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What changed in Skyward Specialty Insurance Group, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Skyward Specialty Insurance Group, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+294 added−341 removedSource: 10-K (2024-04-01) vs 10-K (2023-03-28)

Top changes in Skyward Specialty Insurance Group, Inc.'s 2023 10-K

294 paragraphs added · 341 removed · 234 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

82 edited+27 added−51 removed75 unchanged
Biggest changeBest rating, if applicable, as of December 31, 2022: ($ 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 $39.2 million on our net reinsurance recoverables.
Biggest changeBest rating, if applicable, as of December 31, 2023: ($ in thousands) Reinsurer Reinsurance Recoverables AM Best Rating Everest Reinsurance Co. $ 121,832 A+ eCaptive PC1-IC (and PC2-IC), Inc (1) 121,805 Unrated RGA Reinsurance Company 37,070 A+ Partner Reinsurance Co. of the US 23,381 A+ Swiss Reinsurance America Corp 22,334 A+ General Reinsurance Corp 21,548 A++ Randall & Quilter (R&Q Bermuda (SAC) Ltd) (2) 20,859 Unrated ACE (Chubb Property & Casualty Insurance Company) 16,003 A+ Aspen Insurance UK Limited 14,822 A Munich Reinsurance America Inc. 14,817 A+ Top 10 Total 414,471 All Others 181,863 Total $ 596,334 (1) This reinsurer facilitates our eMaxx captive; we hold collateral in a statutory trust of $150.8 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 $23.0 million on our net reinsurance recoverables.
References to “the Company,” “we,” “our,” “us” or like terms refer to the business of Skyward Specialty Insurance Group, Inc. and its subsidiaries. We are a growing specialty insurance company delivering commercial property casualty (P&C) products and solutions on a non-admitted (or E&S) and admitted basis, predominantly in the United States.
References to “the Company,” “we,” “our,” “us” or like terms refer to the business of Skyward Specialty Insurance Group, Inc. and its subsidiaries. We are a growing specialty insurance company delivering commercial property and casualty (P&C) products and solutions on a non-admitted (or E&S) and admitted basis, predominantly in the United States.
Superior Claims Staff and Operations . We have cultivated a best-in-class and highly specialized team of claims professionals who are highly knowledgeable about the niches we serve the lines of business we write.
Superior Claims Staff and Operations . We have cultivated a best-in-class and highly specialized team of claims professionals who are highly knowledgeable about the niches we serve and the lines of business we write.
Many carriers have chosen to reject businesses that they deem to be too complex, or that requires thoughtful individual underwriting; or, alternatively, have focused on simple small account risks for which more automated underwriting can be effective. Instead, we have chosen to build our underwriting divisions around deeply experienced underwriters who we empower with appropriate authority to make underwriting decisions.
Many carriers have chosen to reject businesses that they deem to be too complex, or that requires thoughtful individual underwriting; or, alternatively, have focused on simple account risks for which more automated underwriting can be effective. Instead, we have chosen to build our underwriting divisions around deeply experienced underwriters who we empower with appropriate authority to make underwriting decisions.
Kirby Hill, our President of Industry Solutions, Captives and Programs underwriting divisions, has more than 30 years of experience spanning multiple facets of the insurance business, John Burkhart, our President of Specialty Lines overseeing the Professional Lines, Surety, Transactional E&S and A&H underwriting divisions, has approximately 30 years of underwriting experience, and Doug Davies, our Senior Vice President of the Global Property Underwriting Division, has approximately 20 years of underwriting experience.
Kirby Hill, our President of Industry Solutions, Captives and Programs underwriting divisions, has more than 30 years of experience spanning multiple facets of the insurance business, John Burkhart, our President of Specialty Lines overseeing the Professional Lines, Surety, Transactional E&S and A&H underwriting divisions, has approximately 30 years of underwriting experience, and Doug Davies, our Senior Vice President of the Global Property and Agriculture Underwriting Division, has approximately 20 years of underwriting experience.
