Skyward/2022/FY/Annual report

Document info
Document ID	rtwsssra8p
Organization	Skyward
Year	2022
Period	FY
Period label	FY22
Document category	Annual report
Document type	Form 10-K
Document name	Skyward Specialty Insurance Group 2022 Form 10-K
Publication date	2023-03-28
Language	English
Pages	23
Source	original URL
Transcript	wiki page
Data	data page

This article summarizes Skyward's Annual report published on 2023-03-28 (23 pages).

Cover

[c. 1; p. 1]

Cover

USD ($)	12 Months Ended
	Dec. 31, 2022	Mar. 22, 2023	Jun. 30, 2022
Cover [Abstract]	—	—	—
Document Type	10-K	—	—
Document Annual Report	true	—	—
Document Period End Date	Dec. 31, 2022	—	—
Current Fiscal Year End Date	--12-31	—	—
Document Transition Report	false	—	—
Entity File Number	001-41591	—	—
Entity Registrant Name	SKYWARD SPECIALTY INSURANCE GROUP, INC.	—	—
Entity Incorporation, State or Country Code	DE	—	—
Entity Tax Identification Number	14-1957288	—	—
Entity Address, Address Line One	800 Gessner Road	—	—
Entity Address, Address Line Two	Suite 600	—	—
Entity Address, City or Town	Houston	—	—
Entity Address, State or Province	TX	—	—
Entity Address, Postal Zip Code	77024-4284	—	—
City Area Code	713	—	—
Local Phone Number	935-4800	—	—
Title of 12(b) Security	Common stock, par value $0.01	—	—
Trading Symbol	SKWD	—	—
Security Exchange Name	NASDAQ	—	—
Entity Well-known Seasoned Issuer	No	—	—
Entity Voluntary Filers	No	—	—
Entity Current Reporting Status	No	—	—
Entity Interactive Data Current	Yes	—	—
Entity Filer Category	Non-accelerated Filer	—	—
Entity Small Business	false	—	—
Entity Emerging Growth Company	true	—	—
Entity Ex Transition Period	false	—	—
Entity Shell Company	false	—	—
Entity Common Stock, Shares Outstanding	—	37,658,111	—
Documents Incorporated by Reference	Portions of the Registrant’s Proxy Statement relating to the 2023 annual meeting of stockholders (the “2023 Proxy Statement”), which will be filed within 120 days of December 31, 2022, are incorporated by reference into Part III of this Form 10-K.	—	—
Entity Central Index Key	0001519449	—	—
Amendment Flag	false	—	—
Document Fiscal Year Focus	2022	—	—
Document Fiscal Period Focus	FY	—	—
Entity Public Float	—	—	0

Audit Information

[c. 2; p. 2]

Audit information by auditor name, auditor location, and auditor firm ID

	12 Months Ended
	Dec. 31, 2022
Audit Information [Abstract]	—
Auditor Name	Ernst & Young LLP
Auditor Location	Houston, Texas
Auditor Firm ID	42

Business

Who We Are

[c. 3; p. 8] Company overview and business model

• Skyward Specialty was formed as a Delaware corporation on January 3, 2006, as an insurance holding company.
• The company operated as Houston International Insurance Group, Ltd. until re-branding as Skyward Specialty in November 2020.
• Skyward Specialty is a growing specialty insurance company providing commercial property casualty (P&C) products and solutions on a non-admitted (E&S) and admitted basis, predominantly in the United States.
• The business focuses on underserved, dislocated markets or those where standard insurance coverages are insufficient.
• Customers typically require highly specialized, customized underwriting solutions and claims capabilities.
• The company develops and delivers tailored insurance products and services for niche markets.
• The portfolio of insured risks is highly diversified, covering customers in various industries, distributed through multiple channels.
• The company writes multiple lines of business, including general liability, excess liability, professional liability, commercial auto, group accident and health, property, surety, and workers’ compensation.
• The business insures both short and medium duration liabilities.
• The business mix is balanced between E&S and admitted markets.
• Diversification, combined with underwriting and claims expertise, is expected to produce strong growth and consistent profitability across P&C insurance pricing cycles.

[c. 4; p. 8] Management and financial strength

• The company is led by an entrepreneurial executive management team with decades of insurance leadership experience in the global P&C industry.
• Leadership is supported by an experienced team aligned around the company's strategy.
• High-quality leadership, underwriting and claims teams, technology DNA, advanced analytics capabilities, diversified book of business, and strong competitive position are expected to drive profitable growth.
• The company aims to deliver long-term shareholder value through best-in-class underwriting profitability and book value per share growth across P&C market cycles.
• All insurance company subsidiaries are group rated.
• Subsidiaries have financial strength ratings of "A-" (Excellent) from A.M. Best Company with a stable outlook.

[c. 5; p. 8] Initial Public Offering (IPO)

• The company completed its initial public offering (IPO) on January 18, 2023.
• The IPO involved 10,295,240 shares of common stock.
• 4,750,000 shares were sold by the company.
• 4,202,383 shares were sold by selling stockholders.
• The public offering price was USD 15.00 per share.
• Underwriters exercised their option to purchase an additional 1,342,857 shares of common stock from selling stockholders.
• Net proceeds to the company were approximately USD 62.3m, after deducting underwriting discounts and specific incremental expenses attributable to the IPO.

Our Business and Our Strategy

[c. 6; p. 8] Our Business and Our Strategy

• The company operates with one reportable segment, offering a broad array of insurance coverages to various market niches.
• Eight distinct underwriting divisions exist, each with dedicated underwriting leadership and technical staff experienced in their niches.
• This structure and expertise aim to serve customer needs effectively, be a value-add partner to distributors, and earn attractive risk-adjusted returns.
• The Accident & Health (A&H) underwriting division provides medical stop loss solutions for organizations with fewer than 2,500 employees.
• The approach involves managing medical costs and claims oversight, partnering with select distribution partners.
• It targets small and medium-sized enterprise market segments seeking to self-insure a portion of healthcare costs.
• Products are written on an admitted basis and distributed primarily through retail and wholesale broker partners.
• Presence in the A&H marketplace was established in 2015 via a program administrator acquisition, expanding in 2016 with another partnership and eventual acquisition in 2018.
• The Captives underwriting division offers group captive solutions, utilizing underwriting and claims expertise from other divisions.
• This allows for creating group captives for companies aiming to self-insure.
• Leveraging expertise across the company broadens market reach and enables writing additional profitable business with limited extra expense.
• The Captive division writes property, general liability, commercial auto, excess liability, and workers’ compensation lines on both E&S and admitted bases.
• Business is often administered through partnerships with third-party captive managers.
• The Global Property underwriting division provides property-only solutions for large multi-jurisdictional entities with complex property exposures.
• Business is written entirely on an E&S basis.
• Distribution is through retail brokers and select wholesale brokers.
• The division's market position has been developed over more than ten years.
• The Industry Solutions underwriting division includes three units: Construction, Energy, and Specialty Trucking.
• Construction and Energy units provide general liability, excess liability, commercial auto, workers’ compensation, and inland marine solutions, primarily on an admitted basis, to middle market construction and energy production/servicing customers.
• The Specialty Trucking unit writes commercial auto and general liability solutions for mid-sized intermodal trucking companies on an E&S basis.
• These industry segments often have high severity exposures, addressed by skilled underwriters and claims professionals, frequently with multi-line solutions.
• Products are distributed through retail agents and brokers and a select network of wholesalers.
• The Professional Lines underwriting division comprises three units: Management Liability, Professional Liability, and Allied Health.
• Professional Liability and Allied Health offer E&S primary and excess claims-made liability products, distributed exclusively through wholesale brokers.
• The Management Liability unit provides both E&S and admitted products, distributed through wholesale and retail brokers.
• Teams aim to deliver creative solutions for higher severity exposures, providing value to distribution partners and customers.
• The Programs underwriting division partners with program administrators focused on markets aligning with the company's expertise and strategy.
• Partnering with program administrators is considered optimal for profitable participation or extending reach in certain markets.
• Program administrators often have a competitive advantage (scale or proprietary technology) that would be difficult for the company to replicate.
• The combination of the company's underwriting/claims expertise with program administrators' scale/technology creates a powerful partnership.
• The Programs division writes property, general liability, commercial auto liability, excess liability, and workers’ compensation lines on both E&S and admitted bases.
• The Surety underwriting division provides contract and commercial surety solutions to trade and services organizations requiring bonding.
• Focus is primarily on small to medium-sized enterprises with aggregate bond programs up to approximately USD 60.0m.
• Underwriting and claims professionals are differentiated by technical capabilities and decision-making speed.
• Business is written on an admitted basis and distributed through retail agents and brokers.
• The Transactional E&S underwriting division offers primary and excess non-catastrophe prone property and general liability solutions.
• Emphasis is on hard-to-place risks due to complex underlying exposure, loss history, and/or limited operating history (start-up and newer businesses).
• Success in this market is determined by technical underwriting, thoughtful coverage provisions and pricing, and high-quality broker service.
• Market access in this division is exclusively through wholesale brokers.
• The division was formed in September 2020 with the hiring of experienced underwriters.
• In the twelve months ended December 31, 2022, the company wrote premiums in certain markets and lines of business that have since been exited and placed into run-off.
• These exited lines and businesses, along with others previously exited, did not fit the "Rule Our Niche" strategy.
• A graphic depicts the percentage distribution of gross written premiums for continuing business by underwriting division for the year ended December 31, 2022.
• Charts outline the percentage of gross written premiums for continuing business on an admitted and non-admitted basis.
• Charts also show distribution by duration of risk (short-tail, generally less than two years, versus medium-tail, generally greater than two years).
• Distribution by source for the year ended December 31, 2022, is also outlined.
• The company aims to lead in chosen market niches and establish sustainable competitive positions.
• Key elements underpinning the strategy include:
  • Providing differentiated products, services, and solutions that meet target market needs.
  • Attracting and retaining exceptional underwriting and claims talent, incentivizing professionals aligned with organizational and corporate goals.
  • Amplifying expertise with advanced technology and analytics for superior risk selection, pricing, and claims management.
  • Empowering underwriting and claims teams with significant authority for decision-making and expertise application.
  • Fostering a culture that promotes nimbleness and responsiveness to market opportunities and dislocation.
• This strategy is referred to as "Rule Our Niche" and forms the basis for building a strong defensible market position, creating a competitive moat, and winning in chosen markets.
• The principles of this strategy are believed to be key to achieving and sustaining best-in-class underwriting results through P&C insurance pricing cycles.
• The company consistently strives for excellence in risk selection, pricing, and claims outcomes, amplified by advanced technology and analytics.
• Actions within every underwriting division are intentional to "Rule Our Niche," aiming for constant innovation specific to each division and market.
• SkyDrive: Developed within the Specialty Trucking underwriting unit, an award-winning, proprietary underwriting and risk management portal for underwriters, brokers, and insureds.
  • The portal addresses a market disrupted by incumbent carriers' loss experience.
  • It synthesizes real-time intelligence on driver and fleet history, safety, and performance using telematics and other data.
  • The portal significantly increases the power of risk selection, underwriting, risk management, and claims decision-making.
  • Components of SkyDrive are being deployed across commercial auto exposures in other underwriting divisions.
• Quick-Strike: Utilized across all commercial auto lines for an innovative "quick strike" response to claims events.
  • An experienced investigator aims to be at the accident scene within two hours, regardless of location, to assess and resolve third-party claims quickly.
• SkyVantage: Deployed within the Accident & Health underwriting division as a technology-driven stop-loss solution.
  • SkyVantage leverages big data and machine learning to evaluate group health risk, especially for smaller accounts (under 250 lives).
  • It facilitates risk scoring to augment underwriters' analyses for risk selection and pricing.
• Cannabis Industry: Identified as an underserved market niche by the P&C insurance industry.
  • For property and general liability lines, the company partnered with a technology-forward program administrator with specific capabilities for the cannabis industry.
  • Cannabis-specific professional and executive liability products were developed and launched, offered directly to wholesale partners.
  • Cannabis-specific commercial surety products were further developed and launched.
  • Products were identified, evaluated, and launched across these underwriting divisions in less than six months.
  • The company believes it has one of the market-leading product offerings for cannabis, one of the fastest-growing industries in the United States by sales and job creation.
• Construction Captive: An innovative captive solution developed for a particular specialty contractor segment, leveraging market-leading experience and capabilities.
  • Offered alongside the traditional guaranteed cost product.
  • This has broadened the portion of this market that can be served while leveraging existing underwriting, claims, and analytic expertise.

[c. 7; p. 8] Our Business and Our Strategy

Our Business and Our Strategy

Chart / Image:

• Industry Solutions: 24%
• Global Property: 18%
• Programs: 14%
• Accident & Health: 11%
• Captives: 11%
• Professional Lines: 8%
• Surety: 7%
• Transactional E&S: 7%

[c. 8; p. 8] Our Business and Our Strategy

Our Business and Our Strategy

Chart / Image:

• Chart title: Admitted versus Non-Admitted
• Non-Admitted: 52%
• Admitted: 48%

[c. 9; p. 8] Our Business and Our Strategy

Our Business and Our Strategy

Chart / Image:

• Chart title: Duration of Risk
• Medium-Tail: 53%
• Short-Tail: 47%

[c. 10; p. 8] Our Business and Our Strategy

Our Business and Our Strategy

Chart / Image:

• Chart title: Distribution Source
• Retail: 39%
• Wholesale: 34%
• Program Administrator: 16%
• Captive Manager: 11%

Our Competitive Strengths

[c. 11; p. 8] Our Competitive Strengths

• The company focuses on profitable niches in the market that require technical underwriting and claims management as barriers to entry.
• Niche areas of the commercial lines P&C markets are considered an attractive subset of the P&C insurance market, offering opportunities for attractive risk-adjusted returns.
• The company targets underserved, dislocated, or markets where standard products are insufficient.
• Risks in core markets require efficient, individual underwriting to generate acceptable, sustainable underwriting profit.
• The company builds underwriting divisions around deeply experienced underwriters empowered with appropriate authority.
• This structure allows for innovative and unique products and solutions for distribution partners and customers, even for complex risks.
• Underwriters' experience is augmented with data and predictive analytics to differentiate risk selection and pricing, and enhance efficiency.
• The adjusted combined ratio was 92.6% for the year ended December 31, 2022, and 94.6% for the year ended December 31, 2021, indicating underwriting profitability potential.
• The company hires underwriting and technical staff for their expertise and experience.
• Underwriting teams are knowledgeable, experienced, and empowered, which is critical for operating in markets with risks difficult to automate.
• The company does not impose strict underwriting rules, allowing professionals to use expertise and judgment in evaluating and pricing risks.
• The company has a specialized team of claims professionals knowledgeable about the niches and lines of business served.
• Claims professionals address first-party claims with fair solutions and third-party claims with comprehensive responses, aiming for consistent and early loss recognition of indemnity and LAE.
• The company responds quickly to claims with specialized adjusters using expertise, advanced technology, and analytics.
• Technology is embedded in the claims process, leveraging a technology-enabled platform and tools from first notice of loss to settlement.
• Analytics capabilities provide real-time, detailed information on open claims and benchmarks against closed claims for senior leadership and claims teams.
• SkyBI, the business intelligence platform, provides real-time intelligence for senior leadership and technical teams to drive decision-making.
• SkyBI reflects best practices learned from management's experience in P&C insurance and technology sectors.
• SkyBI is a single, comprehensive enterprise-wide data repository for reporting, business intelligence, analytics, and advanced data capabilities.
• The platform provides information and performance metrics across the company in an easy-to-consume visualized format.
• Data can be filtered by categories including distributor, customer segment, line of business, industry, underwriter, and risk feature.
• SkyBI aids in establishing clear objectives and facilitating decision-making processes.
• Underwriting and claims decisions are augmented with new types of risk data and advanced technology.
• Underwriting decisions are backed by historical data and in-depth risk evaluation from investments in data collection and processing.
• Underwriting and claims capabilities are amplified by combining data with new forms of risk data and predictive analytics.
• Examples of technology utilization include SkyDrive in the Specialty Trucking unit and SkyVantage in the A&H line.
• The company has built a diversified group of underwriting divisions across multiple product lines, industries, geographies, and distribution channels.
• The strategy is to evolve with the market, growing certain lines when conditions are favorable and limiting exposure when conditions are less favorable.
• The diversity of the book allows the company to respond to and capitalize on market opportunities and dislocations across P&C insurance market and pricing cycles.
• The company has a distinctive winning culture, as evidenced by internal surveys and public information (e.g., Glassdoor, LinkedIn).
• Key cultural elements include a flat communication and decision-making structure.
• Staff are trusted to make decisions that meet or exceed financial results and are supported by a clear performance measurement system.
• Advanced technology enhances, but does not replace, underwriting and claims teams' decision-making.
• The company maintains an entrepreneurial environment that encourages and rewards a proactive approach to market disruption.
• This environment aligns with the company's identity as a specialty insurer and helps attract talent and deliver best-in-class results.
• The company has a high-quality, experienced leadership team aligned with shareholders.
• The executive leadership team, led by CEO Andrew Robinson, is experienced, innovative, and entrepreneurial.
• The leadership team has a track record of success in senior management roles at industry-leading P&C companies and in building new businesses.
• Senior leadership's compensation is directly aligned with shareholders.
• A material portion of each leader's compensation is in long-term and short-term incentives tied to delivering sustainable, best-in-class underwriting returns.
• Select executive leadership team members have additional long-term incentive targets tied directly to growth in book value per share.

Our Strategy in Action

[c. 12; p. 8] "Rule Our Niche" strategy overview

• The "Rule Our Niche" strategy focuses on selecting underserved market niches with attractive risk-adjusted returns where commoditized products are inadequate.
• The strategy aims to build sustainable, defensible competitive positions in these markets using talent and technology.
• The goal of the strategy is to generate best-in-class underwriting profitability for niches and create superior long-term shareholder value through growth in book value per share.

[c. 13; p. 8] Talent acquisition and market position

• The strategy includes attracting and retaining blue-chip underwriting and claims talent to expand and enhance market position.
• The company seeks to hire talented technical underwriting professionals with long-standing industry relationships with distribution partners and claims professionals with expertise in their niches.
• These relationships are key to accessing preferred business.
• The company believes it is a company of choice for top industry talent and will continue to grow its market position by bringing on world-class talent in chosen markets.

[c. 14; p. 8] Technology leverage

• The strategy involves leveraging technology DNA to further differentiate from competitors.
• The company has demonstrated an ability to utilize new forms of risk data and advanced technology in complex, higher severity risk categories of the specialty P&C insurance market.
• SkyBI allows for prompt sensing and quick response to market changes.
• Core operating platforms enable efficient entry into new markets without complex systems.
• Technological advantage positions the company for profitable growth and expansion into additional specialty market niches.

[c. 15; p. 8] Business growth and market trends

• The strategy includes profitably growing existing lines of business and expanding with new underwriting divisions.
• The company is positioned to capitalize on trends impacting customers in the US and globally, such as rising demand for specialized insurance due to increasing and complex risks.
• Identified risks include climate change/severe weather, supply chain uncertainty, financial inflation, cyber risk, novel health risks, increased litigation, attorney involvement, jury awards, and healthcare delivery/cost.
• Another market trend is the emergence of "micro cycles and micro dislocations" in the commercial P&C market, where different segments experience hardening and softening at different times.
• Within the last 24 months, the company launched an Allied Health professional lines underwriting unit, entered the cannabis industry in three underwriting divisions, acquired Aegis Surety, announced a program administration technology partnership in cargo, launched two new captive solutions, and added excess liability capability in its E&S business.
• Gross written premium growth and profitability indicate momentum and position the company for continued expansion and growth.

[c. 16; p. 8] Operational excellence and performance monitoring

• The strategy emphasizes daily excellence to drive best-in-class underwriting performance.
• Achieving long-term goals, including best-in-class underwriting returns and book value per share growth, depends on day-to-day operational execution across all functional departments (underwriting, product management, claims management).
• SkyBI provides a foundation for senior management to monitor performance, including renewal rates, new business pricing, portfolio performance for underwriters, and claims aging, reserving practices, and outcomes by claims adjusters.
• Focus on fundamentals drives underwriting excellence.
• Cross-functional collaboration ensures underwriting, claims, actuarial, and product management teams regularly review performance and trends for quick implementation of portfolio, pricing, and coverage changes.

[c. 17; p. 8] Balance sheet strength and reserving practices

• The strategy involves using the balance sheet to capture a larger market share.
• The company is committed to establishing and maintaining a strong balance sheet through conservative loss reserves and strong capitalization ratios.
• This commitment is considered imperative for maintaining confidence among customers, distribution partners, reinsurers, regulators, rating agencies, and shareholders.
• Since 2019, the company executed an LPT to limit exposure to potential loss reserve development from certain exited business.
• Claims case reserve practices have been materially strengthened to reserve to the expected ultimate loss within 90 days of first notice of loss.
• The level of IBNR reserves held above claims case reserves has been intentionally increased to a more conservative position.
• Net IBNR as a percentage of total net losses and LAE reserves was 61.8% as of December 31, 2022, compared to 60.0% as of December 31, 2021.
• The company believes its reserve position is the strongest in its history, positioning it for consistently strong underwriting profitability.

Marketing and Distribution

[c. 18; p. 8] Marketing and Distribution Strategy

• The company's marketing and distribution approach mirrors its underwriting approach and is a key facet of its "Rule Our Niche" strategy.
• Underwriting teams and the company have strong relationships and reputations with distribution partners, providing a foundation for new affiliations.
• The company believes it wins with distribution partners due to deep expertise in niche markets, high-caliber underwriters, innovation culture, thoughtful product lineup and design, and speed/quality of responsiveness.
• All underwriting divisions invest time and effort in sustaining and expanding distribution partner loyalty and long-term relationships.
• The company tailors its choice of distribution partners to access specific business, similar to how underwriting is tailored to individual insureds.
• Products are distributed through retail agents, wholesale brokers, select program administrators, and captive managers.
• This approach allows effective and efficient access to targeted business based on market niche needs and dynamics.

[c. 19; p. 8] Distribution Channels

• Retail Agents and Brokers: Primarily distribute Industry Solutions and Surety products, and a portion of Global Property products.
  • The company partners with retail agents and brokers specializing in targeted niche markets who can produce desired quality and quantity of business.
  • Specialized retail agents and brokers offer better visibility into client needs, aiding in customized coverages.
• Wholesale Brokers: Primarily market and distribute Professional Lines, Transactional E&S products, and a portion of Global Property products, including through London market wholesale brokers.
  • The company partners with leading wholesale brokers in target markets with experience, knowledge, and ability to produce desired business type, volume, and quality.
  • The company writes business with many leading wholesalers in the United States and London.
• Program Administrators: The company partners with select program administrators believed to have competitive advantages in certain markets due to scale, underwriting, technology, and/or distribution infrastructure, and who align with the company's strategy.
  • Thorough diligence is conducted on program administrators before new partnerships to ensure alignment on underwriting and risk management.
  • Strict underwriting guidelines are set to ensure business produced meets target returns.
  • Performance of business produced by program administration partners is regularly and actively monitored.
  • Stringent reporting and auditing requirements are imposed on partners to identify potential issues.
  • The company is not a fronting carrier and generally does not intend to generate fee income from program partners.
  • Currently, the company has relationships with six program administrators.
  • Compensation of program administration partners is aligned to meet target underwriting profit.
  • In two partnerships, interests are further aligned through minority equity ownership and/or warrants to acquire an equity ownership position.
• Captive Managers: Partnered with for their critical role in sourcing prospective customers, supporting captive product sales, and administering group captives.
  • Captive Managers work with retail agents and brokers to ensure prospective customers are suitable for group captive solutions and assist in product presentation.
  • Captive managers facilitate day-to-day needs of the captive and its members, coordinating administrative and operating functions like compliance, financial reporting, and board meetings.
  • In some instances, the captive manager will pre-underwrite a prospective customer before submission for full underwriting review by the Captives underwriting unit.
  • The company performs other components of the captive product, including underwriting, claims oversight, reinsurance, and collateral management for claims.
  • Close partnership on nearly all functions is critical for successful construction and delivery of group captive solutions.

Underwriting

[c. 20; p. 8] Underwriting strategy and expertise

• Underwriting approach is deeply embedded in the "Rule Our Niche" strategy and is core to market success.
• Underwriting teams are specialized within eight divisions, focusing on specific niches.
• Kirby Hill, President of Industry Solutions, Captives and Programs underwriting divisions, has over 30 years of insurance experience.
• John Burkhart, President of Specialty Lines (overseeing Professional Lines, Surety, Transactional E&S, and A&H underwriting divisions), has approximately 30 years of underwriting experience.
• Doug Davies, Senior Vice President of the Global Property Underwriting Division, has approximately 20 years of underwriting experience.
• Underwriting approach is underpinned by hiring experienced, best-in-class, and diverse technical underwriters with established track records in specific specialty niche markets.
• Underwriters' skill sets are amplified with advanced technology and data analytics and empowered with appropriate decision-making authority.
• This approach is believed to be key to superior risk selection, pricing, and sustainable best-in-class underwriting results across market cycles.

[c. 21; p. 8] Underwriting data and technology

• Capabilities and experience of underwriting professionals are augmented using new forms of data and analytics for risk selection and pricing.
• Underwriting data is captured in the business intelligence platform, SkyBI.
• SkyBI forms the foundation of reporting, analytics, and other data capabilities and is a key tool for senior management and business leaders.

[c. 22; p. 8] Risk selection and pricing

• The company is highly selective in the policies chosen to bind.
• Underwriters are encouraged to move on quickly from prospective opportunities if coverage cannot be bound at a premium and terms meeting company standards.
• When accepting risks, terms and price are carefully established to suit the underlying exposure.
• In the admitted market, approved forms and filed rates are ensured to be appropriate and adequate for accepted risks, while allowing flexibility for specific/unique exposures.
• In the E&S market, freedom of rate and form is used to ensure risk and coverage are appropriate for unique needs and exposures.
• Policies are crafted to offer affordable and appropriate protection for insureds' exposures, while constructing coverage for predictable losses and managed claims costs.

[c. 23; p. 8] Underwriting support and collaboration

• Underwriting teams are supported by active engagement and collaboration with Claims, Actuarial, Product Management, Legal and Compliance, and Finance departments.
• This collaboration ensures trends in business, legal and tort developments, and competitor and regulatory actions are analyzed, shared, and acted upon timely.
• Underwriters are viewed as the center of the company, with all support functions incentivized and measured to support underwriting profitability targets.
• This structure helps surface opportunities and issues early, contributing to nimbleness and ability to leverage market disruptions.
• Underwriting controls and procedures are regularly reviewed to ensure underwriters act with clear line of sight to profitably underwrite each market served.
• The combination of best-in-class underwriting talent, advanced technology and analytics, and support from other functional areas is considered a unique composition of capabilities to "Rule Our Niche".

Claims Management

[c. 24; p. 8] Claims handling operations and principles

• 72.5% of claims were handled in-house during the year ended December 31, 2022, measured as a percentage of gross reported losses.
• Third-Party Administrators (TPAs) are used for claims not handled in-house, specifically for select captives and programs requiring specialized expertise.
• TPAs are also utilized for the workers' compensation line of business due to the need for specific geographical knowledge.
• Internal claims managers oversee TPA activities and monitor their claim handling against prescribed service levels and standards.
• The claims department collaborates with underwriting teams to share claims trends and provide feedback on emerging loss experience.
• Claims department principles include: (1) prompt and comprehensive claim investigations using advanced analytics and technology; (2) providing quality claims handling service and engaging customers; (3) promptly establishing reserves reflecting the best estimate of ultimate loss; (4) effectively pursuing contribution and subrogation; (5) detecting and preventing fraud using existing tools and new technological processes; and (6) disciplined litigation management to provide superior legal defense while monitoring costs.

[c. 25; p. 8] Legal defense and technology investments

• Specialized independent legal counsel is retained to defend insureds when they are sued or presented with a claim.
• Individual attorneys and law firms are vetted for experience and expertise.
• Litigation guidelines have been developed for claims professionals and outside counsel to ensure appropriate defense for insureds.
• Legal invoices are reviewed to confirm case handling and billing practices are reasonable, customary, and standard within the attorney's geography and practice area, aligning with retainer agreements.
• Significant investment has been made in technology across all aspects of claims, from first notice of loss to settlement.
• Claims data is captured in SkyBI for reporting and analytics, similar to underwriting data.
• Claims processes have been innovated to reduce loss costs.
• For commercial auto, a "quick strike" response has been implemented, deploying an experienced investigator to accident scenes within two hours to assess and resolve third-party claims.
• Artificial intelligence is being piloted to signal fraud, identify early indicators of legal representation propensity by third-party claimants, and route claims based on potential severity at first notice of loss.

Technology

[c. 26; p. 8] Technology strategy and platforms

• Technology is central to Skyward's operations and decision-making, driving competitive advantages.
• Skyward deploys technology in three primary functional ways: Superior Business Intelligence Platform, Predictive Analytics Technology, and Core Transactional Platforms.
• SkyBI (business intelligence platform) provides real-time intelligence to senior leadership and technical teams for decision-making.
• SkyBI is a single, comprehensive enterprise-wide data repository for reporting, business intelligence, analytics, and advanced data capabilities.
• SkyBI provides information and performance metrics across the company in a visualized format, filterable by categories such as distributor, customer segment, line of business, industry, underwriter, and risk feature.
• Predictive Analytics Technology augments employee capabilities using new risk data and predictive analytics, including AI, for risk selection, pricing, and claims handling.
• Skyward aims to innovate constantly within each underwriting division, with examples including SkyDrive and SkyVantage.
• Core Transactional Platforms (policy administration, billing, claims systems) are designed for nimble scaling and business expansion.
• Skyward generally uses customized third-party vendor core operating applications.
• The core platform organization is used for all business except Accident & Health, Global Property, and Surety, which require dedicated core processing components due to unique features.
• Data from all divisions' core operating platforms flows to the SkyBI platform with comparable data quality and granularity.
• Advanced technology in underwriting, claims, SkyBI, and core operating platforms creates a "flywheel effect," enabling underwriters to better select risk, claims professionals to better adjudicate claims, unit leaders to better communicate with partners, and senior leadership to better evaluate business trends.
• These tools also improve communication accuracy, effectiveness, and efficiency with distribution partners, reinsurers, and other third-party partners.

[c. 27; p. 8] Cybersecurity and data protection

• Skyward faces external threats to its information technology systems, including system failure, customer data theft, and ransomware attacks.
• The technology infrastructure is designed to function through major disruptions.
• Data is replicated in real-time to a third-party cloud disaster recovery site for use during major system failures.
• Data is backed up daily for system restoration.
• Actions taken to prevent disruptions include: actively monitoring Cybersecurity and Infrastructure Security Agency’s (CISA) cybersecurity directives and taking immediate action on identified vulnerabilities.
• Monthly vulnerability scans are conducted on all network-attached devices at all locations, with patching applied as needed.
• Two-factor authentication is required for access to any Skyward system.
• Monthly security training is conducted for all employees.
• Endpoint detection agents are implemented for threat detection and response.
• Desktop scenarios are performed to practice responses to breaches with cybersecurity insurance partners and retained security consultants.
• Annual penetration testing is performed.
• Skyward constantly reviews its security breach posture and regularly implements updated processes, best practices, and tools.

Reinsurance

[c. 28; p. 8] Reinsurance strategy and types

• Reinsurance is strategically purchased from third parties to protect capital from severity events (large single event losses or catastrophes) and reduce earnings volatility.
• Reinsurance contracts are predominantly one year in length and renew annually, primarily in January and June.
• Factors influencing changes to reinsurance purchases at annual renewal include plans to change underlying insurance coverage, updated loss activity, capital and surplus levels, changes in risk appetite, and the cost and availability of reinsurance treaties.
• The company purchases quota share reinsurance, excess of loss reinsurance, and facultative reinsurance coverage to limit exposure from losses on any one occurrence.
• The mix of reinsurance purchased considers efficiency, cost, risk appetite, and specific factors of underlying risks.
• Quota share reinsurance involves the reinsurer assuming a specified percentage of the ceding company’s losses from a defined class of business in exchange for a corresponding percentage of premiums, net of a ceding commission.
• Excess of loss reinsurance involves the reinsurer assuming all or a portion of the ceding company’s losses for an individual claim or event above a specified amount, in exchange for a negotiated premium, and includes the catastrophe reinsurance program.
• Facultative coverage is a reinsurance contract on individual risks, used to supplement treaty coverage limits or cover risks/perils excluded from treaty reinsurance.

[c. 29; p. 8] Property catastrophe reinsurance

• As of December 31, 2022, property insurance represented 24% of gross written premiums.
• The company actively manages and continuously monitors property writings by geographic area to limit potential loss aggregation from severe events like hurricanes, convective storms, and earthquakes.
• Catastrophe reinsurance is purchased to further mitigate aggregation of property losses due to a single event or series of events.
• Third-party stochastic and internal deterministic models are used to analyze the risk of loss aggregation from such events, providing a quantitative view of Probable Maximum Loss (PML) events.
• Based on modeling, an event beyond a 1 in 250-year PML would be required to exhaust the USD 25.0m property catastrophe coverage.
• The company aims to expose no more than 3.0% of stockholders’ equity to a catastrophic loss that is less than a 1 in 250-year event.
• The current reinsurance program is believed to provide coverage well in excess of theoretical losses from any recorded historical event.
• A portion of the reinsurance program includes the right to pay additional premium to reinstate reinsurance limits for potential future recoveries during the same contract year and preserve limits for subsequent events, known as a "reinstatement".

[c. 30; p. 8] Retroactive reinsurance and accounting

• In 2020, the company entered into a Loss Portfolio Transfer (LPT) retroactive reinsurance agreement with a Bermuda-domiciled third-party reinsurer for liabilities (including claim payments, allocated losses, LAE reserves, and certain extra-contractual obligations) related to policies issued or assumed for policy years 2017 and prior.
• The LPT agreement aims to limit volatility associated with business written during those years.
• Additional information about the LPT is available in Item 7 of Form 10-K, "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Losses and LAE".
• Certain ceded reinsurance contracts that do not transfer significant insurance risk are accounted for using the deposit method of accounting.
• More information on the deposit method of accounting is in "Management’s Discussion and Analysis—Critical Accounting Policies and Estimates—Reinsurance".

[c. 31; p. 8] Net premium retention and reinsurer quality

• Net premium retention, defined as the ratio of net premiums written divided by gross written premiums, was 59.1% for the year ended December 31, 2022, and 56.3% for 2021.
• The company seeks to purchase reinsurance from reinsurers rated at least "A-" ("Excellent") or better by A.M. Best.
• As of December 31, 2022, 99% of reinsurance recoverables were from reinsurers rated "A-" (Excellent) or better by A.M. Best, or were collateralized.
• While reinsurers are selected based on acceptable credit and A.M. Best ratings, the company retains primary liability to policyholders if reinsurers fail to pay claims.
• Failure of a reinsurer to honor obligations could result in losses to the company, leading to the establishment of allowances for uncollectible amounts.
• At December 31, 2022 and 2021, there was no allowance for uncollectible reinsurance.

[c. 32; p. 8]

Maximum company retention by line of business

Line of Business	Maximum Company Retention
Accident & Health	$0.75 million per occurrence
Commercial Auto (1)	$1.0 million per occurrence
Excess Casualty (1)(2)	$2.35 million per occurrence
General Liability (1)	$2.0 million per occurrence
Professional Lines (2)	$2.4 million per occurrence
Property (3)	$2.0 million per occurrence
Surety (2)	$3.0 million per occurrence
Workers’ Compensation (2)	$1.55 million per occurrence

(1) Legal defense expenses can force exposure above the maximum company retention for Excess Casualty, Commercial Auto and General Liability.

