# Skyward Specialty Insurance Group, Inc. (SKWD) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Skyward Specialty Insurance Group, Inc.'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1519449/000151944925000011/skwd-20241231.htm
Accession: 0001519449-25-000011
Filing date: 2025-03-03
Report date: 2024-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/SKWD/
All MD&A years: /company/SKWD/mda/
Previous year: /company/SKWD/mda/fy2023/ (FY 2023)
Next year: /company/SKWD/mda/fy2025/ (FY 2025)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a growing specialty insurance company delivering commercial P&C products and solutions on a non-admitted (or E&S) and admitted basis, predominantly in the United States. We focus our business on markets that are underserved, dislocated and/or for which standard insurance coverages are insufficient or inadequate to meet the needs of businesses, including our customers and prospective customers operating in these markets. Our customers typically require highly specialized, customized underwriting solutions and claims capabilities. As such, we develop and deliver tailored insurance products and services to address each of the niche markets we serve.

Our portfolio of insured risks is highly diversified — we insure customers operating in a wide variety of industries; we distribute through multiple channels; we write multiple lines of business, including general liability, excess liability, professional liability (which includes cyber and media liability insurance), commercial auto, group accident and health, property, agriculture, credit, surety and workers’ compensation; we insure both short and medium duration liabilities; and our business mix is principally primary insurance and balanced between E&S and admitted markets. A small portion of our business is specialty reinsurance (principally agriculture and credit) which is similarly focused on attractive specialty classes where we believe it is more efficient to approach these classes through reinsurance given factors such as cost of entry, including the costs of geographic expansion. All of these factors enable us to respond to market opportunities and dislocations by deploying capital with attractive risk-adjusted returns. We believe this diversification, which includes businesses not typically aligned with traditional P&C pricing cycles, combined with our underwriting and claims expertise, will more consistently produce strong growth and profitability across all insurance pricing cycles.

We seek to lead in our chosen market niches and establish sustainable competitive positions in these markets. We refer to this strategy as “Rule Our Niche” and it forms the basis of our approach to building a strong defensible market position, creating a competitive moat, and winning our chosen markets. We believe that the principles underlying our strategy are key to achieving and sustaining best-in-class underwriting results through P&C insurance pricing cycles. We consistently

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strive for excellence in risk selection, pricing, and claims outcomes, and to amplify these critical functions with the use of advanced technology and analytics.

Results of Operations

The following table summarizes our results for the years ended December 31, 2024 and 2023:

[[GREPCENT_TABLE]]
[["","","","","Years Ended December 31,"],["($ in thousands)","","","","","","2024","","2023"],["Gross written premiums","","","","","","$","1,743,232","","","$","1,459,829"],["Ceded written premiums","","","","","","(619,654)","","","(549,138)"],["Net written premiums","","","","","","$","1,123,578","","","$","910,691"],["Net earned premiums","","","","","","$","1,056,722","","","$","829,143"],["Commission and fee income","","","","","","6,703","","","6,064"],["Losses and LAE","","","","","","669,809","","","515,237"],["Underwriting, acquisition and insurance expenses","","","","","","311,757","","","243,444"],["Underwriting income(1)","","","","","","$","81,859","","","$","76,526"],["Net investment income","","","","","","$","80,686","","","$","40,322"],["Net investment gains (losses)","","","","","","$","6,256","","","$","11,072"],["Income before income taxes","","","","","","$","152,739","","","$","110,102"],["Net income","","","","","","$","118,828","","","$","85,984"],["Adjusted operating income(1)","","","","","","$","126,650","","","$","80,847"],["Loss and LAE ratio","","","","","","63.4","%","","62.1","%"],["Expense ratio","","","","","","28.9","%","","28.6","%"],["Combined ratio","","","","","","92.3","%","","90.7","%"],["Adjusted loss and LAE ratio(1)","","","","","","62.3","%","","62.3","%"],["Expense ratio","","","","","","28.9","%","","28.6","%"],["Adjusted combined ratio(1)","","","","","","91.2","%","","90.9","%"],["Return on equity","","","","","","16.3","%","","15.9","%"],["Return on tangible equity(1)","","","","","","18.6","%","","19.0","%"],["Adjusted return on equity(1)","","","","","","17.4","%","","14.9","%"],["Adjusted return on tangible equity(1)","","","","","","19.8","%","","17.9","%"],["(1) See \u201cReconciliation of Non-GAAP Financial Measures\u201d in this Item 2"]]
[[/GREPCENT_TABLE]]

Reconciliation of Non-GAAP Financial Measures

Adjusted Operating Income

The following table provides a reconciliation of adjusted operating income to net income for the years ended December 31, 2024 and 2023:

[[GREPCENT_TABLE]]
[["","","2024","","","","","","2023"],["($ in thousands)","","Pre-tax","","After-tax","","","","","","Pre-tax","","After-tax"],["Income as reported","","$","152,739","","","$","118,828","","","","","","","$","110,102","","","$","85,984"],["Less (add):"],["Net investment gains (losses)","","6,256","","","4,942","","","","","","","11,072","","","8,747"],["Net impact of LPT","","(11,598)","","","(9,162)","","","","","","","1,427","","","1,127"],["Other (loss) income","","(167)","","","(132)","","","","","","","(632)","","","(499)"],["Other expenses","","(4,392)","","","(3,470)","","","","","","","(5,364)","","","(4,238)"],["Adjusted operating income","","$","162,640","","","$","126,650","","","","","","","$","103,599","","","$","80,847"]]
[[/GREPCENT_TABLE]]