These outputs are measured against risk tolerances that are set out and updated annually by the ERM Committee and discussed with the Audit Committee of our Board. More specifically, our ECM provides a probabilistic modeled view of earnings and capital loss that brings together the potential loss from catastrophes, reserving, underwriting, market, credit risk, strategic and operational risks.
These outputs are measured against risk tolerances that are set out and updated annually by the ERM Committee and discussed with the Risk Committee of our Board. More specifically, our ECM provides a probabilistic modeled view of earnings and capital loss that brings together the potential loss from catastrophes, reserving, underwriting, market, credit risk, strategic and operational risks.
Within Claims, we diligently monitor our claims handling practices against guidelines through regular internal audits, conduct monthly large loss reviews, and maintain and monitor a watchlist of potential high severity claims. Within Actuarial, we perform quarterly reserve studies, and our Reserve Committee meets twice each quarter to review and respond to trends in loss emergence.
Within Claims, we diligently monitor our claims handling practices against guidelines through regular internal audits, conduct monthly large loss reviews, and maintain and monitor a watchlist of potential high severity claims. Within Actuarial, we perform quarterly reserve studies, and our Reserve Committee meets each quarter to review and respond to trends in loss emergence.
The top 10 risks are further identified and quantified by the Chief Risk Officer and the ERM Committee and reviewed every quarter. The Chief Risk Officer and the ERM Committee submit these reports to the Audit Committee on a regular basis.
The top 10 risks are further identified and quantified by the Chief Risk Officer and the ERM Committee and reviewed every quarter. The Chief Risk Officer and the ERM Committee submit these reports to the Risk Committee on a regular basis.
We aim to deliver long-term value for our shareholders by generating best-in-class underwriting profitability and book value per share growth across P&C market cycles. All of our insurance company subsidiaries are group rated and have financial strength ratings of “A-” (Excellent) from the A.M. Best Company (“A.M. Best”) with a stable outlook.
We aim to deliver long-term value for our shareholders by generating best-in-class underwriting profitability and book value per share growth across P&C market cycles. All of our insurance company subsidiaries are group rated and have financial strength ratings of “A-” (Excellent) from the A.M. Best Company (“A.M. Best”) with positive outlook.
These models provide a quantitative view of PML events, which is an estimate of the level of loss we would expect to experience once in a given number of years (referred to as the return period). Based upon our modeling, it would take an event beyond our 1 in 250-year PML to exhaust our $25.0 million property catastrophe coverage.
These models provide a quantitative view of PML events, which is an estimate of the level of loss we would expect to experience once in a given number of years (referred to as the return period). Based upon our modeling, it would take an event beyond our 1 in 250-year PML to exhaust our $28.0 million property catastrophe coverage.
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, commercial auto, group accident and health, property, surety and workers’ compensation; we insure both short and medium duration liabilities; and our business mix is balanced between E&S and admitted markets.
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 (including cyber insurance), commercial auto, group accident and health, property, agriculture, surety and workers’ compensation; we insure both short and medium duration liabilities; and our business mix is balanced between E&S and admitted markets.
This structure enables us to offer innovative and unique products and solutions to our distribution partners and customers, regardless of how challenging or complex a risk may be. Further, we augment our underwriters’ experience with data and predictive analytics that are intended to differentiate risk selection and pricing decision-making while enhancing efficiency.
This structure enables us to offer innovative and unique products and solutions to our distribution partners and customers, regardless of how challenging or complex a risk may be. Further, we augment our underwriters’ experience with data and predictive analytics that are intended to differentiate risk selection and pricing decision-making while enhancing efficiency. Highly skilled underwriters .