(2) Reinsurance is subject to a loss ratio cap or aggregate level of loss cover that exceeds a modeled 1:250-year PML event.

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

($ in thousands)
Reinsurer	Reinsurance Recoverables	AM Best Rating
Everest Reinsurance Co.	164,044	A+
eCaptive PC1-IC (and PC2-IC), Inc (1)	101,476	Unrated
Randall & Quilter (R&Q Bermuda (SAC) Ltd) (2)	38,146	Unrated
RGA Reinsurance Company	28,142	A+
Swiss Reinsurance America Corp	22,676	A+
Munich Reinsurance America Inc.	19,107	A+
Hannover Ruckversicherung AG	14,114	A+
Amlin Bermuda Limited	13,206	A
Scor Reinsurance Co.	12,747	A+
ACE (Chubb Property & Casualty Insurance Company)	12,227	A+
Top 10 Total	425,885	—
All Others	155,474	—
Total	581,359	—

(1) This reinsurer facilitates our eMaxx captive; we hold collateral in a statutory trust of $124.1 million on our reinsurance recoverables.

(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

[c. 33; p. 8] Enterprise Risk Management

• Enterprise Risk Management (ERM) is embedded in nearly every aspect of the company and guides day-to-day activities.
• The ERM approach aims to achieve an acceptable risk-adjusted return for shareholders through intentional underwriting and asset portfolio construction.
• The company balances the liability duration of its underwriting portfolio.
• Reinsurance is used to manage volatility from single losses and cumulative losses tied to single or series of events.
• The investment strategy targets a diversified portfolio that balances yield, liquidity, volatility, and potential for principal loss.
• The Chief Risk Officer oversees critical ERM processes and chairs the cross-functional corporate ERM Committee.
• The company formalizes its view of risk and solvency in terms of potential economic loss using its Economic Capital Model (ECM).
• The Economic Capital Model (ECM) measures potential earnings and capital loss for various scenarios.
• ECM outputs are measured against risk tolerances set and updated annually by the ERM Committee and discussed with the Audit Committee of the Board.
• The ECM provides a probabilistic modeled view of earnings and capital loss, integrating potential losses from catastrophes, reserving, underwriting, market, credit risk, strategic, and operational risks.
• The Chief Risk Officer and ERM Committee maintain a comprehensive risk register with accountabilities for mitigation and monitoring.
• The top 10 risks are identified, quantified, and reviewed quarterly by the Chief Risk Officer and ERM Committee.
• Reports on these risks are submitted regularly to the Audit Committee.
• Operational processes and controls are designed to identify, assess, and manage key risks continuously.
• The Underwriting Committee oversees standard letters of authority, underwriting audits, changes in risk appetite, and product line/division expansion.
• Claims diligently monitors handling practices via regular internal audits, conducts monthly large loss reviews, and maintains a watchlist for potential high-severity claims.
• Actuarial performs quarterly reserve studies, and the Reserve Committee meets twice per quarter to review and respond to loss emergence trends.
• Key observations from Actuarial are discussed with the CEO.
• Underwriting divisions monthly and quarterly assess rate change and retention on existing business, new business quality and pricing adequacy, and loss emergence versus expectations.
• The SkyBI platform provides real-time portfolio, underwriting, claims, and actuarial analytics to support these processes.
• Enterprise Risk Management is central to decision-making and daily activities.
• ERM is a core component of the strategy to achieve market-leading risk-adjusted returns for shareholders.

Reserves

[c. 34; p. 8] Reserve management and types

• Reserves are maintained for specific claims incurred and reported, IBNR reserves, and uncollectible reinsurance.
• Ultimate liability may differ from current reserves, and there is a risk of inadequate reserves in the insurance industry.
• Reserves are continually monitored using new information on reported claims and statistical analyses.
• Anticipated inflation is implicitly reflected in the reserving process through cost trend analysis and historical development review.
• Reserves for losses and LAE are not discounted to reflect estimated present value.
• Case reserves are established for reported claims, representing the estimated ultimate payment after assessing coverage, damages, and investigation.
• Case estimates are based on reserving practices and the claims adjuster’s experience and knowledge of the claim type and value.
• Case reserves are revised periodically based on subsequent developments for each claim.
• IBNR reserves are established for estimated future loss payments on incurred but not yet reported claims and potential development on reported claims.
• IBNR reserves are estimated using generally accepted actuarial reserving techniques, incorporating quantitative loss experience data and qualitative factors.
• Loss reserves are regularly reviewed using various actuarial techniques.
• Reserve estimates are updated as historical loss experience develops, additional claims are reported/settled, and new information becomes available.
• Reserves can be increased or decreased as claims move towards settlement, impacting earnings through adverse development or reserve releases.
• Additional information on loss reserves is available in Item 7 of Form 10-K, "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Losses and LAE".

[c. 35; p. 8] One-year loss reserve development table

• The following table presents one-year development information on changes in the loss reserve for the years ended December 31, 2022 and 2021.

[c. 36; p. 8]

Reserves for losses and loss adjustment expenses by year

($ in thousands)	2022	2021
Beginning of Year:
Reserves for losses and LAE	979,549	856,780
Less: reinsurance recoverable on unpaid claims	(381,338)	(375,178)
Net reserves for losses and loss adjustment expenses	598,211	481,602
Incurred, net of reinsurance, related to:	—	—
Current year	393,939	338,348
Prior years (1)	14,385	28,000
Total	408,324	366,348
Paid, net of reinsurance, related to:	—	—
Current year	105,928	77,551
Prior years	194,836	172,188
Total	300,764	249,739
End of Year:	—	—
Net reserves for losses and LAE	705,771	598,211
Add: reinsurance recoverable on unpaid claims, end of period	435,986	381,338
Reserves for losses and loss adjustment expenses	1,141,757	979,549

(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.”.

Investments

[c. 37; p. 8] Investment strategy and portfolio composition

• The company aims to maintain a balanced investment portfolio primarily composed of investments generating predictable and stable returns.
• Select strategic investments are used to augment the portfolio, generating attractive risk-adjusted returns.
• An Enterprise Based Asset Allocation model is utilized for investment allocation strategy, embedded in the Economic Capital Model.
• This model helps understand the impact of investment allocation decisions on capital, liquidity, and risk profile across various market scenarios.
• Investment risk is actively managed and monitored to balance stable growth and liquidity goals with compliance to insurance regulatory and rating agency frameworks.
• The portfolio mainly comprises cash and cash equivalents and investment-grade fixed-maturity securities.
• Additional investments, fitting the company's risk appetite, include higher yielding direct lending strategies and equities.
• Other investments, typically unrated, are generally lower volatility fixed income loans and securities.
• These other investments, termed "opportunistic fixed income," are believed to provide risk-adjusted returns above those achievable in liquid investment grade markets.

[c. 38; p. 8] Investment governance and management

• The Investment Committee of the Board of Directors reviews and approves the company's investment policy and strategy.
• The committee meets regularly to review investment activities, tactics, and new investment opportunities.
• The portfolio is directed internally and includes both self-managed investments and portfolios managed by select third-party investment management firms.
• The opportunistic fixed income portfolio is managed by Arena Investors, LP ("Arena").
• Arena is affiliated with The Westaim Corporation ("Westaim"), which is the company's largest shareholder through Westaim HIIG LP.

[c. 39; p. 8] Additional investment discussion reference

• Additional discussion regarding investments, including market risks related to the investment portfolio, can be found in Item 7 of Form 10-K, "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Investments".

Competition

[c. 40; p. 8] Specialty lines P&C market competition factors and competitors

• The specialty lines property & casualty insurance market comprises many markets and sub-markets, each with distinct customer needs, products, services, and specific economic and structural features.
• Competition in underwriting divisions comes from other specialty and standard insurers, as well as program administrators.
• Competition is based on factors including pricing of coverage, general reputation, perceived financial strength, relationships with brokers, terms and conditions of products, ratings from independent rating agencies, speed of claims payment and reputation, and the experience and reputation of underwriting and claims teams.
• Due to the diversity of underwriting divisions, competition is broad, with certain competitors specific to subsets of divisions.
• 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..

Ratings

[c. 41; p. 8] A.M. Best rating

• Skyward Specialty Insurance Group, Inc. currently holds an "A-" (Excellent) rating with a stable outlook from A.M. Best.
• A.M. Best rates insurance companies based on factors relevant to policyholders.
• A.M. Best assigns 16 ratings to insurance companies, ranging from "A++" (Superior) to "F" (In Liquidation).
• The "A-" (Excellent) rating is the fourth highest rating assigned by A.M. Best.
• A.M. Best evaluates a company's financial and operating performance by reviewing profitability, leverage, liquidity, book of business, reinsurance adequacy, asset quality and market value, loss and loss expense reserve adequacy, surplus adequacy, capital structure, management experience and competence, and market presence.
• A.M. Best's ratings reflect its opinion on an insurance company’s financial strength, operating performance, and ability to meet policyholder obligations.
• 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.

Employees and Human Capital

[c. 42; p. 8] employee overview

• As of December 31, 2022, the company had approximately 448 employees.
• Employees are not subject to any collective bargaining agreement, and no current efforts to implement such an agreement are known.
• The company believes it has good working relations with its employees.
• The company aims to be an employer of choice, striving to create a culture fostering diversity of thought, background, and perspective.

[c. 43; p. 8] diversity, equity, and inclusion

• The company embraces diversity, equity, and inclusion initiatives to improve workplace culture and value employees as people.
• The goal is to attract, develop, and retain talent from diverse backgrounds, promoting a culture where different viewpoints are valued, individuals are respected, treated fairly, and have opportunities to excel.

[c. 44; p. 8] compensation and benefits

• The company offers a competitive benefits package to support employee well-being.
• Benefits include medical, dental, and vision insurance, a 401(k) plan, paid time off, family leave, and employee assistance programs.
• The company emphasizes employee training and development, providing opportunities for education and professional development.

Intellectual Property

[c. 45; p. 8] Trademark registrations and protection

• The company has applied for various trademark registrations in the United States at both federal and state levels.
• The company plans to pursue additional trademark registrations and other intellectual property protection if deemed beneficial and cost-effective.
• The company monitors its trademarks and service marks and protects them from unauthorized use as necessary.

Our Structure

[c. 46; p. 8] Insurance subsidiaries and operations

• Operations are conducted principally through four insurance companies.
• Houston Specialty Insurance Company (HSIC) is the largest insurance subsidiary, underwriting multiple lines of insurance on a surplus lines basis in 50 states and the District of Columbia.
• Imperium Insurance Company (IIC), a subsidiary of HSIC, underwrites on an admitted basis in all 50 states and the District of Columbia.
• Great Midwest Insurance Company (GMIC), a subsidiary of IIC, underwrites multiple lines of insurance on an admitted basis in all 50 states and the District of Columbia, and is a certified surety bond company listed with the Department of the Treasury.
• Oklahoma Specialty Insurance Company (OSIC), a subsidiary of GMIC, is an approved surplus lines company in 47 states.

[c. 47; p. 8] Gross written premiums geographic distribution

• A table sets forth the geographic distribution of gross written premiums for the year ended December 31, 2022.

[c. 48; p. 8] Reinsurance and non-insurance operations

• Skyward Re, a wholly-owned captive reinsurance company domiciled in the Cayman Islands, was incorporated on January 7, 2020.
• Skyward Re was established to facilitate the LPT (Loss Portfolio Transfer).
• Additional information about the LPT can be found in Item 7 of Form 10-K, "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Loss and LAE".
• Skyward Underwriters Agency, Inc. operates as a licensed agent, managing general agent, and reinsurance broker.
• Skyward Service Company provides various administrative services to subsidiaries.

[c. 49; p. 8] Organizational structure

• The organizational structure is set forth, with each entity wholly-owned by its immediate parent.

[c. 50; p. 8]

Our Structure

	2022
Texas	11.0%
California	10.7
Louisiana	9.3
New York	6.7
Florida	6.6
Illinois	3.3
Pennsylvania	3.2
New Jersey	3.1
Georgia	3.0
Massachusetts	2.7
All other states	40.4
Total	100.0%

[c. 51; p. 8] Our Structure

Our Structure

Chart / Image:

• Skyward Specialty Insurance Group, Inc. is a Delaware corporation.
• Skyward Specialty Insurance Group, Inc. owns Skyward Service Company.
• Skyward Service Company is a Delaware corporation.
• Skyward Specialty Insurance Group, Inc. owns Houston Specialty Insurance Company.
• Houston Specialty Insurance Company is a Texas stock insurance company.
• Skyward Specialty Insurance Group, Inc. owns Skyward Underwriters Agency, Inc.
• Skyward Underwriters Agency, Inc. is a Texas corporation.
• Skyward Specialty Insurance Group, Inc. owns Skyward Re.
• Skyward Re is a Cayman Islands corporation.
• Houston Specialty Insurance Company owns Imperium Insurance Company.
• Imperium Insurance Company is a Texas stock insurance company.
• Imperium Insurance Company owns Great Midwest Insurance Company.
• Great Midwest Insurance Company is a Texas stock insurance company.
• Great Midwest Insurance Company owns Oklahoma Specialty Insurance Company.
• Oklahoma Specialty Insurance Company is an Oklahoma insurance corporation.

Risk Factors

[c. 52; p. 9] Investment risk disclosure

• Investing in the company's common stock involves a high degree of risk.
• Investors should carefully consider the risks and uncertainties described in the report, including consolidated financial statements and related notes, and other SEC filings, before investing.
• The described risks are not exhaustive; additional unknown or currently immaterial risks may also affect the company.
• If any described risks occur, the company's business, operating results, financial condition, and prospects could be materially harmed.
• Such harm could lead to a decline in the common stock price, potentially resulting in a loss of part or all of an investment.

Summary of Material Risk Factors

[c. 53; p. 9] Business and operational risks

• Our business is subject to numerous risks and uncertainties.
• Our financial condition and results of operations could be materially adversely affected if underwriting risk is not accurately assessed.
• Competition for business in our industry is intense.
• Reliance on insurance retail agents and brokers, wholesalers, and program administrators exposes us to certain distribution channel risks.
• Inability to purchase third-party reinsurance in desired amounts, on commercially acceptable terms, or on terms that adequately protect us, may materially adversely affect our business, financial condition, and results of operations.
• Losses and loss expense reserves may be inadequate to cover actual losses, which could materially adversely affect financial condition, results of operations, and cash flows.
• A decline in our financial strength rating may adversely affect the amount of business written.
• Unexpected changes in the interpretation of coverage or provisions, including loss limitations and exclusions, in our policies could materially adversely affect financial condition and results of operations.
• Reinsurers may not reimburse claims on a timely basis, or at all, which may materially adversely affect our business, financial condition, and results of operations.
• Failure to accurately and timely pay claims could materially and adversely affect our business, financial condition, results of operations, and prospects.
• Adverse economic factors, including recession, inflation, high unemployment, or lower economic activity, could lead to fewer policy sales, increased claim frequency, premium defaults, or claim falsification, affecting growth and profitability.
• The insurance business is historically cyclical, and we are currently experiencing a relatively hard market cycle, which may affect financial performance and cause operating results to vary quarterly and not be indicative of future performance.
• Extensive regulation may adversely affect our ability to achieve business objectives; non-compliance could result in penalties, including fines and suspensions, adversely affecting financial condition and results of operations.
• We could be adversely affected by the loss of key personnel or inability to attract and retain qualified personnel.
• Failure to achieve and maintain effective internal controls could impact operating results and financial condition, and negatively affect the market price of our common stock.
• Costs will increase significantly due to operating as a public company, requiring substantial management time for compliance with public company regulations.

Risks Related to Our Business and Industry

[c. 54; p. 9] Risks Related to Our Business and Industry

• Financial condition and results of operations could be materially adversely affected by inaccurate assessment of underwriting risk.
• Underwriting success depends on accurately assessing risks of business written and retained.
• Reliance on underwriting staff experience for risk assessment.
• Misunderstanding risk nature or extent may lead to inappropriate premium rates, adversely affecting financial results.
• Employees, including management and underwriters, make decisions exposing the company to risk.
• Competition in the insurance industry is intense.
• Competition comes from other specialty insurance companies, standard insurance companies, and underwriting agencies.
• Competition factors include price, reputation, financial strength, distribution relationships, product terms, ratings, claims payment speed, and underwriting team experience.
• Increasing consolidation in the insurance industry may further increase competition.
• Some competitors are larger, with greater financial, marketing, and other resources, and can absorb large losses more easily.
• Other competitors have longer operating history and more market recognition in certain lines of business.
• New industry or legislative developments could increase competition, such as increased capital-raising by competitors leading to new entrants and excess capital.
• Federal regulatory reform of the insurance industry could increase competition from standard carriers.
• Inability to compete successfully could result in changes to supply and demand for insurance, affect product pricing at risk-adequate rates, and impact retention of existing business or underwriting new business on favorable terms.
• Increased competition limiting business transactions could adversely affect operating results.
• Reliance on insurance retail agents, brokers, wholesalers, and program administrators exposes the company to risks that could adversely affect results.
• Substantially all products are distributed through independent retail agents and brokers who have principal relationships with policyholders.
• Retail agents and brokers generally own "renewal rights," making the business model dependent on relationships with them.
• Dependence on relationships wholesalers and program administrators maintain with agents and brokers.
• Relationships with retail agents, brokers, wholesalers, and program administrators can be discontinued at any time or may not be profitable.
• Consolidation of insurance distribution firms may increase their influence on commission rates and business concentration with particular brokers.
• Premiums from policyholders, when business is produced by brokers, are collected directly by brokers and remitted to the company.
• In certain jurisdictions, premium paid to a broker by an insured might be considered paid under applicable insurance laws, making the insured not liable to the company even if the company has not received the premium.
• The company assumes credit risk associated with brokers.
• Failure by brokers to remit premiums has not been material to date, but instances may occur where brokers collect premiums but do not remit them, requiring the company to provide coverage despite non-payment.
• Limitations on canceling policies for non-payment could decline underwriting profits and materially adversely affect financial condition and results of operations.
• Financial condition of potential new brokers is reviewed before transacting business.
• Periodic reviews of agencies, brokers, wholesalers, and program administrators identify those not meeting profitability standards or business objectives.
• Following reviews, distributors' access to products may be restricted or relationships terminated, subject to contractual and regulatory requirements.
• Deterioration in distributor relationships or failure to provide competitive compensation could lead distributors to place more premium with other carriers.
• Adverse effects could arise if distributors exceed granted authority, fail to transfer collected premium, or breach obligations.
• Monitoring distribution relationships is routine, but such actions could expose the company to liability.
• Continued or increased consolidation of insurance distribution firms could materially affect sales channels, including loss of market access or market share.
• Negative effects could include loss of talent knowledgeable about products and increased commission costs due to larger distributors gaining negotiating leverage.
• Any material disruption to sales channels could negatively impact results of operations and financial condition.
• The company is subject to risks related to distributors' ability to keep pace with accelerating digitization.
• Distributors unable to provide a digital or technology-driven experience risk losing customers to more technology-driven distributors.
• Inability to purchase third-party reinsurance in desired amounts on commercially acceptable terms or terms that adequately protect the company may materially adversely affect business, financial condition, and results of operations.
• Reinsurance is strategically purchased to protect capital from severity events (large single event losses or catastrophes) and reduce earnings volatility.
• Reinsurance involves ceding a portion of risk exposure to another insurer for a cost.
• Inability to renew expiring contracts, enter new reinsurance arrangements on acceptable terms, or expand coverage could increase loss exposure.
• Increased loss exposure would increase potential losses related to loss events.
• Unwillingness to bear increased loss exposure may necessitate reducing underwriting commitments, which could materially adversely affect business, financial condition, and results of operations.
• Reinsurers may exclude certain coverages or alter terms in reinsurance contracts.
• Gaps in reinsurance protection expose the company to greater risk and potential losses.
• Losses and loss expense (LAE) reserves may be inadequate to cover actual losses, materially adversely affecting financial condition, results of operations, and cash flows.
• Success depends on accurately assessing risks related to insured businesses and people.
• Losses and LAE reserves are established for the best estimate of ultimate payment of incurred claims and related adjustment costs.
• Reserves are estimates, not exact calculations, and ultimate liability may differ from the estimate.
• The reserving process reviews historical data and considers factors such as claims inflation, claims development patterns, pricing, legislative activity, social/economic patterns, and litigation/judicial/regulatory trends.
• Variables are affected by internal and external events that could increase loss exposure.
• Loss reserves are continually monitored using new information on reported claims and statistical techniques/modeling simulations.
• The process assumes past experience, adjusted for current developments, trends, and market conditions, is an appropriate basis for predicting future events.
• There is no precise method for evaluating the impact of specific factors on reserve adequacy, and actual results may deviate substantially from estimates.
• Uncertainties impacting reserve adequacy include:
  • Time required to fully appreciate covered loss extent, leading to increased loss estimates over time and potentially inadequate reserves.
  • Retroactive enforcement of new theories of liability by courts.
  • Failure of loss limitations or exclusions, or changes in claims/coverage issues, could materially adversely affect financial condition or results of operations.
  • Volatility in financial markets, economic events, and other external factors may increase claim numbers and/or severity.
  • Elevated inflationary conditions would increase loss costs.
  • Adverse economic factors (recession, inflation, high unemployment, lower economic activity) could result in fewer policy sales, increased claim frequency/severity, or premium defaults, affecting growth and profitability.
  • Increased claim frequency, even without liability, could escalate evaluation costs beyond established reserves.
  • Entering new lines of business or new theories of claims may lead to increased claim frequency and higher claims handling costs than anticipated.
• Inadequate reserves would require increases, reducing net income and stockholders’ equity in the identification period.
• Future loss experience substantially exceeding established reserves could materially adversely affect future earnings, liquidity, and financial rating.
• A decline in financial strength rating may adversely affect the amount of business written.
• Independent ratings agencies, like A.M. Best, provide ratings used by industry participants to assess financial strength and quality.
• A.M. Best's ratings are based on quantitative and qualitative analysis of balance sheet strength, operating performance, and business profile.
• A.M. Best financial strength ratings range from "A++" (Superior) to "F" (liquidation).
• As of the filing date, A.M. Best assigned an "A-" (Excellent) financial strength rating with a stable outlook.
• A.M. Best ratings provide an independent opinion of an insurer's ability to meet policyholder obligations, not an evaluation for investors or a recommendation to buy/sell securities.
• A.M. Best's analysis includes comparisons to peers, industry standards, operating plans, philosophy, and management.
• A.M. Best periodically reviews and may revise ratings downward based on balance sheet strength, operating performance, and business profile.
• Specific building blocks reviewed by A.M. Best include capital adequacy, operating performance, operating profile, and Enterprise Risk Management.
• Other factors that could affect A.M. Best's analysis include:
  • Changes in business practices from the organizational plan that no longer support the rating.
  • Unfavorable financial, regulatory, or market trends, including excess market capacity.
  • Losses exceeding loss reserves.
  • Unresolved issues with government regulators.
  • Inability to retain senior management or other key personnel.
  • Significant losses in the investment portfolio or limited liquidity.
  • Alterations in A.M. Best's capital adequacy assessment methodology that adversely affect the rating.
• These factors could result in a downgrade of the financial strength rating.
• A downgrade or withdrawal of rating could lead to:
  • Current and future distribution partners and insureds choosing higher-rated competitors.
  • Increased cost or reduced availability of reinsurance.
  • Severely limiting or preventing writing new and renewal insurance contracts.
• Rating organizations may heighten scrutiny, increase frequency/scope of credit reviews, request additional information, or increase capital/other requirements for certain rating levels due to earnings and capital pressures in financial institutions.
• No assurance that the rating will remain at its current level.
• Reviews could result in adverse ratings consequences, materially adversely affecting financial condition and results of operations.
• Unexpected changes in the interpretation of coverage or provisions, including loss limitations and exclusions, could materially adversely affect financial condition and results of operations.
• No assurances that loss limitations or exclusions will be enforceable as intended.
• Unexpected and unintended issues related to claims and coverage may emerge with changes in industry practices and legal, judicial, social, and other conditions.
• Policies may limit the period for bringing a claim, which could be shorter than statutory periods.
• Courts or regulatory authorities could nullify or void limitations/exclusions, or legislation could be enacted modifying/barring their use.
• Governmental actions could result in higher than anticipated losses and LAE.
• Court decisions, such as the 1995 Montrose decision in California, could narrowly read policy exclusions, expanding coverage and requiring new exclusions.
• These issues may adversely affect business by broadening coverage beyond underwriting intent or increasing claim frequency/severity.
• Changes may not become apparent until years after affected insurance contracts are issued.
• The full extent of liability under insurance contracts may not be known for many years after issuance.
• Reinsurers may not reimburse claims on a timely basis, or at all, which may materially adversely affect business, financial condition, and results of operations.
• Reinsurance contracts require premium payments to reinsurers who then reimburse a portion of covered policy claims.
• Reinsurers may be called upon to reimburse claims many years after premiums were paid.
• Reinsurance makes the reinsurer liable to the company for transferred risk, but does not relieve the company of primary liability to policyholders.
• The current reinsurance program is designed to limit financial risk.
• Reinsurers may not pay claims timely or may not pay some or all claims.
• Reinsurers may default due to insolvency, lack of liquidity, operational failure, political/regulatory prohibitions, fraud, asserted defenses based on agreement wordings or utmost good faith, or documentation deficiencies.
• Disputes with reinsurers regarding coverage could be time-consuming, costly, and uncertain of success.
• These risks could lead to increased net losses and adversely affect financial condition.
• As of December 31, 2022, aggregate reinsurance recoverables were USD 581.4m.
• Failure to accurately and timely pay claims could materially and adversely affect business, financial condition, results of operations, and prospects.
• Ability to pay claims accurately and timely is affected by training/experience of claims representatives (including TPAs), management effectiveness, and ability to develop/implement appropriate procedures and systems.
• Failure to pay claims accurately and timely could lead to regulatory/administrative actions or material litigation, undermine reputation, and materially adversely affect business, financial condition, results of operations, and prospects.
• Ineffective management of TPAs or their inability to handle claim volume could adversely affect ability to handle increasing workload.
• This could require slowing growth in affected markets and lead to decreased quality of claims work, adversely affecting operating margins.
• Severe weather conditions, climate change effects, catastrophes, pandemics, and man-made events may adversely affect business, results of operations, and financial condition.
• Business is exposed to risks of severe weather, earthquakes, and man-made catastrophes (explosions, war, terrorist attacks, riots).
• Changing weather patterns and climatic conditions (global warming) have increased unpredictability and frequency of natural disasters in operating markets.
• Climate change may increase frequency and severity of extreme weather events, leading to conditions that increase hurricane activity.
• Natural disasters or other catastrophe losses could materially adversely affect business, financial condition, and results of operations.
• Increased frequency and severity of weather events, including hurricanes, could materially adversely affect ability to predict, quantify, reinsure, and manage catastrophe risk, and materially increase losses.
• Extent of catastrophe losses depends on frequency and severity of insured events and total insured exposure in affected areas.
• Incidence and severity of catastrophes and severe weather are inherently unpredictable.
• Exposure to losses is managed by analyzing probability and severity of loss events and their impact on underwriting and investment portfolio.
• Inability to obtain reinsurance coverage at reasonable rates and adequate amounts for severe weather and catastrophes could materially adversely affect business and results of operations.
• Business is exposed to risks of pandemics, outbreaks, public health crises, and geopolitical/social events.
• While policy terms are expected to preclude coverage for virus-related claims (e.g., COVID-19), court decisions and governmental actions may challenge exclusions or interpretations.
• If program administrators fail to comply with pre-established guidelines, results of operations could be adversely affected.
• Certain insurance products are marketed and distributed through program administrators with limited quoting and binding authority.
• Program administrators sell products to insureds via retail agents and brokers.
• Program administrators can bind certain risks without initial approval.
• Failure of program administrators to comply with underwriting guidelines and appointment terms could bind the company to unanticipated risks.
• Such actions could adversely affect results of operations.
• If actual renewals of existing contracts do not meet expectations, written premium in future years and future results of operations could be materially adversely affected.
• Most contracts are written for a one-year term.
• Financial forecasting assumes specific renewal rates for prior year contracts.
• Insurance and reinsurance industries are cyclical with intense price-based competition.
• If actual renewals do not meet expectations or if renewals are not written due to pricing conditions, written premium and future operations would be materially adversely affected.
• Increased public attention to environmental, social, and governance (ESG) matters may expose the company to negative public perception, reputational harm, additional costs, or impact stock price.
• Failure, or perceived failure, to respond to investor or customer expectations regarding ESG concerns could harm business and reputation.
• Insureds include a wide variety of industries, potentially controversial ones.
• Damage to reputation from providing policies to certain insureds could decrease demand for insurance products.
• This could materially adversely affect business, operational results, and financial results, and require additional resources to rebuild reputation, competitive position, and brand strength.
• Changes in accounting practices and future pronouncements may materially affect reported financial results.
• Developments in accounting practices may require considerable additional expenses for compliance, especially if information for prior periods is required or new requirements are applied retroactively.
• The impact of changes in current accounting practices and future pronouncements cannot be predicted but may affect calculation of net income, shareholder’s equity, and other financial statement line items.
• Insurance subsidiaries must comply with statutory accounting principles (SAP).
• SAP and its components are constantly reviewed by the National Association of Insurance Commissioners (NAIC) and its task forces/committees, as well as state insurance departments, to address emerging issues and improve financial reporting.
• Various proposals are pending before NAIC committees and task forces, some of which, if enacted and adopted at a state level, could negatively affect insurance industry participants.
• The NAIC continuously examines existing laws and regulations.
• It is unpredictable whether or in what form reforms will be enacted, and whether they will positively or negatively affect the company.

Risks Related to the Market and Economic Conditions

[c. 55; p. 9] Risks Related to the Market and Economic Conditions

• Adverse economic factors like recession, inflation, high unemployment, or lower economic activity could lead to fewer policy sales, increased claim frequency, premium defaults, or claim falsification, impacting growth and profitability.
• Economic downturns with higher unemployment, declining spending, and reduced corporate revenue generally decrease demand for insurance products, affecting premium levels and profitability.
• Negative economic factors can hinder the ability to charge appropriate rates for risk, reduce the number of policies written, and limit opportunities for profitable underwriting.
• Customers may reduce or cancel coverage, or not renew policies during economic downturns.
• Policyholders may exaggerate or falsify claims to obtain higher payments.
• Significant collapse in economic segments like construction or energy production could adversely affect results by reducing underwriting profit if not reflected in rates.
• The insurance business is historically cyclical, and the company believes it is currently in a relatively hard market cycle, which may cause financial performance and operating results to vary quarterly and not indicate future performance.
• Insurance carriers have historically experienced significant fluctuations in operating results due to competition, catastrophic events, capacity levels, litigation trends, regulatory constraints, and general economic conditions.
• The supply of insurance is linked to prevailing prices, insured losses, and industry capital, which fluctuate with investment returns.
• The insurance industry is cyclical, characterized by periods of intense price competition (soft market) and periods of capacity shortages leading to increased premiums (hard market).
• Demand for insurance depends on factors like catastrophic event frequency/severity, capacity levels, new capital providers, and general economic conditions, all of which fluctuate and can contribute to price declines.
• P&C insurance companies' profitability tends to follow cyclical market patterns, with higher gross written premium growth and improved profitability during hard market cycles.
• This cyclical pattern is more pronounced in the E&S (Excess and Surplus) market than in the standard insurance market.
• When the standard insurance market hardens, the E&S market typically hardens, with significantly more rapid growth.
• When conditions soften, customers may return to the admitted market from the E&S market, exacerbating rate decrease effects on financial results.
• The company believes it is currently experiencing a relatively hard market cycle, but cannot predict the timing or duration of market cycle changes due to competitor actions and general economic factors.
• Operating results are subject to fluctuation and have historically varied quarterly, and are expected to continue fluctuating due to general economic conditions, frequency/severity of insured events, fluctuating interest rates, claims exceeding loss reserves, competition, deviations from expected premium retention, adverse investment performance, and reinsurance costs.
• The company's results of operations depend partly on the performance of its investment portfolio.
• The investment portfolio is diversified and managed by professional investment advisory firms according to an investment policy, routinely reviewed by the Investment Committee.
• Investments are subject to general economic conditions, market risks, and risks inherent to specific securities.
• Primary market risk exposures are to changes in interest rates and equity prices.
• A significant portion of the investment portfolio is in fixed maturity securities, or separately managed accounts and limited partnerships primarily invested in fixed maturity securities.
• Interest rates were at or near historic lows in recent years but steadily rose for the year ended December 31, 2022.
• If recent rate increases cease or decline (e.g., due to federal government actions like the Inflation Reduction Act of 2022), a low interest rate environment would pressure net investment income, particularly for fixed maturity and short-term investments, adversely affecting operating results.
• Recent and future interest rate increases could cause fixed income securities portfolio values to decline, with the magnitude depending on security duration and the extent of rate increases.
• Some fixed income securities with call or prepayment options create reinvestment risk in declining rate environments.
• Mortgage-backed and asset-backed securities carry prepayment risk or may not prepay as quickly as expected in a rising interest rate environment.
• All fixed maturity securities, including those in separately managed accounts and limited partnerships, are subject to credit risk.
• Credit risk is the risk of investment default or impairment due to deterioration in the financial condition of issuers or guarantors of securities held.
• Downgrades in credit ratings of fixed maturity securities could significantly negatively affect their market valuation.
• The company also invests in marketable preferred and common equity securities and exchange-traded funds, which are carried at fair market value and are subject to potential losses and market value declines.
• Market and credit risks could reduce net investment income and result in realized investment losses.
• The investment portfolio is subject to increased valuation uncertainties when investment markets are illiquid, such as with fixed maturity securities held to maturity, separately managed accounts, and limited partnership investments.
• Valuation of investments is more subjective in illiquid markets, increasing the risk that estimated fair value does not reflect actual transaction prices.
• Risks for all security types are managed through an investment policy that sets parameters including maximum investment percentages in certain security types and minimum credit quality levels, believed to be within NAIC, Texas Department of Insurance, and Oklahoma Department of Insurance guidelines.
• The Investment Committee periodically reviews Enterprise Based Asset Allocation models for overall risk management.
• While the company seeks to preserve capital, investment objectives may not be achieved, and results may vary substantially over time.
• Investment strategies aim to be uncorrelated with insurance and reinsurance exposures, but investment portfolio losses may coincide with underwriting losses, exacerbating adverse effects.
• The company could be forced to sell investments to meet liquidity requirements.
• Premiums received are invested until needed for policyholder claims.
• The company manages the duration of its investment portfolio based on the duration of losses and LAE (Loss Adjustment Expense) reserves to ensure sufficient liquidity and avoid liquidating investments to fund claims.
• Risks like inadequate losses and LAE reserves or unfavorable litigation trends could necessitate selling investments to fund liabilities.
• 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 individual security credit issues.

