock for their face value of $50.00 per share and any declared but unpaid dividends to related common shares at the applicable conversion rate ^{p. 90}.

 

 

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* The Company's provision for income taxes generally does not deviate substantially from the statutory tax rate ^{p. 91}.

* The Company provides a valuation allowance against deferred tax assets when it is more likely-than-not that some portion, or all, of deferred tax assets will not be realized ^{p. 91}.

 

 

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* The Company presents loss development on a consolidated basis but evaluates net ultimate loss and LAE under three sub-categories: multiline solutions, short tail/monoline specialty lines, and exited lines ^{p. 92}.

* ''Favorable development of USD 5.6 million'' within short tail lines in 2021 was primarily related to the 2019 and 2020 accident years, driven by favorable loss emergence relative to actuarial expectations in property and accident & health ^{p. 92}.

 

 

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* ''Losses and LAE reserves'' represent the Company's best estimate of the ultimate net cost of all reported and unreported losses unpaid as of the balance sheet dates ^{p. 93}.

* ''Multi-line Solutions'' includes mid to longer tail lines of business, industry solutions, programs, captives, and transactional E&S underwriting divisions ^{p. 93}.

 

 

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* The table presents the reconciliation of net incurred and paid claims development to loss reserves in the consolidated balance sheets as of December 31, 2022, by sub-category ^{p. 94}.

* The following table presents supplementary information about average historical claims duration as of December 31, 2022, by sub-category ^{p. 94}.

 

 

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* ''Direct and assumed premiums written'' for the year ended December 31, 2022, totaled USD 1,200,000 ^{p. 95}.

* ''Direct and assumed premiums written'' for the year ended December 31, 2021, totaled USD 875,000 ^{p. 95}.

 

 

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* ''SUA'' acts as a managing general insurance agent and reinsurance broker for property and casualty and accident and health risks in specialty niche markets ^{p. 96}.

* ''Contract assets'' from commission and fee income for the years ended December 31, 2022 and 2021 are presented ^{p. 96}.

 

 

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* ''Underwriting, acquisition and insurance expenses'' at December 31, 2022, included:

** ''Total underwriting, acquisition and insurance expenses'' of USD 320,000 ^{p. 97}

 

 

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* Reinsurance agreements provide the Company with increased capacity to write larger risks and maintain loss exposure within its capital resources ^{p. 98}.

* The Company's deposit asset was included in other assets on the consolidated balance sheets ^{p. 98}.

 

 

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* The ''Legacy Programs'' were active during the year ended December 31, 2021 ^{p. 99}.

* The weighted average period over which the unrecognized compensation cost is expected to be recognized is ''1.6 years'' ^{p. 99}.

 

 

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* ''Preferred Shares'' participate in dividends and distributions with common stock on an as-converted basis, classifying them as a participating security ^{p. 100}.

* The ''impact of contingently issuable instruments'' on diluted earnings per share was calculated using the treasury stock method and included in the reconciliation of the denominator for basic and diluted EPS computations for the years ended December 31, 2022 and 2021 ^{p. 100}.

 

 

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* The Company sponsors the ''401(k) Plan'' ("the Plan") ^{p. 101}.

* The Company's expensed matching contributions for the years ended December 31, 2022 and 2021 are presented in the following table ^{p. 101}.

 

 

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* ''Westaim HIIG LP'' acquired a majority of the Company's common stock in 2014 and 2015 ^{p. 102}.

* The ''Management Services Agreement termination date'' is the earliest of: (a) Westaim HIIG LP owning less than 8% of outstanding shares, (b) the Company's initial public offering consummation, or (c) a change in control ^{p. 102}.

 

 

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* In ''2016'', the Company entered into an agency agreement with RISCOM for wholesale brokerage services ^{p. 103}.

* This agency agreement is in addition to an ''already existing managing general agency agreement'' between the parties ^{p. 103}.