Additional 9 Table of Conte nt s actions we take to prevent disruptions to our systems and data include: actively monitoring Cybersecurity and Infrastructure Security Agency’s (CISA) cybersecurity directives, taking immediate action on any vulnerability identified in a directive; conducting monthly vulnerability scans on all network attached devices, at all locations, with patching applied whenever needed; requiring two-factor authentication for access to any of our systems; conducting monthly security training for all employees; implementing endpoint detection agents for threat detection and response; performing desktop scenarios to practice responses to breaches involving our cybersecurity insurance partners and retained security consultants; and performing annual penetration testing.
Additional actions we take to prevent disruptions to our systems and data include: actively monitoring Cybersecurity and Infrastructure Security Agency’s (CISA) cybersecurity directives, taking immediate action on any vulnerability identified in a directive; conducting monthly vulnerability scans on all network attached devices, at all locations, with patching applied whenever needed; requiring two-factor authentication for access to any of our systems; conducting monthly security training for all employees; implementing endpoint detection agents for threat detection and response; performing desktop scenarios to practice responses to breaches involving our cybersecurity insurance partners and retained security consultants; and performing annual penetration testing.
This comprehensive data repository forms the foundation of our reporting, analytics, and other data capabilities and is a key tool for our senior management team and business leaders. See the section entitled “Technology” below for more information on SkyBI. We are highly selective in the policies we choose to bind.
This comprehensive data repository forms the foundation of our reporting, analytics, and other data capabilities and is a key tool for our senior management team and business leaders. See the section entitled “Technology” below for more information on SkyBI. 5 Table of Contents We are highly selective in the policies we choose to bind.
While our underwriting decisions are backed by reliable historical data and in-depth evaluation of risks resulting from intentional investment in data collection and processing capabilities, we amplify our underwriting and claims prowess by combining this data with new forms of risk data and predictive analytics.
While our underwriting decisions are backed by reliable historical data and in-depth 3 Table of Contents evaluation of risks resulting from intentional investment in data collection and processing capabilities, we amplify our underwriting and claims prowess by combining this data with new forms of risk data and predictive analytics.
Professional Lines : Our Professional Lines underwriting division includes three underwriting units: Management Liability, Professional Liability, and Allied Health. Professional Liability and Allied Health provide E&S primary and excess claims-made liability products distributed exclusively through wholesale brokers, while our Management Liability unit provides both E&S and admitted products distributed through both wholesale and retail brokers.
Professional Lines : Our Professional Lines underwriting division includes three underwriting units: Management Liability, Professional Liability (which includes cyber insurance), and Allied Health. Professional Liability and Allied Health provide E&S primary and excess claims-made liability products distributed exclusively through wholesale brokers, while our Management Liability unit provides both E&S and admitted products distributed through both wholesale and retail brokers.
For the year ended December 31, 2022, property insurance represented 24% of our gross written premiums. We actively manage and continuously monitor our aggregation of property writings by geographic area to limit our potential for aggregation of loss resulting from severe events such as hurricanes, convective storms, and earthquakes.
For the year ended December 31, 2023, property insurance represented 27% of our gross written premiums. We actively manage and continuously monitor our aggregation of property writings by geographic area to limit our potential for aggregation of loss resulting from severe events such as hurricanes, convective storms, and earthquakes.
(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.
(2) Reinsurance is subject to a loss ratio cap or aggregate level of loss cover that exceeds a modeled 1:250-year PML event. (3) Catastrophe loss protection is purchased up to $28.0 million in excess of $12.0 million retention, which provides cover for a 1:250-year PML event.
Our Strategy in Action With everything we do, from recruiting to marketing to underwriting to loss adjusting and claims resolution, we seek to follow the core tenets of our “Rule Our Niche” strategy.
Our Strategy in Action With everything we do, from recruiting to marketing to underwriting to loss adjusting and claims resolution, we seek to follow the core tenets of our “Rule Our Niche” strategy, as described above.
Furthermore, our cross functional collaboration ensures that our underwriting, claims, actuarial and product management 6 Table of Conte nt s teams regularly review performance and trends so that portfolio, pricing and coverage changes can be implemented quickly. Use our balance sheet to capture a larger part of the market we serve.