Risks Related to the Regulatory Environment

[c. 56; p. 9] Regulatory compliance and impact on business objectives

• Extensive regulation may adversely affect the ability to achieve business objectives.
• Failure to comply with regulations may result in penalties, including fines and suspensions, adversely affecting financial condition and results of operations.
• Primary insurance subsidiaries (HSIC, IIC, and GMIC) are extensively regulated in Texas (state of domicile) and to a lesser degree in other operating states.
• Most insurance regulations protect policyholders' interests, not investors' or stockholders'.
• Regulations are administered by state departments of insurance and cover capital and surplus, investment and underwriting limitations, affiliate transactions, dividend limitations, changes in control, solvency, and other financial/non-financial aspects.
• Significant changes in laws and regulations could limit discretion or increase business costs.
• State insurance regulators conduct periodic examinations and require filings on financial condition, holding company issues, and other matters.
• Regulatory requirements may impose timing and expense constraints, adversely affecting business objectives.
• Insurance subsidiaries are part of an "insurance holding company system" under Texas statutes and regulations.
• Certain transactions between insurance subsidiaries and affiliates require prior notice to the Texas Department of Insurance, potentially causing business delays and additional expenses.
• Failure to file required notifications or comply with Texas insurance regulations may lead to significant fines, penalties, and impaired working relationships with the Texas Department of Insurance.
• State insurance regulators have broad discretion to deny or revoke licenses for various reasons, including regulation violations.
• Practices based on interpretations of regulations or industry norms may differ from regulatory authorities' interpretations.
• Lack of requisite licenses/approvals or non-compliance with regulations could lead to regulators precluding or suspending activities in a state or imposing penalties, adversely affecting business operations.
• Changes in insurance industry regulation, laws, or interpretations could interfere with operations and incur additional compliance costs, adversely affecting business.

[c. 57; p. 9] Capital requirements and regulatory oversight

• Insurance subsidiaries are subject to risk-based capital requirements based on the NAIC's "risk based capital model" and minimum capital/surplus restrictions under Texas law.
• These requirements establish minimum risk-based capital for business operations and identify inadequately capitalized property and casualty insurers based on asset/liability risks and net written premium mix.
• Insurers below a calculated threshold may face regulatory action, including supervision, rehabilitation, or liquidation.
• Failure to maintain required risk-based capital levels could adversely affect the insurance subsidiary's ability to maintain regulatory authority and its A.M. Best Rating.
• Additional government or market regulation may have a material adverse impact on the business.
• Business could be adversely affected by changes in state laws regarding asset/reserve valuation, surplus requirements, investment/dividend limitations, enterprise risk, and risk-based capital requirements.
• Federal laws and regulations may affect certain insurance industry aspects, including proposals for preemptive federal regulation.
• The U.S. federal government generally has not directly regulated the insurance industry, except for flood, nuclear, and terrorism risks.
• Federal government initiatives or legislation in areas like tort reform, corporate governance, and reinsurance company taxation may affect the insurance industry.

[c. 58; p. 9] Cannabis industry exposure

• Revenues are derived from customers in the cannabis industry.
• Risks related to the cannabis industry, including its status as a controlled substance under federal laws, may adversely impact clients and potential clients, which in turn may impact services.
• Reversal of cannabis legality in one or more states could force businesses, including customers, to cease operations.
• A change in the legal status or enforcement of federal laws related to the cannabis industry could negatively impact the company and decrease revenue through loss of current and potential customers.

[c. 59; p. 9] Net operating loss carryforwards

• The ability to utilize net operating loss carryforwards (NOLs) and other tax attributes may be limited.
• As of December 31, 2022, gross federal income tax NOLs were approximately USD 71.3m, available to offset future taxable income, prior to Section 382 limitations.
• The NOLs will begin to expire in 2033.
• Under Section 382 of the Code, an "ownership change" (greater than 50% change in equity ownership by certain stockholders over a three-year period) may limit the use of pre-ownership change NOLs to offset post-ownership change income.
• Future ownership changes may occur due to shifts in stock ownership, some outside of control.
• Future regulatory changes could also limit the ability to utilize NOLs.
• Inability to offset future taxable income with NOLs may adversely affect net income and cash flows.

[c. 60; p. 9] Holding company liquidity and dividend policy

• As a holding company with substantially all operations conducted by insurance subsidiaries, liquidity and ability to pay dividends and service debt obligations depend on cash dividends or other permitted payments from insurance subsidiaries.
• Continued operation and growth require substantial capital.
• No intention to declare and pay cash dividends on common stock in the foreseeable future.
• Ability to pay dividends to stockholders and meet debt obligations largely depends on dividends and distributions from primary insurance subsidiaries: HSIC, IIC, and GMIC.
• State insurance laws, including Texas, restrict the ability of HSIC, IIC, and GMIC to determine stockholder dividends.
• State insurance regulators require insurance companies to maintain specified levels of statutory capital and surplus.
• Dividend payments are limited to the portion of available policyholder surplus derived from net profits.
• State insurance regulators have broad powers to prevent reduction of statutory surplus to inadequate levels, and there is no assurance that maximum calculated dividends would be permitted.
• Future statutory provisions adopted by state insurance regulators regarding dividend payments by insurance subsidiaries may be more restrictive.
• Any future dividend determination will be at the discretion of the Board of Directors, depending on results of operations, financial condition, contractual debt restrictions, indebtedness, applicable law, and other relevant factors.
• Investors may need to sell common stock after price appreciation (which may not occur) to realize gains, as it may be the only way.
• Investors seeking immediate cash dividends should not purchase common stock.

[c. 61; p. 9] Change of control regulations

• Applicable insurance laws may make it difficult to effect a change of control.
• Under Texas insurance laws and regulations, acquiring control of a domestic insurer requires written approval from the state insurance commissioner.
• Approval is contingent on factors including the acquiror's financial strength, plans for future operations, and potential anti-competitive results.
• Texas insurance laws apply to direct and indirect acquisition of 10% or more of the voting stock of a Texas-domiciled insurer.
• Acquisition of 10% or more of Skyward Specialty's common stock would be considered an indirect change of control, triggering applicable filing requirements under Texas insurance laws, unless a disclaimer of control filing is accepted by the Texas Insurance Department.
• These requirements may discourage potential acquisition proposals and may delay, deter, or prevent a change of control, even for transactions desirable to some or all stockholders.

Risks Related to Our Liquidity and Access to Capital

[c. 62; p. 9] Future capital requirements

• Additional capital may be required in the future, which might not be available or only on unfavorable terms.
• Future capital requirements depend on factors including the ability to write new business successfully and establish sufficient premium rates and reserves to cover losses.
• If cash flows from operations are insufficient for future operating requirements and claim losses, or if capital is adversely impacted by investment portfolio fair value decline, catastrophe losses, or other events, additional funds may be needed through financings or growth curtailment.
• Many factors affect capital needs' amount and timing, including growth rate, profitability, claims experience, reinsurance availability, market disruptions, and unforeseeable developments.
• If additional capital is needed, equity or debt financing may not be available or only on unfavorable terms.
• Equity financings could result in dilution to stockholders.
• Debt financings may include covenants restricting business operations.
• Securities issued for capital raising may have rights, preferences, and privileges senior to common stock.
• Inability to obtain adequate capital on favorable terms could materially adversely affect operating plans, business, financial condition, or results of operations.

[c. 63; p. 9] Debt obligations and financial condition

• Debt obligations could impair financial condition and limit operating flexibility.
• Indebtedness under the Credit Agreement and other financial obligations could impair the ability to obtain future financing or additional debt for working capital, capital expenditures, acquisitions, or general corporate purposes.
• Indebtedness could impair the ability to access capital and credit markets on favorable terms.
• Failure to comply with financial, affirmative, and restrictive covenants in the Credit Agreement, leading to an uncured or un-waived event of default, could have a material adverse effect.
• A portion of cash flow may be dedicated to interest payments on indebtedness and other financial obligations, reducing availability for working capital and capital expenditures.
• Debt obligations could limit flexibility in planning for or reacting to changes in business and industry.

[c. 64; p. 9] Credit Agreement covenants and security

• Financial covenants in the Credit Agreement require maintaining certain minimum fixed charges coverage ratio and total adjusted capital of subsidiaries.
• Breach of these covenants gives the lender the right to accelerate repayment of outstanding amounts.
• There is no assurance of sufficient cash to satisfy obligations if repayment is accelerated, which could materially harm business operations.
• There is no guarantee of ability to pay principal and interest under the Credit Agreement or that future working capital, borrowings, or equity financing will be available to repay or refinance amounts outstanding.
• Obligations under the Credit Agreement are secured by a perfected security interest in all tangible and intangible assets (including intellectual property), except for certain customary excluded property, and all capital stock of the company and its subsidiaries, with limited exceptions.
• Future debt agreements may contain similar or more burdensome terms and covenants, including financial covenants.

Risks Related to Our Operations

[c. 65; p. 9] Personnel and talent retention

• The company could be adversely affected by the loss of key personnel or an inability to attract and retain qualified personnel.
• The company depends on its ability to attract and retain experienced and seasoned personnel knowledgeable about its business.
• The pool of talent for recruitment is limited and can fluctuate based on market dynamics specific to the industry.
• Higher demand for employees with desired skills and expertise could lead to increased compensation expectations, making it difficult to retain and recruit key personnel and maintain labor costs.
• Inability to retain and attract talented personnel could prevent the company from maintaining its competitive position in specialized markets, adversely affecting results of operations.

[c. 66; p. 9] Information technology and cybersecurity risks

• Security breaches, data loss, cyberattacks, and other IT failures could disrupt operations, damage reputation, and adversely affect business, operations, and financial results.
• The business is highly dependent on information technology and telecommunications systems, including underwriting systems.
• These systems are used for interacting with brokers and insureds, underwriting business, preparing policies, processing premiums, performing actuarial and modeling functions, processing claims, making claims payments, and preparing financial statements.
• Some systems may include or rely on third-party systems not located on company premises or under its control.
• Events like natural catastrophes, terrorist attacks, industrial accidents, computer viruses, and cyber-attacks can cause systems to fail or be inaccessible for extended periods.
• Sustained or repeated system failures or service denials could severely limit the ability to write and process new and renewal business, provide customer service, pay claims, or operate in the ordinary course of business, despite implemented business contingency plans and protection measures.
• Computer viruses, hackers, employee misconduct, and other external hazards could expose systems to security breaches, cyber-attacks, or disruptions.
• The company's systems and networks, and those of third-party service providers, may be subject to breaches or interference despite implemented security measures.
• Such events may result in operational disruptions, unauthorized access, disclosure, or loss of proprietary information or customer data, leading to legal claims, regulatory scrutiny, liability, reputational damage, mitigation costs, loss of customers, or other business damage.
• The trend toward public notification of security incidents could exacerbate harm to the business, financial condition, and results of operations.
• Harm to business and reputation could occur even if technology infrastructure and data confidentiality are protected, if attempted security breaches are publicized.
• Advances in criminal capabilities, new vulnerability discoveries, exploitation attempts, data thefts, physical system or network break-ins, or inappropriate access could compromise or breach technology or security measures.
• Third parties to whom functions are outsourced are also subject to these risks.
• While the company reviews and assesses third-party providers' cybersecurity controls and adjusts business processes, it cannot ensure information confidentiality will always be successful.
• Increased use of third-party services (e.g., cloud technology, software as a service) can make it more difficult to identify and respond to cyberattacks due to the dynamic nature of these technologies.
• These risks could increase as vendors adopt and use more cloud-based software services.

[c. 67; p. 9] Growth management

• The company may not be able to manage its growth effectively.
• Future business growth could require additional capital, systems development, and skilled personnel.
• The company must meet capital needs, expand systems and internal controls, optimally allocate human resources, identify, hire, train, and develop qualified employees, and effectively incorporate acquired business components.
• Failure to manage growth effectively could have a material adverse effect on the business, financial condition, and results of operations.

[c. 68; p. 9] Litigation risks

• The effects of litigation on the business are uncertain and could have an adverse effect.
• The company continually faces risks associated with various types of litigation, including disputes related to insurance claims and general commercial and corporate litigation.
• While not currently involved in out-of-the-ordinary litigation with customers, other insurance industry members are targets of class action lawsuits and other litigation involving substantial or indeterminate amounts with unpredictable outcomes.
• This litigation is based on issues such as insurance and claim settlement practices.
• The company cannot predict future involvement in such litigation or its impact on the business.

[c. 69; p. 9] Vendor and third-party software reliance

• Loss of key vendor relationships or a vendor's failure to protect data, confidential, and proprietary information could affect operations.
• The company relies on services and products from many vendors in the United States and abroad, including computer hardware and software vendors, and outsourcing for claim adjustment, human resource benefits management, and investment management services.
• If a vendor suffers bankruptcy, becomes unable to provide products or services, or fails to protect confidential information, the company may suffer operational impairments and financial losses.
• While vendor risk, including security and stability of critical vendors, is generally monitored, the company may fail to properly assess and understand risks and costs in third-party relationships, which could materially and adversely affect financial condition and results of operations.
• The company anticipates continued reliance on third-party software.
• Although commercially reasonable alternatives to currently licensed third-party software are believed to exist, this may not always be the case, or replacement could be difficult or costly.
• Integration of new third-party software may require significant work and substantial investment of time and resources.
• Use of additional or alternative third-party software would require license agreements with third parties, which may not be available on commercially reasonable terms or at all.
• Many risks associated with third-party software use cannot be eliminated and could negatively affect the business.

[c. 70; p. 9] Intellectual property rights

• The company may fail or be unable to protect its intellectual property rights for its proprietary technology platform and brand, or may be sued for alleged infringement of third-party proprietary rights.
• Success and ability to compete depend partly on intellectual property, including rights in the brand and proprietary technology used in certain product lines.
• The company primarily relies on copyright and trade secret laws, and confidentiality agreements with employees, customers, service providers, partners, and others to protect intellectual property rights.
• Steps taken to protect intellectual property may be inadequate.
• Efforts to enforce intellectual property rights may face defenses, counterclaims, and countersuits attacking their validity, enforceability, and scope.
• Failure to secure, protect, and enforce intellectual property rights could adversely affect the brand and business.
• Success also depends partly on not infringing on the intellectual property rights of others.
• Competitors and other entities/individuals may own or claim intellectual property related to the industry or the company.
• Third parties may claim infringement of their intellectual property rights in the future, and the company may be found to be infringing.
• Claims or litigation could incur significant expenses, require substantial damages or ongoing royalty payments if successfully asserted, prevent service offerings, or require compliance with unfavorable terms.
• Even if the company prevails in a dispute, litigation could be costly, time-consuming, and divert management and key personnel attention from business operations.

Risks Related to Ownership of Our Common Stock

[c. 71; p. 9] Risks Related to Ownership of Our Common Stock

• Operating as a public company incurs increased costs and requires substantial management time for new compliance initiatives.
• Financial reporting and other requirements may exceed the preparedness of accounting and management systems and resources.
• As a public company, especially after ceasing to be an emerging growth company, significant legal, accounting, and other expenses will be incurred.
• Federal securities laws, including Sarbanes-Oxley Act, Dodd-Frank Act, and SEC/Nasdaq rules, impose requirements on public companies for filing reports, establishing disclosure and financial controls, and corporate governance practices.
• These rules increase legal and financial compliance costs, make activities more time-consuming and costly, and require substantial management and personnel time.
• There is a risk of not producing reliable financial statements or filing them timely with the SEC, or complying with Nasdaq listing requirements.
• These rules may make it more difficult and expensive to obtain director and officer liability insurance.
• Section 404 of the Sarbanes-Oxley Act requires a management report on internal control over financial reporting, including an attestation report from an independent registered public accounting firm, starting the first full year after July 1, 2019.
• While an emerging growth company, an attestation report on internal control over financial reporting from an independent registered public accounting firm is not required.
• Compliance with Section 404 involves a costly and challenging process to document and evaluate internal control over financial reporting.
• This process requires dedicating internal resources, potentially engaging outside consultants, adopting a detailed work plan, improving control processes, validating controls through testing, and implementing continuous reporting and improvement.
• There is a risk that neither the company nor its independent registered public accounting firm will conclude that internal control over financial reporting is effective within the prescribed timeframe, potentially leading to an adverse market reaction and SEC investigations.
• Disclosure controls and procedures are designed to ensure information required for SEC reports is recorded, processed, summarized, and reported within specified time periods.
• Disclosure controls and procedures or internal control over financial reporting may not prevent or detect all errors and fraud.
• A control system provides only reasonable, not absolute, assurance that objectives will be met due to inherent limitations.
• Misstatements due to error or fraud may occur and not be detected because of inherent limitations in the control system.
• Failure to achieve and maintain effective internal controls could harm operating results and financial condition, and negatively affect the market price of common stock.
• Section 404(a) of the Sarbanes-Oxley Act requires annual management assessments of internal control over financial reporting effectiveness, starting with the annual report for the fiscal year ended December 31, 2023.
• As an emerging growth company, the company is exempt from the auditor attestation requirement of Section 404(b) of Sarbanes-Oxley until it no longer qualifies as such.
• Reduced reporting and disclosure requirements applicable to emerging growth companies could make common stock less attractive to investors.
• Substantial internal control systems and procedures are still needed to satisfy Exchange Act reporting requirements.
• Management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding financial reporting reliability and GAAP financial statement preparation.
• A material weakness in internal control over financial reporting was identified for the year ended December 31, 2021, due to not designing or maintaining an effective control environment and associated control activities.
• The material weaknesses identified for the year ended December 31, 2021, were remediated for the year ended December 31, 2022.
• The effectiveness of internal control over financial reporting has not been tested by the company or its independent registered public accounting firm, and there is no certainty of concluding on an ongoing basis that it is effective under Section 404(a) of Sarbanes-Oxley.
• If internal control over financial reporting is concluded to be ineffective, the timing of completion of evaluation, testing, and remediation actions, or their effect on operations, is uncertain.
• Even if internal control over financial reporting is deemed effective, the independent registered public accounting firm may conclude there are material weaknesses.
• Material weaknesses or other deficiencies could impede the ability to file timely and accurate reports with the SEC.
• Any of these issues could cause investors to lose confidence, lead to litigation or investigations by Nasdaq, the SEC, or other regulatory authorities, or result in suspension or termination of common stock listing on Nasdaq, negatively affecting the stock's trading price.
• As an "emerging growth company," the company intends to use exemptions from various reporting requirements applicable to other public companies.
• Exemptions include not requiring an independent registered public accounting firm to audit internal control over financial reporting under Section 404 of Sarbanes-Oxley.
• Other exemptions include reduced disclosure obligations for executive compensation in registration statements, periodic reports, and proxy statements.
• Exemptions also cover requirements for nonbinding advisory votes on executive compensation and stockholder approval of golden parachute payments not previously approved.
• The company will cease to be an emerging growth company upon the earliest of: (i) the last day of the fiscal year with total annual gross revenues of USD 1.235bn or more; (ii) the last day of the fiscal year following the fifth anniversary of the IPO date.
• Other triggers for ceasing emerging growth company status are: (iii) the date of issuing more than USD 1bn in nonconvertible debt during the previous three years; and (iv) the date of being deemed a large accelerated filer under SEC rules.
• Investors may find common stock less attractive if the company relies on these exemptions, potentially leading to a less active trading market and more volatile stock price.
• Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until they apply to private companies.
• The company has elected to use this extended transition period, delaying the adoption of new or revised accounting standards compared to other public companies.
• Operating results and stock price may be volatile or decline regardless of operating performance, risking loss of investment.
• The market price of common stock has been and is likely to remain highly volatile and fluctuate substantially due to many factors beyond control.
• Securities markets worldwide have experienced and will likely continue to experience significant price and volume fluctuations.
• Market volatility, general economic, market, or political conditions could cause wide price fluctuations in common stock regardless of operating performance.
• Investment in common stock is considered risky, suitable only for those who can withstand significant loss and wide market value fluctuations.
• Factors that could affect stock price include: market conditions in the broader stock market; actual or anticipated fluctuations in quarterly financial and operating results; introduction of new products or services by the company or competitors.
• Other factors include: issuance of new or changed securities analysts’ reports or recommendations; operating results varying from analyst and investor expectations; short sales, hedging, and other derivative transactions in common stock.
• Further factors are: guidance provided to the public, changes in guidance, or failure to meet guidance; strategic actions by the company or competitors; announcements by the company, competitors, or acquisition targets.
• Sales, or anticipated sales, of large blocks of stock by directors, executive officers, and principal stockholders could affect stock price.
• Additions or departures in the Board of Directors, senior management, or other key personnel are also factors.
• Regulatory, legal, or political developments; public response to press releases or announcements; litigation and governmental investigations; changing economic conditions; and changes in accounting principles can affect stock price.
• Any incurred indebtedness or future securities issuance; default under indebtedness agreements; exposure to capital and credit market risks affecting investment portfolio or capital resources; and changes in credit ratings are also factors.
• Other events or factors, including natural disasters, war, acts of terrorism, or responses to these events, can impact stock price.
• Securities markets have experienced extreme price and volume fluctuations unrelated or disproportionate to company operating performance.
• Investors may not be able to resell shares at or above the initial offering price due to these factors.
• Broad market fluctuations, general market, economic, and political conditions (e.g., recessions, loss of investor confidence, interest rate changes) may negatively affect common stock market price.
• Stock markets, including Nasdaq, have experienced extreme price and volume fluctuations affecting equity securities.
• Such occurrences could cause stock price to fall and expose the company to costly securities class action litigation, diverting management attention and harming the business.
• Substantial future sales of common stock by existing stockholders, or the perception of such sales, could cause the market price to decline.
• Such sales could depress the market price and impair the ability to raise capital through additional equity securities.
• The effect of such sales on the prevailing market price of common stock is unpredictable.
• Management has the authority to change underwriting guidelines or strategy without notice to stockholders and without stockholder approval.
• This could lead to fundamental changes in operations without stockholder approval, potentially resulting in a strategy or underwriting guidelines materially different from those described in the "Business" section or elsewhere.
• Anti-takeover provisions in organizational documents could delay a change in management and limit share price.
• Provisions in the certificate of incorporation and bylaws could make it more difficult for a third party to acquire control, even if beneficial to common stock value, and prevent attempts to replace the Board of Directors or management.
• Anti-takeover provisions include: permitting the Board of Directors to establish the number of directors and fill vacancies/newly created directorships.
• The Board of Directors will be classified into three classes with staggered, three-year terms, and directors may only be removed for cause.
• Super-majority voting is required to amend provisions in the certificate of incorporation and bylaws.
• Blank-check preferred stock, with preference rights and terms set by the Board, could delay or prevent a transaction or change in control that might offer a premium price for common stock.
• Stockholders' ability to call special meetings is eliminated.
• Special meetings of stockholders can only be called by the Board of Directors, the chairman of the Board, or the chief executive officer.
• Stockholder consent action by other than unanimous written consent is prohibited.
• Vacancies on the Board of Directors may only be filled by a majority of directors then in office, even if less than a quorum.
• Cumulative voting in the election of directors is prohibited.
• Advance notice requirements are established for nominations to the Board of Directors or for proposing matters at annual stockholder meetings.
• As a Delaware corporation, the company is subject to Section 203 of the Delaware General Corporation Law, which may prohibit large stockholders (15% or more of voting stock) from merging or combining for a period.
• The certificate of incorporation and bylaws designate the Court of Chancery of the State of Delaware as the exclusive forum for substantially all disputes between the company and its stockholders.
• This could limit stockholders' ability to obtain a favorable judicial forum for disputes with the company or its directors, officers, or employees.
• The exclusive forum applies to: any derivative action or proceeding on the company's behalf; any action asserting a claim of breach of fiduciary duty by directors, officers, employees, agents, or stockholders.
• It also applies to: any action asserting a claim under the DGCL or the certificate of incorporation/bylaws where DGCL confers jurisdiction on the Court of Chancery; any action to interpret, apply, enforce, or determine the validity of the certificate of incorporation or bylaws; or any action asserting a claim governed by the internal affairs doctrine.
• Unless written consent is given for an alternative forum, federal district courts of the United States of America are the sole and exclusive forum for complaints arising under the Securities Act.
• Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over suits to enforce duties or liabilities under the Securities Act.
• There is uncertainty whether a court would enforce the exclusive forum provision for Securities Act claims, and stockholders are not deemed to have waived compliance with federal securities laws.
• This exclusive forum provision would not apply to suits under the Exchange Act or other claims where federal courts have exclusive jurisdiction.
• If enforced, this choice of forum provision may limit a stockholder's ability to bring a claim in a favorable judicial forum, potentially discouraging lawsuits.
• If a court finds the choice of forum provision inapplicable or unenforceable, additional costs for resolving actions in other jurisdictions could materially adversely affect the business, financial condition, or results of operations.

Properties

[c. 72; p. 10] Executive offices and insurance operations

• Primary executive offices and insurance operations are located in Houston, Texas.
• These offices occupy approximately 40,000 square feet of space.
• The lease for this space expires in 2029.
• Management considers the office facilities suitable and adequate for current operations.

Legal Proceedings

[c. 73; p. 11] Legal proceedings

• The company is periodically involved in legal proceedings that arise in the ordinary course of business.
• Currently, the company is not involved in any legal proceedings believed to have a material adverse effect on its business or results of operation.

Mine Safety Disclosures

[c. 74; p. 12] Table of Contents

• The document includes a Table of Contents.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

[c. 75; p. 13] Common stock trading and holders

• Our common shares began trading on the NASDAQ Global Select Market under the symbol “SKWD” on January 13, 2023.
• Prior to January 13, 2023, there was no public market for our common shares.
• As of March 22, 2023, there were approximately 171 holders of record of our common stock.
• This number does not represent the total number of stockholders because many shares are held by brokers and institutions on behalf of stockholders.

Securities Authorized for Issuance Under Equity Compensation Plans

[c. 76; p. 13] equity compensation plans

• 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.

Recent Sales of Unregistered Equity Securities

[c. 77; p. 13] Unregistered securities overview

• 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 set forth.
• The information presented in Item 5 gives effect to a 4-for-1 reverse stock split, effective January 3, 2023.

[c. 78; p. 13] Class A Common Stock conversion

• Immediately prior to completing the IPO, all preferred stock converted into 16,305,113 shares of common stock.
• The issuance of these common shares was exempt from Securities Act registration requirements under Section 3(a)(9) of the Securities Act.
• The exemption applies to an exchange of securities by the issuer with existing security holders exclusively, where no commission or other remuneration is paid directly or indirectly for soliciting the exchange.
• No underwriters were involved in this issuance of shares.

[c. 79; p. 13] Stock awards and share issuance

• During the period covered by this Annual Report on Form 10-K, 198,842 shares of restricted stock and restricted stock units were granted to certain employees and directors under the Company’s 2020 Long-Term Incentive Plan.
• The weighted average price for these grants was USD 14.17 per share.
• No shares of common stock were issued upon the exercise of stock options during the period covered by this Annual Report on Form 10-K.
• No underwriters were involved in the issuance of these securities.
• The issuances were deemed exempt from registration pursuant to Section 4(a)(2) of the Securities Act or Rule 701 promulgated under the Securities Act, as transactions under compensatory benefit plans.
• Shares of common stock issued upon the exercise of stock options or warrants are considered restricted securities.
• All recipients either received adequate information about the company or had access to such information through employment or other relationships.

Use of Proceeds from Initial Public Offering

[c. 80; p. 13] Initial Public Offering details

• The company closed its IPO on January 18, 2023.
• The company issued and sold 4,750,000 shares of common stock in the IPO.
• Selling stockholders sold 4,202,383 shares in the IPO.
• Underwriters fully exercised their option to purchase 1,342,857 additional shares of common stock from selling stockholders.
• The offer and sale of shares in the IPO were registered under the Securities Act via a registration statement on Form S-1 (File No. 333-265326), declared effective by the SEC on January 12, 2023.
• Barclays Capital Inc. and Keefe, Bruyette & Woods, Inc. were the representatives of the underwriters.
• The public offering price was $15.00 per share.
• Net proceeds to the company were approximately $62.3m, after deducting underwriting discounts and specific incremental IPO expenses.
• 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.

Issuer Purchases of Equity Securities

[c. 81; p. 13] Equity securities purchases

• The company did not purchase any of its equity securities during the period covered by this Annual Report on Form 10-K.
• Table of Contents.

Dividends

[c. 82; p. 13] Dividend policy

• The company does not currently intend to pay cash dividends on its common stock in the foreseeable future.
• Future dividend payments are at the discretion of the Board of Directors and depend on results of operations, financial condition, legal restrictions, and other relevant factors.
• Investors may need to sell common stock for gains, as dividends are not anticipated.
• Investors seeking immediate cash dividends should not purchase the company's common stock.

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

Overview

[c. 83; p. 14] Business overview and strategy

• The company is a growing specialty insurance company providing commercial P&C products and solutions primarily in the United States.
• Products are offered on both a non-admitted (E&S) and admitted basis.
• The company focuses on underserved, dislocated, and/or markets where standard insurance coverages are insufficient for businesses.
• Customers typically require highly specialized, customized underwriting solutions and claims capabilities.
• The company develops and delivers tailored insurance products and services for niche markets.
• The portfolio of insured risks is highly diversified across industries, distribution channels, and lines of business.
• Lines of business include general liability, excess liability, professional liability, commercial auto, group accident and health, property, surety, and workers’ compensation.
• The company insures both short and medium duration liabilities.
• The business mix is balanced between E&S and admitted markets.
• Diversification, combined with underwriting and claims expertise, is expected to produce strong growth and consistent profitability across P&C insurance pricing cycles.
• The company's strategy, referred to as "Rule Our Niche," aims to lead in chosen market niches and establish sustainable competitive positions.
• This strategy forms the basis for building a strong defensible market position, creating a competitive moat, and winning chosen markets.
• The principles of the strategy are considered key to achieving and sustaining best-in-class underwriting results through P&C insurance pricing cycles.
• The company strives for excellence in risk selection, pricing, and claims outcomes, amplified by advanced technology and analytics.

[c. 84; p. 14] Table of Contents

• Table of Contents.

Results of Operations

[c. 85; p. 14] Summary of results

• The table summarizes results for the years ended December 31, 2022 and 2021.

[c. 86; p. 14]

Results of Operations

($ in thousands)	2022	2021
Gross written premiums	1,143,952	939,859
Ceded written premiums	(468,409)	(410,716)
Net written premiums	675,543	529,143
Net earned premiums	615,994	499,823
Commission and fee income	5,199	3,973
Losses and LAE	402,512	354,411
Underwriting, acquisition and insurance expenses	182,171	138,498
Underwriting income (1)	36,510	10,887
Net investment income	36,931	24,646
Net investment (losses) gains	(15,705)	17,107
Income before federal income tax	49,783	48,309
Net income	39,396	38,317
Adjusted operating income (1)	58,574	36,062
Loss and LAE ratio	65.3%	70.9%
Expense ratio	28.7%	26.9%
Combined ratio	94.0%	97.8%
Adjusted loss and LAE ratio (1)	63.9%	67.7%
Expense ratio	28.7%	26.9%
Adjusted combined ratio (1)	92.6%	94.6%
Return on equity	9.3%	9.4%
Return on tangible equity (1)	11.8%	11.9%
Adjusted return on equity (1)	13.8%	8.8%
Adjusted return on tangible equity (1)	17.6%	11.2%

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

Adjusted Operating Income (Loss)

[c. 87; p. 14] Adjusted operating income reconciliation

• A table provides a reconciliation of adjusted operating income to net income for the years ended December 31, 2022 and 2021.
• The document includes a Table of Contents.

[c. 88; p. 14]

Adjusted operating income by income taxes

	2022		2021
($ in thousands)	Before income taxes	After income taxes	Before income taxes	After income taxes
Income as reported	49,783	39,396	48,309	38,317
Less:	—	—	—	—
Net impact of LPT	(8,572)	(6,772)	(16,063)	(12,690)
Net investment (losses) gains	(15,705)	(12,407)	17,107	13,515
Net realized gain on sale of business	—	—	5,077	4,011
Impairment charges	—	—	(2,821)	(2,229)
Other income (loss)	1	1	(445)	(352)
Adjusted operating income	74,059	58,574	45,454	36,062

Underwriting income (loss)

[c. 89; p. 14] Underwriting income reconciliation

• The provided table reconciles underwriting income (loss) to income (loss) before federal income tax for the years ended December 31, 2022 and 2021.

[c. 90; p. 14]

Underwriting income (loss)

($ in thousands)	2022	2021
Income before federal income tax	49,783	48,309
Add:	—	—
Interest expense	6,407	4,622
Amortization expense	1,547	1,520
Impairment charges	—	2,821
Less:	—	—
Net investment income	36,931	24,646
Net investment (losses) gains	(15,705)	17,107
Net realized gain on sale of business	—	5,077
Other income (loss)	1	(445)
Underwriting income	36,510	10,887

Adjusted Loss Ratio / Adjusted Combined Ratio

[c. 91; p. 14] Adjusted loss and combined ratio reconciliation

• The 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 years ended December 31, 2022 and 2021.

[c. 92; p. 14]

Adjusted Loss Ratio / Adjusted Combined Ratio

($ in thousands)	2022	2021
Net earned premiums	615,994	499,823
Losses and LAE	402,512	354,411
Less: Pre-tax net impact of LPT	8,572	16,063
Adjusted losses and LAE	393,940	338,348
Loss and LAE ratio	65.3%	70.9%
Less: Net impact of LPT	1.4%	3.2%
Adjusted loss and LAE ratio	63.9%	67.7%
Combined ratio	94.0%	97.8%
Less: Net impact of LPT	1.4%	3.2%
Adjusted combined ratio	92.6%	94.6%

Tangible Stockholders’ Equity

[c. 93; p. 14] Tangible stockholders' equity reconciliation

• A table provides a reconciliation of tangible stockholders’ equity to stockholders’ equity for the years ended December 31, 2022 and 2021.

[c. 94; p. 14]

Tangible stockholders’ equity

($ in thousands)	2022	2021
Stockholders’ equity	421,662	426,080
Less: goodwill and intangible assets	89,870	91,336
Tangible stockholders’ equity	331,792	334,744
—	331,792	334,744

Adjusted Return on Equity

[c. 95; p. 14] Adjusted Return on Equity Reconciliation

• The following table provides a reconciliation of adjusted return on equity to return on equity for the years ended December 31, 2022 and 2021.
• Table of Contents.

[c. 96; p. 14]

Adjusted operating income by average stockholders’ equity

($ in thousands)	2022	2021
Numerator: adjusted operating income	58,574	36,062
Denominator: average stockholders’ equity	423,871	409,803
Adjusted return on equity	13.8%	8.8%

Return on Tangible Equity

[c. 97; p. 14] Return on tangible equity reconciliation

• Return on tangible equity for the years ended December 31, 2022 and 2021 reconciles to return on equity as follows.

[c. 98; p. 14]

Net income by average tangible stockholders’ equity

($ in thousands)	2022	2021
Numerator: net income	39,396	38,317
Denominator: average tangible stockholders’ equity	333,268	322,128
Return on tangible equity	11.8%	11.9%

Adjusted Return on Tangible Equity

[c. 99; p. 14] Adjusted return on tangible equity reconciliation

• Adjusted return on tangible equity for the years ended December 31, 2022 and 2021 reconciles to return on equity.

[c. 100; p. 14]

Adjusted operating income by average tangible stockholders’ equity

($ in thousands)	2022	2021
Numerator: adjusted operating income	58,574	36,062
Denominator: average tangible stockholders’ equity	333,268	322,128
Adjusted return on tangible equity	17.6%	11.2%

Underwriting Results

[c. 101; p. 14] Premiums

• Gross written premiums increased YoY, driven by double-digit premium growth in all eight underwriting divisions.
• Gross written premium increases were primarily driven by retention, rate increases, and new business.
• Growth was also impacted by the addition of new products and expanded coverage offerings, new underwriting teams, and new tech-enabled partnerships.
• The increase in gross written premiums was partially offset by the continued impact of the run-off of exited business.
• Net earned premiums were USD 616.0m for the year ended December 31, 2022, compared to USD 499.8m for the same 2021 period, an increase of USD 116.2m or 23.2%.
• The increase in net earned premiums was primarily driven by the same reasons as gross written premiums.