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Underwriting Income

The following table provides a reconciliation of underwriting income to income before federal income tax expense for the years ended December 31, 2024 and 2023:

[[GREPCENT_TABLE]]
[["($ in thousands)","","","","","","2024","","2023"],["Income before income taxes","","","","","","$","152,739","","$","110,102"],["Add:"],["Interest expense","","","","","","9,496","","10,024"],["Amortization expense","","","","","","2,007","","1,798"],["Other expenses","","","","","","4,392","","5,364"],["Less (add):"],["Net investment income","","","","","","80,686","","40,322"],["Net investment gains","","","","","","6,256","","11,072"],["Other loss","","","","","","(167)","","(632)"],["Underwriting income","","","","","","$","81,859","","$","76,526"]]
[[/GREPCENT_TABLE]]

Adjusted Loss Ratio / Adjusted Combined Ratio

The following table provides a reconciliation of the adjusted loss and LAE ratio and adjusted combined ratio to the loss and LAE ratio and combined ratio for the years ended December 31, 2024 and 2023:

[[GREPCENT_TABLE]]
[["($ in thousands)","","","","","","2024","","2023"],["Net earned premiums","","","","","","$","1,056,722","","$","829,143"],["Losses and LAE","","","","","","669,809","","515,237"],["Pre-tax net impact of loss portfolio transfer","","","","","","(11,598)","","1,427"],["Adjusted losses and LAE","","","","","","$","658,211","","$","516,664"],["Loss ratio","","","","","","63.4","%","","62.1","%"],["Less: Net impact of LPT","","","","","","1.1","%","","(0.2)%"],["Adjusted loss ratio","","","","","","62.3","%","","62.3","%"],["Combined ratio","","","","","","92.3","%","","90.7","%"],["Less: Net impact of LPT","","","","","","1.1","%","","(0.2)%"],["Adjusted combined ratio","","","","","","91.2","%","","90.9","%"]]
[[/GREPCENT_TABLE]]

Tangible Stockholders’ Equity

The following table provides a reconciliation of tangible stockholders’ equity to stockholders’ equity for the years ended December 31, 2024 and 2023:

[[GREPCENT_TABLE]]
[["($ in thousands)","","2024","","2023"],["Stockholders\u2019 equity","","$","793,999","","$","661,031"],["Less: Goodwill and intangible assets","","87,348","","88,435"],["Tangible stockholders\u2019 equity","","$","706,651","","$","572,596"]]
[[/GREPCENT_TABLE]]

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Adjusted Return on Equity

The following table provides a reconciliation of adjusted return on equity to return on equity for the years ended December 31, 2024 and 2023:

[[GREPCENT_TABLE]]
[["($ in thousands)","","","","","","2024","","2023"],["Numerator: adjusted operating income","","","","","","$","126,650","","","$","80,847"],["Denominator: average stockholders\u2019 equity","","","","","","$","727,515","","","$","541,347"],["Adjusted return on equity","","","","","","17.4","%","","14.9","%"]]
[[/GREPCENT_TABLE]]

Return on Tangible Equity

Return on tangible equity for the years ended December 31, 2024 and 2023 reconciles to return on equity as follows:

[[GREPCENT_TABLE]]
[["($ in thousands)","","","","","","2024","","2023"],["Numerator: net income","","","","","","$","118,828","","","$","85,984"],["Denominator: average tangible stockholders\u2019 equity","","","","","","$","639,624","","","$","452,194"],["Return on tangible equity","","","","","","18.6","%","","19.0","%"]]
[[/GREPCENT_TABLE]]

Adjusted Return on Tangible Equity

Adjusted return on tangible equity for the years ended December 31, 2024 and 2023 reconciles to return on equity as follows:

[[GREPCENT_TABLE]]
[["($ in thousands)","","","","","","2024","","2023"],["Numerator: adjusted operating income","","","","","","$","126,650","","","$","80,847"],["Denominator: average tangible stockholders\u2019 equity","","","","","","$","639,624","","","$","452,194"],["Adjusted return on tangible equity","","","","","","19.8","%","","17.9","%"]]
[[/GREPCENT_TABLE]]

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Underwriting Results

Premiums

The following tables present gross written premiums by underwriting division for the years ended December 31, 2024 and 2023:

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["($ in thousands)","","2024","","2023","","Change","","% Change"],["Industry Solutions","","317,198","","","305,476","","","11,722","","","3.8","%"],["Global Property & Agriculture","","$","311,402","","","$","273,191","","","$","38,211","","","14.0","%"],["Captives","","241,902","","","167,624","","","74,278","","","44.3","%"],["Programs","","218,407","","","178,726","","","39,681","","","22.2","%"],["Accident & Health","","173,073","","","151,701","","","21,372","","","14.1","%"],["Transactional E&S","","169,053","","","122,508","","","46,545","","","38.0","%"],["Professional Lines","","159,785","","","154,565","","","5,220","","","3.4","%"],["Surety","","152,429","","","106,056","","","46,373","","","43.7","%"],["Total gross written premiums(1)","","$","1,743,249","","","$","1,459,847","","","$","283,402","","","19.4","%"],["(1) Excludes exited business"]]
[[/GREPCENT_TABLE]]

The year-over-year increase in gross written premiums, when compared to 2023, was driven by double-digit premium growth from our captives, surety, transactional E&S, programs and global property & agriculture underwriting divisions. We continued to broaden and diversify our product portfolio during 2024, growing in areas that are less exposed to the P&C cycles. The gross written premium increases were primarily driven by (i) new captive members and growth in existing captives, (ii) new product offerings, including participation in the Small Business Administration (“SBA”) Bond Guarantee Program, and regional expansion in surety, (iii) new business and rate in transactional E&S, (iv) the addition of four new programs, including Aviation. and (iv) new business in global agriculture. Slightly offsetting the gross written premium increases were (i) downward pricing pressure in the global property market, and (ii) our intentional actions to address profitability in commercial auto.