 

 

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* The Company has ''reinsurance agreements'' with Everest Re, an affiliate of Mt. Whitney Securities, LLC, which is a limited partner of Westaim HIIG LP and a holder of Preferred Shares ^{p. 104}.

* ''Reinsurance recoverable'' from Everest Re, net of premium payables, for the years ended December 31, 2022, and 2021 are as follows ^{p. 104}.

 

 

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* During the year ended December 31, 2022, the Company began investing in multiple investment products issued by Arena Special Opportunities Partners (Feeder) II, LP ("Arena SOP II"), which is managed by Arena, an affiliate of Westaim ^{p. 105}.

* As of December 31, 2022, the Company had no unfunded commitment related to this asset-backed securities investment ^{p. 105}.

 

 

* Advisory and professional services fees and expense reimbursements were paid to affiliated shareholders and directors during the years ended December 31, 2022 and 2021 ^{p. 106}.

* Note 13 details related party transactions concerning the Company’s preferred share rights offering ^{p. 106}.

 

 

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* The Company is a defendant in various legal actions related to claims under insurance policies and contracts ^{p. 107}.

* The Company recorded no provision for various contingencies during the years ended December 31, 2022 and 2021 ^{p. 107}.

 

 

* The Company has provided ''indemnifications'' to certain buyers in conjunction with the sale of business assets and subsidiaries ^{p. 108}.

* As of December 31, 2022, the Company does not believe any ''significant claims'' exist related to these indemnifications ^{p. 108}.

 

 

* The Company may owe ''earn-out liabilities'' to former owners of acquired assets and businesses ^{p. 109}.

* ''No earn-out liabilities'' existed as of December 31, 2022, and 2021 ^{p. 109}.

 

 

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* A significant portion of the consolidated assets are assets of the Company's insurance company subsidiaries: HSIC, IIC, GMIC, and OSIC ^{p. 110}.

* The capital and surplus and RBC level of HSIC on a consolidated statutory basis (including IIC, GMIC, OSIC, and BIC) are provided for the years ended December 31, 2022 and 2021 ^{p. 110}.

 

 

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* ''Statutory capital and surplus'' for the Company's principal operating subsidiaries for the years ended December 31, 2022 and 2021 included ownership interests in affiliated insurance subsidiaries ^{p. 111}.

* Additional information regarding the sale of BIC can be found in note 4 ^{p. 111}.

 

 

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* On September 23, 2022, the Board of Directors approved a ''4-for-1 reverse stock split'' of the Company’s common stock, effective January 3, 2023 ^{p. 112}.

== Controls and Procedures ==

 

 

* ''Management evaluation'' of disclosure controls and procedures was conducted as of the end of the period covered by the Annual Report on Form 10-K ^{p. 113}.

* Management applies judgment in evaluating the ''cost-benefit relationship'' of potential controls and procedures ^{p. 113}.

 

 

* ''Management responsibility'': Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended ^{p. 114}.

* ''Attestation report exclusion'': This annual report on Form 10-K does not include an attestation report from the company’s registered public accounting firm regarding internal control over financial reporting because the company is an emerging growth company as of December 31, 2022, as defined in the JOBS Act ^{p. 114}.

 

 

* ''Material weakness'' in internal control over financial reporting identified for the year ended December 31, 2021, due to not designing or maintaining an effective control environment and associated control activities to meet accounting and reporting requirements ^{p. 115}.

** Exhibits marked with <code>†</code> have portions omitted for confidentiality purposes. ^{p. 121}

 

 

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(2) Amount does not include gain or loss on retroactive reinsurance which is included in losses and loss adjustment expenses presented on the Consolidated Statements of Operations.

 

 

* The report was signed on behalf of the registrant by duly authorized individuals, pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 ^{p. 122}.

* The report was signed by the indicated persons on behalf of the Registrant, in their specified capacities and on the given dates, as per the requirements of the Securities Exchange Act of 1934 ^{p. 122}.

 

 

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