[c. 102; p. 14] Losses and LAE

• The loss and LAE ratio improved 5.6 points compared to the same 2021 period.
• The loss and LAE ratio for 2022 was impacted by 1.4 points of LPT prior accident year development, compared to 3.2 points for the same 2021 period.
• The adjusted loss and LAE ratio improved 3.8 points compared to the same 2021 period.
• The improvement in the adjusted loss and LAE ratio was primarily driven by a shift in the mix of business, continued run-off of exited business, and lower catastrophe losses.
• Catastrophe losses from Hurricane Ian and Winter Storm Elliott added 1.1 points to the loss and LAE ratio in 2022.
• The same 2021 period was impacted by 2.4 points of catastrophe losses from tornadoes in the Midwest, Hurricane Ida, and first quarter winter storms.

[c. 103; p. 14] Losses and LAE Development

• For the year ended December 31, 2022, net incurred losses for accident years 2021 and prior developed unfavorably by USD 14.4m, related to losses subject to the LPT.
• Within exited lines, adverse development of USD 14.5m was from the 2019 accident year, primarily driven by increased frequency and severity in general and professional liability.
• The remaining USD 8.4m of net adverse development was from various other accident years.
• Within multi-line solutions, favorable development of USD 10.8m was from the 2020 through 2021 accident years, primarily driven by a reduction in frequency of claims in commercial auto and general liability.
• The remaining USD 2.3m of net adverse development in multi-line solutions was from various other accident years.
• There was no net development in short tail/monoline specialty lines.
• For the year ended December 31, 2021, net incurred losses and LAE for accident years 2020 and prior developed adversely by USD 28.0m.
• This adverse development in 2021 was driven by USD 28.8m of adverse development in exited lines and USD 4.8m of adverse development in multi-line solutions.
• This was partially offset by USD 5.6m of favorable development in short tail lines in 2021.
• Within exited lines in 2021, the USD 28.8m adverse development was primarily related to the 2013, 2015, and 2018 accident years, predominantly driven by increases in both frequency and severity of losses in general liability.
• Within multi-line solutions in 2021, adverse development of USD 4.8m was primarily related to the 2016 and 2017 accident years, driven by increased frequency and severity of claims in commercial auto.
• Favorable development of USD 5.6m 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.

[c. 104; p. 14] Loss Portfolio Transfer (LPT)

• On April 1, 2020, with a valuation date of June 30, 2019, the company entered into an LPT retroactive reinsurance agreement with R&Q Bermuda (SAC) Limited.
• The LPT covers liabilities (including claim payments, allocated LAE, and certain extra-contractual obligations) related to certain policies issued or assumed for policy years 2017 and prior.
• The LPT agreement covers the majority of the company's exited business.
• The company believes the LPT reduces volatility associated with covered business from 2017 and prior, allowing management to focus on continuing business.
• As of the Valuation Date, the company agreed to cede USD 153.1m of Net LPT Reserves for certain lines of business, primarily related to 2017 and prior policy years, subject to an aggregate cash deductible of USD 105m.
• Subsequent to the Valuation Date but prior to the Inception Date, Net LPT Reserves were strengthened by USD 5.5m, increasing them to USD 158.6m.
• At the Inception Date, the cash remitted to the third-party reinsurer for the cession of Net LPT reserves was USD 53.6m (USD 158.6m Net LPT Reserves less USD 105m cash deductible).
• As of the Inception Date, the LPT provided reinsurance protection of approximately USD 127.4m above the Net LPT Reserves, subject to co-participations.
• The company paid USD 43.5m in premium to the reinsurer for this reinsurance protection.
• The premium payment of USD 43.5m combined with the USD 53.6m remitted to the reinsurer resulted in a total cash transfer of USD 97.1m on the Inception Date.
• The LPT is structured into two distinct sections with separate and independent reinsurance structures.
• Section A: represented USD 22.2m of ceded net reserves at inception, covering claims from exited workers’ compensation and general liability lines primarily related to business written in policy years 2011 and prior.
  • As of December 31, 2022, net loss reserves subject to the LPT were USD 68.6m.
  • The company materially strengthened reserves subject to the LPT based on actuarial and claims analyses.
  • The number of open claims has been reduced by 70.1% since the LPT inception.
  • Based on Valuation Date reserves, USD 22.2m of net reserves related to Section A were ceded, subject to the aggregate cash deductible.
  • The LPT provides 100% reinsurance coverage on the first USD 2.8m of incurred losses and LAE above ceded net reserves for Section A.
  • Above the USD 2.8m coverage layer, there is a further USD 5.0m of reinsurance coverage for which the company retains 50% of incurred losses and LAE.
  • In April 2021, a review of every open claim for Section A business was conducted with an independent actuarial firm, leading to strengthened reserves.
  • As of December 31, 2022, total incurred losses and LAE (including claims paid, case reserves, and IBNR) for Section A were USD 34.7m, which is USD 4.7m in excess of reinsurance coverage under Section A.
  • Should new claims arise or existing claims develop adversely for Section A business, there would be no further reinsurance coverage.
  • As of December 31, 2022, paid losses and LAE on policies subject to Section A were USD 22.0m, which is USD 8.0m below total reinsurance coverage under Section A.
  • The ratio of paid losses and LAE to total incurred losses and LAE for Section A was 63.5% as of December 31, 2022.
  • Section A open claims have been reduced by 51.8% since the Valuation Date.
• Section B: represented USD 130.9m of ceded net reserves at inception, covering claims from other exited business and certain continuing business related to policies written in years 2017 and prior, principally general liability and commercial auto lines.
  • Based on Valuation Date reserves, USD 130.9m of net reserves related to Section B were ceded, subject to the aggregate cash deductible.
  • The LPT provides 100% reinsurance coverage on the first USD 19.1m of incurred losses and LAE above ceded net reserves for Section B.
  • Above the USD 19.1m layer, a further USD 70.0m of reinsurance coverage is provided, with a 50% co-participation on incurred losses and LAE in that layer.
  • There is an additional USD 36.0m of reinsurance providing 100% coverage above the USD 70.0m layer.
  • In September 2021, open claims for Section B business were reviewed, leading to strengthened reserves.
  • As of December 31, 2022, total incurred losses and LAE (including claims paid, case reserves, and IBNR) for Section B were USD 220.0m.
  • The entire USD 36.0m of 100% coverage layer is available for Section B should new claims arise or existing claims develop adversely.
  • As of December 31, 2022, paid losses and LAE on policies subject to Section B were USD 164.0m, which is USD 92.0m below total reinsurance coverage under Section B (including co-participation amounts).
  • The ratio of paid losses and LAE to total incurred losses and LAE for Section B was 74.6% as of December 31, 2022.
  • Section B open claims have been reduced by 74.2% since the Valuation Date.

[c. 105; p. 14] Expense Ratio

• The expense ratio increased 1.8 points compared to the same 2021 period.
• The increase was primarily driven by changes in the mix of business resulting in higher net policy acquisition expenses.
• Higher operating expenses due to continued investment in new underwriters and underwriting teams also contributed to the increase.

[c. 106; p. 14] Investment Results

• Net investment income was USD 36.9m for the year ended December 31, 2022, compared to USD 24.6m for the same 2021 period.
• The increase in net investment income was driven by a larger asset base in the core fixed income portfolio due to increased allocation.
• Higher net investment yields in the core fixed income portfolio of 3.0% (prior: 2.3%) also contributed to the increase.
• An increase in income from the opportunistic fixed income portfolio due to market appreciation of underlying investments also drove the increase.
• The investment portfolio had a net investment yield of 3.4% for the year ended December 31, 2022, compared to 2.7% for the same 2021 period.

[c. 107; p. 14]

Gross written premiums by business

($ in thousands)	2022	2021	Change	% Change
Industry Solutions	267,628	219,973	47,655	21.7%
Global Property	205,081	167,887	37,194	22.2%
Programs	163,653	140,283	23,370	16.7%
Accident & Health	130,808	112,146	18,662	16.6%
Captives	124,286	87,836	36,450	41.5%
Professional Lines	93,011	59,992	33,019	55.0%
Surety	79,062	51,792	27,270	52.7%
Transactional E&S	75,098	27,997	47,101	168.2%
Total continuing business	1,138,627	867,906	270,721	31.2%
Exited business	5,325	71,953	(66,628)	(92.6)%
Total gross written premiums	1,143,952	939,859	204,093	21.7%

	2022		2021
($ 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)	387,440	62.8%	326,520	65.3%
Cat loss and LAE (1)	6,500	1.1%	11,828	2.4%
Prior accident year development - non-LPT	—	—%	—	—%
Prior accident year development - LPT	8,572	1.4%	16,063	3.2%
Total losses and LAE	402,512	65.3%	354,411	70.9%
Adjusted losses and LAE (2) :	—	—	—	—
Non-cat loss and LAE (1)	387,440	62.8%	326,520	65.3%
Cat loss and LAE (1)	6,500	1.1%	11,828	2.4%
Prior accident year development - non-LPT	—	—%	—	—%
Total adjusted losses and LAE (2)	393,940	63.9%	338,348	67.7%

(1) Current accident year.

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

($ in thousands)	Development
			(Favorable) Adverse
Accident Year			2022	2021
Prior	—	—	7,701	27,980
2019	—	—	22,440	(1,280)
2020	—	—	(6,756)	1,300
2021	—	—	(9,000)	—
Total	14,385	28,000	—	—
Reserve development on losses subject to LPT	14,385	28,000	—	—
Reserve development on losses excluding losses subject to LPT	—	—	—	—

	2022		2021
($ in thousands)	Expenses	% of Net Earned Premiums	Expenses	% of Net Earned Premiums
Net policy acquisition expenses	65,695	10.6%	47,061	9.4%
Other operating and general expenses	116,476	18.9%	91,437	18.3%
Underwriting, acquisition and insurance expenses	182,171	29.5%	138,498	27.7%
Commission and fee income	(5,199)	(0.8)%	(3,973)	(0.8)%
Total net expenses	176,972	28.7%	134,525	26.9%

	2022		2021
($ in thousands)	Net Investment Income	Net Yield	Net Investment Income	Net Yield
Cash and short-term investments (1)	1,443	0.8%	180	0.1%
Core fixed income	16,544	3.0%	8,812	2.3%
Opportunistic fixed income	16,784	9.2%	12,571	8.6%
Equities	2,160	1.4%	3,083	2.5%
Net investment income	36,931	3.4%	24,646	2.7%
Net unrealized gains (losses) on securities still held	(15,058)	—	15,251	—
Net realized (losses) gains	(647)	—	1,856	—
Net investment (losses) gains	(15,705)	—	17,107	—

(1) Excludes restricted cash.

[c. 108; p. 14] Underwriting Results

Underwriting Results

Chart / Image:

• Chart title: Section A Structure and Incurred Losses
• Y-axis label: $ (currency in millions)
• Y-axis range: $0.0 to $40.0, with increments of $5.0
• X-axis category 1: Section A:
• X-axis category 2: Total Incurred at December 31, 2022
• Bar "Section A:" total value: $30.0M cover
• Bar "Section A:" segment 1 value: $22.2
• Bar "Section A:" segment 1 color: Dark blue
• Bar "Section A:" segment 1 legend: Net LPT Reserves
• Bar "Section A:" segment 2 value: $2.8
• Bar "Section A:" segment 2 color: Dark purple
• Bar "Section A:" segment 2 legend: 100% Reinsurance Coverage
• Bar "Section A:" segment 3 value: $5.0
• Bar "Section A:" segment 3 color: Teal
• Bar "Section A:" segment 3 legend: 50% Reinsurance Coverage Reserves
• Bar "Total Incurred at December 31, 2022" total value: $34.6
• Bar "Total Incurred at December 31, 2022" segment 1 value: $22.0
• Bar "Total Incurred at December 31, 2022" segment 1 color: Light blue
• Bar "Total Incurred at December 31, 2022" segment 1 legend: Paid
• Bar "Total Incurred at December 31, 2022" segment 2 value: $12.6
• Bar "Total Incurred at December 31, 2022" segment 2 color: Grey-blue
• Bar "Total Incurred at December 31, 2022" segment 2 legend: Reserves

[c. 109; p. 14] Underwriting Results

Underwriting Results

Chart / Image:

• Chart title: Open Claims
• Y-axis scale: 0, 50, 100, 150, 200, 250, 300, 350, 400, 450, 500, 550
• Bar 1 label: Open Claims at the Valuation Date
• Bar 1 value: 508
• Bar 2 label: Open Claims at December 31, 2022
• Bar 2 value: 245

[c. 110; p. 14] Underwriting Results

Underwriting Results

Chart / Image:

• Chart title: Section B Structure and Incurred Losses
• Y-axis label: (currency in dollars, ranging from $0.0 to $275.0 in increments of $25.0)
• Bar 1, labeled "Section B:", has a total value of $256.0M cover.
• Bar 1, "Section B:", segment 1 (bottom) value: $130.9.
• Bar 1, "Section B:", segment 2 value: $19.1.
• Bar 1, "Section B:", segment 3 value: $70.0.
• Bar 1, "Section B:", segment 4 (top) value: $36.0.
• Bar 2, labeled "Total Incurred at December 31, 2022", has a total value of $220.0.
• Bar 2, "Total Incurred at December 31, 2022", segment 1 (bottom) value: $164.0.
• Bar 2, "Total Incurred at December 31, 2022", segment 2 (top) value: $56.0.
• Legend entry for dark blue color: Net LPT Reserves.
• Legend entry for light blue color: 50% Reinsurance Coverage.
• Legend entry for dark purple color: 100% Reinsurance Coverage.
• Legend entry for teal color: Paid.
• Legend entry for light purple color: 100% Reinsurance Coverage.
• Legend entry for grey color: Reserves.

[c. 111; p. 14] Underwriting Results

Underwriting Results

Chart / Image:

• Chart title: Open Claims at the Valuation Date
• Y-axis scale: 0, 250, 500, 750, 1,000, 1,250, 1,500, 1,750, 2,000, 2,250, 2,500
• Bar 1: "Open Claims at the Valuation Date" has a value of 2,260.
• Bar 2: "Open Claims at December 31, 2022" has a value of 582.

Investments

[c. 112; p. 14] Investments

• Fixed maturity securities comprised 71.2% of the total investment portfolio as of December 31, 2022 (prior: 63.2% as of December 31, 2021).
• Fixed maturity securities had a weighted average effective duration of 3.1 years as of December 31, 2022 (prior: 2.8 years as of December 31, 2021).
• Fixed maturity securities had an average core fixed income credit rating of "AA" (Standard & Poor’s) as of December 31, 2022 and 2021.
• The core fixed income portfolio consists primarily of investment grade fixed income securities, predominantly highly-rated and liquid bonds.
• The objective of the core fixed income portfolio is to earn attractive risk-adjusted returns with a low risk of loss of principal.
• The core fixed income portfolio is managed by third-party managers.
• The average duration of the core fixed income portfolio was approximately 4.3 years as of December 31, 2022 and 2021.
• The weighted average credit rating of the core fixed income portfolio was "AA" by Standard & Poor’s Financial Services, LLC at December 31, 2022 and 2021.
• The opportunistic fixed income portfolio is managed by Arena, an affiliate of Westaim, the largest shareholder.
• The opportunistic fixed income portfolio includes separately managed accounts, limited partnerships, promissory notes, and equity interests.
• Underlying securities are primarily floating rate senior secured loans, which are short duration, collateralized, asset-oriented credit investments.
• Investments are backed by significant collateral and strong covenants, with a typical loan-to-value of 66% or better.
• Limited partnerships are subject to future increases or decreases in asset value and may exhibit volatile results.
• As of December 31, 2022, the opportunistic fixed income portfolio consisted of:
  • diversified asset based lending: 54.6%
  • commercial mortgage loans: 26.5%
  • cash and cash equivalents: 18.9%
• The diversified asset based lending portfolio includes floating rate senior secured asset-based loans with significant collateral and strong covenants.
• The average duration of the opportunistic fixed income portfolio was approximately 1.4 years as of December 31, 2022 (prior: 1.5 years as of December 31, 2021).
• The equities portfolio primarily consists of domestic preferred stocks, common equities, exchange traded funds, limited partnerships, limited liability corporations, and other equity interests.
• 76.3% of the equities portfolio is publicly traded.
• A tail-risk management strategy was initiated in 2021 to protect the equity portfolio from significant S&P 500 declines within a 30-day period.
• The tail-risk management strategy continued in 2022, with an annual cost of approximately USD 3.0m as of December 31, 2022.
• The equities portfolio is directed internally and includes both self-managed investments and portfolios managed by third-party investment management firms.
• Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial instrument from changes in interest rates, equity prices, foreign currency exchange rates, and commodity prices.
• The primary components of market risk affecting the company are credit risk and interest rate risk.
• The company does not have significant exposure to foreign currency exchange rate risk or commodity risk.
• Credit risk is the potential loss from adverse changes in an issuer’s ability to repay debt obligations.
• The company has exposure to credit risk as a holder of debt instruments in its core fixed income and opportunistic fixed income portfolios.
• The risk management strategy and investment policy is to invest primarily in debt instruments of high credit quality issuers and limit credit exposure to particular ratings categories and single issuers.
• At December 31, 2022, the core fixed income portfolio had an average rating of "AA".
• Approximately 81% of securities in the core fixed income portfolio were rated "A" or better by at least one nationally recognized rating organization at December 31, 2022.
• The policy is to invest in investment grade fixed income securities for stable income, supplemented by opportunistic fixed income and equity securities for diversification and risk-adjusted returns.
• Approximately 4.4% of the core fixed income portfolio was unrated or rated below investment-grade at December 31, 2022.
• The company monitors the financial condition of all issuers in its portfolio through investment managers.
• The company is subject to credit risk from third-party reinsurers, as it remains ultimately liable to policyholders for ceded risks.
• This credit risk is addressed by purchasing reinsurance from reinsurers rated at least "A-" (Excellent) or better by A.M. Best.
• Periodic credit reviews of reinsurers are performed with the reinsurance broker.
• At December 31, 2022, 99% of reinsurance recoverables were from reinsurers rated A- (Excellent) or better by A.M. Best, or were collateralized.
• If a reinsurer suffers a credit downgrade, options to mitigate asset impairment risk include commutation, novation, and letters of credit.
• Interest rate risk is the risk of economic losses due to adverse changes in interest rates.
• The primary market risk to the investment portfolio is interest rate risk associated with fixed income securities.
• Fluctuations in interest rates directly affect the market valuation of fixed income securities.
• Rising market interest rates decrease the fair value of securities, while falling rates increase it.
• Interest rate risk is managed by investing in securities with varied maturity dates and by managing the duration of the investment portfolio in relation to the duration of reserves.
• Duration is the weighted average payment period of cash flows, weighted by the present value of cash flows.
• Duration targets for the core fixed income investment portfolio are set after considering the estimated duration of liabilities and other factors.
• Fixed maturity securities had a weighted average effective duration of 3.1 years as of December 31, 2022.
• Fixed income securities subject to interest rate risk had a fair value of USD 607.6m at December 31, 2022.
• Opportunistic fixed income securities are excluded from interest rate sensitivity analysis as they are primarily floating rate and treated as held-to-maturity.
• Changes in interest rates immediately affect comprehensive income and stockholders’ equity but not ordinarily net income.
• Sensitivity analysis does not reflect actions taken to mitigate hypothetical losses in fair value.
• Equity price risk represents potential economic losses due to adverse changes in equity security prices.
• At December 31, 2022, approximately 16.4% of the fair value of the investment portfolio (excluding cash and cash equivalents and short-term investments) was invested in equity securities.
• Equity price risk is managed through portfolio diversification and a tail-risk management strategy.
• The tail-risk management strategy is designed to protect the equity portfolio from significant S&P 500 declines within a 30-day period.

[c. 113; p. 14]

Fair value by investment portfolio

	2022		2021
($ in thousands)	Fair value	% of total	Fair value	% of total
Cash and short-term investments (1)	166,706	14.8%	207,024	20.9%
Core fixed income	607,572	53.9%	458,351	46.2%
Opportunistic fixed income	196,021	17.3%	168,058	17.0%
Equities	157,506	14.0%	158,033	15.9%
Total investment portfolio	1,127,805	100.0%	991,466	100.0%

(1) Excludes restricted cash.

	2022		2021
($ in thousands)	Fair value	% of total fair value	Fair value	% of total fair value
U.S. government securities	48,541	8.0%	49,263	10.7%
Corporate securities and miscellaneous	235,129	38.7%	154,163	33.6%
Municipal securities	57,727	9.5%	56,942	12.5%
Residential mortgage-backed securities	119,856	19.7%	103,735	22.6%
Commercial mortgage-backed securities	36,495	6.0%	14,484	3.2%
Asset-backed securities	109,824	18.1%	79,764	17.4%
Core fixed income securities, available for sale	607,572	100.0%	458,351	100.0%

	2022		2021
($ in thousands)	Fair value	% of total	Fair value	% of total
AAA	283,733	46.7%	223,404	48.7%
AA	74,604	12.3%	67,157	14.7%
A	134,175	22.1%	87,337	19.1%
BBB	88,369	14.5%	76,835	16.8%
BB and Lower	26,691	4.4%	3,618	0.8%
Total core fixed income	607,572	100.0%	458,351	100.0%

	2022		2021
($ in thousands)	Fair Value	% of Total	Fair Value	% of Total
Real Estate	90,370	46.1%	75,305	44.8%
Oil & Gas	20,725	10.6%	20,321	12.1%
Banking, Finance & Insurance	13,870	7.1%	13,683	8.1%
Other sectors (1)	34,072	17.4%	16,936	10.1%
Cash and cash equivalents (2)	36,984	18.8%	41,813	24.9%
Opportunistic fixed income	196,021	100.0%	168,058	100.0%

(1) Other Sectors primarily includes Aerospace & Defense, Business Services, Retail, Commercial & Industrial and Environmental.

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

	2022		2021
($ in thousands)	Fair value	% of total fair value	Fair value	% of total fair value
Domestic common equities	76,929	48.8%	82,895	52.5%
International common equities	34,468	21.9%	16,911	10.7%
Preferred stock	8,772	5.6%	18,166	11.5%
Other (1)	37,337	23.7%	40,061	25.3%
Equities	157,506	100.0%	158,033	100.0%

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

($ in thousands)	Estimated Fair Value	Estimated Change in Fair Value	Estimated % Increase (Decrease) in Fair Value
300 basis point increase	540,703	(66,869)	(11.0)%
200 basis point increase	560,411	(47,161)	(7.8)%
100 basis point increase	582,701	(24,871)	(4.1)%
No change	607,572	—	0.0%
100 basis point decrease	635,026	27,454	4.5%
200 basis point decrease	665,062	57,490	9.5%
300 basis point decrease	697,679	90,107	14.8%

Other Items

[c. 114; p. 14] Income taxes

• 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.
• The effective tax rate was 20.9% for the year ended December 31, 2022, compared to 20.7% for the year ended December 31, 2021.
• The change in the effective tax rate in 2022 compared to 2021 was primarily due to the relationship of taxable to non-taxable income.
• The Company's provision for income taxes generally does not deviate substantially from the statutory tax rate.
• The effective tax rate may vary slightly from the statutory rate due to tax adjustments for tax-exempt income and dividends-received deduction.
• 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.

Sources and Uses of Funds

[c. 115; p. 14] Holding company structure and funding sources

• 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).
• The holding company may receive cash through corporate service fees from operating subsidiaries, payments from a consolidated tax allocation agreement, dividends from subsidiaries (subject to limitations), loans from banks, draws on a revolving loan agreement, and issuance of equity and debt securities.
• Proceeds from these sources may be used to contribute funds to insurance subsidiaries to support premium growth, pay dividends and taxes, and for other business purposes.

[c. 116; p. 14] Corporate service fees and tax allocation

• Skyward Service Company receives corporate service fees from operating subsidiaries to reimburse most operating expenses incurred.
• Reimbursement of expenses via corporate service fees is based on actual expected costs, with no mark-up.
• The company files a consolidated U.S. federal income tax return with its subsidiaries.
• Under the corporate tax allocation agreement, each participant is charged or refunded taxes based on what they would have paid or received if filing separately with the IRS.

[c. 117; p. 14] Insurance subsidiary dividend restrictions

• Applicable state insurance laws restrict insurance subsidiaries' ability to declare stockholder dividends without prior regulatory approval.
• State insurance regulators require insurance companies to maintain specified levels of statutory capital and surplus.
• Dividend payments are further limited to the portion of available policyholder surplus derived from net profits on an insurer’s business.
• Insurance regulators have broad powers to prevent reduction of statutory surplus to inadequate levels, and there is no assurance that maximum calculated dividends would be permitted.
• State insurance regulatory authorities may adopt more restrictive statutory provisions regarding dividend payments by insurance subsidiaries in the future.
• The insurance subsidiaries did not pay dividends to the holding company for the years ended December 31, 2022 or 2021.
• Further information on regulatory matters regarding insurance companies is in Note 25, "Regulatory Matters," to the consolidated financial statements in Item 8 of Form 10-K.

[c. 118; p. 14] Holding company liquidity

• As of December 31, 2022, the holding company had USD 8.9m in cash and investments, compared to USD 6.0m as of December 31, 2021.
• The company believes it has sufficient liquidity to meet operating cash needs, obligations, and committed capital expenditures for the next 12 months.

Cash Flows

[c. 119; p. 14] Cash Flows

• The most significant source of cash is premiums received from insureds, net of related commission, typically at the beginning of the coverage period.
• The most significant cash outflow is for claims when a policyholder incurs an insured loss.
• Cash is invested in various investment securities that earn interest and dividends because claim payments occur after premium receipt, often years later.
• Cash is also used for operating expenses (salaries, rent, taxes) and capital expenditures (technology systems).
• Reinsurance is used to manage policy risk; part of premiums are ceded to reinsurers, and cash is collected back when covered losses are paid.
• The timing of cash flows from operating activities can vary due to payment/receipt timing, with significant loss settlements and subsequent reinsurance receipts influencing cash flows.
• Management believes cash receipts from premiums and investment income proceeds are sufficient to cover cash outflows in the foreseeable future.
• The increase in cash provided by operating activities in 2022 and 2021 was primarily due to the timing of premium receipts, claim payments, and reinsurance activity.
• Cash flows from operations in the past two years were primarily used to fund investing activities.
• The change in net cash used in investing activities from 2022 to 2021 was primarily driven by increases in purchases of fixed maturities.

[c. 120; p. 14]

Cash and cash equivalents provided by (used in) operating, investing, and financing activities

($ in thousands)	2022	2021
Cash and cash equivalents provided by (used in):
Operating activities	208,938	175,285
Investing activities	(193,381)	(183,014)
Financing activities	2,180	1,380
Change in cash and cash equivalents	17,737	(6,349)

Credit Agreements

[c. 121; p. 14] Prosperity Bank credit agreement

• On December 11, 2019, the company entered into a credit agreement with Prosperity Bank for a USD 50.0m term loan (the "Term Loan") and a USD 50.0m revolving line of credit (the "Revolver") with additional capacity up to USD 75.0m.
• The interest rate on the Term Loan is the lesser of the one-month LIBOR (4.39% on December 31, 2022) plus the "Applicable Margin" of 1.65%, or the Highest Lawful Rate.
• The "Highest Lawful Rate" is defined as the lesser of (a) the "weekly ceiling" or "annualized ceiling" as defined in Section 303.003 and Section 303.103 of the Texas Finance code, respectively, and (b) 24% if the principal is less than USD 250 thousand or 28% if the principal is greater than USD 250 thousand.
• Interest-only payments on the Term Loan are due quarterly through December 31, 2024.
• As of December 31, 2022, the principal balance on the Term Loan was USD 50.0m, due December 31, 2024.
• The interest rate on the Revolver is the lesser of the prime rate (published by the Wall Street Journal) or the one-month LIBOR (4.39% on December 31, 2022) plus the Applicable Margin, which is the lesser of 1.65% or the Highest Lawful Rate.
• The revolving promissory note includes a fee of 0.25% on the unused portion.
• Interest-only payments on the Revolver are due quarterly through December 31, 2024.
• As of December 31, 2022, there was no outstanding balance on the Revolver, compared to a contractual capacity of USD 50.0m.
• The company has the right to increase the Revolver capacity to USD 75.0m, subject to lender approval.
• Borrowings under the Term Loan and Revolver can be used to refinance debt and for general corporate purposes.
• The Credit Agreement allows for the issuance of up to USD 20.0m in letters of credit (LOCs).
• Any amounts drawn on LOCs must be repaid or constitute additional borrowings under the Revolver.
• As of December 31, 2022, no LOCs had been issued.

[c. 122; p. 14] Trust Preferred debentures

• In August 2006, the company received USD 58.0m in proceeds from a debenture offering through Delos Capital Trust (the "Trust").
• The Trust's sole asset is Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures (the "Trust Preferred") with a principal amount of USD 59.8m, issued by the company, and USD 1.8m in cash from the issuance of Trust common shares purchased by the company (equal to 3% of 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 (4.77% at December 31, 2022), plus 3.4%.

[c. 123; p. 14] Subordinated debt

• In May 2019, the company issued unsecured subordinated notes (the "Notes") with an aggregate principal amount of USD 20.0m.
• Interest on the subordinated notes is 7.25% fixed for the first 8 years and 8.25% fixed thereafter.
• Early retirement of the debt before the 8-year commitment requires all interest payments to be paid in full, plus the return of all capital.
• Principal payment is due at maturity on May 24, 2039, and interest is payable quarterly.

[c. 124; p. 14] Total debt to capitalization ratio

• At December 31, 2022, the ratio of total debt outstanding (including the Term Loan, Revolver, Trust Preferred, and Notes) to total capitalization was 23.4%.
• At December 31, 2021, this ratio was 23.2%.
• Total capitalization is defined as total debt plus stockholders' equity plus any temporary equity.

Contractual Obligations and Commitments

[c. 125; p. 14] Contractual obligations and commitments

• Contractual obligations and commercial commitments are presented by due date as of December 31, 2022.
• Reserves for losses and LAE represent the best estimate of the ultimate cost of settling reported and unreported claims and related expenses.
• Estimating reserves for losses and LAE involves complex and subjective judgments.
• Actual losses and settlement expenses paid may deviate substantially from the reserve estimates in financial statements.
• The timing for payment of estimated losses is not fixed or determinable on an individual or aggregate basis.
• Assumptions for estimating payments due by period are based on the company's own, industry, and peer group claims payment experience.
• There is a risk that amounts paid in any period will differ significantly from disclosed amounts due to uncertainty in timing estimation.
• Disclosed amounts are gross of anticipated amounts recoverable from reinsurers.
• Reinsurance balances recoverable on reserves for losses and LAE are reported separately as assets, not netted with liabilities, because reinsurance does not discharge liability to policyholders.
• Reinsurance balances recoverable on reserves for paid and unpaid losses and LAE totaled USD 581.4m at December 31, 2022.
• Reinsurance balances recoverable on reserves for paid and unpaid losses and LAE totaled USD 536.3m at December 31, 2021.

[c. 126; p. 14]

Contractual Obligations and Commitments

	Payments due by period
($ in thousands)	Total	Less Than One Year	One Year or More
Reserves for losses and LAE	1,141,757	293,647	848,110
Long-term debt	129,794	—	129,794
Interest on debt obligations	110,879	9,383	101,496
Operating lease obligations	9,199	2,206	6,993
Total	1,391,629	305,236	1,086,393

Critical Accounting Policies and Estimates

[c. 127; p. 14] Critical Accounting Policies and Estimates

• Critical accounting estimates are important for understanding financial position and results of operations and require significant judgment concerning future results and developments.
• These judgments and estimates affect reported amounts of assets, liabilities, revenues, expenses, and disclosure of material contingent assets and liabilities.
• Actual results may differ materially from estimates and assumptions used in preparing consolidated financial statements.
• Estimates are regularly evaluated using relevant information.
• For detailed accounting policies, refer to Note 2, "Summary of Significant Accounting Policies" in Item 8 of Form 10-K.
• Reserves for unpaid losses and LAE are the largest and most complex estimate in the consolidated balance sheet.
• These reserves represent the estimated ultimate cost of all unreported and reported but unpaid insured claims and the cost to adjust these losses as of or before the balance sheet date.
• Reserves for losses and LAE are not discounted to reflect estimated present value.
• Estimates are made using individual case-basis valuations of reported claims, statistical analyses, and various actuarial procedures.
• Estimates are based on historical information, industry and peer group information, and estimates of future trends in variable factors like loss severity, loss frequency, and inflation.
• Estimates are regularly reviewed and adjusted as experience develops or new information becomes known.
• During the loss settlement period, estimates of liability on a claim may need to be refined and adjusted upward or downward.
• Ultimate liability may exceed or be less than revised estimates, and ultimate settlement of losses and related LAE may vary significantly from financial statement estimates.
• Reserves for unpaid losses and LAE are categorized into two types: case reserves and IBNR.
• A table sets forth gross and net reserves for unpaid losses and LAE at December 31, 2022 and 2021.
• Case reserves are established for individual claims reported to the company.
• Notification of losses comes from insureds, their agents, or brokers.
• Case reserves are established by estimating ultimate losses, including defense costs, based on information provided.
• Claims department personnel use knowledge of specific claims and advice from internal and external experts (underwriters, legal counsel) to estimate expected ultimate losses.
• Third-Party Administrators (TPAs) are used in limited circumstances to assist in claims adjustment.
• Internal claims managers oversee TPA activities and monitor their claim handling to prescribed standards.
• IBNR reserves are developed in accordance with Actuarial Standards of Practice promulgated by the American Academy of Actuaries.
• The Reserve Committee performs the reserve review, utilizing several accepted loss reserving methods to arrive at the best estimate of loss reserves.
• Consideration is given to the relative strengths and weaknesses of each method in deriving the actuarial best estimate.
• For limited years of loss experience compared to the reporting period, industry and/or peer-group data are used in addition to internal data for selecting parameters.
• Loss emergence is monitored daily.
• Internal or external factors (underwriting, claims handling, economic, environmental changes) that could affect assumption accuracy are considered, and adjustments are made as necessary.
• The duration of loss reserves was 2.2 years as of December 31, 2022.
• The Reserve Committee includes the Chief Actuary, Chief Risk Officer, Chief Financial Officer, and Chief Claims Officer.
• The Reserve Committee meets quarterly to review actuarial reserving recommendations from the Chief Actuary and determine the best estimate for losses and LAE.
• The actuary estimates an initial expected ultimate loss ratio for each underwriting division, considering input from underwriting and claims departments, including premium pricing assumptions and historical experience.
• Multiple actuarial methods are used to estimate reserves for losses and LAE, utilizing initial expected loss ratio, statistical analysis of past claims reporting and payment patterns, claims frequency and severity, paid loss experience, industry loss experience, and changes in market conditions, policy forms, exclusions, and exposures.
• Actuarial methods used include: Reported and/or Paid Loss Development Methods, Reported Bornhuetter-Ferguson Methods, and Paid Bornhuetter-Ferguson Method.
• Reported and/or Paid Loss Development Methods: Ultimate losses are estimated based on historical reported and/or paid loss reporting patterns; reported losses are the sum of paid and case losses; industry development patterns are substituted when sufficient historical data is unavailable.
• Reported Bornhuetter-Ferguson Methods: Ultimate losses are estimated as the sum of cumulative reported losses and estimated IBNR losses; IBNR losses are estimated based on historical development patterns and one or more of the following: expected average severity and estimated ultimate claims counts, expected pure premium, and expected loss ratios underlying loss cost multipliers.
• Paid Bornhuetter-Ferguson Method: Ultimate losses are estimated as the sum of cumulative paid losses and estimated unpaid losses; unpaid losses are estimated based on expected loss ratios underlying loss cost multipliers and selected industry development patterns of paid losses.
• All these methods are utilized in the comprehensive review of reserves.
• For less mature policy years, the Bornhuetter-Ferguson Method is the primary method for ultimate loss indications.
• For more mature policy years, the transition is made to Reported and/or Paid Loss Development Methods.
• Reliance is primarily on reported methods where case reserving is consistently applied across policy years; however, if there is a change in reserving philosophy, both reported and paid methods are blended.
• Reserves are driven by factors including litigation and regulatory trends, legislative activity, climate change, social and economic patterns, and claims inflation assumptions.
• Reserve estimates reflect current inflation in legal claims' settlements and assume no exposure to losses from significant new legal liability theories.
• Reserve estimates assume no significant changes in the regulatory and legislative environment.
• The impact of potential changes in the regulatory or legislative environment is difficult to quantify without specific new regulation or legislation.
• Quantification of impact from significant new regulation or legislation will be attempted, but accuracy or success cannot be assured.
• While reserve estimates are believed to be reasonable, actual loss experience may not conform to assumptions.
• Actual ultimate loss ratio could differ from the initial expected loss ratio, or actual reporting and payment patterns could differ from expected patterns (based on internal and industry data).
• Ultimate settlement of losses and related LAE may vary significantly from financial statement estimates.
• Estimates are regularly reviewed and adjusted as experience develops or new information becomes known, with adjustments included in current operations.
• A table quantifies the impact of potential reserve deviations from the carried reserve at December 31, 2022.
• Sensitivity factors were applied to incurred losses for the three most recent accident years and to the carried reserve for all prior accident years combined.
• Volatility factors consider potential impact of changes in current loss trends, pricing trends, and other actuarial reserving assumptions.
• The aggregate development depicted in the sensitivity analysis is consistent with average development in recent calendar periods and a reasonable depiction of potential volatility.
• Potential changes such as these are not expected to have a material impact on liquidity.
• "Development" is the amount by which estimated losses differ from those originally reported for a period.
• Development is unfavorable when losses settle for more than reserved amounts or subsequent estimates indicate reserve increases.
• Development is favorable when losses settle for less than reserved amounts or subsequent estimates indicate reserve reductions.
• Favorable or unfavorable development of loss reserves is reflected in the results of operations in the period the estimates are changed.
• Goodwill and intangible assets are recorded as a result of a business combination.
• Goodwill represents the excess of the purchase price over the fair value of acquired assets and assumed liabilities.
• Identifiable intangible assets with a finite useful life are amortized over the period they are expected to contribute to future cash flows.
• Indefinite-lived intangible assets are not amortized.
• Goodwill and identifiable intangible assets are evaluated for recoverability annually in the fourth quarter or on an interim basis if circumstances indicate a carrying amount may not be recoverable.
• Impairment testing involves a qualitative assessment to determine if it is more likely-than-not that the fair value of a reporting unit is less than its carrying value, including goodwill.
• The initial qualitative assessment considers past, current, and projected future earnings and equity; recent trends and market conditions; and valuation metrics of similar publicly traded companies and acquisitions.
• If the more likely-than-not threshold is met, a quantitative impairment test compares estimated fair value with carrying value.
• If the carrying value of net assets associated with the reporting unit exceeds its fair value, goodwill is considered impaired by that excess, not to exceed the carrying amount of goodwill.
• The reporting unit is at the underwriting division level, one level below the consolidated group, where it represents a business with discrete financial information reviewed by underwriting management.
• Determining the fair value of reporting units is subjective and involves significant estimates and assumptions, including projected net cash flows, discount, and long-term growth rates.
• Fair value of reporting units is determined using an income approach and market approach, deriving fair value from the present value of estimated future cash flows.
• Assumptions about estimated cash flows include factors such as future premiums, loss and LAE expenses, general and administrative expenses, and industry trends.
• Historical rates and current market conditions are considered when determining discount and long-term growth rates.
• Other valuation methods are considered if they provide a more representative approximation of fair value.
• Changes in estimates due to evolving economic conditions or business strategies could result in material impairment charges in future periods.
• Fair value estimates are based on assumptions believed to be reasonable, but actual results may differ from those estimates.