Net written premiums were $1,123.6 million compared to $910.7 million in 2023, an increase of $212.9 million or 23.4%. The increase in net written premiums was primarily driven by the same reasons that drove the increases in gross written premiums discussed above.

Net earned premiums for 2024 were $1,056.7 million compared to $829.1 million for 2023, an increase of $227.6 million, or 27.4%. The increase in net earned premiums was primarily driven by the same reasons that drove the increases in gross written premiums discussed above.

For additional information regarding our reinsurance programs, see the discussion included in “Item 1 Business - Reinsurance”.

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Losses and LAE

The following tables set forth the components of the loss and LAE ratios and adjusted loss and LAE ratios for the years ended December 31, 2024 and 2023:

[[GREPCENT_TABLE]]
[["","","Twelve months ended December 31,"],["","","2024","","2023"],["($ in thousands)","","Lossesand LAE","","% of Net EarnedPremiums","","Losses and LAE","","% ofNet EarnedPremiums"],["Losses and LAE:"],["Non-cat loss and LAE","","$","640,257","","","60.6","%","","$","504,664","","","60.9","%"],["Cat loss and LAE(1)","","17,954","","","1.7","%","","12,000","","","1.4","%"],["Prior accident year development - LPT","","11,598","","","1.1","%","","(1,427)","","","(0.2)%"],["Total losses and LAE","","$","669,809","","","63.4","%","","$","515,237","","","62.1","%"],["Adjusted losses and LAE(2):"],["Non-cat loss and LAE","","$","640,257","","","60.6","%","","$","504,664","","","60.9","%"],["Cat loss and LAE(1)","","17,954","","","1.7","%","","12,000","","","1.4","%"],["Total adjusted losses and LAE(2)","","$","658,211","","","62.3","%","","$","516,664","","","62.3","%"],["(1) Current accident year"],["(2) See \"Reconciliation of Non-GAAP Financial Measures\" included in this Item 2"]]
[[/GREPCENT_TABLE]]

The 2024 loss ratio increased 1.3 points, respectively, when compared to 2023, primarily due to the net impact of prior accident year development related to the LPT, which added 1.1 points to the loss ratio. The non-cat loss and LAE ratio for 2024 improved 0.3 points when compared to 2023, primarily driven by the shift in the mix of business. The 2024 cat loss and LAE ratio increased 0.3 points when compared to 2023, primarily due to catastrophe losses from Hurricanes Helene and Beryl in the third quarter of 2024 and Hurricane Milton in the fourth quarter of 2024.

Losses and LAE Development

The following table sets forth the presentation of the development of the ultimate liability by accident year for the years ended December 31, 2024 and 2023:

[[GREPCENT_TABLE]]
[["($ in thousands)","","Development"],["","","(Favorable) Adverse"],["Accident Year","","2024","","2023"],["Prior","","$","25,535","","","$","4,333"],["2020","","(606)","","","4,341"],["2021","","978","","","289"],["2022","","(1,479)","","","1,807"],["2023","","1,300","","","\u2014"],["Total","$","25,728","","","$","10,770"],["Reserve development on losses subject to LPT","$","25,300","","","$","\u2014"],["Reserve development on losses excluding losses subject to LPT","$","428","","","$","10,770"]]
[[/GREPCENT_TABLE]]

In 2024, the Company transitioned from evaluating reserves on a policy year basis to an accident year basis which results in earlier recognition of underlying claim trends, better alignment of exposure to risks, and adherence to commonly used industry best practices. In prior years, the Company’s methodology allocated IBNR from its policy year analysis to accident year. As a result of transitioning to accident year, IBNR within short-tail/monoline specialty lines, multi-line solutions, and exited lines was reallocated for the years ended December 31, 2023, 2022, 2021 and 2020, and certain amounts have been conformed to the current year presentation.

For the year ended December 31, 2024, the Company recognized adverse development related to prior years’ loss and loss expense reserves of $25.7 million; $10.1 million and $15.2 million in multi-line solutions and exited lines, respectively, were related to losses previously subject to the LPT from accident years 2018 and prior.

During the year ended December 31, 2023, the Company recognized adverse development related to prior years’ loss and loss expense reserves of $10.8 million. Adverse development of $11.7 million in multi-line solutions was driven by

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greater than expected severity in auto, general, and excess liability lines of business primarily from accident years 2020 to 2022. The adverse development was partially offset by favorable development in short-tail/monoline specialty lines. The favorable development was in the property line of business primarily from accident years 2021 and 2022.

Expense Ratio

The following tables set forth the components of the expense ratios for the years ended December 31, 2024 and 2023:

[[GREPCENT_TABLE]]
[["","","Twelve months ended December 31,"],["","","2024","","2023"],["($ in thousands)","","Expenses","","% of Net Earned Premiums","","Expenses","","% of Net Earned Premiums"],["Net policy acquisition expenses","","$","149,975","","","14.2","%","","$","108,514","","","13.0","%"],["Other operating and general expenses","","161,782","","","15.3","%","","134,930","","","16.3","%"],["Underwriting, acquisition and insurance expenses","","311,757","","","29.5","%","","243,444","","","29.3","%"],["Less: commission and fee income","","(6,703)","","","(0.6","%)","","(6,064)","","","(0.7","%)"],["Total net expenses","","$","305,054","","","28.9","%","","$","237,380","","","28.6","%"]]
[[/GREPCENT_TABLE]]

The expense ratio for 2024 increased 0.3 points when compared 2023, primarily driven by the business mix shift partially offset by earnings leverage.