Furthermore, our cross functional collaboration ensures that our underwriting, claims, actuarial and product management teams regularly review performance and trends so that portfolio, pricing and coverage changes can be implemented quickly. Use our balance sheet to capture a larger part of the market we serve.
Competition is based on many factors including pricing of coverage, the general reputation and 13 Table of Conte nt s perceived financial strength of the company, relationships with brokers, terms and conditions of products offered, ratings assigned by independent rating agencies, speed of claims payment and reputation, and the experience and reputation of the members of the underwriting and claims teams.
Competition is based on many factors including pricing of coverage, the general reputation and perceived financial strength of the company, relationships with brokers, terms and conditions of products offered, ratings assigned by independent rating agencies, speed of claims payment and reputation, and the experience and reputation of the members of the underwriting and claims teams.
We construct our operational processes and controls with a view to identify, assess and manage key risks on an ongoing basis. For example, our Underwriting Committee is responsible for overseeing standard letters of authority, underwriting audits, changes in risk appetite, and product line and division expansion.
We construct our operational processes and controls with a view to identify, assess and manage key risks on an ongoing basis. For example, our Underwriting Committee is responsible for overseeing changes in risk appetite, and product line and division expansion.
Fostering a culture that promotes nimbleness and responsiveness to market opportunities and dislocation. 3 Table of Conte nt s 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 in our chosen markets.
Fostering a culture that promotes nimbleness and responsiveness to market opportunities and dislocation. 2 Table of Contents 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 in our chosen markets.
Altogether, our Enterprise Risk Management is at the center of our decision making and our day-to-day activities. It is a central component to our strategy to achieve market leading risk adjusted returns for our shareholders. Reserves We maintain reserves for specific claims incurred and reported, IBNR reserves and reserves for uncollectible reinsurance when appropriate.
Altogether, our ERM is at the center of our decision making and our day-to-day activities. It is a central component to our strategy to achieve market leading risk adjusted returns for our shareholders. 9 Table of Contents Reserves We maintain reserves for specific claims incurred and reported, IBNR reserves and reserves for uncollectible reinsurance when appropriate.
Compensation and Benefits We offer and maintain a competitive benefits package designed to support the well-being of our employees, including, but not limited to, medical, dental and vision insurance, a 401(k) plan, paid time off, family leave and employee assistance programs.
Compensation and Benefits We offer and maintain a competitive benefits package designed to support the well-being of our employees, including, but not limited to, medical, dental and vision insurance, a 401(k) plan, paid time off, family leave, employee assistance programs as well as an employee stock purchase plan available to all employees.
This payment for subsequent event coverage is known as a “reinstatement.” In addition to our reinsurance programs for our continuing business, during 2020, we entered into a LPT retroactive reinsurance agreement with a third-party reinsurer domiciled in Bermuda for liabilities (including claim payments, allocated losses and LAE reserves and certain extra-contractual obligations) related to certain policies issued or assumed for policy years 2017 and prior so as to limit the volatility associated with the business written during those years.
In addition to our reinsurance programs for our continuing business, during 2020, we entered into a LPT retroactive reinsurance agreement with a third-party reinsurer domiciled in Bermuda for liabilities (including claim payments, allocated losses and LAE reserves and certain extra-contractual obligations) related to certain policies issued or assumed for policy years 2017 and prior so as to limit the volatility associated with the business written during those years.
For additional information about the LPT, see Item 7 of this Form 10-K, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Loss and LAE.” We also operate two non-insurance companies: Skyward Underwriters Agency, Inc., a licensed agent, managing general agent and reinsurance broker, and Skyward Service Company, which provides various administrative services to our subsidiaries.
For additional information about the LPT, see Item 7 of this Form 10-K, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Loss and LAE.” We also operate two non-insurance companies: Skyward Underwriters Agency, Inc., a licensed agent, managing general agent and reinsurance broker, and Skyward Service Company, which provides various administrative services to our subsidiaries. 11 Table of Contents Our organizational structure is set forth below.