[c. 128; p. 14]

Gross and net by case reserves and IBNR

	2022				2021
($ in thousands)	Gross	% of Total	Net	% of Total	Gross	% of Total	Net	% of Total
Case reserves	485,143	42.5%	269,273	38.2%	451,446	46.1%	239,013	40.0%
IBNR	656,614	57.5%	436,498	61.8%	528,103	53.9%	359,198	60.0%
Total	1,141,757	100.0%	705,771	100.0%	979,549	100.0%	598,211	100.0%

($ in thousands)			December 31, 2022		Potential Impact on 2022
Sensitivity	Accident Year	Net Ultimate Loss and LAE Sensitivity Factor	Net Ultimate Incurred Losses and LAE	Net Loss and LAE Reserve	Pre-tax income	Stockholders’ Equity (1)
Sample increases	2022	4.0%	379,083	288,748	15,163	11,979
Sample increases	2021	3.0%	324,882	182,085	9,746	7,700
Sample increases	2020	2.0%	295,599	78,813	5,912	4,670
Sample increases	Prior	1.0%	—	156,787	1,568	1,239
Sample decreases	2022	(4.0)%	379,083	288,748	(15,163)	(11,979)
Sample decreases	2021	(3.0)%	324,882	182,085	(9,746)	(7,700)
Sample decreases	2020	(2.0)%	295,599	78,813	(5,912)	(4,670)
Sample decreases	Prior	(1.0)%	—	156,787	(1,568)	(1,239)

(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.

Recent Accounting Pronouncements

[c. 129; p. 14] Emerging Growth Company status

• The company qualifies as an "emerging growth company" under the Jumpstart Our Business Startups Act of 2012 (JOBS Act).
• The company has the option to adopt new or revised accounting guidance either within the same periods as non-emerging growth companies or private companies.
• The company has elected to use the extended transition period, meaning it is not required to adopt new or revised accounting standards on the same dates as other public companies.
• The company will remain an emerging growth company until the earliest of:
  • The last day of the fiscal year with total annual gross revenues of USD 1.235bn or more.
  • The last day of the fiscal year following the fifth anniversary of the offering's completion date.
  • The date on which more than USD 1bn in nonconvertible debt has been issued during the previous three years.
  • The date on which the company is deemed a large accelerated filer under SEC rules.

[c. 130; p. 14] ASU 2016-13 adoption

• In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326).
• ASU 2016-13 requires estimating credit losses on financial instruments, including receivables and available-for-sale debt securities, using an expected loss approach.
• The expected loss approach requires incorporating historical information, current information, and reasonable and supportable forecasts.
• The guidance is effective for fiscal years beginning after December 15, 2022.
• The company will adopt ASU 2016-13 effective January 1, 2023, using the modified retrospective approach.
• The company expects to recognize an increase in the allowance for uncollectible reinsurance of approximately USD 2.3m.
• The company expects to recognize an increase in accumulated deficit of approximately USD 2.3m, net of tax.

Quantitative and Qualitative Disclosures About Market Risk

[c. 131; p. 15] Market risk disclosures

• Qualitative and Quantitative Disclosures about Market Risk are included in Item 7 of this Form 10-K under “Investments—Market Risk”.
• Table of Contents.

Financial Statements

Report Of Independent Registered Public Accounting Firm

[c. 132; p. 16] Independent Auditor's Report

• The report is addressed to the Shareholders and the Board of Directors of Skyward Specialty Insurance Group, Inc.

Opinion on the Financial Statements

[c. 133; p. 16] Audit opinion

• The consolidated financial statements of Skyward Specialty Insurance Group, Inc. and subsidiaries (the Company) as of December 31, 2022 and 2021, and for the two years ended December 31, 2022, have been audited.
• The audit included the consolidated balance sheets, statements of operations and comprehensive (loss) income, changes in stockholders' equity, and cash flows, along with related notes and financial statement schedules listed in Item 15.
• The auditors' opinion is that the consolidated financial statements fairly present, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and cash flows for the two years ended December 31, 2022.
• The financial statements are in conformity with U.S. generally accepted accounting principles.

Basis for Opinion

[c. 134; p. 16] Auditor's responsibility and scope

• The financial statements are the responsibility of the Company's management.
• The auditor's responsibility is to express an opinion on the Company’s financial statements based on audits.
• The auditor is a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB).
• The auditor is required to be independent with respect to the Company in accordance with U.S. federal securities laws and applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
• Audits were conducted in accordance with the standards of the PCAOB.
• PCAOB standards require planning and performing the audit to obtain reasonable assurance that financial statements are free of material misstatement, whether due to error or fraud.
• The Company is not required to have, nor was the auditor engaged to perform, an audit of its internal control over financial reporting.
• As part of the audits, the auditor is required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on its effectiveness.
• No opinion is expressed on the effectiveness of the Company's internal control over financial reporting.
• Audits included performing procedures to assess risks of material misstatement due to error or fraud, and responding to those risks.
• Procedures included examining, on a test basis, evidence regarding amounts and disclosures in the financial statements.
• Audits also included evaluating accounting principles used, significant estimates made by management, and the overall presentation of the financial statements.
• The audits provide a reasonable basis for the auditor's opinion.

[c. 135; p. 16] Document structure

• The document includes a Table of Contents.

[c. 136; p. 16]

Basis for opinion

/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2021.
Houston, Texas
March 28, 2023

Consolidated balance sheets

[c. 137; p. 16] Financial statement notes

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

[c. 138; p. 16] Table of contents

• Table of Contents.

[c. 139; p. 16]

Assets, liabilities and stockholders' equity by December 31

	December 31
($ in thousands, except share and per share amounts)	2022	2021
Assets
Investments:
Fixed maturity securities, available for sale, at fair value (amortized cost of $ 662,616 and $ 452,478 , respectively)	607,572	458,351
Fixed maturity securities, held to maturity, at amortized cost	52,467	47,117
Equity securities, at fair value	120,169	117,971
Mortgage loans	51,859	29,531
Other long-term investments	129,142	132,111
Short-term investments, at fair value	121,158	164,278
Total investments	1,082,367	949,359
Cash and cash equivalents	45,438	42,107
Restricted cash	79,573	65,167
Premiums receivable, net of allowance	139,215	112,158
Reinsurance recoverables	581,359	536,327
Ceded unearned premium	157,645	137,973
Deferred policy acquisition costs	68,938	59,456
Deferred income taxes	36,188	33,663
Goodwill and intangible assets, net	89,870	91,336
Other assets	82,846	90,666
Total assets	2,363,439	2,118,212
Liabilities and stockholders' equity	—	—
Liabilities:	—	—
Reserves for losses and loss adjustment expenses	1,141,757	979,549
Unearned premiums	442,509	363,288
Deferred ceding commission	29,849	30,500
Reinsurance and premium payables	113,696	119,919
Funds held for others	36,858	29,587
Accounts payable and accrued liabilities	48,499	40,760
Notes payable	50,000	50,000
Subordinated debt, net of debt issuance costs	78,609	78,529
Total liabilities	1,941,777	1,692,132
Stockholders' equity	—	—
Series A preferred stock, $ 0.01 par value; 2,000,000 shares authorized, 1,969,660 and 1,970,124 shares issued and outstanding, respectively	20	20
Common stock, $ 0.01 par value, 168,000,000 shares authorized, 16,832,955 and 16,763,069 shares issued, respectively	168	168
Treasury stock, $ 0.01 par value, 233,289 and 229,449 shares, respectively	( 2 )	( 2 )
Additional paid-in capital	577,289	575,159
Stock notes receivable	( 6,911 )	( 9,092 )
Accumulated other comprehensive (loss) income	( 43,485 )	4,640
Accumulated deficit	( 105,417 )	( 144,813 )
Total stockholders' equity	421,662	426,080
Total liabilities and stockholders' equity	2,363,439	2,118,212

Consolidated statements of operations and comprehensive (loss) income

[c. 140; p. 16] Consolidated financial statements notes

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

[c. 141; p. 16] Table of contents

• Table of Contents.

[c. 142; p. 16]

Revenues, expenses, income before income taxes, net income, and comprehensive (loss) income by December 31

	December 31
	2022	2021
($ in thousands, except share and per share amounts)
Revenues:
Net earned premiums	615,994	499,823
Commission and fee income	5,199	3,973
Net investment income	36,931	24,646
Net investment (losses) gains	( 15,705 )	17,107
Net realized gain on sale of business	—	5,077
Other income (loss)	1	( 445 )
Total revenues	642,420	550,181
Expenses:	—	—
Losses and loss adjustment expenses	402,512	354,411
Underwriting, acquisition and insurance expenses	182,171	138,498
Impairment charges	—	2,821
Interest expense	6,407	4,622
Amortization expense	1,547	1,520
Total expenses	592,637	501,872
Income before income taxes	49,783	48,309
Income tax expense	10,387	9,992
Net income	39,396	38,317
Net income attributable to participating securities	18,879	18,507
Net income attributable to common shareholders	20,517	19,810
Comprehensive (loss) income:	—	—
Net income	39,396	38,317
Other comprehensive loss:	—	—
Unrealized gains and losses on investments:	—	—
Net change in unrealized losses on investments, net of tax	( 48,545 )	( 8,173 )
Reclassification adjustment for gains on securities no longer held, net of tax	420	597
Total other comprehensive loss	( 48,125 )	( 7,576 )
Comprehensive (loss) income	( 8,729 )	30,741
Per share data:	—	—
Basic earnings per share	1.24	1.21
Diluted earnings per share	1.21	1.18
Weighted-average common shares outstanding	—	—
Basic	16,568,393	16,308,712
Diluted	32,653,194	32,468,048

Consolidated statements of stockholders’ equity

[c. 143; p. 16] Financial statement notes and contents

• The accompanying notes are an integral part of these consolidated financial statements.
• Table of Contents.

[c. 144; p. 16]

Consolidated statements of stockholders’ equity

($ in thousands)	Preferred Stock	Common Stock	Treasury Stock	Additional Paid-In Capital	Stock Notes Receivable	Accumulated Other Comprehensive Income	Accumulated Deficit	Total
Balance at January 1, 2021	—	168	( 4 )	476,482	( 2,510 )	12,216	( 183,130 )	303,222
Employee equity transactions	—	—	2	427	880	—	—	1,309
Net income	—	—	—	—	—	—	38,317	38,317
Other comprehensive loss, net of tax	—	—	—	—	—	( 7,576 )	—	( 7,576 )
Reclassification of temporary equity to stockholders’ equity	20	—	—	98,250	( 7,462 )	—	—	90,808
Balance at December 31, 2021	20	168	( 2 )	575,159	( 9,092 )	4,640	( 144,813 )	426,080
Employee equity transactions	—	—	—	2,130	2,181	—	—	4,311
Net income	—	—	—	—	—	—	39,396	39,396
Other comprehensive loss, net of tax	—	—	—	—	—	( 48,125 )	—	( 48,125 )
Balance at December 31, 2022	20	168	( 2 )	577,289	( 6,911 )	( 43,485 )	( 105,417 )	421,662

Consolidated statements of cash flows

[c. 145; p. 16] Consolidated financial statements

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

[c. 146; p. 16]

Cash flows from operating, investing, and financing activities by December 31

	December 31
($ in thousands)	2022	2021
Cash flows from operating activities:
Net income	39,396	38,317
Adjustments to reconcile net income to net cash provided by (used in) operating activities:	—	—
Net realized losses (gains)	647	( 1,856 )
Depreciation and amortization expense	4,097	5,603
Stock-based compensation expense	2,287	522
Provision for bad debts	632	79
Unrealized losses (gains) on equity securities	15,058	( 15,251 )
Earnings on illiquid investments	( 16,032 )	( 11,413 )
Deferred income tax, net	10,267	9,984
Impairment charges	—	2,821
Net realized gain on sale of business	—	( 5,077 )
Changes in operating assets and liabilities:	—	—
Premiums receivable, net	( 27,689 )	1,876
Reinsurance recoverables	( 45,032 )	1,062
Ceded unearned premium	( 19,672 )	8,548
Deferred policy acquisition costs	( 9,482 )	( 5,975 )
Losses and loss adjustment expenses	162,208	124,270
Unearned premiums	79,221	20,772
Deferred ceding commission	( 651 )	( 5,219 )
Reinsurance and premium payables	( 6,223 )	( 4,201 )
Funds held for others	7,271	2,649
Accounts payable and accrued liabilities	7,583	1,148
Other, net	5,052	6,626
Net cash provided by operating activities	208,938	175,285
Cash flows from investing activities:	—	—
Purchase of fixed maturity securities, available for sale	( 268,781 )	( 255,155 )
Purchase of illiquid investments	( 4,873 )	( 48,060 )
Purchase of equity securities	( 53,548 )	( 60,328 )
Purchase of business	—	( 10,554 )
Investment in direct and indirect loans	( 9,767 )	( 16,079 )
Purchase of property and equipment	( 2,325 )	( 2,154 )
Sale of other invested asset	210	—
Sale of investment in subsidiary	—	8,188
Sales and maturities of investment securities	95,641	135,289
Distributions from equity method investments	3,211	2,387
Change in short-term investments	43,120	70,207
Payable (receivable) for securities sold	529	( 725 )
Cash provided by (used in) deposit accounting	3,202	( 6,074 )
Other, net	—	44
Net cash used in investing activities	( 193,381 )	( 183,014 )
Cash flows from financing activities:	—	—
Employee share purchases	2,180	1,380
Net cash provided by financing activities	2,180	1,380
Net increase (decrease) in cash and cash equivalents and restricted cash	17,737	( 6,349 )
Cash and cash equivalents and restricted cash at beginning of year	107,274	113,623
Cash and cash equivalents and restricted cash at end of year	125,011	107,274
Supplemental disclosure of cash flow information:	—	—
Cash paid for interest	5,761	4,669

1. Nature of Operations

[c. 147; p. 16] Company overview and strategy

• Skyward Specialty Insurance Group, Inc. (the "Company") is a Delaware corporation organized in 2006, operating as an insurance holding company.
• The Company operates in one segment, delivering commercial property and casualty products and group accident and health insurance coverages through its underwriting divisions.
• The business focuses on underserved, dislocated, and/or markets where standard insurance coverages are insufficient.
• Customers typically require highly specialized, customized underwriting solutions and claims capabilities.
• The Company develops and delivers tailored insurance products and services for niche markets.
• The portfolio of insured risks is highly diversified across industries, distribution channels, and lines of business.
• Lines of business include general liability, excess liability, professional liability, commercial automobile liability, commercial automobile physical damage, group accident and health, property, surety, and workers’ compensation.

[c. 148; p. 16] Insurance subsidiaries

• The Company conducts operations principally through its four insurance companies.
• Houston Specialty Insurance Company (HSIC) is the largest insurance subsidiary, underwriting multiple lines of insurance on a surplus lines basis in 50 states and the District of Columbia.
• Imperium Insurance Company (IIC), a subsidiary of HSIC, underwrites on an admitted basis in all 50 states and the District of Columbia.
• Great Midwest Insurance Company (GMIC), a subsidiary of IIC, underwrites multiple lines of insurance on an admitted basis in all 50 states, the District of Columbia, and is a certified surety bond company listed with the U.S. Department of the Treasury.
• Oklahoma Specialty Insurance Company (OSIC), a subsidiary of GMIC, is an approved surplus lines company in 47 states.

[c. 149; p. 16] Reinsurance operations

• Skyward Re is a wholly owned captive reinsurance company domiciled in the Cayman Islands, incorporated on January 7, 2020.
• Skyward Re assumes net reserves for certain divisions, related to a retroactive reinsurance contract, from the Company’s insurance companies.
• Skyward Re retrocedes these net reserves to a third-party reinsurer.

[c. 150; p. 16] Non-insurance subsidiaries

• 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.
• Skyward Service Company, also a subsidiary of the Company, provides various administrative services to the Company’s subsidiaries.

Basis of Presentation

[c. 151; p. 16] Basis of financial statement presentation

• The Company's consolidated financial statements are prepared in accordance with generally accepted accounting principles ("GAAP") in the United States of America.
• The statements include accounts of the Company and its subsidiaries as of and for the years ended December 31, 2022 and 2021.
• All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

[c. 152; p. 16] GAAP financial statement preparation

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

Cash and Cash Equivalents

[c. 153; p. 16] Cash and cash equivalents definition

• Cash and cash equivalents include cash on hand and highly liquid short-term investments.
• Short-term investments purchased with an original maturity of three months or less are considered cash equivalents.
• The carrying value of the Company’s cash and cash equivalents approximates fair value.

Restricted Cash

[c. 154; p. 16] Restricted cash definition and sources

• Cash with a legal restriction on withdrawal or use by the consolidated group is recorded as restricted cash.
• The carrying value of the Company's restricted cash approximates fair value.
• SUA holds unremitted insurance premiums in a fiduciary capacity for third-party insurance companies as restricted cash.
• The Company is required by state regulations to maintain assets on deposit with certain states and hold cash as collateral for certain reinsurance balances.
• Cash held in a depository account for others or restricted by a state is recorded as restricted cash.

Investments

[c. 155; p. 16] Fixed maturity securities classification and valuation

• Investments in fixed maturity securities are classified as available for sale and reported at fair value based on quoted market prices or dealer quotes.
• Unrealized gains and losses for fixed maturity securities are excluded from net income and reported in stockholders’ equity, net of taxes, as a component of accumulated other comprehensive income (loss).
• If quoted market prices or dealer quotes are unavailable, fair value is estimated based on recent trading information.
• Premiums and discounts on mortgage-backed securities are amortized using the retroactive method adjusted for anticipated prepayments and estimated economic life.
• Adjustments related to changes in prepayment assumptions are included in net investment income.
• Investments in fixed maturity securities where the Company has the intent and ability to hold until maturity are classified as held to maturity and reported at amortized cost.

[c. 156; p. 16] Other-than-Temporary Impairments

• The Company evaluates declines in market value of invested assets below amortized cost for other-than-temporary impairment losses on a quarterly basis.
• Impairment losses for declines in fixed maturity securities due to issuer-specific events are based on relevant facts and circumstances for each investment and recognized when appropriate.
• Declines in value below cost are not assumed to be other-than-temporary for investments with unrealized losses due to market conditions or industry-related events, where the Company does not intend to sell and has the ability to hold the investment for market recovery or to maturity.
• When an impairment is considered other-than-temporary, the decrease in value is reported in net income within the Consolidated Statements of Operations and a corresponding reduction in carrying value on the consolidated balance sheet.

[c. 157; p. 16] Equity securities with readily determinable fair value

• Equity securities consist of common stock or preferred stock.
• Mutual funds, including those primarily investing in debt securities, are classified as equity securities.
• Investments in equity securities with a readily determinable fair value are carried on the balance sheet at fair value using quoted market prices.
• Changes in the carrying value of equity securities are included in net investment (losses) gains within the Consolidated Statements of Operations.

[c. 158; p. 16] Mortgage loans

• Investments in mortgage loans are classified as held for investment and carried on the balance sheet at cost adjusted for unamortized premiums, discounts, and loan fees.
• Uncollectible amounts are written off in the period they are determined to be uncollectible.
• Interest on loans is recognized as interest receivable and included in other assets on the consolidated balance sheet.

[c. 159; p. 16] Other long-term investments

• Other long-term investments include equity and equity securities of non-public entities and indirect investments in loans and loan collateral.
• The Company has equity investments in certain limited partnerships and corporations where it has significant influence but not control.
• The Company is not the primary beneficiary of variable interest entities and does not consolidate them.
• The equity method is used to account for these investments.
• Under the equity method, initial investment is recorded at cost and adjusted based on the proportionate share of distributions and net income or loss of the equity method investee.
• The difference between investment cost and proportionate share of underlying equity in net assets is a component of investment income and is amortized as an adjustment to the pro-rata share of equity method income over the useful life of the underlying asset.
• For equity securities of non-public entities where the Company does not have significant influence and no readily determinable fair value, investments are carried at cost, minus impairment, and adjusted for observable price changes in orderly transactions for identical or similar investments of the same issuer.
• Investments in indirect collateralized loans and loan collateral are held through and accounted for as an ownership interest in an unconsolidated subsidiary.
• Ownership interests in unconsolidated subsidiaries include investments in partnerships, joint ventures, and special purpose investment vehicles.
• The Company has significant influence but not control over these unconsolidated subsidiaries and uses the equity method for these investments.

[c. 160; p. 16] Short-term investments

• Short-term investments primarily consist of money market funds.
• Short-term investments are carried at cost, which approximates fair value.

[c. 161; p. 16] Net investment income and realized gains/losses

• Net investment income consists of interest, dividends, and equity in earnings (losses) of investees, net of investment expenses such as investment management expenses.
• Interest income is recognized on the accrual basis.
• Dividends are recognized as earned at the ex-dividend date.
• Interest income on mortgage-backed and asset-backed securities is recognized using the effective-yield method based on estimated principal repayments.
• Amortization of premium and accretion of discounts on debt securities are included in interest income.
• Net realized gains and losses on investments are recognized in net income based upon the specific identification method.

Reinsurance

[c. 162; p. 16] Reinsurance accounting principles

• The Company purchases prospective reinsurance for certain lines of business on a proportional, excess of loss, and facultative basis.
• Proportional reinsurance involves sharing losses and expenses with the reinsurer in exchange for a share of premiums.
• Excess of loss reinsurance shares losses, either proportionally or entirely, above a certain dollar threshold for a negotiated cost.
• Facultative reinsurance covers specific risks and/or policies on either a proportional or excess of loss basis.
• Ceded unearned premium and reinsurance balances recoverable (on paid and unpaid losses and settlement expenses) are reported separately as assets, not netted with related liabilities, because reinsurance does not relieve the Company of its legal liability to policyholders.
• Reinsurance on unpaid losses and settlement expenses represents estimates of the portion of liabilities recoverable from reinsurers.
• On the Consolidated Statements of Operations, net earned premium, losses and loss adjustment expenses, net, and underwriting, acquisition, and insurance expenses are presented net of reinsurance ceded.
• The Company purchases retroactive reinsurance for certain lines of business via loss portfolio transfers ("LPT") and adverse development covers.
• These retroactive contracts indemnify losses related to past loss events, with the reinsurer sharing losses based on dollar thresholds.
• Income from retroactive reinsurance contracts is deferred and amortized into net income over the settlement period.
• Losses from retroactive reinsurance contracts are charged to net income immediately.
• Subsequent changes in the measurement of retroactive reinsurance contracts are accounted for using a full retrospective method.

[c. 163; p. 16] Deposit accounting for reinsurance

• Certain ceded reinsurance contracts that management determines do not transfer significant insurance risk are accounted for using the deposit method.
• The evaluation of significant insurance risk transfer assesses both timing risk and underwriting risk.
• A reinsurance contract may not transfer significant insurance risk if either underwriting risk, timing risk, or both are not deemed transferred.
• For contracts transferring only significant timing risk but not sufficient underwriting risk, a deposit asset is recorded equal to the initial cash outflow, offset by cash inflows from reinsurers.
• If cash outflows are expected to differ from cash inflows, an accretion rate is established at inception based on actuarial estimates to adjust the deposit accounting asset to the estimated receivable over the contract term.
• The accretion of the deposit is based on the expected rate of return implied from estimated cash inflows and outflows.
• The Company periodically reassesses the estimated ultimate receivable and the related expected rate of return on the deposit asset.
• Accretion of the deposit asset, including changes from estimated cash flow changes, is reflected as part of investment income in the Company’s results of operations.
• Several reinsurance contracts require deposit accounting due to not transferring sufficient underwriting risk.
• No reinsurance contracts required deposit accounting due to not transferring sufficient timing risk.

[c. 164; p. 16] Reinsurance recoverables and credit risk

• Reinsurance does not relieve the Company of its legal liability to policyholders.
• The Company continuously monitors the financial condition of its reinsurers by reviewing annual financial statements and industry developments.
• Credit risk of reinsurance recoverables is analyzed by monitoring reinsurers' financial strength ratings from A.M. Best.
• The Company also assesses the adequacy of collateral obtained where applicable.
• If reinsurers fail to fulfill obligations, the Company has access to collateral from various reinsurers.
• The Company's policy is to charge net income and provide an allowance for estimated unrecoverable amounts when uncollectible amounts from reinsurers are indicated.
• No allowance for uncollectible reinsurance recoverables was required as of December 31, 2022, and December 31, 2021.
• Reinsurance recoverables present potential exposures to individual reinsurers.

[c. 165; p. 16]

Reinsurance

($ in thousands)	2022	2021
Reinsurance collateral	253,870	230,908

	A.M. Best Rating	2022	2021
	A.M. Best Rating	2022	2021
Everest Reinsurance Co	A+	28.2%	28.9%
Randall & Quilter (R&Q Bermuda (SAC) Ltd)	Not rated	Below 10 %	12.0%

Concentration of Credit Risk

[c. 166; p. 16] Credit risk concentration

• Financial instruments potentially subject to concentrations of credit risk include cash and cash equivalents, restricted cash, investments, and premiums receivable, in addition to reinsurance recoverables.
• Cash equivalents and short-term investments include investments in money market funds and securities backed by the U.S. government.
• Investments are diversified across many industries and geographic regions.
• The Company limits credit exposure with any single financial institution or issuer.
• The Company believes no significant concentration of credit risk exists with respect to cash and investments.
• As of December 31, 2022 and 2021, outstanding premiums receivable are generally diversified due to the large number of entities in the customer base and their dispersion across many different lines of business and geographic regions.
• Failure by distribution sources to remit premiums could result in premium write-offs and a corresponding loss of income.

Deferred Policy Acquisition Costs

[c. 167; p. 16] Policy acquisition costs and premium deficiency

• Policy acquisition costs include commissions and premium taxes that vary with and are directly related to the production of new or renewal business.
• The Company defers policy acquisition costs and related ceding commissions, charging or crediting them to earnings proportionally with the premium earned over the policy's life.
• A premium deficiency is recognized if the sum of expected losses, loss adjustment expenses, and unamortized acquisition costs exceeds related unearned premiums.
• To recognize a premium deficiency, the Company first charges any unamortized acquisition costs to expense to eliminate the deficiency.
• If the premium deficiency exceeds unamortized acquisition costs, a liability is accrued for the excess deficiency.
• Anticipated investment income is considered when determining premium deficiencies.
• Management determined that no premium deficiency existed as of December 31, 2022, and 2021.

Goodwill and Intangible Assets

[c. 168; p. 16] Goodwill and intangible assets accounting

• Goodwill and intangible assets are recorded following a business combination.
• Goodwill represents the excess of the purchase price over the fair value of acquired assets and assumed liabilities.
• The Company reviews its purchase price allocation for up to one year post-acquisition and may make adjustments within this period.
• Identifiable intangible assets with a finite useful life are amortized over the period they are expected to contribute to future cash flows.
• Indefinite-lived intangible assets are not amortized.
• The Company annually evaluates goodwill and identifiable intangible assets for recoverability in the fourth quarter, or on an interim basis if events or circumstances suggest a carrying amount may not be recoverable.

[c. 169; p. 16] Impairment testing methodology

• Impairment testing begins with a qualitative assessment to determine if it is more likely-than-not that the fair value of a reporting unit is less than its carrying value, including goodwill.
• This initial assessment considers past, current, and projected future earnings and equity; recent trends and market conditions; and valuation metrics of similar publicly traded companies and acquisitions.
• If the more likely-than-not threshold is met, a quantitative impairment test compares the estimated fair value with the carrying value.
• Goodwill is considered impaired if the carrying value of the net assets associated with the reporting unit exceeds its fair value.
• The impairment amount is the excess of the reporting unit’s carrying value over its fair value, not to exceed the carrying amount of goodwill.
• The Company’s reporting unit is at the underwriting division level, which is one level below the consolidated group.
• The underwriting division represents a business with discrete financial information available and regularly reviewed by underwriting management.
• Determining the fair value of reporting units is subjective and involves significant estimates and assumptions, including projected net cash flows, discount rates, and long-term growth rates.
• The Company determines fair value using an income approach and market approach, deriving fair value from the present value of estimated future cash flows.
• Assumptions about estimated cash flows include future premiums, loss and LAE expenses, general and administrative expenses, and industry trends.
• Historical rates and current market conditions are considered for discount and long-term growth rates.
• Other valuation methods may be used if they provide a more representative approximation of fair value.
• Changes in estimates due to evolving economic conditions or business strategies could lead to material impairment charges in future periods.
• Fair value estimates are based on assumptions believed to be reasonable, but actual results may differ.

[c. 170; p. 16] Goodwill impairment charges

• Goodwill impairment charges for the years ended December 31, 2022 and 2021 are presented in a table.
• Goodwill impairment is recorded under "impairment charges" in the Consolidated Statements of Operations and Comprehensive (Loss) Income.

[c. 171; p. 16]

Goodwill and Intangible Assets

($ in thousands)	2022	2021
Goodwill impairment	—	2,821

Property and Equipment

[c. 172; p. 16] Property and equipment accounting

• Property and equipment is included in other assets on the consolidated balance sheets.
• Property and equipment is recorded at cost less accumulated depreciation.
• Depreciation expense is recognized on a straight-line basis for financial statement purposes over periods ranging from three to seven years.

Leases

[c. 173; p. 16] Lease accounting policies

• Right-of-use (ROU) assets are categorized under other assets on the balance sheet.
• Lease liabilities are included in accounts payable and accrued liabilities on the balance sheet.
• For operating leases, the Company identifies if a contract contains a lease at inception.
• Operating lease ROU assets and lease liabilities are recognized based on the present value of future minimum lease payments at the commencement date.
• The Company uses its incremental borrowing rate to determine the present value of future payments, as the interest rate implicit in its leases is not available.
• Lease agreements may contain options to extend or terminate.
• Options are exercised at the Company's discretion and are included in operating lease liabilities if their exercise is reasonably certain.
• Lease agreements combine lease and non-lease components, which are treated as a single lease component.
• Operating lease cost for future minimum lease payments is recognized on a straight-line basis over the lease term.
• Sublease income is recognized on a straight-line basis over the sublease term.

Reserves for losses and loss adjustment expenses

[c. 174; p. 16] Reserves for losses and LAE estimation

• Reserves for losses and loss adjustment expenses (LAE) represent the Company’s best estimate of the ultimate net cost of all reported and unreported losses unpaid as of the balance sheet dates.
• Estimated reserves for losses and LAE include estimates for reported and unpaid claims, increases in claims costs for already reported claims, claims incurred but not reported, and expenses for investigating and adjusting all incurred and unpaid claims.
• The Company estimates reserves on an undiscounted basis using individual case-basis valuations, statistical analyses, and various actuarial methods.
• Paid Loss Development: uses historical payment patterns for prior claims to estimate future payment patterns, applied to current payments by policy year to yield an expected ultimate loss.
• Incurred Loss Development: uses historical case loss patterns for past claims to estimate future case-incurred amounts for current claims, applied to current case losses by policy year to yield an expected ultimate loss.
• Case Reserve Development: determines patterns of historical development in reported losses relative to historical case reserves, applied to current case reserves by policy year and combined with paid losses to yield an expected ultimate loss.
• Expected Loss Ratio: analyzes historical loss ratios, projections of frequency and severity trends, and estimates of price and exposure changes to produce an estimated expected loss ratio ("loss pick") for each policy year, which is then applied to earned premium to estimate expected ultimate losses.
• Paid and Incurred Bornhuetter/Ferguson (BF): blends the expected loss ratio method with either the paid or incurred loss development method to produce weighted average indications for each policy year.

[c. 175; p. 16] Estimation method considerations and uncertainty

• Multiple estimation methods are often valid for evaluating claim liabilities, each with its own assumptions, advantages, and disadvantages.
• No single estimation method is superior in all situations, and no single set of assumption variables is meaningful for all underwriting divisions.
• The relative strengths and weaknesses of estimation methods can change over time, leading to varying weights given to each method by policy year and evaluation.
• Estimates are based on the Company’s historical information, industry information, and estimates of future trends in variables like loss severity and frequency.
• Reserves for losses and LAE are subject to uncertainty from changes in reporting patterns, claims settlement patterns, judicial decisions, legislation, and economic conditions.
• The Company's actual loss experience may not conform to the methods or assumptions used in determining estimated liabilities.
• The Company continually monitors and reviews reserves, adjusting estimates as new information becomes available.
• Differences arising from settlements or reserve adjustments are reported in the current year.
• 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.