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

Investment Results

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

The following table sets forth the components of net investment income and net investment gains (losses) for the years ended December 31, 2024 and 2023:

[[GREPCENT_TABLE]]
[["","","","","Twelve months ended December 31,"],["$ in thousands","","","","","","2024","","2023"],["Short-term investments & cash and cash equivalents","","","","","","$","17,643","","","$","11,677"],["Fixed income","","","","","","57,631","","36,547"],["Equities","","","","","","2,745","","2,212"],["Alternative and strategic investments","","","","","","2,667","","(10,114)"],["Net investment income","","","","","","$","80,686","","","$","40,322"],["Net unrealized gains on securities still held","","","","","","$","7,921","","$","11,130"],["Net realized losses","","","","","","(1,665)","","(58)"],["Net investment gains","","","","","","$","6,256","","","$","11,072"]]
[[/GREPCENT_TABLE]]

Net investment income for the year ended 2024 increased $40.4 million when compared to 2023.

The increase in income from our fixed income portfolio for 2024, when compared to 2023, was due to (i) a larger asset base as we continued to increase our allocation to this part of our investment portfolio and (ii) a higher book yield of 5.2% at December 31, 2024 compared to 4.5% at December 31, 2023. The increase in income from short-term investments & cash and cash equivalents for 2024 when compared to 2023 was due to higher investment yields and a larger asset base. The fair value of our alternative and strategic investments portfolio for 2024 increased when compared to 2023 due to an increase in the fair value of limited partnership investments.

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Investments

Composition of Investment Portfolio

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

[[GREPCENT_TABLE]]
[["","","2024","","2023"],["($ in thousands)","","Carrying Value","","% of Total","","Carrying Value","","% of Total"],["Cash and cash equivalents","","$","121,603","","","6.1","%","","$","65,891","","","3.9","%"],["Short-term investments","","274,929","","","13.8","%","","270,259","","","16.1","%"],["Fixed income","","1,318,708","","","66.2","%","","1,067,721","","","63.6","%"],["Equities","","106,254","","","5.3","%","","118,249","","","7.0","%"],["Alternative and strategic investments","","170,929","","","8.6","%","","157,458","","","9.4","%"],["Total portfolio","","$","1,992,423","","","100.0","%","","$","1,679,578","","","100.0","%"]]
[[/GREPCENT_TABLE]]

Fixed income

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

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

[[GREPCENT_TABLE]]
[["","","2024","","2023"],["($ in thousands)","","Carrying Value","","% of Total","","Carrying Value","","% of Total"],["U.S. government securities","","$","26,486","","","2.0","%","","$","44,166","","","4.1","%"],["Corporate securities and miscellaneous","","425,628","","","32.3","%","","383,420","","","35.9","%"],["Municipal securities","","84,716","","","6.4","%","","92,778","","","8.7","%"],["Residential mortgage-backed securities","","393,833","","","29.9","%","","281,626","","","26.4","%"],["Commercial mortgage-backed securities","","69,364","","","5.2","%","","29,934","","","2.8","%"],["Other asset-backed securities","","292,191","","","22.2","%","","185,727","","","17.4","%"],["Total fixed income portfolio, available-for-sale","","1,292,218","","","98.0","%","","1,017,651","","","95.3","%"],["Commercial mortgage loans","","$","26,490","","","2.0","%","","$","50,070","","","4.7","%"],["Total fixed income portfolio","","$","1,318,708","","","100.0","%","","$","1,067,721","","","100.0","%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","2024","","2023"],["($ in thousands)","","Fair Value","","% of Total","","Fair Value","","% of Total"],["AAA","","$","483,099","","","37.3","%","","$","493,252","","","48.6","%"],["AA","","141,177","","","10.9","%","","105,906","","","10.4","%"],["A","","429,703","","","33.3","%","","233,487","","","22.9","%"],["BBB","","216,602","","","16.8","%","","154,096","","","15.1","%"],["BB and Lower","","21,637","","","1.7","%","","30,910","","","3.0","%"],["Total fixed income portfolio, available-for-sale","","$","1,292,218","","","100.0","%","","$","1,017,651","","","100.0","%"]]
[[/GREPCENT_TABLE]]

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

The average duration of our fixed income portfolio was approximately 4.34 years and 4.24 years, respectively, as of December 31, 2024 and 2023.

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Equities

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

The following table sets forth the components of our equities portfolio by security type at December 31, 2024 and 2023:

[[GREPCENT_TABLE]]
[["","","2024","","2023"],["($ in thousands)","","FairValue","","% of TotalFair Value","","FairValue","","% of TotalFair Value"],["Domestic common equities","","$","70,665","","","66.5","%","","$","71,502","","","60.5","%"],["International common equities","","34,425","","","32.4","%","","39,389","","","33.3","%"],["Preferred stock","","1,164","","","1.1","%","","7,358","","","6.2","%"],["Equities","","$","106,254","","","100.0","%","","$","118,249","","","100.0","%"]]
[[/GREPCENT_TABLE]]

Alternative and strategic investments

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

Market Risk

Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial instrument as the result of changes in interest rates, equity prices, foreign currency exchange rates and commodity prices. The primary components of market risk affecting us are credit risk and interest rate risk. We do not have significant exposure to foreign currency exchange rate risk or commodity risk.