Led by our CEO, Andrew Robinson, we have an experienced, innovative and entrepreneurial executive leadership team with a track record of success in senior management roles at industry leading property and casualty companies as well as in starting and building new businesses in our industry. Our entire senior leadership’s compensation is directly aligned with our shareholders.
High-quality, experienced leadership team that is aligned with our shareholders. Led by our CEO, Andrew Robinson, we have an experienced, innovative and entrepreneurial executive leadership team with a track record of success in senior management roles at industry leading property and casualty companies as well as in starting and building new businesses in our industry.
We formalize our own view of risk and solvency in terms of potential economic loss using our Economic 11 Table of Conte nt s Capital Model (“ECM”). We use the output of our ECM to measure potential earnings and capital loss for a range of scenarios.
We formalize our own view of risk and solvency in terms of potential economic loss using our Economic Capital Model (“ECM”). We use the output of our ECM to measure potential earnings and capital loss for a range of scenarios.
Our Underwriting Divisions Accident & Health : Our Accident & Health (“A&H”) underwriting division provides a medical stop loss solution targeting organizations with less than 2,500 employees. Our approach for managing medical costs, combined with our claims oversight, enables us to partner with select distribution partners.
Our Underwriting Divisions Accident & Health : Our Accident & Health (“A&H”) underwriting division provides a medical stop loss solution targeting organizations with less than 2,500 employees, as well as group and single-employer captive solutions. Our approach for managing medical costs, combined with our claims oversight, enables us to partner with select distribution partners.
This committee meets on a regular basis to review and consider investment activities, tactics, and new investment opportunities as they arise. The portfolio is directed internally and includes both self-managed investments and portfolios managed by select third-party investment management firms.
The Investment Committee of our Board of Directors reviews and approves our investment policy and strategy. This committee meets on a regular basis to review and consider investment activities, tactics, and new investment opportunities as they arise. The portfolio is directed internally and includes both self-managed investments and portfolios managed by select third-party investment management firms.
Each of our leaders have a material portion of their compensation in the form of long-term and short-term incentives tied to delivering sustainable, best-in-class underwriting returns. Select members of our executive leadership team have additional long term incentive targets tied directly to growth in book value per share.
Our entire senior leadership’s compensation is directly aligned with our shareholders. Each of our leaders have a material portion of their compensation in the form of long-term and short-term incentives tied to delivering sustainable, best-in-class underwriting returns. Our executive leadership team have additional long-term incentive targets tied directly to growth in book value per share.
Best’s ratings reflect its opinion of an insurance company’s financial strength, operating performance, and ability to meet its obligations to policyholders. 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 As of December 31, 2022, we had approximately 448 employees.
Best’s ratings reflect its opinion of an insurance company’s financial strength, operating performance, and ability to meet its obligations to policyholders. 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.
We have developed carefully crafted litigation guidelines for both our claims processionals and our outside counsel to ensure that counsel is providing the appropriate defense to our insureds.
We have developed carefully crafted litigation guidelines for both our claims professionals and our outside counsel to follow. Adherence to these guidelines ensures that counsel is providing the appropriate defense to our insureds.
Our opportunistic fixed income portfolio is managed by Arena Investors, LP (“Arena”), which is affiliated with The Westaim Corporation (“Westaim”) who, through Westaim HIIG LP (a limited partnership controlled by Westaim), is the Company’s largest shareholder.
Our opportunistic fixed income portfolio is managed by Arena Investors, LP (“Arena”), which is affiliated with The Westaim Corporation (“Westaim”), the Company’s largest shareholder.
We strive to cultivate an exceptional workforce to perpetuate our ownership culture and continue to achieve superior business results. Our goal is to attract, develop and retain the best talent from diverse backgrounds, while promoting a culture where different viewpoints are valued and individuals feel respected, are treated fairly and have an opportunity to excel in their chosen careers.