Premiums

[c. 176; p. 16] Premium recognition and accounting

• The Company earns and recognizes property and casualty and surety premiums on a pro-rata basis over the terms of the policies.
• Accident and health premiums are earned as billed, based on census data.
• Gross premiums written are reduced by ceded premiums from proportional, facultative, and excess of loss reinsurance costs for prospective reinsurance.
• Premiums receivable include deferred premiums, which are installment payments due from insureds under their policy payment terms.
• A table presents the recorded allowance for estimated uncollectible premiums receivable for the years ended December 31, 2022 and 2021.
• Unearned premiums represent the portion of gross premiums written applicable to the unexpired terms of in-force insurance policies or reinsurance contracts.
• Ceded unearned premiums represent the portion of ceded premiums written applicable to the unexpired terms of in-force insurance policies or reinsurance contracts.
• Unearned premiums (direct and ceded) are calculated on a pro-rata basis over the terms of the policies.

[c. 177; p. 16]

Premiums

($ in thousands)	2022	2021
Allowance for doubtful accounts	629	261

Commission and Fee Income

[c. 178; p. 16] SUA commission revenue

• SUA commission revenue is generated from placing insurance policies on reinsurance programs via a reinsurance broker.
• The Company's single performance obligation for SUA commission revenue is the placement of insurance policies.
• The transaction price for SUA commission revenue is fixed at contract inception and based on a percentage of premiums placed.
• The Company recognizes 100% of the transaction price as revenue when the performance obligation is satisfied at the point a policy is placed, as there are no constraints on revenue.

[c. 179; p. 16] SUA fee income

• SUA fee income is generated from placing insurance policies with a third-party insurance company.
• The Company's single performance obligation for SUA fee income is the placement of the policy.
• The transaction price for SUA fee income is variable at contract inception and based on a percentage of premium, which is determined by risk factors that vary monthly (e.g., employee census data, worker roles).
• The Company estimates its transaction price over the life of the policy using the expected value method.
• Revenue from SUA fee income is recognized at the point in time the policy is placed.
• Changes in the estimate of variable consideration for SUA fee income are recognized in the month they occur.

Income Taxes

[c. 180; p. 16] Income tax accounting principles

• Income tax expense is accrued for tax effects of transactions reported on consolidated financial statements.
• Income tax provision consists of currently due taxes plus deferred taxes from temporary differences between financial statement and income tax purposes.
• A valuation allowance is established for any deferred tax asset not expected to be realized.
• Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years temporary differences are recovered or settled.
• The effect on deferred tax assets and liabilities from a tax rate change is recognized in income in the period of enactment.
• A liability for uncertain tax positions is recorded if it is more likely-than-not that the position will not be sustained upon examination by the appropriate tax authority.
• Changes in the liability for uncertain tax positions are reflected in income tax expense when a new uncertain tax position arises, judgment changes about uncertainty likelihood, the tax issue is settled, or the statute of limitation expires.
• Potential net interest income or expense and penalties related to uncertain tax positions are recorded on the Consolidated Statements of Operations.

[c. 181; p. 16] Tax filings and premium taxes

• The Company files a consolidated federal income tax return in the United States and certain other state tax returns.
• Admitted insurance subsidiaries pay premium taxes on gross written premiums in lieu of most state income or franchise taxes.
• Premium tax expense is recognized within underwriting, acquisition and insurance expense on the Consolidated Statement of Operations.

Fair Value of Financial Instruments

[c. 182; p. 16] Fair value measurement framework

• Fair value for each class of financial instrument is estimated based on the framework in fair value accounting guidance.
• The guidance requires maximizing observable inputs and minimizing unobservable inputs when measuring fair value.
• Fair value hierarchy disclosures are based on the quality of inputs used for measurement.
• The hierarchy prioritizes unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements).
• The hierarchy gives lowest priority to unobservable inputs (Level 3 measurements).
• The Company uses widely recognized, third-party pricing sources to determine fair values of financial instruments.
• The Company understands the valuation methodologies and inputs of these third-party pricing sources.
• Further details on fair value disclosures are in Note 6.

Stock Based Compensation

[c. 183; p. 16] Legacy Stock Programs

• The Company granted common stock to employees and non-employee directors through the Stock Purchase Program and Equity Incentive Program (Legacy Programs).
• Legacy Programs required employees to purchase a certain amount of stock, which the Company then matched.
• Matching share awards were subject to vesting requirements.
• For the purchased portion of stock, participants made a minimum payment, with the remainder issued as a note receivable to the Company and recorded as stock notes receivable within Stockholders’ Equity.
• Compensation costs for share-based payments are recognized over the vesting period at the fair value of common stock on the grant date.
• The fair value of common stock on the grant date was determined using an income approach and market approach.
• Forfeiture of purchased and awarded shares are recognized as they occur.

[c. 184; p. 16] 2021 Long Term Incentive Plan

• In December 2020, the Compensation Committee of the Company’s Board of Directors approved a new Long Term Incentive Plan (the 2021 Plan).
• The 2021 Plan allows for granting restricted stock, restricted stock units, performance share awards, and cash-based performance awards to select employees and non-employee directors.
• Under the 2021 Plan, the Compensation Committee ratifies participant selection for each year’s grants, subject to the plan's terms and conditions.
• Equity awards consist of common share awards with either a market or performance condition, and restricted common stock and common stock units.
• All awards are subject to a service condition.

[c. 185; p. 16] Market Condition Awards

• For common share awards with a market and service condition, the Company uses a probability assessment to determine fair value on the grant date.
• Grant date fair value is recognized as compensation costs over the applicable service period.
• If the market condition is not met, previously recognized compensation expense is not reversed.

[c. 186; p. 16] Performance and Service Condition Awards

• For common share awards with a performance condition and a service condition, the Company calculates grant date fair value based on a probability-weighted assessment of the performance condition and respective award values.
• Compensation costs are recognized over the service period based on the latest estimate of grant date fair value.
• If the performance condition is not satisfied, the Company reverses previously recognized compensation expense.

[c. 187; p. 16] Service Condition Awards

• The Company grants restricted common stock units that only have a service condition.
• Compensation costs are recognized over the service period based on the fair value of common stock on the grant date.

Earnings Per Share

[c. 188; p. 16] Basic EPS calculation

• Basic earnings per share is calculated using the two-class method.
• Undistributed earnings are allocated to participating securities based on their potential share in earnings as if all earnings for the period were distributed.
• Basic earnings per share is calculated by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding for the period.
• Common shares related to Legacy Programs are excluded from the weighted-average number of common shares outstanding for basic EPS if contingencies, such as vesting requirements, exist and are not satisfied.
• Contingently issuable common shares and common share equivalents are excluded from basic and diluted EPS if specified conditions are not met, assuming the period end is the contingency period end.

[c. 189; p. 16] Diluted EPS calculation

• Instruments convertible into common shares are included in diluted weighted-average common shares outstanding on an if-converted basis, using the legal conversion rate for the period, if dilutive.
• Share-based awards to employees with only service conditions are included as potential common shares, weighted for the unvested portion of the period, if dilutive.
• Share-based awards to employees with performance and service or market conditions are included as potential common shares, assuming the period end is the contingency period end, if dilutive.
• If common share adjustments increase EPS or reduce loss per share, the effect is anti-dilutive, and diluted net earnings or net loss per share is computed excluding these common share equivalents.

3. Recent Accounting Pronouncements

[c. 190; p. 16] Emerging Growth Company status

• The Company qualifies as an "emerging growth company" under the JOBS Act of 2012.
• The Company has the option to adopt new or revised accounting guidance either within the same periods as non-emerging growth companies or within the same time periods as private companies.
• The Company may elect to adopt new or revised accounting guidance within the same time period as private companies, unless management determines early adoption provisions are preferable.

[c. 191; p. 16] Recent accounting standards not yet adopted

• In June 2016, FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326).
• ASU 2016-13 requires organizations to estimate credit losses on financial instruments, including receivables and available-for-sale debt securities, using an expected loss approach.
• The expected loss approach requires incorporating historical information, current information, and reasonable and supportable forecasts.
• The guidance is effective for fiscal years beginning after December 15, 2022.
• The Company will adopt ASU 2016-13 effective January 1, 2023, using the modified retrospective approach.
• The Company expects to recognize an increase in the allowance for uncollectible reinsurance of approximately USD 2.3m.
• The Company expects to recognize an increase, net of tax, in accumulated deficit of approximately USD 2.3m.

4. Goodwill and Intangible Assets

[c. 192; p. 16] Aegis Surety acquisition

• In January 2021, the Company acquired the surety business of Aegis Surety Bonds and Insurance Services, LLC ("Aegis") for USD 10.0m in cash and the disposal of its Exterminator Pro business.
• The Aegis acquisition increased the Company's scale in surety.
• The implied fair value of the Aegis surety underwriting business was USD 15.3m.
• The Company recognized a gain of USD 3.5m on disposal of assets related to its Exterminator Pro underwriting business.
• The remaining goodwill of USD 0.9m associated with the Exterminator Pro business was fully impaired after disposal.
• The purchase price for Aegis was allocated to identifiable assets, resulting in an USD 8.3m intangible asset for agent relationships with a 15-year useful life and USD 6.9m of goodwill.

[c. 193; p. 16] Compass Group Partners impairment

• During Q2 2021, the Company exited a book of errors & omissions business from its acquisition of Compass Group Partners, LLC ("Compass").
• This decision resulted in an impairment of USD 1.9m for goodwill and USD 0.1m for agent relationships, as their fair value was determined to be zero.

[c. 194; p. 16] Sale of Boston Indemnity Company

• In June 2021, the Company signed a Purchase Agreement for the sale of all issued and outstanding capital stock of Boston Indemnity Company (BIC).
• The transaction was completed on October 4, 2021.
• The Company recorded USD 8.2m in net proceeds from the sale.
• A gain on sale of business of USD 1.8m was recognized.

[c. 195; p. 16] Goodwill and intangible assets overview

• The carrying amount and changes in the balance of goodwill are presented by reporting unit.
• The carrying amount and changes in the balance of other intangible assets are presented.
• The Company's indefinite-lived intangible assets include insurance licenses and trademarks.
• Finite-lived intangible assets, including policy renewals, agency relationships, and non-compete/exclusivity agreements, had a weighted average useful life of approximately 14 years as of December 31, 2022.
• Recognized amortization expense for the years ended December 31, 2022 and 2021 is presented.
• Estimated future net amortization expense of intangible assets for the next five years is presented.

[c. 196; p. 16]

Goodwill by line of business

($ in thousands)	Accident and Health	Surety	Energy	Other	Total
Goodwill
Gross balance at December 31, 2021	91,577	6,781	10,052	4,031	112,441
Accumulated impairment at December 31, 2021	( 44,821 )	—	—	( 1,886 )	( 46,707 )
Net balance at December 31, 2022	46,756	6,781	10,052	2,145	65,734

($ in thousands)	Accident and Health	Surety	Energy	Exterminator Pro	Other	Total
Goodwill
Gross balance at December 31, 2020	91,577	—	10,052	11,810	4,681	118,120
Accumulated impairment at December 31, 2020	( 44,821 )	—	—	( 9,248 )	—	( 54,069 )
Additions	—	6,956	—	—	—	6,956
Disposals	—	( 175 )	—	( 1,680 )	( 650 )	( 2,505 )
Impairment	—	—	—	( 882 )	( 1,886 )	( 2,768 )
Net balance at December 31, 2021	46,756	6,781	10,052	—	2,145	65,734

($ in thousands)	Agent Relationships	Non-competes	Trademarks	Licenses	Total
Other Intangible Assets
Gross balance at December 31, 2021	24,558	1,117	999	14,019	40,693
Accumulated amortization at December 31, 2021	( 14,421 )	( 670 )	—	—	( 15,091 )
Amortization	( 1,243 )	( 223 )	—	—	( 1,466 )
Net balance at December 31, 2022	8,894	224	999	14,019	24,136

($ in thousands)	Agent Relationships	Non-competes	Trademarks	Licenses	Total
Other Intangible Assets
Gross balance at December 31, 2020	16,355	1,117	1,122	15,019	33,613
Accumulated amortization at December 31, 2020	( 13,203 )	( 447 )	—	—	( 13,650 )
Additions	8,300	—	—	—	8,300
Disposals	( 45 )	—	( 123 )	( 1,000 )	( 1,168 )
Impairment	( 52 )	—	—	—	( 52 )
Amortization	( 1,218 )	( 223 )	—	—	( 1,441 )
Net balance at December 31, 2021	10,137	447	999	14,019	25,602

($ in thousands)	2022	2021
Amortization expense	1,466	1,441

Years Ending December 31,	Amount (in thousands)
2023	1,466
2024	1,074
2025	998
2026	553
2027	553

5. Investments

[c. 197; p. 16] Investment fair value and amortized cost

• The amortized cost and fair value of the Company’s investments are summarized.
• The amortized cost and estimated fair value of fixed maturity securities, available for sale, at December 31, 2022, are presented by contractual maturity.
• Expected maturities may differ from contractual maturities due to borrowers' rights to call or prepay obligations, and portfolio sales may occur prior to maturity due to changing interest rates, tax considerations, or other factors.
• The Company’s fixed maturity securities, held to maturity, at December 31, 2022, consist entirely of asset-backed securities that do not have a single maturity date.

[c. 198; p. 16] Unrealized losses on investments

• Gross unrealized losses and corresponding fair values of investments are summarized by the length of time individual securities have been in a continuous unrealized loss position.
• As of December 31, 2022, the Company had 111 lots of fixed maturity securities in an unrealized loss position aged over 12 months.
• The Company does not intend to sell, nor is it more likely-than-not to be required to sell, these fixed maturity securities available for sale before they recover to their amortized cost value.
• The Company believes none of the declines in fair values of these fixed maturity securities available for sale relate to credit losses.
• The Company believes none of the declines in fair value of these fixed maturity securities available for sale were other-than-temporary at December 31, 2022.
• The Company recognized no other-than-temporary impairment adjustments on fixed maturity securities available for sale for the years ended December 31, 2022 and 2021.

[c. 199; p. 16] Net realized gains and losses

• The components of net realized (losses) gains at December 31, 2022 and 2021 are summarized.
• Proceeds from sales of debt and equity securities at December 31, 2022 and 2021 are summarized.

[c. 200; p. 16] Net investment income

• The Company’s net investment income for the years ended December 31, 2022 and 2021 is summarized.

[c. 201; p. 16] Unrealized losses in other comprehensive income

• The change in net unrealized losses on investments, net of deferred income taxes, in other comprehensive loss for the years ended December 31, 2022 and 2021 is summarized.

[c. 202; p. 16] State-required deposits

• Various state regulations require the Company to maintain cash, investment securities, or letters of credit on deposit with the states in a depository account.
• At December 31, 2022, cash and investment securities on deposit had fair values of approximately USD 60.2m.
• At December 31, 2021, cash and investment securities on deposit had fair values of approximately USD 63.2m.

[c. 203; p. 16]

5. Investments

($ in thousands)	Gross Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Fair Value
December 31, 2022
Fixed maturity securities, available for sale:
U.S. government securities	50,416	1	( 1,876 )	48,541
Corporate securities and miscellaneous	255,116	767	( 20,754 )	235,129
Municipal securities	65,836	24	( 8,133 )	57,727
Residential mortgage-backed securities	134,844	218	( 15,206 )	119,856
Commercial mortgage-backed securities	40,129	50	( 3,684 )	36,495
Asset-backed securities	116,275	91	( 6,542 )	109,824
Total fixed maturity securities, available for sale	662,616	1,151	( 56,195 )	607,572
Fixed maturity securities, held to maturity:	—	—	—	—
Asset-backed securities	52,467	—	( 5,696 )	46,771
Total fixed maturity securities, held to maturity	52,467	—	( 5,696 )	46,771
Equity securities:	—	—	—	—
Common stocks	50,484	10,015	( 4,503 )	55,996
Preferred stocks	11,798	15	( 3,042 )	8,771
Mutual funds	53,968	3,171	( 1,737 )	55,402
Total equity securities	116,250	13,201	( 9,282 )	120,169

($ in thousands)	Gross Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Fair Value
December 31, 2021
Fixed maturity securities, available for sale:
U.S. government securities	48,816	716	( 269 )	49,263
Corporate securities and miscellaneous	151,053	3,698	( 588 )	154,163
Municipal securities	53,179	3,799	( 36 )	56,942
Residential mortgage-backed securities	103,758	1,232	( 1,255 )	103,735
Commercial mortgage-backed securities	14,634	38	( 188 )	14,484
Asset-backed securities	81,038	226	( 1,500 )	79,764
Total fixed maturity securities, available for sale	452,478	9,709	( 3,836 )	458,351
Fixed maturity securities, held to maturity:	—	—	—	—
Asset-backed securities	47,117	—	—	47,117
Total fixed maturity securities, held to maturity	47,117	—	—	47,117
Equity securities:	—	—	—	—
Common stocks	47,379	13,887	( 2,841 )	58,425
Preferred stocks	17,821	349	( 4 )	18,166
Mutual funds	33,786	7,611	( 17 )	41,380
Total equity securities	98,986	21,847	( 2,862 )	117,971

($ in thousands)	Amortized Cost	Fair Value
Due in less than one year	16,474	16,215
Due after one year through five years	203,569	191,576
Due after five years through ten years	102,114	90,631
Due after ten years	49,211	42,975
Mortgage-backed securities	174,973	156,351
Asset-backed securities	116,275	109,824
Total	662,616	607,572

	Less than 12 Months		12 Months or More		Total
($ in thousands)	Fair Value	Gross Unrealized Losses	Fair Value	Gross Unrealized Losses	Fair Value	Gross Unrealized Losses
December 31, 2022
Fixed maturity securities, available-for-sale:
U.S. government securities	28,966	( 603 )	18,577	( 1,273 )	47,543	( 1,876 )
Corporate securities and miscellaneous	171,506	( 16,063 )	34,283	( 4,691 )	205,789	( 20,754 )
Municipal securities	51,701	( 7,236 )	3,689	( 897 )	55,390	( 8,133 )
Residential mortgage-backed securities	56,246	( 4,152 )	52,778	( 11,054 )	109,024	( 15,206 )
Commercial mortgage-backed securities	25,836	( 1,488 )	8,583	( 2,196 )	34,419	( 3,684 )
Asset-backed securities	74,684	( 3,351 )	25,820	( 3,191 )	100,504	( 6,542 )
Total fixed maturity securities, available-for-sale	408,939	( 32,893 )	143,730	( 23,302 )	552,669	( 56,195 )
Fixed maturity securities, held-to-maturity:	—	—	—	—	—	—
Asset-backed securities	46,771	( 5,696 )	—	—	46,771	( 5,696 )
Total fixed maturity securities, held-to-maturity	46,771	( 5,696 )	—	—	46,771	( 5,696 )
Total	455,710	( 38,589 )	143,730	( 23,302 )	599,440	( 61,891 )

	Less than 12 Months		12 Months or More		Total
($ in thousands)	Fair Value	Gross Unrealized Losses	Fair Value	Gross Unrealized Losses	Fair Value	Gross Unrealized Losses
December 31, 2021
Fixed maturity securities, available-for-sale:
U.S. government securities	19,819	( 267 )	108	( 2 )	19,927	( 269 )
Corporate securities and miscellaneous	47,308	( 588 )	—	—	47,308	( 588 )
Municipal securities	4,549	( 36 )	—	—	4,549	( 36 )
Residential mortgage-backed securities	72,672	( 1,252 )	145	( 3 )	72,817	( 1,255 )
Commercial mortgage-backed securities	12,653	( 175 )	241	( 12 )	12,894	( 187 )
Asset-backed securities	34,266	( 1,463 )	1,256	( 38 )	35,522	( 1,501 )
Total fixed maturity securities, available-for-sale	191,267	( 3,781 )	1,750	( 55 )	193,017	( 3,836 )

($ in thousands)	2022	2021
Gross realized gains
Fixed maturity securities, available-for sale	313	474
Equity securities	3,865	2,763
Other	36	13
Total	4,214	3,250
Gross realized losses	—	—
Fixed maturity securities, available-for sale	( 958 )	( 1,160 )
Equity securities	( 3,827 )	( 230 )
Other	( 76 )	( 4 )
Total	( 4,861 )	( 1,394 )
Net unrealized (losses) gains on securities still held	—	—
Equity securities	( 15,058 )	15,251
Net investment (losses) gains	( 15,705 )	17,107

($ in thousands)	2022	2021
Fixed maturity securities, available-for sale	13,964	15,142
Equity securities	37,177	37,952

($ in thousands)	2022	2021
Income:
Fixed maturity securities, available-for sale	18,481	9,931
Fixed maturity securities, held-to-maturity	5,375	4,840
Equity securities	3,579	2,572
Equity method investments	6,015	9,280
Mortgage loans	4,767	1,188
Indirect loans	4,846	1,852
Short-term investments and cash	1,523	141
Other	( 102 )	241
Total investment income	44,484	30,045
Investment expenses	( 7,553 )	( 5,399 )
Net investment income	36,931	24,646

($ in thousands)	2022	2021
Fixed maturity securities	( 60,918 )	( 9,674 )
Deferred income taxes	12,793	2,098
Other comprehensive loss	( 48,125 )	( 7,576 )

6. Fair Value Measurements

[c. 204; p. 16] Fair value measurement principles

• 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.
• Fair value is generally determined using the market approach, which uses prices and data from market transactions involving identical or comparable assets and liabilities.
• The Company uses data primarily from third-party investment managers or pricing vendors to determine the fair value of investments.
• Periodic analyses are performed on third-party prices to ensure they are reasonable estimates of fair value, including reviewing month-to-month price fluctuations and comparing valuations from different pricing services for identical securities.
• Financial instruments are classified into a 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 observable for the asset or liability through corroboration with market data at the measurement date, other than quoted prices in Level 1.
• Level 3 inputs are unobservable inputs reflecting management's best estimate of what market participants would use in pricing the asset or liability at the measurement date.
• Methods and assumptions used for fair value disclosures are detailed in the consolidated financial statements and notes.

[c. 205; p. 16] Fair value measurement by instrument type

• U.S. government securities, mutual funds and common stock: The Company uses unadjusted quoted prices for identical instruments in an active exchange, representing Level 1 inputs.
• Preferred stocks, municipal securities, corporate securities and miscellaneous: The Company uses a pricing model with market-based inputs like trades in illiquid markets for specific securities or active markets for similar securities, and other inputs such as benchmark yields, issuer spreads, security terms, and market data, representing Level 2 fair value inputs.
• Commercial mortgage-backed securities, residential mortgage-backed securities and asset-backed securities: The Company uses a pricing model with market-based inputs including dealer quotes, market spreads, and yield curves, and may evaluate individual tranches by determining cash flows using security terms, collateral performance, credit information, benchmark yields, and estimated prepayments, representing Level 2 fair value inputs.

[c. 206; p. 16] Fair value disclosure requirements

• A table presents the carrying value and estimated fair value of the Company’s financial instruments at December 31, 2022 and 2021.
• A table summarizes fair value measurements by level within the fair value hierarchy for assets and liabilities with a disclosed fair value.
• The Company measures certain assets (investments in indirect loans and loan collateral, equity method investments, and other invested assets) at fair value on a nonrecurring basis only when impaired.
• The Company is required to disclose fair values for other financial instruments where estimation is practicable.
• Estimated fair value amounts, defined as the quoted market price, are determined using available market information and valuation methodologies.
• Considerable judgment is required for fair value estimates when quoted market prices are unavailable.
• These estimates are not necessarily indicative of amounts realizable in a current market exchange.
• Different market assumptions or estimation methodologies may affect estimated fair value amounts.

[c. 207; p. 16] Fair value measurement of other financial instruments

• Methods and assumptions used for estimating fair value disclosures of other financial instruments are provided.
• Fixed maturity securities, held to maturity: Consist of senior and junior notes with target rates of return; as of December 31, 2022, fair value was determined using the income approach with unobservable (Level 3) inputs.
• Mortgage loans: Have variable interest rates and are collateralized by real property; fair value is determined using the income approach with unobservable (Level 3) inputs.
• Notes payable: Carrying value approximates estimated fair value because they accrue interest at current market rates plus a spread; fair value is determined using the income approach with available (Level 2) inputs.
• Subordinated debt: Consists of Junior Subordinated Interest Debentures (due September 15, 2036) and Unsecured Subordinated Notes (due May 24, 2039).
  • The carrying value of Junior Subordinated Interest Debentures approximates estimated fair value as they accrue interest at current market rates plus a spread.
  • Unsecured Subordinated Notes have a fixed interest rate.
  • Fair value for these instruments is determined using the income approach with observable (Level 2) inputs.
• Other financial instruments qualify as insurance-related products and are exempt from fair value disclosure requirements.

[c. 208; p. 16]

Carrying value and fair value by assets and liabilities

	2022		2021
($ in thousands)	Carrying Value	Fair Value	Carrying Value	Fair Value
Assets
Fixed maturity securities, available-for-sale	607,572	607,572	458,351	458,351
Fixed maturity securities, held-to-maturity	52,467	46,771	47,117	47,117
Equity securities	120,169	120,169	117,971	117,971
Mortgage loans	51,859	52,842	29,531	29,264
Short-term investments	121,158	121,158	164,278	164,278
Cash and cash equivalents	45,438	45,438	42,107	42,107
Restricted cash	79,573	79,573	65,167	65,167
Liabilities	—	—	—	—
Notes payable	50,000	50,000	50,000	50,000
Subordinated debt	78,609	78,728	78,529	83,235

	December 31, 2022
($ in thousands)	Level 1	Level 2	Level 3	Total
Assets:
Fixed maturity securities, available-for-sale:
U.S. government securities	48,541	—	—	48,541
Corporate securities and miscellaneous	—	235,129	—	235,129
Municipal securities	—	57,727	—	57,727
Residential mortgage-backed securities	—	119,856	—	119,856
Commercial mortgage-backed securities	—	36,495	—	36,495
Asset-backed securities	—	109,824	—	109,824
Total fixed maturity securities, available-for-sale	48,541	559,031	—	607,572
Fixed maturity securities, held-to-maturity:	—	—	—	—
Asset-backed securities	—	—	46,771	46,771
Total fixed maturity securities, held-to-maturity	—	—	46,771	46,771
Common stocks:	—	—	—	—
Consumer discretionary	1,948	—	—	1,948
Consumer staples	12,036	—	—	12,036
Energy	3,241	—	—	3,241
Finance	22,636	—	—	22,636
Industrial	9,452	—	—	9,452
Information technology	2,284	—	—	2,284
Materials	2,820	—	—	2,820
Other	1,579	—	—	1,579
Total common stocks	55,996	—	—	55,996
Preferred stocks:	—	—	—	—
Consumer staples	—	117	—	117
Finance	—	7,085	—	7,085
Industrial	—	1,020	—	1,020
Other	—	549	—	549
Total preferred stocks	—	8,771	—	8,771
Mutual funds:	—	—	—	—
Fixed income	5,068	—	—	5,068
Equity	49,773	—	—	49,773
Commodity	561	—	—	561
Total mutual funds	55,402	—	—	55,402
Total equity securities	111,398	8,771	—	120,169
Mortgage loans	—	—	52,842	52,842
Short-term investments	121,158	—	—	121,158
Total assets measured at fair value	281,097	567,802	99,613	948,512
Liabilities:	—	—	—	—
Notes payable	—	50,000	—	50,000
Subordinated debt	—	78,728	—	78,728

	December 31, 2021
($ in thousands)	Level 1	Level 2	Level 3	Total
Assets:
Fixed maturity securities, available-for-sale:
U.S. government securities	49,263	—	—	49,263
Corporate securities and miscellaneous	—	154,163	—	154,163
Municipal securities	—	56,942	—	56,942
Residential mortgage-backed securities	—	103,735	—	103,735
Commercial mortgage-backed securities	—	14,484	—	14,484
Asset-backed securities	—	79,764	—	79,764
Total fixed maturity securities, available-for-sale	49,263	409,088	—	458,351
Fixed maturity securities, held-to-maturity:	—	—	—	—
Asset-backed securities	—	—	47,117	47,117
Total fixed maturity securities, held-to-maturity	—	—	47,117	47,117
Common stocks:	—	—	—	—
Consumer discretionary	2,102	—	—	2,102
Consumer staples	13,643	—	—	13,643
Energy	2,781	—	—	2,781
Finance	24,657	—	—	24,657
Industrial	8,806	—	—	8,806
Information technology	2,408	—	—	2,408
Materials	3,160	—	—	3,160
Other	868	—	—	868
Total common stocks	58,425	—	—	58,425
Preferred stocks:	—	—	—	—
Finance	—	17,018	—	17,018
Other	—	1,148	—	1,148
Total preferred stocks	—	18,166	—	18,166
Mutual funds:	—	—	—	—
Fixed income	5,374	—	—	5,374
Equity	35,471	—	—	35,471
Commodity	535	—	—	535
Total mutual funds	41,380	—	—	41,380
Total equity securities	99,805	18,166	—	117,971
Mortgage loans	—	—	29,264	29,264
Short-term investments	164,278	—	—	164,278
Total assets measured at fair value	313,346	427,254	76,381	816,981
Liabilities:	—	—	—	—
Notes payable	—	50,000	—	50,000
Subordinated debt	—	83,235	—	83,235

7. Mortgage Loans

[c. 209; p. 16] Mortgage loan investments and characteristics

• The Company has invested in Separately Managed Accounts ("SMA1" and "SMA2") managed by Arena Investors, LP ("Arena").
• Arena is affiliated with The Westaim Corporation ("Westaim"), which, through Westaim HIIG LP, is the Company's largest shareholder.
• As of December 31, 2022 and 2021, 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..
• Loans earn interest at fixed rates and mature in approximately one to two years from origination.
• Principal amounts of the loans range between 40% to 90% of the property’s appraised value at the time of loan origination.
• Mortgage loan participations are carried at cost adjusted for unamortized premiums, discounts, and loan fees.

[c. 210; p. 16] Mortgage loan carrying value and income

• The carrying value of the Company’s mortgage loans for the years ended December 31, 2022 and 2021 is presented.
• The Company’s gross investment income for the years ended December 31, 2022 and 2021 is presented.

[c. 211; p. 16] Mortgage loan collectibility and foreclosures

• Uncollectible amounts on loans are determined on an individual loan basis based on consultations with the Company’s specialized investment manager.
• Factors considered for uncollectibility include adverse situations affecting borrower repayment ability, estimated value of underlying collateral, and other relevant factors.
• When an amount is determined to be uncollectible, it is written off in the period of determination.
• There were no write-offs for uncollectible amounts for the years ended December 31, 2022 and 2021.
• As of December 31, 2022, approximately USD 6.4m of mortgage loans were in the process of foreclosure.
• As of December 31, 2021, approximately USD 10.8m of mortgage loans were in the process of foreclosure.
• 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.

[c. 212; p. 16]

7. Mortgage Loans

($ in thousands)	2022	2021
Retail	16,516	10,593
Commercial	15,309	6,298
Industrial	6,329	6,314
Multi-family	5,593	3,296
Office	3,197	1,691
Hospitality	4,915	1,339
—	51,859	29,531

	Years Ended December 31,
($ in thousands)	2022	2021
Retail	1,255	66
Commercial	1,242	151
Industrial	565	90
Multi-family	909	143
Office	385	64
Land	—	451
Hospitality	411	223
—	4,767	1,188

8. Other Long-Term Investments

[c. 213; p. 16] Equity Method Investments Overview

• The Company's ownership interests in most equity method investments range from approximately 3% to less than 50%, indicating significant influence but not control.
• The Company owns 100% of the limited partner interests in Universa Black Swan Protection Protocol LIX L.P. ("Universa Black Swan") but does not consolidate it as it lacks power to direct its activities.
• The Company owns investment products issued by Arena Special Opportunities Partners (Feeder) I, LP ("Arena SOP"), managed by Arena, which is affiliated with Westaim.
• Investment products include senior and junior notes issued by Arena SOP to raise capital for investment purchases.
• Return on investments is used to pay interest on senior and junior notes based on target returns for each class.
• Senior and junior notes are debt securities classified as held to maturity and presented on the balance sheet within fixed maturity securities, held to maturity.
• Income exceeding return targets on senior and junior notes is allocated to the investment in Arena SOP.

[c. 214; p. 16] Equity Method Investments Activity

• In the year ended December 31, 2021, the Company invested USD 1.9m in Hudson Ventures Fund 2, LP, USD 5.0m in Universa Black Swan, and USD 12.0m in JVM Multi-Family Premier Fund IV, LLC and USD 12.0m in JVM Preferred Equity Fund, LLC (together "JVM Funds LLC").
• In the year ended December 31, 2022, the Company entered an agreement for limited partnership interests in Brewer Lane Ventures Fund II, L.P..
• In the year ended December 31, 2022, the Company invested USD 0.2m in Brewer Lane Ventures Fund II, L.P. and USD 1.3m in Hudson Ventures Fund 2, LP.
• The carrying value of equity method investments is reported as of December 31, 2022 and 2021.
• Net investment income from equity method investments is summarized as of December 31, 2022 and 2021.
• The unfunded commitment of equity method investments is reported as of December 31, 2022 and 2021.

[c. 215; p. 16] Equity Method Investment Amortization

• The difference between the cost of an investment and its proportionate share of underlying equity in net assets is allocated to the various assets and liabilities of the equity method investment.
• The Company amortizes this difference in net assets over the useful life of a similar asset as the underlying equity method investment.
• For investment in RISCOM, a similar asset is agent relationships, and the difference is amortized over a 15-year useful life.
• A table summarizes the Company's recorded investment in RISCOM compared to its share of underlying equity for the years ended December 31, 2022 and 2021.
• The USD 24.0m investment in JVM Funds LLC as of December 31, 2021, was a provisional amount, reflecting an estimate of no difference in the proportionate share of underlying equity in net assets.
• In the year ended December 31, 2022, the Company adjusted its purchase price allocation for JVM Funds LLC, allocating the difference between cost and proportionate share of underlying equity to investments in rental properties.
• The Company amortizes this difference in net assets over the 7-year estimated useful life of the investment in rental properties.
• A table summarizes the Company's recorded investment in JVM Funds LLC compared to its share of underlying equity for the years ended December 31, 2022 and 2021.

[c. 216; p. 16] Bank Holding Company Investments

• From 2017 through 2018, the Company acquired a USD 2.0m investment in Captex Bancshares, a Texas bank holding company.
• The Company does not have significant influence over Captex Bancshares, based on its ownership percentage and an employee's presence on the Board of Directors of Captex Bankshares.
• The investment in Captex Bancshares is carried at cost, less impairment or observable changes in price.
• The Company reviews these investments for impairment or observable changes in price each reporting period.
• There were no impairments or observable changes in price for Captex Bancshares during the years ended December 31, 2022 and 2021.
• In the first quarter of 2020, the Company acquired a USD 2.0m investment in Gulf Capital Bank, a Texas bank holding company.
• The Company's ownership percentage indicated no significant influence over Gulf Capital Bank.
• In the fourth quarter of 2020, the Company sold approximately USD 1.8m of shares in Gulf Capital Bank to other owners at cost.
• The remaining USD 0.2m shares in Gulf Capital Bank were sold at cost during the year ended December 31, 2022.
• The investment in Gulf Capital Bank was carried at cost, less impairment or observable changes in price.