Credit risk

Credit risk is the potential loss resulting from adverse changes in an issuer’s ability to repay its debt obligations. We have exposure to credit risk as a holder of debt instruments in our core fixed income and opportunistic fixed income portfolios. Our risk management strategy and investment policy is to invest primarily in debt instruments of high credit quality issuers and to limit the amount of credit exposure with respect to particular ratings categories and any one issuer. At December 31, 2024, our core fixed income portfolio had an average rating of “AA-,” with approximately 81.5% of securities in that portfolio rated “A” or better by at least one nationally recognized rating organization. Our policy is to invest in investment grade fixed income securities which are high quality and liquid, providing a stable income stream, supplemented by opportunistic fixed income and equity securities, with the objective of further enhancing the portfolio’s diversification and risk-adjusted returns. At December 31, 2024, approximately 1.7% of our core fixed income portfolio was unrated or rated below investment-grade. Through our investment managers, we monitor the financial condition of all of the issuers of securities in our portfolio.

In addition, we are subject to credit risk with respect to our third-party reinsurers. Although our third-party reinsurers are obligated to reimburse us to the extent we cede risk to them, we are ultimately liable to our policyholders on all risks we have ceded. As a result, reinsurance contracts do not limit our ultimate obligations to pay claims covered under the insurance policies we issue, and we might not collect amounts recoverable from our reinsurers. We address this credit risk by seeking to purchase reinsurance from reinsurers that are rated at least “A-” (Excellent) or better by A.M. Best. We also perform, along with our reinsurance broker, periodic credit reviews of our reinsurers. At December 31, 2024, 99% of our reinsurance recoverables were either derived from reinsurers rated “A-” (Excellent) by A.M. Best, or better, or were collateralized through funds held, trusts and letters of credit by the reinsurer. If one of our reinsurers suffers a credit downgrade, we may consider various options to lessen the risk of asset impairment, including commutation, novation and letters of credit.

Interest rate risk

Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. The primary market risk to our investment portfolio is interest rate risk associated with investments in fixed income securities. Fluctuations in interest rates have a direct effect on the market valuation of these securities. When market interest rates rise, the fair value of our securities decreases. Conversely, as interest rates fall, the fair value of our securities increases. We

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manage this interest rate risk by investing in securities with varied maturity dates and by managing the duration of our investment portfolio in directional relation to the duration of our reserves. Expressed in years, duration is the weighted average payment period of cash flows, where the weighting is based on the present value of the cash flows. We set duration targets for our core fixed income investment portfolio after consideration of the estimated duration of our liabilities and other factors. Our fixed maturity securities had a weighted average effective duration of 4.34 years as of December 31, 2024.

We had fixed income securities that were subject to interest rate risk with a fair value of $1,292.2 million at December 31, 2024. Our opportunistic fixed income securities are excluded from our interest rate sensitivity analysis as they are primarily floating rate and treated as held to maturity securities.

The following table sets forth what changes might occur in the value of our core fixed income portfolio given hypothetical changes in interest rates as of December 31, 2024:

[[GREPCENT_TABLE]]
[["($ in thousands)","","EstimatedFair Value","","EstimatedChangein Fair Value","","Estimated % Increase (Decrease) in Fair Value"],["300 basis point increase","","$","1,118,982","","","$","(173,236)","","","(13.4)","%"],["200 basis point increase","","$","1,177,074","","","$","(115,144)","","","(8.9)","%"],["100 basis point increase","","$","1,234,820","","","$","(57,398)","","","(4.4)","%"],["No change","","$","1,292,218","","","$","\u2014","","","0.0","%"],["100 basis point decrease","","$","1,349,269","","","$","57,051","","","4.4","%"],["200 basis point decrease","","$","1,405,973","","","$","113,755","","","8.8","%"],["300 basis point decrease","","$","1,462,329","","","$","170,111","","","13.2","%"]]
[[/GREPCENT_TABLE]]

Changes in interest rates will have an immediate effect on comprehensive income and stockholders’ equity but will not ordinarily have an immediate effect on net income. Actual results may differ from the hypothetical change in market rates assumed in the table above. This sensitivity analysis does not reflect the results of any action that we may take to mitigate such hypothetical losses in fair value.

Equity price risk

Equity price risk represents the potential economic losses due to adverse changes in equity security prices. At December 31, 2024, approximately 6.7% of the fair value of our investment portfolio (excluding cash and cash equivalents and short-term investments) was invested in equity securities. We manage equity price risk through portfolio diversification and maintain a tail-risk management strategy that is designed to provide some protection for the equity portfolio if there is a significant decline in the S&P 500 within a 30 day period.

Other Items

Income Taxes

Income tax expense for the year ended December 31, 2024 was $33.9 million, compared to $24.1 million, for the year ended December 31, 2023. Our effective tax rate for the year ended December 31, 2024 was 22.2%, compared to 21.9%, for the year ended December 31, 2023.

See Note 13, “Income Taxes” to our consolidated financial statements included in Item 8 of this Form 10-K for a reconciliation between our actual federal income tax expense and the amount computed at the indicated statutory rate for the years ended December 31, 2024 and 2023.