Our goal is to attract, develop and retain the best talent from diverse backgrounds, while promoting a culture where different viewpoints are valued and individuals feel respected, are treated fairly and have an opportunity to excel in their chosen careers.
Oklahoma Specialty Insurance Company (“OSIC”), a subsidiary of GMIC, is an approved surplus lines company in 47 states. 14 Table of Conte nt s The following table sets forth the geographic distribution of our gross written premiums for the year ended December 31, 2022: 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 % In addition to our primary insurance companies, we also own Skyward Re, a wholly-owned captive reinsurance company domiciled in the Cayman Islands that was incorporated on January 7, 2020.
The following table sets forth the geographic distribution of our gross written premiums for the year ended December 31, 2023: 2023 Texas 11.4 % California 9.0 New York 8.7 Louisiana 8.0 Florida 7.3 Pennsylvania 3.4 New Jersey 3.4 Georgia 3.3 Illinois 3.2 Massachusetts 2.4 All other states 39.9 Total 100.0 % In addition to our primary insurance companies, we also own Skyward Re, a wholly-owned captive reinsurance company domiciled in the Cayman Islands that was incorporated on January 7, 2020.
The following is a summary of our reinsurance programs as of December 31, 2022: 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.
The following is a summary of our reinsurance programs as of December 31, 2023: Line of Business Maximum Company Retention Accident & Health $0.88 million per occurrence Commercial Auto (1) $1.0 million per occurrence Cyber $2.69 million per occurrence Excess Casualty (1)(2) $1.24 million per occurrence General Liability (1) $1.25 million per occurrence Professional Lines (2) $2.7 million per occurrence Property (3) $2.8 million per occurrence Representation and Warranty $2.5 million per occurrence Surety (2) $3.0 million per occurrence Workers’ Compensation (2) $2.33 million per occurrence (1) Legal defense expenses can force exposure above the maximum company retention for Excess Casualty, Commercial Auto and General Liability.
In addition, our claims department works closely with our underwriting teams to keep them apprised of claims trends and provide feedback to our underwriters on emerging areas of loss experience. 8 Table of Conte nt s Our claims department is guided by the following principles: (1) prompt and comprehensive claim investigations, considering all aspects of each loss, and using advanced analytics and technology to improve efficiency, accuracy and speed of response; (2) providing our customers with quality claims handling service while engaging customers through the entire claims resolution process; (3) promptly establishing reserves reflective of our best estimate of ultimate loss; (4) effectively pursuing contribution and subrogation on every claim; (5) detecting and preventing fraud activity throughout the claims handling process using a variety of existing tools and new technological processes; and (6) disciplined litigation management to provide our customers with a superior legal defense while closely monitoring legal costs.
Claims Management Skyward’s claims department is guided by the following principles: (1) prompt and comprehensive claim investigations, considering all aspects of each loss, and using advanced analytics and technology to improve efficiency, accuracy and speed of response; (2) providing our customers with quality claims handling service while engaging customers through the entire claims resolution process; (3) promptly establishing reserves reflective of our best estimate of ultimate loss; (4) effectively pursuing contribution and subrogation where appropriate and warranted; (5) detecting and preventing fraud activity throughout the claims handling process using a variety of tools; and (6) disciplined litigation management to provide our customers with a superior legal defense while closely monitoring legal costs.
Houston Specialty Insurance Company (“HSIC”), our largest insurance subsidiary, underwrites 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.
Imperium Insurance Company (“IIC”), a subsidiary of HSIC, underwrites on an admitted basis in all 50 states and the District of Columbia.
Our underwriting teams, as well as the Company as a whole, have strong and well-established relationships with our distribution partners and equally strong reputations that provide a foundation to establish affiliations with new distribution partners.
Marketing and Distribution Our approach to marketing and distribution mirrors our approach to underwriting and is a key facet of our “Rule Our Niche” strategy. Our underwriting teams, as well as the Company as a whole, have strong and well-established relationships with our distribution partners and equally strong reputations that provide a foundation to establish affiliations with new distribution partners.