[c. 217; p. 16] Indirect Loans and Loan Collateral

• As of December 31, 2022 and 2021, the Company held indirect investments in collateralized loans and loan collateral through SMA1 and SMA2.
• The carrying value and unfunded commitment of SMA1 and SMA2 for the years ended December 31, 2022 and 2021 are reported.
• Note 11 provides information on common stock acquired from an entity providing the Company's subordinated debt.

[c. 218; p. 16]

8. Other Long-Term Investments

($ in thousands)	2022	2021
Arena SOP LP units	8,734	5,692
Arena Special Opportunities Fund, LP units	44,504	41,763
Brewer Lane Ventures Fund II LP units	200	—
Dowling Capital Partners LP units	1,965	2,416
Hudson Ventures Fund 2 LP units	3,551	1,913
JVM Funds LLC units	22,473	24,000
RISCOM	4,037	3,366
Universa Black Swan LP units	1,325	4,354
—	86,789	83,504

($ in thousands)	2022	2021
Arena SOP LP units	3,042	4,717
Arena Special Opportunities Fund, LP units	3,719	3,729
Dowling Capital Partners LP units	502	438
Hudson Ventures Fund 2 LP units	379	( 16 )
JVM Funds LLC	( 70 )	—
RISCOM	1,471	1,058
Universa Black Swan LP units	( 3,028 )	( 646 )
—	6,015	9,280

($ in thousands)	2022	2021
Brewer Lane Ventures Fund II LP units	4,800	—
Dowling Capital Partners LP units	386	368
Hudson Ventures Fund 2 LP units	1,796	3,063
—	6,982	3,431

($ in thousands)	2022	2021
Investment in RISCOM:
Underlying equity	2,292	1,378
Difference	1,745	1,988
Recorded investment balance	4,037	3,366

($ in thousands)	2022	2021
Investment in JVM Funds LLC:
Underlying equity	21,565	24,000
Difference	908	—
Recorded investment balance	22,473	24,000

	2022		2021
($ in thousands)	Carrying Value	Unfunded Commitment	Carrying Value	Unfunded Commitment
SMA1	36,426	—	33,100	—
SMA2	2,010	—	10,855	16,563
Investment in indirect loans and loan collateral	38,436	—	43,955	16,563

9. Property and Equipment

[c. 219; p. 16] Property and equipment components and depreciation

• Property and equipment components for the years ended December 31, 2022 and 2021 are included within other assets on the consolidated balance sheets.
• The table presents recorded depreciation expense at December 31, 2022 and 2021.

[c. 220; p. 16]

9. Property and Equipment

($ in thousands)	2022	2021
Leasehold improvements	2,670	2,761
Equipment	7,230	7,477
Software	25,964	23,314
Other	39	39
—	35,903	33,591
Accumulated depreciation	( 27,229 )	( 23,964 )
Total	8,674	9,627

($ in thousands)	2022	2021
Depreciation expense	3,582	3,636

10. Leases

[c. 221; p. 16] Lease accounting and expense

• The Company determines if a contract contains a lease at inception and recognizes a right-of-use asset (within other assets) and lease liability (within accounts payable and accrued liabilities) based on the present value of future lease payments.
• If leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on inception date information to determine the lease liability.
• The Company's leases are primarily for office facilities, classified as operating leases.
• Lease terms range from one year to 7 years, with some including extension options.
• Lease expense for the year ended December 31, 2022, was USD 2.6m.
• Lease expense for the year ended December 31, 2021, was USD 2.7m.

[c. 222; p. 16] Future minimum lease payment obligations

• The future minimum lease payment obligations for the Company's operating leases at December 31, 2022, are presented in a table.

[c. 223; p. 16]

Operating lease right-of-use assets and liabilities by year

($ in thousands)	2022	2021
Operating lease right-of-use assets	8,214	10,532
Operating lease liabilities	8,616	10,921
Operating lease weighted-average remaining lease term	5.00 years	5.73 years
Operating lease weighted-average discount rate	3.16%	3.12%

($ in thousands)	2022	2021
Operating lease expense	2,414	2,607
Short-term lease expense	220	127
Total lease expense	2,634	2,734
Operating cash outflows from operating leases	2,382	2,361

($ in thousands)	2022
2023	2,206
2024	1,996
2025	1,465
2026	1,227
2027	1,116
Thereafter	1,189
Total future minimum operating lease payments	9,199
Less imputed interest	( 583 )
Total operating lease liability	8,616

11. Subordinated Debt

[c. 224; p. 16] Subordinated notes

• The Company's subordinated debt for the years ended December 31, 2022 and 2021 is summarized in a table.
• In May 2019, the Company agreed to issue unsecured subordinated notes with an aggregate principal amount of USD 20.0m.
• Interest on these Notes is fixed at 7.25% for the first 8 years and 8.25% thereafter.
• Early retirement of the debt before the 8-year commitment requires all interest payments to be paid in full, plus the return of outstanding principal.
• Principal is due at maturity on May 24, 2039, with interest payable quarterly.
• The Notes have junior priority to all previously issued debt.
• Debt related to the Notes is reported in the December 31, 2022 and 2021 consolidated balance sheets, net of debt issuance costs of approximately USD 0.5m and USD 0.6m, respectively.
• These deferred financing costs are presented as a direct deduction from the carrying amount of the subordinated debt.

[c. 225; p. 16] Capital securities and debentures

• On August 2, 2006, Delos Capital Trust (now HIIG Capital Trust I), a Delaware statutory trust, issued USD 58.0m of fixed/floating rate capital securities guaranteed by the Company.
• The Trust also issued the Company USD 1.8m of common stock, classified within other long-term investments.
• The Company has not consolidated the Trust as it does not meet consolidation criteria and the Company lacks significant influence over the investee.
• The Company carries its investment in the common stock of the Trust at cost.
• There were no impairments or observable price changes during the year ended December 31, 2022.
• The sole asset of the Trust consists of Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures (the "Debentures") with a principal amount of USD 59.8m issued by the Company.
• The Debentures are an unsecured obligation, currently redeemable, with a maturity date of September 15, 2036.
• Interest on the Debentures is payable quarterly at an annual rate based on the three-month LIBOR (4.77% at December 31, 2022) plus 3.4%.
• The Company reflects debt related to the Debentures in its December 31, 2022 and 2021 consolidated balance sheets, net of debt issuance costs of approximately USD 0.7m for both years.
• These deferred financing costs are presented as a direct deduction from the carrying amount of the subordinated debt.

[c. 226; p. 16]

11. Subordinated Debt

($ in thousands)	2022	2021
Junior subordinated interest debentures, due September 15, 2036, payable quarterly
Principal	59,794	59,794
Less: Debt issuance costs	( 657 )	( 705 )
Unsecured subordinated notes, due May 24, 2039, interest payable quarterly	—	—
Principal	20,000	20,000
Less: Debt issuance costs	( 528 )	( 560 )
Subordinated debt, net of debt issuance costs	78,609	78,529

12. Notes Payable

[c. 227; p. 16] Notes payable term loan

• The interest rate on the USD 50.0m 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.
• Interest-only payments are due quarterly through December 31, 2024.
• The principal balance of the USD 50.0m term loan is due December 31, 2024.

[c. 228; p. 16] Notes payable revolving line of credit

• The interest rate on the USD 50.0m revolving line of credit is the lesser of the prime rate (Wall Street Journal) or one-month LIBOR (4.39% on December 31, 2022) plus an Applicable Margin, which is the lesser of 1.65% or the highest lawful rate.
• The revolving promissory note includes a fee of 0.25% on the unused portion.
• Interest-only payments are due quarterly through December 31, 2024.
• The entire principal balance of the USD 50.0m revolving line of credit is due December 31, 2024.
• The Company has a right to increase the capacity to USD 75.0m, subject to lender approval.

[c. 229; p. 16] Indebtedness collateral and covenants

• The indebtedness is collateralized by a perfected first priority security interest in all assets of the Company, SUA, and the outstanding capital stock of HSIC (both subsidiaries of the Company).
• The Company's credit agreement includes financial covenants requiring maintenance of minimum surplus and risk-based capital on HSIC, minimum net worth, and a minimum fixed charge coverage ratio, as well as other customary covenants and events of default.
• As of December 31, 2022, the Company was in compliance with all covenants in its credit agreement.

[c. 230; p. 16]

12. Notes Payable

($ in thousands)	2022	2021
Term loan, due December 31, 2024, interest payable quarterly	50,000	50,000

($ in thousands)	2022	2021
Interest payments on term loan	1,443	894

($ in thousands)	2022	2021
Interest payments on revolving line of credit	—	127

13. Stockholders’ Equity

[c. 231; p. 16] Preferred Shares conversion feature

• On April 24, 2020, the Company closed a private preferred share rights offering, giving existing common stock holders the right to subscribe for Series A Convertible Preferred Stock ("Preferred Shares") with a face value of USD 50.00 per share.
• Preferred Shares provide holders the option to convert them into common stock at any time based on the Option Conversion Rate.
• The initial Option Conversion Rate allowed conversion into common stock based on a conversion price of USD 6.96 per common share.
• The Option Conversion Rate was adjusted following the audit of financial statements for the year ended December 31, 2021.
• Adjustments to the Option Conversion Rate included: (i) after-tax cost of the loss portfolio transfer (LPT), a retroactive reinsurance agreement entered in Q2 2020; (ii) after-tax impact of any co-participation expense related to the LPT; (iii) development of losses and LAE reserves subject to but exceeding LPT limits; and (iv) after-tax impact of development on losses and LAE reserves not subject to the LPT subsequent to December 31, 2019.
• As of December 31, 2022 and 2021, the Option Conversion Rate allowed conversion into common stock based on a conversion price of USD 6.04 per common share.
• As of December 31, 2022 and 2021, the Company could settle in common shares, and the Preferred Shares were classified within Stockholders’ Equity.
• Preferred Shares are subject to mandatory conversion upon a defined change of control transaction or the closing of an initial public offering at the Mandatory Conversion Rate.
• The Mandatory Conversion Rate is similar to the Option Conversion Rate but is adjusted for the after-tax impact of any co-participation expense related to the LPT, the development of losses and LAE reserves in excess of LPT limits, and the after-tax impact of development on losses and LAE reserves not subject to the LPT on the final day of the last quarter-end prior to the triggering event.
• As of December 31, 2022 and 2021, the Mandatory Conversion Rate allowed conversion into common stock based on a conversion price of USD 6.04 per common share.

[c. 232; p. 16] Preferred Shares liquidation preference

• The Preferred Shares have liquidation preference over common stock for their face value of USD 50.00 per share.
• This preference also includes any declared but unpaid dividends to related common shares at the applicable conversion rate.

[c. 233; p. 16]

13. Stockholders’ Equity

	2022
Preferred shares outstanding	1,969,660
Common shares upon conversion of preferred shares	16,305,113

14. Income Taxes

[c. 234; p. 16] Income tax expense and effective tax rate

• Income tax (benefit) expense for the years ended December 31, 2022 and 2021 consisted of specific components.
• The Company's provision for income taxes generally does not deviate substantially from the statutory tax rate.
• The effective tax rate may vary slightly from the statutory rate due to tax adjustments for tax-exempt income and dividends-received deduction.
• Differences between income taxes expected at the federal statutory income tax rate of 21% and the reported income tax expense for the years ended December 31, 2022 and 2021 are summarized.

[c. 235; p. 16] Deferred tax assets and liabilities

• The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 2022 and 2021 are presented.

[c. 236; p. 16] Federal income tax payments and examinations

• The Company made no payment for federal income taxes during the years ended December 31, 2022 and 2021.
• These unpaid federal income taxes are available for recoupment in the event of future losses.
• The Company’s federal income tax returns for tax years 2019 to 2021 are subject to examination by the Internal Revenue Service.

[c. 237; p. 16] Uncertain tax benefits and interest/penalties

• As of December 31, 2022 and 2021, management does not believe there are any uncertain tax benefits that could be recognized within the next 12 months that would impact the Company’s effective tax rate.
• The Company classifies all interest and penalties related to tax contingencies as income tax expense.
• As of December 31, 2022 and 2021, there was no accrued interest recorded as an income tax liability.

[c. 238; p. 16] Net operating loss and capital loss carryforwards

• The Company has federal net operating loss carryforwards of approximately USD 71.3m.
• These net operating losses are set to expire beginning in 2030.
• The Company is limited on the utilization of USD 58.6m of the net operating losses under Internal Revenue Code Section 382 due to an ownership change in 2013.
• The Section 382 limitation is expected to result in an expiration of USD 2.8m (USD 0.6m tax effected) of net operating losses.
• A valuation allowance has been established against the balance of net operating losses expected to expire without utilization.
• The Company generated a capital loss carryforward during the year ended December 31, 2022, resulting in a deferred tax asset of approximately USD 1.3m.
• This capital loss carryforward will expire in 2027.
• No valuation allowance is recorded against this deferred tax asset as the Company expects to utilize this carryforward.

[c. 239; p. 16] Deferred tax valuation allowance

• 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.
• The deferred tax valuation allowance for the years ended December 31, 2022 and 2021 is detailed.

[c. 240; p. 16]

14. Income Taxes

($ in thousands)	2022	2021
Current income tax expense	120	—
Deferred tax expense related to temporary differences	10,267	9,992
Total income tax expense	10,387	9,992

	2022		2021
($ in thousands)	Amount	Percentage	Amount	Percentage
Income tax expense at federal statutory rate	10,454	21.0%	10,145	21.0%
Tax advantaged investments	( 324 )	( 0.7 )	( 256 )	( 0.5 )
Other	257	0.6	103	0.2
Total income tax expense	10,387	20.9%	9,992	20.7%

($ in thousands)	2022	2021
Deferred tax assets:
Net operating losses	14,966	28,009
Losses and loss adjustment expenses	10,748	7,782
Unearned premiums	11,959	9,461
Intangibles	607	1,632
Capital loss carryover	1,321	—
Unrealized losses on investments	11,563	—
Stock options/awards	1,107	627
Other	3,369	1,034
Total deferred tax assets	55,640	48,545
Less valuation allowance	( 586 )	( 586 )
Total deferred tax assets after valuation allowance	55,054	47,959
Deferred tax liabilities:	—	—
Deferred policy acquisition costs	8,209	6,063
Depreciation	1,481	1,459
Investments	7,144	5,507
Unrealized gains on investments	—	1,230
Other	2,032	37
Total deferred tax liabilities	18,866	14,296
Deferred income taxes	36,188	33,663

($ in thousands)	2022	2021
Balance at beginning of year	586	586
Balance at end of year	586	586

15. Reserves for Losses and Loss Adjustment Expenses

[c. 241; p. 16] Loss development sub-categories

• 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.
• This disaggregation of short-duration loss disclosures is to avoid obscuring useful information by aggregating items with significantly different characteristics.
• Short tail/monoline specialty lines: includes market niches served with monoline solutions, generally having shorter durations for losses to fully develop.
• Losses for short tail/monoline specialty lines are generally reported within a short period from the date of loss, and claims are typically settled and paid within a relatively short timeframe.
• Short tail/monoline specialty lines can be impacted by larger, more complex losses due to factors like difficulty in determining actual damages, and legal/regulatory impediments extending claim settlement periods.
• Multi-line solutions: includes market niches where the Company provides multiple products, most frequently as an integrated solution.
• The multi-line solution subcategory primarily consists of occurrence liability, including general liability, excess liability, and commercial auto.
• Multi-line solutions have a longer duration for losses to fully develop compared to short-tail/monoline specialty lines.
• The unique claim characteristics and longer-tail nature of multi-line solutions introduce more uncertainty, as claims can be impacted by changes in regulation, inflation, and other unforeseen factors over time.
• Exited lines: includes all underwriting divisions placed in run-off and are presented separately from currently underwritten lines.

[c. 242; p. 16] Unpaid losses and LAE reconciliation

• The reconciliation of unpaid losses and loss adjustment expenses is reported in the consolidated balance sheets for the years ended December 31, 2022 and 2021.
• For the year ended December 31, 2022, the Company’s net incurred losses for accident years 2021 and prior developed adversely by USD 14.4m, related to losses subject to the LPT.
• Within exited lines, adverse development of USD 14.5m was from the 2019 accident year, primarily driven by increased frequency and severity in general and professional liability.
• The remaining net adverse development in exited lines was USD 8.4m from various other accident years.
• Within multi-line solutions, favorable development of USD 10.8m was from the 2020 through 2021 accident years, primarily driven by a reduction in frequency of claims in commercial auto and general liability.
• The remaining net adverse development in multi-line solutions was USD 2.3m from various other accident years.
• There was no net development in short tail/monoline specialty lines.
• For the year ended December 31, 2021, the Company’s net incurred losses and LAE for accident years 2020 and prior developed adversely by USD 28.0m.
• This adverse development was driven by USD 28.8m in exited lines and USD 4.8m in multi-line solutions.
• This was partially offset by USD 5.6m of favorable development in short tail lines.
• Within exited lines, the USD 28.8m adverse development was primarily related to the 2013, 2015, and 2018 accident years, predominantly driven by increases in both frequency and severity of losses in general liability.
• Within multi-line solutions, adverse development of USD 4.8m was primarily related to the 2016 and 2017 accident years, driven by increased frequency and severity of claims in commercial auto.
• Favorable development of USD 5.6m within short tail lines, primarily related to the 2019 and 2020 accident years, partially offset the adverse development.
• This favorable development in short tail lines was driven by favorable loss emergence relative to actuarial expectations in property and accident & health.

[c. 243; p. 16]

Reserves for losses and LAE by incurred and paid, net of reinsurance

($ in thousands)	2022	2021
Reserves for losses and LAE, beginning of period	979,549	856,780
Less: reinsurance recoverable on unpaid claims, beginning of period	( 381,338 )	( 375,178 )
Reserves for losses and LAE, beginning of period, net of reinsurance	598,211	481,602
Incurred, net of reinsurance, related to:	—	—
Current period	393,939	338,348
Prior years	14,385	28,000
Total incurred, net of reinsurance	408,324	366,348
Paid, net of reinsurance, related to:	—	—
Current period	105,928	77,551
Prior years	194,836	172,188
Total paid	300,764	249,739
Net reserves for losses and LAE, end of period	705,771	598,211
Plus: reinsurance recoverable on unpaid claims, end of period	435,986	381,338
Reserves for losses and LAE, end of period	1,141,757	979,549

Short Duration Contract Disclosures

[c. 244; p. 16] Loss and LAE reserves estimation

• Losses and LAE reserves represent the Company’s best estimate of the ultimate net cost of all reported and unreported losses that are unpaid as of the balance sheet dates.
• Estimated reserves for losses and LAE include accumulated estimates for claims reported and unpaid prior to balance sheet dates.
• Reserves also include estimates (based on projections of relevant historical data) for increases in claims costs for already reported claims, claims incurred but not reported, and expenses for investigating and adjusting all incurred and unpaid claims.
• The Company measures claim counts by incident when determining the cumulative number of reported claims.
• Claim counts include all reported claims, even if no liability is established for the claim (i.e., no reserve for loss and loss adjustment expenses).

[c. 245; p. 16] Short Tail/Monoline Specialty

• Short Tail/Monoline Specialty includes specialty/monoline business from Global Property, A&H, Surety, and Professional Lines underwriting divisions.

[c. 246; p. 16] Multi-line Solutions

• Multi-line Solutions includes mid to longer tail lines of business.
• Multi-line Solutions includes the Company’s industry solutions, programs, captives, and transactional E&S underwriting divisions.

[c. 247; p. 16]

Incurred losses and ALAE, net of reinsurance by accident year

Incurred Losses and ALAE, Net of Reinsurance ($ in thousands)						As of December 31, 2022
	Years Ended December 31,						Reported Claims
Accident Year	2018*	2019*	2020*	2021*	2022	IBNR	Reported Claims
2018	33,570	33,570	33,570	36,863	34,363	559	858
2019	—	62,922	48,101	45,301	48,800	230	1,015
2020	—	—	66,359	64,859	64,859	6,614	1,258
2021	—	—	—	100,172	100,172	25,018	1,428
2022	—	—	—	—	123,342	80,974	1,282
Total	—	—	—	—	371,536	—	—
Cumulative net paid loss and LAE from the table below	Cumulative net paid loss and LAE from the table below	Cumulative net paid loss and LAE from the table below	Cumulative net paid loss and LAE from the table below	Cumulative net paid loss and LAE from the table below	( 218,145 )	—	—
Net reserves for loss and LAE before 2018	Net reserves for loss and LAE before 2018	Net reserves for loss and LAE before 2018	Net reserves for loss and LAE before 2018	Net reserves for loss and LAE before 2018	5,512	—	—
Total net reserves for loss and LAE	Total net reserves for loss and LAE	Total net reserves for loss and LAE	Total net reserves for loss and LAE	Total net reserves for loss and LAE	158,903	—	—
*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.

Cumulative Paid Losses and ALAE, Net of Reinsurance ($ in thousands)
	Years Ended December 31,
Accident Year	2018*	2019*	2020*	2021*	2022
2018	24,754	31,907	31,323	33,522	33,446
2019	—	33,714	40,228	41,484	45,031
2020	—	—	30,974	56,499	70,684
2021	—	—	—	14,754	49,526
2022	—	—	—	—	19,458
Total	—	—	—	—	218,145
*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.

Incurred Losses and ALAE, Net of Reinsurance ($ in thousands)											As of December 31, 2022
Accident Year	Years Ended December 31,											Reported Claims
Accident Year	2013*	2014*	2015*	2016*	2017*	2018*	2019*	2020*	2021*	2022	IBNR	Reported Claims
2013	66,517	71,800	64,439	73,382	75,196	74,701	74,987	75,419	69,496	69,515	1,994	3,324
2014	—	100,355	100,355	115,749	116,970	116,970	117,783	118,995	120,697	120,777	946	4,977
2015	—	—	103,191	114,266	117,024	117,024	119,216	121,746	122,839	122,902	2,446	5,364
2016	—	—	—	63,223	62,843	62,843	62,643	69,701	73,200	73,318	1,523	4,691
2017	—	—	—	—	65,332	65,332	64,260	72,913	78,578	78,762	4,331	5,515
2018	—	—	—	—	—	74,476	74,476	73,868	73,868	74,209	10,202	5,041
2019	—	—	—	—	—	—	107,432	106,432	106,432	110,896	1,487	6,021
2020	—	—	—	—	—	—	—	140,880	140,880	134,124	27,390	5,393
2021	—	—	—	—	—	—	—	—	173,568	169,566	60,497	6,486
2022	—	—	—	—	—	—	—	—	—	223,447	105,571	7,330
Total	—	—	—	—	—	—	—	—	—	1,177,516	—	—
Cumulative net paid loss and LAE from the table below	Cumulative net paid loss and LAE from the table below	Cumulative net paid loss and LAE from the table below	Cumulative net paid loss and LAE from the table below	Cumulative net paid loss and LAE from the table below	Cumulative net paid loss and LAE from the table below	Cumulative net paid loss and LAE from the table below	Cumulative net paid loss and LAE from the table below	Cumulative net paid loss and LAE from the table below	Cumulative net paid loss and LAE from the table below	( 821,766 )	—	—
Net reserves for loss and LAE before 2013	Net reserves for loss and LAE before 2013	Net reserves for loss and LAE before 2013	Net reserves for loss and LAE before 2013	Net reserves for loss and LAE before 2013	Net reserves for loss and LAE before 2013	Net reserves for loss and LAE before 2013	Net reserves for loss and LAE before 2013	Net reserves for loss and LAE before 2013	Net reserves for loss and LAE before 2013	4,945	—	—
Total net reserves for loss and LAE	Total net reserves for loss and LAE	Total net reserves for loss and LAE	Total net reserves for loss and LAE	Total net reserves for loss and LAE	Total net reserves for loss and LAE	Total net reserves for loss and LAE	Total net reserves for loss and LAE	Total net reserves for loss and LAE	Total net reserves for loss and LAE	360,695	—	—
*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.

Cumulative Paid Losses and ALAE, Net of Reinsurance ($ in thousands)
	Years Ended December 31,
Accident Year	2013*	2014*	2015*	2016*	2017*	2018*	2019*	2020*	2021*	2022
2013	19,912	40,425	48,673	59,460	67,857	73,511	75,117	75,340	75,030	74,178
2014	—	32,530	63,699	81,251	96,639	101,984	104,984	105,756	106,214	104,076
2015	—	—	44,152	72,137	88,833	99,401	108,291	114,098	117,295	118,166
2016	—	—	—	23,239	42,528	53,352	58,895	60,864	63,893	71,565
2017	—	—	—	—	23,770	41,945	53,093	64,235	67,243	69,096
2018	—	—	—	—	—	26,201	42,568	50,320	64,119	70,080
2019	—	—	—	—	—	—	33,019	59,529	78,803	96,601
2020	—	—	—	—	—	—	—	33,538	67,216	83,533
2021	—	—	—	—	—	—	—	—	39,388	78,923
2022	—	—	—	—	—	—	—	—	—	55,548
Total	—	—	—	—	—	—	—	—	—	821,766
*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.

Exited Lines — all lines in runoff

[c. 248; p. 16] Claims development and duration

• The table below presents the reconciliation of the net incurred and paid claims development to loss reserves in the consolidated balance sheets at December 31, 2022 by sub-category.
• The following table presents supplementary information about average historical claims duration as of December 31, 2022, by sub-category.

[c. 249; p. 16]

Incurred losses and ALAE, net of reinsurance by accident year

Incurred Losses and ALAE, Net of Reinsurance ($ in thousands)											As of December 31, 2022
	Years Ended December 31,											Reported Claims
Accident Year	2013*	2014*	2015*	2016*	2017*	2018*	2019*	2020*	2021*	2022	IBNR	Reported Claims
2013	44,791	37,993	44,909	46,437	48,372	48,372	49,850	49,486	53,236	54,130	2,031	2,640
2014	—	64,186	57,904	62,425	63,729	63,729	68,855	69,920	71,219	71,761	11,475	4,149
2015	—	—	61,810	65,063	68,008	70,803	75,187	80,678	83,365	84,058	1,779	4,550
2016	—	—	—	93,526	92,743	91,119	93,324	103,602	104,612	105,852	5,975	4,858
2017	—	—	—	—	75,919	80,341	82,545	95,119	97,011	98,646	33,630	4,309
2018	—	—	—	—	—	73,492	68,125	78,902	90,348	96,685	335	4,864
2019	—	—	—	—	—	—	87,115	90,598	92,118	106,594	2,487	5,549
2020	—	—	—	—	—	—	—	83,900	86,700	86,700	5,196	4,719
2021	—	—	—	—	—	—	—	—	49,957	46,146	33,733	2,265
2022	—	—	—	—	—	—	—	—	—	31,487	9,336	185
Total	—	—	—	—	—	—	—	—	—	782,059	—	—
Cumulative net paid loss and LAE from the table below	Cumulative net paid loss and LAE from the table below	Cumulative net paid loss and LAE from the table below	Cumulative net paid loss and LAE from the table below	Cumulative net paid loss and LAE from the table below	Cumulative net paid loss and LAE from the table below	Cumulative net paid loss and LAE from the table below	Cumulative net paid loss and LAE from the table below	Cumulative net paid loss and LAE from the table below	Cumulative net paid loss and LAE from the table below	( 612,456 )	—	—
Net reserves for loss and LAE before 2013	Net reserves for loss and LAE before 2013	Net reserves for loss and LAE before 2013	Net reserves for loss and LAE before 2013	Net reserves for loss and LAE before 2013	Net reserves for loss and LAE before 2013	Net reserves for loss and LAE before 2013	Net reserves for loss and LAE before 2013	Net reserves for loss and LAE before 2013	Net reserves for loss and LAE before 2013	8,890	—	—
Total net reserves for loss and LAE	Total net reserves for loss and LAE	Total net reserves for loss and LAE	Total net reserves for loss and LAE	Total net reserves for loss and LAE	Total net reserves for loss and LAE	Total net reserves for loss and LAE	Total net reserves for loss and LAE	Total net reserves for loss and LAE	Total net reserves for loss and LAE	178,493	—	—
*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.

Cumulative Paid Losses and ALAE, Net of Reinsurance ($ in thousands)
	Years Ended December 31,
Accident Year	2013*	2014*	2015*	2016*	2017*	2018*	2019*	2020*	2021*	2022
2013	4,763	17,904	36,890	42,995	41,158	44,186	47,101	48,069	48,322	49,605
2014	—	9,700	30,863	42,141	50,785	49,906	52,450	53,290	53,615	55,737
2015	—	—	9,026	41,653	55,610	65,269	73,100	77,981	80,312	81,789
2016	—	—	—	36,592	57,638	70,253	78,070	81,516	85,794	87,966
2017	—	—	—	—	34,177	52,103	51,985	56,839	63,516	68,434
2018	—	—	—	—	—	25,552	60,149	67,262	80,448	90,791
2019	—	—	—	—	—	—	28,636	63,243	66,682	82,878
2020	—	—	—	—	—	—	—	24,468	54,950	63,468
2021	—	—	—	—	—	—	—	—	9,856	15,449
2022	—	—	—	—	—	—	—	—	—	16,339
Total	—	—	—	—	—	—	—	—	—	612,456
*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.	*Data presented for these calendar years is required supplementary information, which is unaudited.

($ in thousands)	2022
Net reserves for losses and LAE:
Short Tail/Monoline Specialty	158,903
Multi-line Solutions	360,695
Exited Lines	178,493
Reserves for losses and LAE, net of reinsurance	698,091
Reinsurance recoverable on unpaid claims:	—
Short Tail/Monoline Specialty	147,435
Multi-line Solutions	252,673
Exited Lines	35,878
Total reinsurance recoverable on unpaid claims	435,986
Unallocated LAE	7,680
Reserves for losses and LAE at end of year	1,141,757

Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance (Unaudited Required Supplementary Information)
	Years
Years	1	2	3	4	5	6	7	8	9	10
Short Tail/Monoline Specialty	56.0%	24.0%	10.1%	6.2%	2.9%	0.1%	—%	0.6%	0.1%	—%
Multi-line Solutions	40.7%	26.1%	14.9%	8.1%	5.1%	3.6%	1.2%	—%	0.2%	0.1%
Exited Lines	43.4%	26.7%	12.7%	8.6%	4.5%	1.7%	1.1%	0.9%	0.4%	—%

16. Premiums

[c. 250; p. 16] Direct and assumed premiums written by line of business

• Direct and assumed premiums written by line of business are reported pursuant to statutory accounting guidelines for the years ended December 31, 2022 and 2021.

[c. 251; p. 16]

Premiums by line of business

($ in thousands)	2022		2021
Property	279,384	24.4%	235,686	25.1%
Commercial Auto Liability	243,300	21.3%	227,853	24.2%
General Liability	140,557	12.3%	116,953	12.4%
Group Accident & Health	130,808	11.4%	112,146	11.9%
Professional Liability	90,418	7.9%	61,466	6.5%
Excess Liability	79,922	7.0%	52,176	5.6%
Surety	79,062	6.9%	51,792	5.6%
Workers’ Compensation	51,790	4.5%	41,890	4.5%
Commercial Auto Physical Damage	48,711	4.3%	39,897	4.2%
Total	1,143,952	100.0%	939,859	100.0%

17. Commission and Fee Income

[c. 252; p. 16] SUA business overview

• SUA acts as 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 placing insurance policies with third-party insurance or reinsurance companies.

[c. 253; p. 16] Disaggregated revenues and contract assets

• The Company's disaggregated revenues from contracts with customers are presented for the years ended December 31, 2022 and 2021.
• The Company's contract assets from commission and fee income are presented for the years ended December 31, 2022 and 2021.

[c. 254; p. 16]

17. Commission and Fee Income

($ in thousands)	2022	2021
SUA commission revenue	3,224	2,037
SUA fee income	1,597	1,185
Other	378	751
Total commission and fee income	5,199	3,973

($ in thousands)	2022	2021
Contract asset	1,292	1,209

18. Underwriting, Acquisition and Insurance Expenses

[c. 255; p. 16] underwriting, acquisition and insurance expenses

• The Company's underwriting, acquisition and insurance expenses for 2022 and 2021 are detailed in the following table.

[c. 256; p. 16]

18. Underwriting, Acquisition and Insurance Expenses

($ in thousands)	2022	2021
Amortization of policy acquisition costs	65,695	47,061
Other operating and general expenses	116,476	91,437
Total underwriting, acquisition and insurance expenses	182,171	138,498

19. Reinsurance

[c. 257; p. 16] Reinsurance agreements overview

• Premiums and benefits are assumed from and ceded to other insurance companies under various reinsurance agreements.
• 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 if reinsurers do not meet their obligations.

[c. 258; p. 16] Reinsurance effects on premiums and recoverables

• The effects of reinsurance on premiums written and earned are presented for December 31, 2022 and 2021.
• The components of reinsurance recoverables and ceded unearned premium are presented for December 31, 2022 and 2021.

[c. 259; p. 16] Reinsurer funded trust accounts

• The Company entered agreements with several reinsurers for funded trust accounts, with the Company as the sole beneficiary.
• These trust accounts provide additional security for the Company to collect claim recoverables under reinsurance contracts.
• The Company does not carry these trust accounts on the balance sheet as it only has custody upon the reinsurer's failure to pay amounts due.
• At December 31, 2022, the market value of these accounts was approximately USD 128.0m.
• The agreements stipulate that 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.

[c. 260; p. 16] LPT retroactive reinsurance agreement

• During Q1 2020, the Company entered into an LPT retroactive reinsurance agreement.
• Under the LPT, the Company received reinsurance protection of approximately USD 127.4m above the ceded losses and LAE reserves.
• The LPT is subject to co-participations at specified amounts.
• During 2022 and 2021, the Company strengthened reserves for certain divisions covered by the LPT by USD 14.4m and USD 28.0m, respectively.
• This strengthening resulted in an increase in the amount ceded under the agreement.
• The increase in the amount ceded during 2022 and 2021 was partially offset by USD 5.8m and USD 11.9m, respectively, of recognized gain.
• A table presents the impact of the LPT on the consolidated statements of operations for 2022 and 2021.

[c. 261; p. 16] Deposit method of accounting for reinsurance

• Certain ceded reinsurance contracts that transfer only significant timing risk and not sufficient underwriting risk are accounted for using the deposit method of accounting.
• The Company’s deposit asset was included in other assets on the consolidated balance sheets.
• A table presents the Company’s deposit assets for 2022 and 2021.

[c. 262; p. 16]

Net premiums and ceded losses and LAE incurred by written and earned

	2022		2021
($ in thousands)	Written	Earned	Written	Earned
Direct premiums	1,012,239	951,121	842,318	816,837
Assumed premiums	131,713	113,610	97,541	102,352
Ceded premiums	( 468,409 )	( 448,737 )	( 410,716 )	( 419,366 )
Net premiums	675,543	615,994	529,143	499,823
Ceded losses and LAE incurred	—	311,257	—	248,360

($ in thousands)	2022	2021
Unpaid losses and loss adjustment expenses ceded	435,986	381,338
Paid losses and loss adjustment expense ceded	107,228	90,761
Loss portfolio transfer	38,145	64,228
Reinsurance recoverables	581,359	536,327
Ceded unearned premium	157,645	137,973

($ in thousands)	2022	2021
Strengthening of reserves subject to the LPT	( 14,385 )	( 28,000 )
Reinsurance recoveries under the LPT	5,813	11,937
Pretax net impact of the LPT and strengthening of reserves subject to the LPT	( 8,572 )	( 16,063 )

($ in thousands)	2022	2021
Deposit asset	41,801	45,003

20. Stock Based Compensation

[c. 263; p. 16] Legacy Programs overview

• The Legacy Programs were active during the year ended December 31, 2021.
• These programs allowed key employees to purchase the Company’s common stock at a price based on the fair value of the Company at the end of the quarter in which the employee committed to the purchase.
• The Company matched all purchases with stock grants.
• Programs required an initial cash payment of at least 30% of the committed fair value of the purchase.
• Any remaining commitment was recorded as a note receivable to the Company, included in Stockholders’ Equity.
• Grants awarded vest after two conditions are met: (i) the employee has worked for the company for three years after the grant, and (ii) cash payments are made for stock purchases.
• All grants awarded under the Legacy Programs vest over a three-year service period and are expensed on a pro rata basis over the service period.
• Under the Legacy Programs, the Company sold 63,374 shares of its common stock during the year ended December 31, 2021.
• The Company granted a match of 63,374 shares of its common stock during the year ended December 31, 2021.
• During the year ended December 31, 2021, members of the Board of Directors were awarded 51,889 common shares with a service period of between 0 to 3 years.
• Under the Legacy Programs, employees could finance up to 70% of purchased shares with a stock note receivable.
• These stock notes receivable are recorded as a reduction to Stockholders’ Equity.
• Stock notes receivable bear interest at a rate ranging from 0.95% to 2.80%, based on the Internal Revenue Service applicable federal rates.