Liquidity and Capital Resources

Sources and Uses of Funds

We are organized as a holding company with our operations primarily conducted by our wholly-owned insurance subsidiaries, GMIC, HSIC, and IIC, which are domiciled in Texas, and OSIC, which is domiciled in Oklahoma. Accordingly, the holding company may receive cash through (1) corporate service fees from our operating subsidiaries, (2) payments pursuant to our consolidated tax allocation agreement, (3) dividends from our subsidiaries, subject to certain limitations discussed below regarding dividends from our insurance subsidiaries, (4) loans from banks, (5) draws on a revolving loan agreement, and (6) issuance of equity and debt securities. We also may use the proceeds from these sources

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to contribute funds to insurance subsidiaries in order to support premium growth, pay dividends and taxes and for other business purposes.

Skyward Service Company receives corporate service fees from the operating subsidiaries to reimburse it for most of the operating expenses that it incurs. Reimbursement of expenses through corporate service fees is based on the actual costs that we expect to incur with no mark-up above our expected costs.

We file a consolidated U.S. federal income tax return with our subsidiaries, and under our corporate tax allocation agreement, each participant is charged or refunded taxes according to the amount that the participant would have paid or received had it filed on a separate return basis with the Internal Revenue Service (the “IRS”).

Applicable state insurance laws restrict the ability of the insurance subsidiaries to declare stockholder dividends without prior regulatory approval. Applicable state insurance regulators require insurance companies to maintain specified levels of statutory capital and surplus. Dividend payments are further limited to that part of available policyholder surplus which is 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 dividends of the maximum amounts calculated under any applicable formula would be permitted. State insurance regulatory authorities that have jurisdiction over the payment of dividends by our insurance subsidiaries may in the future adopt statutory provisions more restrictive than those currently in effect. Our insurance subsidiaries did not pay dividends to us for the years ended December 31, 2024 and 2023. See Note 23, “Statutory Accounting Principles and Regulatory Matters” to our consolidated financial statements included in Item 8 of this Form 10-K for additional information regarding our insurance companies.

At December 31, 2024, our holding company had $2.9 million in cash and investments compared to $3.0 million at December 31, 2023.

We believe that we have sufficient liquidity available to meet our operating cash needs and obligations and committed capital expenditures for the next 12 months.

Cash Flows

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

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

The following table sets forth our cash flows for the years ended December 31, 2024 and 2023:

[[GREPCENT_TABLE]]
[["($ in thousands)","","2024","","2023"],["Cash and cash equivalents provided by (used in):"],["Operating activities","","$","305,115","","","$","338,187"],["Investing activities","","(243,694)","","","(493,809)"],["Financing activities","","(4,232)","","","130,947"],["Change in cash and cash equivalents and restricted cash","","$","57,189","","","$","(24,675)"]]
[[/GREPCENT_TABLE]]

The decrease in cash provided by operating activities in 2024 when compared to 2023 was primarily due an increase in cash outflows from our net reinsurance recoverables and net premiums receivables. Cash from operations can vary from period to period due to the timing of premium receipts, claim payments and reinsurance activity. Cash flows from operations in each of the past two years were used primarily to fund investing activities.

Net cash used in investing activities in 2024 was primarily driven by purchases of fixed maturity securities, partially offset by sales and maturities of investment securities and sales of short-term investments. Net cash used in investing activities in 2023 was primarily driven by purchases of fixed maturity securities.

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

Credit Agreements

FHLB Loan

On August 30, 2024, we entered into a loan (the “FHLB Loan”) with the Federal Home Loan Bank of Dallas (the “FHLB”) pursuant to its Advances and Security Agreement. The FHLB Loan is a 4.5-year term loan in the principal amount of $57.0 million. The FHLB Loan provides for interest-only payments during its term, with principal due in full at maturity. The interest rate is fixed over the term of the loan at 4.00%. The FHLB Loan is fully secured by a pledge of specific investment securities of HSIC. We used the proceeds to fund the redemption of the March 15, 2024 draw on the Revolving Credit Facility and redeemed $7.0 million of the March 29, 2023 draw on the Revolving Credit Facility (see “Revolving Credit Facility” below for additional information regarding the redemption).

Revolving Credit Facility

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

On March 14, 2024, we drew $50.0 million on the Revolving Credit Facility and used the proceeds and existing cash to fund the redemption of the Debentures (see “Debentures” below for additional information regarding the redemption).

On August 30, 2024, we fully redeemed the March 15, 2024 draw on the Revolving Credit Facility and redeemed $7.0 million of the March 29, 2023 draw on the Revolving Credit Facility. As of December 31, 2024, we had $43.0 million outstanding under the Revolving Credit Facility with another $107.0 million of undrawn capacity.

Interest on the Revolving Credit Facility is payable quarterly. The interest rate on the Revolving Credit Facility is the SOFR plus a margin of between 150 and 190 basis points based on the ratio of debt to total capital and a credit spread adjustment of 10 basis points. At December 31, 2024, the six-month SOFR on the Revolving Credit Facility was 4.25%, plus a margin of 1.60%.

We are subject to covenants on the Revolving Credit Facility based on minimum net worth, maximum debt to capital ratio, minimum A.M. Best Rating and minimum liquidity. As of December 31, 2024, we are in compliance with all covenants.

Debentures

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

Subordinated Debt

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

At December 31, 2024 the ratio of total debt outstanding, including the FHLB Loan, the Revolving Credit Facility and the Notes, to total capitalization (defined as total debt plus stockholders’ equity) was 13.1% and at December 31, 2023, the ratio of total debt outstanding, including the Term Loan, the Revolver, the Trust Preferred and the Notes, to total capitalization was 16.3%.

Share Repurchase Program

In October 2024, the Board of Directors approved a share repurchase program authorizing the repurchase of up to $50.0 million of our common stock. The shares may be repurchased from time to time in open market purchases, privately-negotiated transactions, block purchases, accelerated share repurchase agreements or a combination of methods, including through Rule 10b5-1 trading plans. The timing, manner, price and amount of any repurchases under the share repurchase program will be determined by us in our discretion. The share repurchase program does not require us to repurchase any specific number of shares, and may be modified, suspended or terminated at any time. As of December 31, 2024, no shares have been repurchased under this plan.

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Contractual Obligations and Commitments

The following table sets forth our contractual obligations and commercial commitments by due date as of December 31, 2024:

[[GREPCENT_TABLE]]
[["","","Payments due by period"],["($ in thousands)","","Total","","Less ThanOne Year","","One Yearor More"],["Reserves for losses and LAE","","$","1,782,383","","","$","433,204","","","$","1,349,179"],["Long-term debt","","120,000","","","\u2014","","","120,000"],["Interest on debt obligations","","41,443","","","6,246","","","35,197"],["Operating lease obligations","","3,632","","","968","","","2,664"],["Total","","$","1,947,458","","","$","440,418","","","$","1,507,040"]]
[[/GREPCENT_TABLE]]

Reserves for losses and LAE represent our best estimate of the ultimate cost of settling reported and unreported claims and related expenses. Estimating reserves for losses and LAE is based on various complex and subjective judgments. Actual losses and settlement expenses paid may deviate, perhaps substantially, from the reserve estimates reflected in our financial statements. Similarly, the timing for payment of our estimated losses is not fixed and is not determinable on an individual or aggregate basis. The assumptions used in estimating the payments due by period are based on our own, industry and peer group claims payment experience. Due to the uncertainty inherent in the process of estimating the timing of such payments, there is a risk that the amounts paid in any period will be significantly different than the amounts disclosed above. Amounts disclosed above are gross of anticipated amounts recoverable from reinsurers. Reinsurance balances recoverable on reserves for losses and LAE are reported separately as assets, instead of being netted with the related liabilities, since reinsurance does not discharge us of our liability to policyholders. Reinsurance balances recoverable on reserves for paid and unpaid losses and LAE totaled $857.9 million and $596.3 million at December 31, 2024 and December 31, 2023, respectively.

Critical Accounting Policies

We identified the accounting estimates below as critical to the understanding of our financial position and results of operations. Critical accounting estimates are defined as those estimates that are both important to the portrayal of our financial condition and results of operations and require us to exercise significant judgment. We use significant judgment concerning future results and developments in applying these critical accounting estimates and in preparing our consolidated financial statements. These judgments and estimates affect our reported amounts of assets, liabilities, revenues and expenses and the disclosure of our material contingent assets and liabilities. Actual results may differ materially from the estimates and assumptions used in preparing the consolidated financial statements. We evaluate our estimates regularly using information that we believe to be relevant. For a detailed discussion of our accounting policies, see Note 1, “Summary of Significant Accounting Policies” to our consolidated financial statements included in Item 8 of this Form 10-K.

Reserves for unpaid losses and LAE

The reserves for unpaid losses and LAE is the largest and most complex estimate in our consolidated balance sheet. The reserves for unpaid losses and LAE represent our estimated ultimate cost of all unreported and reported but unpaid insured claims and the cost to adjust these losses that have occurred as of or before the balance sheet date. We do not discount our reserves for losses and LAE to reflect estimated present value. We estimate the reserves using individual case-basis valuations of reported claims and statistical analyses and various actuarial procedures. Those estimates are based on our historical information, industry and peer group information and our estimates of future trends in variable factors such as loss severity, loss frequency and other factors such as inflation. We regularly review our estimates and adjust them as necessary as experience develops or as new information becomes known to us. Additionally, during the loss settlement period, it often becomes necessary to refine and adjust the estimates of liability on a claim either upward or downward. Even after such adjustments, the ultimate liability may exceed or be less than the revised estimates. Accordingly, the ultimate settlement of losses and the related LAE may vary significantly from the estimate included in our financial statements.

We categorize our reserves for unpaid losses and LAE into two types: case reserves and IBNR.

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The following table sets forth our gross and net reserves for unpaid losses and LAE at December 31, 2024 and 2023:

[[GREPCENT_TABLE]]
[["","","2024","","2023"],["($ in thousands)","","Gross","","% of Total","","Net","","% of Total","","Gross","","% of Total","","Net","","% of Total"],["Case reserves","","$","567,192","","","31.8","%","","$","342,612","","","30.8","%","","$","561,474","","","42.7","%","","$","318,863","","","37.1","%"],["IBNR","","1,215,191","","","68.2","%","","768,925","","","69.2","%","","753,027","","","57.3","%","","540,154","","","62.9","%"],["Total","","$","1,782,383","","","100.0","%","","$","1,111,537","","","100.0","%","","$","1,314,501","","","100.0","%","","$","859,017","","","100.0","%"]]
[[/GREPCENT_TABLE]]

Case reserves are established for individual claims that have been reported to us. We are notified of losses by our insureds or their agents or our brokers. Based on the information provided, we establish case reserves by estimating the ultimate losses from the claim, including defense costs associated with the ultimate settlement of the claim. Our claims department personnel use their knowledge of the specific claim along with advice from internal and external experts, including underwriters and legal counsel, to estimate the expected ultimate losses. In limited circumstances, we utilize the services of TPAs to assist in the adjustment of claims. Our internal claims managers oversee TPA activities and monitor their individual claim handling activities to our prescribed standards. The incurred but not reported (“IBNR”) reserve is derived by estimating the ultimate unpaid reserve liability and subtracting case reserves.