[c. 264; p. 16] Legacy Programs stock notes receivable

• During the year ended December 31, 2021, several employees notified the Company they would not be repaying the remaining balance on their stock notes receivable.
• Under the terms of the Legacy Programs, employees would return common shares financed by the remaining stock note balance and forfeit the same number of award shares.
• During the year ended December 31, 2021, 21,314 common shares financed and awarded were returned and forfeited.
• The return of 10,657 financed shares resulted in the cancellation of USD 0.8m in stock notes for the year ended December 31, 2021.
• Forfeitures of the 10,657 award shares resulted in the reversal of previously recognized stock compensation expense of USD 0.8m for the year ended December 31, 2021.

[c. 265; p. 16] Long Term Incentive Plan

• During the year ended December 31, 2022, the Compensation Committee approved 198,842 shares of common stock under the 2021 Plan.
• During the year ended December 31, 2021, the Compensation Committee approved 217,395 shares of common stock under the 2021 Plan.
• During the year ended December 31, 2022, members of the Board of Directors were awarded 15,196 common shares with a service period of one year.
• Shares granted to employees and the Board of Directors during the year ended December 31, 2022, were valued at approximately USD 2.6m based on the grant date fair value.
• Shares granted to employees and the Board of Directors during the year ended December 31, 2021, were valued at approximately USD 2.5m based on the grant date fair value.

[c. 266; p. 16] Equity awards summary and unrecognized compensation cost

• As of December 31, 2022, the total unrecognized compensation cost related to non-vested, share-based compensation awards was USD 2.8m.
• The weighted average period over which that cost is expected to be recognized is 1.6 years.

[c. 267; p. 16]

20. Stock Based Compensation

($ in thousands)	2022	2021
Common stock notes receivable	512	1,630

	Award Payout Range	Requisite Service Period	Authorized Target Common Shares
Year ended December 31, 2022
Market condition awards	0 % — 150 %	3 years	28,495
Performance condition awards	0 % — 150 %	3 years	26,210
Restricted share and stock unit awards	N/A	1 to 3 years	144,137
—	—	—	198,842
Year ended December 31, 2021	—	—	—
Market condition awards	0 % — 150 %	3 years	46,474
Performance condition awards	0 % — 150 %	3 years	29,501
Restricted stock unit awards	N/A	3 years	141,420
—	—	—	217,395

	Weighted-Average Grant-Date Fair Value	Number of Common Shares
Non-vested at January 1, 2022	13.23	375,643
Granted	14.17	198,842
Vested	15.16	( 144,042 )
Forfeited	12.51	( 10,547 )
Non-vested at December 31, 2022	12.55	419,896
Non-vested at January 1, 2021	19.47	84,671
Granted	11.95	332,658
Vested	14.20	( 6,514 )
Forfeited	16.01	( 35,172 )
Non-vested at December 31, 2021	13.23	375,643

($ in thousands)	2022	2021
Stock-based compensation expense
Stock-based compensation expense	2,325	1,365
Forfeitures	( 38 )	( 843 )
Total	2,287	522

21. Earnings Per Share

[c. 268; p. 16] EPS calculation methodology

• A table presents a reconciliation of the numerator and denominator for basic and diluted earnings per share computations for the years ended December 31, 2022 and 2021.
• The Company's Preferred Shares are participating securities, sharing in dividends and distributions with common stock on an as-converted basis.
• Anti-dilutive instruments are excluded from the calculation of diluted weighted-average common share equivalents.
• A table presents instruments excluded from the calculation of diluted weighted-average common share equivalents at both December 31, 2022 and 2021.

[c. 269; p. 16] Contingently issuable instruments

• The Company's common and preferred shares financed by stock notes are contingently issuable instruments, requiring the holder to return shares if stock notes are not paid off.
• A table presents common share equivalents of contingently issuable instruments excluded from basic earnings per share for the years ended December 31, 2022 and 2021.
• 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.

[c. 270; p. 16]

Net income and weighted-average common shares by earnings per share

($ in thousands, except for share and per share amounts)	2022	2021
Numerator
Net income	39,396	38,317
Less: Undistributed income allocated to participating securities	( 18,879 )	( 18,507 )
Net income attributable to common shareholders (numerator for basic earnings per share)	20,517	19,810
Add back: Undistributed income allocated to participating securities	18,879	18,507
Net income (numerator for diluted earnings per share under the two-class method)	39,396	38,317
Denominator	—	—
Basic weighted-average common shares	16,568,393	16,308,712
Preferred shares (if converted method)	15,245,533	15,235,568
Contingently issuable instruments (treasury stock method)	519,080	723,146
Market condition awards (contingently issuable)	94,936	67,598
Performance awards (contingently issuable)	39,148	—
Restricted stock units (treasury stock method)	186,104	133,024
Diluted weighted-average common share equivalents	32,653,194	32,468,048
Basic earnings per share	1.24	1.21
Diluted earnings per share	1.21	1.18

	2022	2021
Contingently issuable instruments (treasury stock method)	60,576	—

	2022	2021
Common shares	22,919	192,609
Preferred shares, if converted	1,059,602	1,235,420
Total	1,082,521	1,428,029

22. Employee Benefit Plans

[c. 271; p. 16] 401(k) plan overview

• The Company sponsors the 401(k) Plan (the "Plan"), available to substantially all its employees.
• The Plan is subject to provisions of the Employee Retirement Income Security Act of 1974.
• The Company matches employee contributions on a discretionary basis.
• The Company's expensed matching contributions for the years ended December 31, 2022 and 2021 are presented in a table.

[c. 272; p. 16]

22. Employee Benefit Plans

($ in thousands)	2022	2021
401(k) matching contributions	2,389	2,288

Westaim

[c. 273; p. 16] Westaim ownership and investments

• Westaim HIIG LP acquired a majority of the Company's common stock in 2014 and 2015.
• As of December 31, 2022, Westaim HIIG LP owned 44.5% of the Company's common stock.
• As of December 31, 2021, Westaim HIIG LP owned 71.0% of the Company's common stock.
• Changes in Westaim HIIG LP's ownership percentage were primarily due to transactions between Westaim HIIG LP and its partners.
• In 2015, the Company purchased 3,076,924 shares of Westaim common stock for USD 8.4m.
• The Company's investment in Westaim is included in equity securities on the consolidated balance sheets.
• On April 24, 2020, Westaim HIIG LP affiliates participated in the Company's preferred share rights offering.
• Westaim HIIG LP affiliates purchased USD 68.6m of Preferred Shares in exchange for USD 68.1m of cash and USD 0.5m of stock notes.
• Within this group, Westaim purchased USD 44.0m of Preferred Shares in exchange for USD 44.0m of cash.
• As of December 31, 2022 and 2021, Westaim owns 44.7% of the Company's preferred stock.

[c. 274; p. 16] Management Services Agreement

• Westaim performs consulting and other services for the Company under a Management Services Agreement.
• The Company is required to pay Westaim USD 0.5m annually plus expenses under the agreement.
• The agreement's termination date is the earliest of:
  • Westaim HIIG LP owning less than 8% of outstanding shares.
  • The Company's initial public offering being consummated.
  • A change in control occurring.
• The Company incurred expenses related to services provided by Westaim under the current Management Services Agreement as of December 31, 2022 and 2021.

[c. 275; p. 16]

Westaim

($ in thousands)	2022	2021
Unrealized losses on investment in Westaim	( 2,283 )	( 1,971 )

($ in thousands)	2022	2021
Management services agreement	500	500

RISCOM

[c. 276; p. 16] RISCOM agreements and premiums

• The Company entered an agency agreement with RISCOM in 2016 for wholesale brokerage services.
• The Company holds a 20% ownership interest in RISCOM.
• This agency agreement is in addition to an existing managing general agency agreement between the parties.
• Net earned premium and gross written commissions related to these agreements for December 31, 2022 and 2021 are summarized.
• Premiums receivable from RISCOM at December 31, 2022 and 2021 are summarized.

[c. 277; p. 16]

RISCOM

($ in thousands)	2022	2021
Net earned premium	91,051	76,701
Gross written commissions	23,472	21,256

($ in thousands)	2022	2021
Premiums receivable	9,940	11,334

Reinsurance

[c. 278; p. 16] Reinsurance agreements with Everest Re

• The Company has reinsurance agreements with Everest Re, an affiliate of Mt. Whitney Securities, LLC, a limited partner of Westaim HIIG LP and holder of Preferred Shares.
• Reinsurance premiums ceded related to the agreement at December 31, 2022 and 2021 are presented.
• Reinsurance recoverable from Everest Re, net of premium payables for the years ended December 31, 2022 and 2021 are presented.

[c. 279; p. 16]

Reinsurance

($ in thousands)	2022	2021
Reinsurance premiums ceded	59,592	101,154

($ in thousands)	2022	2021
Reinsurance recoverable, net of premium payables	177,455	168,847

Arena

[c. 280; p. 16] Arena investments

• During 2022, the Company began investing in multiple investment products issued by Arena Special Opportunities Partners (Feeder) II, LP ("Arena SOP II"), managed by Arena, an affiliate of Westaim.
• The investment products include senior and junior notes issued by Arena SOP II to raise capital from limited partners for investment purchases.
• Returns on investments are used to pay interest on senior and junior notes based on target returns for each class.
• Senior and junior notes are debt securities classified as held to maturity and presented within fixed maturity securities, held to maturity, on the balance sheet.
• As of December 31, 2022, the Company invested USD 3.4m in the senior and junior notes.
• During Q2 2021, the Company began investing in an asset-backed securities investment account managed by Arena.
• These asset-backed securities are classified within fixed maturity securities, available for sale, on the consolidated balance sheet.
• As of December 31, 2022, the Company had no unfunded commitment related to this asset-backed securities investment.

Other

[c. 281; p. 16] Related party transactions

• Advisory and professional services fees and expense reimbursements were paid to various affiliated shareholders and directors during 2022 and 2021.
• See Notes 7, 8, and 11 for investments involving affiliated companies and additional related party transactions.
• See Note 13 for related party transactions related to the Company’s preferred share rights offering.

[c. 282; p. 16]

Other

($ in thousands)	2022	2021
Professional fees and reimbursements	3,387	3,669

Litigation

[c. 283; p. 16] Litigation and contingencies

• The Company is a defendant in various legal actions related to claims under insurance policies and contracts.
• These actions are considered when estimating losses and loss adjustment expense reserves.
• The Company is also a defendant in legal actions concerning bad faith claims, disputes with third parties, or alleged errors and omissions.
• Accruals for these items are recorded when losses are probable and reasonably estimable.
• Management believes that the resolution of these matters, individually or in aggregate, will not have a material adverse effect on the Company’s Consolidated Balance Sheets, Consolidated Statements of Operations, or Consolidated Statements of Cash Flows, based on present information, insurance coverage, and legal advice.
• The Company recorded no provision for various contingencies during the years ended December 31, 2022 and 2021.

Indemnification

[c. 284; p. 16] Indemnification for asset and subsidiary sales

• The Company has provided indemnifications to certain buyers in conjunction with the sale of business assets and subsidiaries.
• These indemnifications cover typical representations and warranties related to performance responsibilities under sales contracts.
• The potential exposure from these indemnifications is difficult to determine due to the variety of matters, operations, and scenarios covered.
• Certain indemnifications have no time limit.
• As of December 31, 2022, the Company does not believe any significant claims exist related to these indemnifications.

Contingent Consideration Related to Acquisitions

[c. 285; p. 16] Earn-out liabilities

• The Company may owe earn-out liabilities to former owners of acquired assets and businesses.
• No earn-out liabilities existed as of December 31, 2022, or December 31, 2021.
• The table following this paragraph presents earn-out payments made to former owners during the years ended December 31, 2022, and 2021.

[c. 286; p. 16]

Contingent Consideration Related to Acquisitions

($ in thousands)	2022	2021
Earn-out payments to former owners	—	554

25. Regulatory Matters

[c. 287; p. 16] Insurance subsidiary regulatory restrictions and compliance

• A significant amount of the Company’s consolidated assets represent assets of its insurance company subsidiaries: HSIC, IIC, GMIC, and OSIC.
• IIC, OSIC, and GMIC are direct and indirect wholly-owned subsidiaries of HSIC.
• HSIC is restricted by Texas law regarding the amount of dividends it may pay without regulatory approval.
• The maximum dividend amount payable by HSIC without prior approval is subject to restrictions related to policyholder surplus, net income, and dividends declared or distributed in the preceding 12 months.
• As of December 31, 2022, HSIC is not restricted from paying ordinary dividends.
• HSIC did not declare or pay any dividends during the years ended December 31, 2022 and 2021.
• Property and casualty insurance companies are subject to Risk Based Capital ("RBC") requirements specified by the National Association of Insurance Commissioners ("NAIC").
• RBC requirements dictate that the amount of capital and surplus maintained by a property and casualty insurance company is determined by various risk factors.
• At December 31, 2022 and 2021, the Company’s insurance company subsidiaries met the RBC requirements.
• The capital and surplus and RBC level of HSIC on a consolidated statutory basis (including IIC, GMIC, OSIC, and BIC) for the years ended December 31, 2022 and 2021 are provided.

[c. 288; p. 16]

25. Regulatory Matters

($ in thousands)	2022	2021
Statutory capital and surplus	408,167	369,583
RBC authorized control level	110,635	84,968

26. Statutory Accounting Principles

[c. 289; p. 16] Statutory capital and surplus

• Statutory capital and surplus for the Company’s principal operating subsidiaries for the years ended December 31, 2022 and 2021 was as follows.
• These amounts include ownership interests in affiliated insurance subsidiaries.

[c. 290; p. 16] Statutory net income (loss)

• Statutory net income (loss) for the Company’s principal operating subsidiaries for the years ended December 31, 2022 and 2021 was as follows.

[c. 291; p. 16] BIC sale reference

• See note 4 for additional information regarding the sale of BIC.

[c. 292; p. 16]

26. Statutory Accounting Principles

($ in thousands)	2022	2021
HSIC	408,167	369,583
IIC	272,413	215,508
GMIC	259,311	209,347
OSIC	21,270	21,095

($ in thousands)	2022	2021
HSIC	10,860	5,880
IIC	25,394	7,315
GMIC	14,091	( 947 )
BIC	—	( 67 )
OSIC	173	31

27. Subsequent Events

[c. 293; p. 16] Reverse stock split

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

[c. 294; p. 16] 2022 Long-Term Incentive Plan

• The Board of Directors approved the Company’s 2022 Long-Term Incentive Plan (the “2022 Plan”) on September 23, 2022.
• The 2022 Plan became effective on January 12, 2023.
• The 2022 Plan made 3,200,516 shares of common stock available for issuance.

[c. 295; p. 16] Employee Stock Purchase Plan

• The Board of Directors approved the Company’s 2022 Employee Stock Purchase Plan (the “ESPP”) on September 23, 2022.
• The ESPP became effective on January 12, 2023.
• The ESPP made 376,531 shares of common stock available for sale.

[c. 296; p. 16] New Credit Facility

• On January 3, 2023, the Company entered into a term sheet with Truist Securities, Inc. (the “Term Sheet”) to refinance its existing credit agreement.
• The Term Sheet provides a new unsecured credit facility (the “New Credit Facility”), with Truist Securities, Inc. leading a syndicate of participating banks.
• The New Credit Facility is expected to provide the Company with up to a USD 150.0m revolving credit facility and a letter of credit sub-facility of up to USD 10.0m.
• The New Credit Facility is also expected to permit an uncommitted accordion facility up to USD 50.0m, subject to agreed conditions.
• The Company expects to close on the New Credit Facility in the first quarter of 2023.

[c. 297; p. 16] 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 common stock at a public price of USD 15.00 per share.
• Of the IPO shares, 4,750,000 shares were offered by the Company and 4,202,383 shares were sold by selling stockholders.
• 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 fully exercised their option to purchase 1,342,857 additional shares of common stock from the selling stockholders at USD 15.00 per share.
• The Company’s net proceeds from the IPO were approximately USD 62.3m, 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.
• The amended certificate increased the number of authorized shares to 500,000,000 shares of common stock (par value USD 0.01 per share) and 10,000,000 shares of preferred stock (par value USD 0.01 per share).
• The Preferred Shares were subject to mandatory conversion at the Mandatory Conversion Rate upon the closing of an IPO.
• On January 18, 2023, 1,969,660 Preferred Shares converted to 16,305,113 shares of common stock.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

[c. 298; p. 17] Disclosure controls and procedures evaluation

• Management, including the principal executive officer and principal financial officer, evaluated the effectiveness of disclosure controls and procedures as of the end of the period covered by the Annual Report on Form 10-K.
• Based on the evaluation, the principal executive officer and principal financial officer concluded that as of December 31, 2022, the disclosure controls and procedures were effective at the reasonable assurance level.
• Management acknowledges that controls and procedures provide only reasonable assurance of achieving objectives and that judgment is applied in evaluating the cost-benefit relationship of controls and procedures.

Management’s Report on Internal Control over Financial Reporting

[c. 299; p. 17] Internal control over financial reporting responsibilities and design

• Management is responsible for establishing and maintaining adequate internal control over financial reporting (ICFR) as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.
• ICFR is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with US GAAP.
• ICFR policies and procedures pertain to maintaining records that accurately reflect transactions and asset dispositions in reasonable detail.
• ICFR provides reasonable assurance that transactions are recorded for financial statement preparation in accordance with US GAAP, and that receipts and expenditures align with management and director authorizations.
• ICFR provides reasonable assurance for preventing or timely detecting unauthorized acquisition, use, or disposition of assets that could materially affect financial statements.

[c. 300; p. 17] Inherent limitations and management assessment of ICFR

• Due to inherent limitations, ICFR may not prevent or detect all misstatements.
• Projections of effectiveness to future periods are subject to risks that controls may become inadequate due to changing conditions or deteriorating compliance.
• Management assessed the effectiveness of ICFR as of December 31, 2022, using the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
• Management's assessment included evaluating the design and testing the operational effectiveness of ICFR.
• Management reviewed the assessment results with the audit committee of the board of directors.
• Based on the assessment using the Internal Control-Integrated Framework (2013), management concluded that the company’s ICFR was effective as of December 31, 2022.

[c. 301; p. 17] Attestation report exclusion

• The annual report on Form 10-K does not include an attestation report from the company’s registered public accounting firm regarding ICFR.
• This exclusion is because the company is an emerging growth company as of December 31, 2022, as defined in the JOBS Act.

Changes in Internal Control over Financial Reporting

[c. 302; p. 17] Internal control over financial reporting

• Management identified a material weakness in internal control over financial reporting 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.
• The material weaknesses identified for the year ended December 31, 2021, were remediated for the year ended December 31, 2022.
• Aside from the remediation of the material weakness from 2021, there were no other changes in internal control over financial reporting during the year ended December 31, 2022, that materially affected or are reasonably likely to materially affect internal control over financial reporting.

Directors, Executive Officers and Corporate Governance

[c. 303; p. 18] Information incorporation by reference

• Information required by Item 10 of Form 10-K will be included in the 2023 Proxy Statement and is incorporated by reference.

Executive Compensation

[c. 304; p. 19] Executive compensation disclosure

• The information required by Item 11 of Form 10-K will be included in the 2023 Proxy Statement and is incorporated by reference.

Security Ownership of Certain Beneficial Owner and Management and Related Stockholder Matters

[c. 305; p. 20] Proxy statement incorporation

• Information required by Item 12 of Form 10-K will be included in the 2023 Proxy Statement and is incorporated by reference.

Certain Relationships and Related Transactions, and Director Independence

[c. 306; p. 21] Proxy Statement incorporation

• Information required by Item 13 of Form 10-K will be included in the 2023 Proxy Statement and is incorporated by reference.

Principal Accounting Fees and Services

[c. 307; p. 22] Independent registered public accounting firm

• Our independent registered public accounting firm is Ernst & Young LLP, Houston, Texas.
• The Auditor Firm ID is 42.

[c. 308; p. 22] Proxy statement incorporation by reference

• The information required by Item 14 of Form 10-K will be included in our 2023 Proxy Statement and is incorporated herein by reference.

Exhibits, Financial Statement Schedules.

[c. 309; p. 23] Financial statements included in Form 10-K

• The consolidated financial statements of the Company are filed as part of Form 10-K and included in Item 8.
• Report of Independent Registered Public Accounting Firm.
• Consolidated Balance Sheets as of December 31, 2022 and 2021.
• Consolidated Statements of Operations and Comprehensive (Loss) Income for the two years in the period ended December 31, 2022 and 2021.
• Consolidated Statements of Stockholders’ Equity for the two years in the period ended December 31, 2022 and 2021.
• Consolidated Statements of Cash Flows for the two years in the period ended December 31, 2022 and 2021.

[c. 310; p. 23] Listing of exhibits

• (a)(2).
• (a)(3) Listing of Exhibits.
• Exhibits marked with an asterisk (*) are to be filed by amendment.
• Exhibits marked with an asterisk (*) include management contracts or compensatory plans or arrangements.
• Exhibits marked with a dagger (†) have portions omitted for confidentiality purposes.

[c. 311; p. 23]

Summary of investments by related parties

Schedule Number	Schedule Description	Page
I.	Summary of Investments — Other Than in Related Parties at December 31, 2022	105
II.	Condensed Financial Information of Registrant (Parent Company) for the years ended December 31, 2022 and 2021	106
IV.	Supplementary Reinsurance Information for the years ended December 31, 2022 and 2021	109
V.	Valuation and Qualifying Accounts for the years ended December 31, 2022 and 2021	110
VI.	Supplementary Information Concerning Property — Casualty Insurance Operations for the years ended December 31, 2022 and 2021	111

Exhibit Number	Exhibit Description
3.1	Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the Commission on January 18, 2023).
3.2	Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K filed with the Commission on January 18, 2023).
4.1	Amended and Restated Stockholders’ Agreement, dated March 12, 2014, by and among the Company and the stockholders listed therein (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1, filed with the SEC on November 14, 2022).
4.2	Description of Capital Stock
10.1+	Share Purchase and Award Agreement and form of agreements thereunder in use before 2016 (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1, filed with the SEC on November 14, 2022).
10.2+	2016 Equity Incentive Program and form of award agreements thereunder (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1, filed with the SEC on November 14, 2022).
10.3+	2020 Long Term Incentive Plan and form of award agreements thereunder (incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1, filed with the SEC on November 14, 2022).
10.4+	Skyward Specialty Insurance Group, Inc. 2022 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1, filed with the SEC on November 14, 2022).
10.5+	Skyward Specialty Insurance Group, Inc. 2022 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1, filed with the SEC on November 14, 2022).
10.6+	Form of Restricted Stock Units Agreement and form of notice under the Company's 2022 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.6 to the Company's Registration Statement on Form S-8, filed with the SEC on January 12, 2023).

Exhibit Number	Exhibit Description
10.7+	Form of Restricted Stock Agreement under the Company’s 2022 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.7 to the Company's Registration Statement on Form S-8, filed with the SEC on January 12, 2023).
10.8+	Form of Nonstatutory Stock Option Agreement and form of notice under the Company's 2022 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.8 to the Company's Registration Statement on Form S-8, filed with the SEC on January 12, 2023).
10.9+	Form of Incentive Stock Option Agreement and form of notice under the Company's 2022 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.9 to the Company's Registration Statement on Form S-8, filed with the SEC on January 12, 2023).
10.10+	Form of Performance-Based Restricted Stock Units Agreement under the Company’s 2022 Long-Term Incentive Plan.
10.11+	Performance-Based Restricted Stock Units Agreement under the Company’s 2022 Long-Term Incentive Plan.
10.12+	Performance Unit Agreement under the Company’s 2022 Long-Term Incentive Plan.
10.13+	Form of Indemnification Agreement (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1, filed with the SEC on November 14, 2022).
10.14+	Employment Agreement, dated May 22, 2020, by and between the Registrant and Andrew Robinson, with Amendment No. 1 dated January 1, 2022 (incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1, filed with the SEC on November 14, 2022).
10.15+	Form of Promissory Note (incorporated by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1, filed with the SEC on November 14, 2022).
10.16	Lease Agreement by and between Memorial City Towers, Ltd. and Southwest Insurance Partners, Inc., dated December 1, 2008, with Amendment No. 1, dated February 16, 2009, Lease Commencement Agreement, dated August 24, 2009, Supplemental Parking Agreement, dated September 24, 2009, Amendment No. 2, dated August 17, 2010, Supplemental Letter Agreement dated August 26, 2010, Supplemental Lease Commencement Agreement, dated November 8, 2010, Amendment No. 3, dated February 20, 2013, Supplemental Commencement Agreement, dated September 25, 2013, Amendment No. 4, dated April 21, 2015, Amendment No. 5, dated July 27, 2015, Supplemental Commencement Agreement, dated October 7, 2015, Supplemental Commencement Agreement, dated April 7, 2016, Amendment No. 6, dated May 9, 2016, Supplemental Commencement Agreement, dated February 24, 2017, Amendment No. 7, dated November 6, 2017, and Supplemental Commencement Agreement, dated October 3, 2018 (incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1, filed with the SEC on November 14, 2022).
10.17	Credit Agreement by and between Prosperity Bank and Houston International Insurance Group, Ltd., dated December 11, 2019 (incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1, filed with the SEC on November 14, 2022).
10.18	Management Services Agreement by and between Westaim HIIG GP Inc. and Houston International Insurance Group, Ltd., dated August 1, 2019 (incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-1, filed with the SEC on November 14, 2022).
10.19	Surety Excess of Loss Reinsurance Contract by and among Everest Reinsurance Company, Houston Specialty Insurance Company, Imperium Insurance Company, Great Midwest Insurance Company, Oklahoma Specialty Insurance Company and Boston Indemnity Company, Inc., dated June 1, 2021 (incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1, filed with the SEC on November 14, 2022).
10.20*	Consulting Agreement by and between Stephen Way and Skyward Specialty Insurance Group, Inc., dated January 1, 2022 (incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1, filed with the SEC on November 14, 2022).
10.21*	Loss Portfolio Transfer and Adverse Development Retrocession Agreement by and among R&Q Bermuda (SAC) Limited acting in respect of the HIIG Segregated Account, HIIG Re, Houston Specialty Insurance Company, Imperium Insurance Company, and Great Midwest Insurance Company, dated April 1, 2020 (incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1, filed with the SEC on November 14, 2022).

Exhibit Number	Exhibit Description
10.22*	Investment Management Agreement by and among Arena Investors, LP, Houston Specialty Insurance Company, Imperium Insurance Company, and Great Midwest Insurance Company, dated November 6, 2015, with a Supplemental Acknowledgement dated January 13, 2016, a Supplemental Acknowledgement dated May 17, 2021, Supplemental Acknowledgement B dated May 17, 2021, an Amendment Agreement effective March 15, 2022, and a Supplemental Acknowledgement dated March 23, 2022 (incorporated by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-1, filed with the SEC on November 14, 2022).
21.1	List of Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 to the Company's Registration Statement on Form S-1, filed with the SEC on November 14, 2022).
23.1	Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
31.1	Certification of P rincipal E xecutive O fficer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Sec uriti es Exchan ge Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Principal Financial and Accounting Officer pursuant to Rule 13a 14(a) or Rule 15d 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.
101.SCH	Inline XBRL Taxonomy Extension Schema Document
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document
104	Cover Page Interactive Date File (embedded within the Inline XBRL document)

Schedule I — summary of investments — other than in related parties

[c. 312; p. 23]

Schedule I — summary of investments — other than in related parties

($ in thousands)	Cost	Fair Value	Amount on Balance Sheet
December 31, 2022
Fixed maturity securities, available for sale:
U.S. government securities	50,416	48,541	48,541
Corporate securities and miscellaneous	255,116	235,129	235,129
Municipal securities	65,836	57,727	57,727
Residential mortgage-backed securities	134,844	119,856	119,856
Commercial mortgage-backed securities	40,129	36,495	36,495
Asset-backed securities	116,275	109,824	109,824
Total fixed maturity securities, available for sale	662,616	607,572	607,572
Fixed maturity securities, held to maturity:	—	—	—
Asset-backed securities	52,467	46,771	52,467
Total fixed maturity securities, held to maturity	52,467	46,771	52,467
Equity securities:	—	—	—
Common stocks	50,484	55,996	55,996
Preferred stocks	11,798	8,771	8,771
Mutual funds	53,968	55,402	55,402
Total equity securities	116,250	120,169	120,169
Mortgage loans	51,859	52,842	51,859
Short-term investments	121,158	121,158	121,158
Total investments	1,004,350	948,512	953,225

Balance sheets (parent company)

[c. 313; p. 23]

Assets, liabilities and stockholders’ equity by December 31

	December 31,
($ in thousands)	2022	2021
Assets
Investments:
Investment in subsidiaries	503,549	517,326
Short-term investments, at fair value	25	25
Total investments	503,574	517,351
Cash and cash equivalents	8,909	5,849
Restricted cash	—	156
Deferred income taxes	19,655	15,182
Goodwill and intangible assets, net	12,641	12,641
Other assets	6,992	4,218
Total assets	551,771	555,397
Liabilities and Stockholders’ Equity	—	—
Liabilities:	—	—
Accounts payable and accrued liabilities	1,500	788
Notes payable	50,000	50,000
Subordinated debt, net of debt issuance costs	78,609	78,529
Total liabilities	130,109	129,317
Stockholders’ Equity:	—	—
Stockholders’ equity	421,662	426,080
Total liabilities and stockholders’ equity	551,771	555,397

(parent company)

[c. 314; p. 23]

(parent company)

	December 31,
($ in thousands)	2022	2021
Revenues:
Net investment income	2,567	2,383
Net investment losses	( 6 )	—
Total revenues	2,561	2,383
Expenses	—	—
Interest expense	6,407	4,621
Amortization expense	81	81
Total expenses	6,488	4,702
Loss before income tax expense	( 3,927 )	( 2,319 )
Income tax benefit	( 1,209 )	( 487 )
Net loss before equity in earnings of subsidiaries	( 2,718 )	( 1,832 )
Equity in undistributed earnings of subsidiaries	42,114	40,149
Net income	39,396	38,317

Schedule ii — condensed statements of cash flows (parent company)

[c. 315; p. 23]

Net cash provided by operating activities by cash flows from operating activities

	December 31,
($ in thousands)	2022	2021
Cash flows from operating activities:
Net income	39,396	38,317
Adjustments to reconcile net income to net cash used in operating activities	( 42,672 )	( 40,447 )
Net cash provided by operating activities	( 3,276 )	( 2,130 )
Cash flows from investing activities:	—	—
Capital contribution to subsidiaries	—	( 10,000 )
Distributions from investment in subsidiaries	4,000	4,000
Net cash provided by (used in) investing activities	4,000	( 6,000 )
Cash flows from financing activities:	—	—
Employee share purchases	2,180	1,380
Net cash provided by financing activities	2,180	1,380
Net increase (decrease) in cash and cash equivalents and restricted cash	2,904	( 6,750 )
Cash and cash equivalents and restricted cash at beginning of year	6,005	12,755
Cash and cash equivalents and restricted cash at end of year	8,909	6,005
Supplemental disclosure of cash flow information:	—	—
Cash paid for interest	5,761	4,669

Schedule iv — reinsurance

[c. 316; p. 23]

Schedule iv — reinsurance

	December 31,
	2022		2021
($ in thousands)	Accident & Health	Property & Casualty	Accident & Health	Property & Casualty
Gross amount	130,377	881,862	111,759	730,559
Ceded to other companies	( 70,291 )	( 398,118 )	( 68,350 )	( 342,366 )
Assumed from other companies	431	131,282	387	97,154
Net amount	60,517	615,026	43,796	485,347
Percentage of amount assumed to net	0.7%	21.3%	0.9%	20.0%

Schedule V — valuation and qualifying accounts

[c. 317; p. 23]

Schedule V — valuation and qualifying accounts

($ in thousands)	Valuation Allowance For Deferred Tax Assets	Allowance for Uncollectible Reinsurance Recoverable	Allowance for Uncollectible Premiums Receivable
Balance at January 1, 2021	586	—	1,146
Charged to costs and expenses	—	—	18
Amounts written off	—	—	( 903 )
Balance at December 31, 2021	586	—	261
Charged to costs and expenses	—	—	584
Amounts written off	—	—	( 216 )
Balance at December 31, 2022	586	—	629

Insurance operations

[c. 318; p. 23]

Insurance operations

	December 31,
($ in thousands)	2022	2021
Deferred policy acquisition costs	68,938	59,456
Reserve for losses and loss adjustment expenses	1,141,757	979,549
Unearned premiums	442,509	363,288
Net earned premium (1)	615,994	499,823
Net investment income	36,931	24,646
Losses and loss adjustment expenses (current year) (1)	393,939	338,348
Losses and loss adjustment expenses (prior years) (1)(2)	14,385	28,000
Amortization of policy acquisition costs (1)	65,695	47,061
Paid claims and claim adjustment expenses (1)	300,764	249,739
Net premiums written (1)	675,543	529,143
Ceded unearned premium	157,645	137,973
Deferred ceding commission	29,849	30,500

(1) Amount is presented net of reinsurance.

(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.

SIGNATURES

[c. 319; p. 23] Report signing

• This report has been signed on behalf of the registrant by the undersigned, duly authorized, pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934.
• This report has been signed by the following persons on behalf of the Registrant, in the capacities and on the dates indicated, pursuant to the requirements of the Securities Exchange Act of 1934.

[c. 320; p. 23]

SIGNATURES

	Skyward Specialty Insurance Group, Inc.
Dated: March 28, 2023	/s/ Andrew Robinson
—	Andrew Robinson Chief Executive Officer

Signature	Title	Date
/s/ Andrew Robinson	Chief Executive Officer and Director (Principal Executive Officer)	March 28, 2023
Andrew Robinson	Chief Executive Officer and Director (Principal Executive Officer)	March 28, 2023
/s/ Mark Haushill	Chief Financial Officer (Principal Financial and Accounting Officer)	March 28, 2023
Mark Haushill	Chief Financial Officer (Principal Financial and Accounting Officer)	March 28, 2023
/s/ J. Cameron MacDonald	Director	March 28, 2023
J. Cameron MacDonald	Director	March 28, 2023
/s/ Robert Creager	Director	March 28, 2023
Robert Creager	Director	March 28, 2023
/s/ Marcia Dall	Director	March 28, 2023
Marcia Dall	Director	March 28, 2023
/s/ James Hays	Director	March 28, 2023
James Hays	Director	March 28, 2023
/s/ Robert Kittel	Director	March 28, 2023
Robert Kittel	Director	March 28, 2023
/s/ Katharine Terry	Director	March 28, 2023
Katharine Terry	Director	March 28, 2023