Management’s best estimate of the ultimate unpaid liability is set by our Reserve Committee, who consider the actuarial indications along with other factors such as underwriting, claims handling, economic, legal and environmental changes.

Our Reserve Committee includes our Chief Actuary, Chief Financial Officer and Chief Claims Officer. The Reserve Committee meets quarterly to review the actuarial reserving recommendations made by the Chief Actuary and uses their judgment to determine the best estimate to be recorded for the reserve for losses and LAE on our balance sheet. In establishing the quarterly actuarial recommendation for the reserves for losses and LAE, our actuary estimates an initial expected ultimate loss ratio for each of our underwriting divisions. Input from our underwriting and claims departments, including premium pricing assumptions and historical experience, is considered in setting our reserves.

Our reserves are driven by several important factors, including litigation and regulatory trends, legislative activity, climate change, social and economic patterns and claims inflation assumptions. Our reserve estimates reflect current inflation in legal claims’ settlements and assume we will not be subject to losses from significant new legal liability theories. Our reserve estimates assume that there will not be significant changes in the regulatory and legislative environment. The impact of potential changes in the regulatory or legislative environment is difficult to quantify in the absence of specific, significant new regulation or legislation. In the event of significant new regulation or legislation, we will attempt to quantify its impact on our business, but no assurance can be given that our attempt to quantify such inputs will be accurate or successful.

The actuarial review considers multiple actuarial methods are used to estimate the reserve for losses and LAE. These methods utilize, to varying degrees, the initial expected loss ratio, detailed 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. The actuarial methods used to estimate losses and LAE reserves are:

•Reported and/or Paid Loss Development Methods

•Reported Bornhuetter-Ferguson Methods

•Paid Bornhuetter-Ferguson Method

When evaluating reserves related to less mature policy years, our actuaries rely on the Bornhuetter-Ferguson Method as the primary method for our ultimate loss indications. As we move to more mature policy years, we transition to the Reported and/or Paid Loss Development Methods. We primarily rely on reported methods where case reserving is consistently applied across policy years, however, when there is a change in reserving philosophy we will blend both reported and paid methods in our evaluation of ultimate loss indications.

Although we believe that our reserve estimates are reasonable, it is possible that our actual loss experience may not conform to our assumptions. Specifically, our actual ultimate loss ratio could differ from our initial expected loss ratio or our actual reporting and payment patterns could differ from our expected reporting and payment patterns, which are based on our own data and industry data. Accordingly, the ultimate settlement of losses and the related LAE may vary significantly from the estimates included in our financial statements. We regularly review our estimates and adjust them as necessary as experience develops or as new information becomes known to us. Such adjustments are included in the results of current operations.

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The amount by which estimated losses differ from those originally reported for a period is known as “development.” Development is unfavorable when the losses ultimately settle for more than the amount reserved or subsequent estimates indicate a basis for reserve increases on unresolved claims. Development is favorable when losses ultimately settle for less than the amount reserved or subsequent estimates indicate a basis for reducing loss reserves on unresolved claims. We reflect favorable or unfavorable development of loss reserves in the results of operations in the period the estimates are changed.

A 5% change in net IBNR would result in a $38.4 million change in our reserves for losses and LAE and a $30.4 million change in net income and stockholders’ equity.

Recent Accounting Pronouncements

In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures (Topic 280). ASU 2023-07 requires segment disclosures for (i) significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”), (ii) how the CODM uses the reported measure(s) of segment profitability in assessing segment performance and resource allocation and (iii) the title and position of the CODM. This update states that entities with a single reportable segment are required to provide full segment disclosures. The guidance became effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. This update is applied retrospectively to all prior periods presented. We have added additional segment disclosures as required by ASU 2023-07. There was no impact to the consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures (Topic 740). ASU 2023-09 requires public companies, on an annual basis, provide enhanced rate reconciliation disclosures, including disclosures of specific categories and additional information that meet a quantitative threshold. This update also requires public companies to, among other things, disaggregate income taxes paid by federal, state and foreign taxes. The guidance is effective for fiscal years beginning after December 15, 2024. We do not expect the amendments will have a material impact on our consolidated financial statements.

In November 2024, the FASB issued ASU 2024-03, which requires disaggregated disclosure of income statement expenses for public business entities (“PBEs”). The ASU does not change the expense captions an entity presents on the face of the income statement; rather, it requires disaggregation of certain expense captions into specified categories in disclosures within the footnotes to the financial statements. ASU 2024-03 require a footnote disclosure about specific expenses by requiring PBEs to disaggregate, in a tabular presentation, each relevant expense caption on the face of the income statement that includes any of the following natural expenses: (1) purchases of inventory, (2) employee compensation, (3) depreciation, (4) intangible asset amortization, and (5) depreciation, depletion, and amortization recognized as part of oil- and gas-producing activities or other types of depletion expenses. The tabular disclosure would also include certain other expenses, when applicable. In January 2025, the FASB issued ASU 2025-01 to clarify the effective date of ASU 2024-03 as the first annual reporting period beginning after December 15, 2026, and interim reporting periods within annual reporting periods beginning after December 15, 2027. We are evaluating the effect of the amendments on our consolidated financial statements.