Our book and position with our customers and distribution partners has been curated over more than ten years, and we have become an important partner to the brokers that place this business and an equally important part of our insureds’ risk transfer program.
Our book and position with our customers and distribution partners has been curated over more than ten years, and we have become an important partner to the brokers that place this business and an equally important part of our insureds’ risk transfer program. Our Global Agriculture underwriting unit provides secondary and reinsurance solutions for crop, livestock and other renewable resources.
At each annual renewal, we consider several factors that influence any changes to our reinsurance purchases, including any plans to change the underlying insurance coverage we offer, updated loss activity, the level of our capital and surplus, changes in our risk appetite and the cost and availability of reinsurance treaties.
At each annual renewal, we consider several factors that influence any changes to our reinsurance purchases, including any plans to change the underlying insurance coverage we offer, updated loss activity, the level of our capital and surplus, changes in our risk appetite and the cost and availability of reinsurance treaties. 7 Table of Contents We purchase quota share reinsurance, excess of loss reinsurance, and facultative reinsurance coverage to limit our exposure from losses on any one occurrence.
SkyBI reflects the best practices our management team has learned from its extensive experience across the P&C insurance and technology sectors. We developed SkyBI, our single, comprehensive enterprise-wide data repository, as our foundation for reporting, business intelligence, analytics, and other advanced data capabilities. It provides our organization information and performance metrics across the Company in an easy-to-consume visualized format.
We developed SkyBI, our single, comprehensive enterprise-wide data repository, as our foundation for reporting, business intelligence, analytics, and other advanced data capabilities. It provides our organization information and performance metrics across the Company in an easy-to-consume visualized format.
We believe the diversity of our book allows us to respond to, and capitalize on, market opportunities and dislocations across P&C insurance market and pricing cycles resulting in a durable insurance franchise. Attractive and winning culture. As evidenced by our internal surveys and public information such as that available on Glassdoor and LinkedIn, we have built a distinctive winning culture.
We believe the diversity of our book allows us to respond to, and capitalize on, market opportunities and dislocations across P&C insurance market and pricing cycles resulting in a durable insurance franchise. Attractive and winning culture.
We will pursue additional trademark registrations and other intellectual property protection to the extent we believe it would be beneficial and cost effective. In addition, we monitor our trademarks and service marks and protect them from unauthorized use as necessary. Our Structure We conduct our operations principally through four insurance companies.
Intellectual Property We have applied for various trademark registrations in the United States at both federal and state levels. We will pursue additional trademark registrations and other intellectual property protection to the extent we believe it would be beneficial and cost effective. In addition, we monitor our trademarks and service marks and protect them from unauthorized use as necessary.
We also emphasize the training and development of our employees and provide opportunities to further their education and professional development. We know that we cannot win at our business unless we first win with our people. Intellectual Property We have applied for various trademark registrations in the United States at both federal and state levels.
We also emphasize the training and development of our employees and provide opportunities to further their education and professional development. We know that we cannot win at our business unless we first win with our people.
Additionally, we seek to expose no more than 3.0% of our stockholders’ equity to a catastrophic loss that is less than a 1 in 250-year event.
Additionally, we seek to expose no more than 3.0% of our stockholders’ equity to a catastrophic loss that is less than a 1 in 250-year event. We believe our current reinsurance program provides coverage well in excess of our theoretical losses from any recorded historical event.
We believe partnering with a program administrator in certain circumstances is the optimal way for us to participate profitably or extend our reach in certain markets. Typically, the program administrators possess a competitive advantage (owing to their scale in a particular market niche and/or proprietary technology) that we believe would be difficult for us to replicate on our own.
Typically, the program administrators possess a competitive advantage (owing to their scale in a particular market niche and/or proprietary technology) that we believe would be difficult for us to replicate on our own. For example, certain of our program administrator partners have developed proprietary technology to optimize risk selection and pricing in specific markets.
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 We seek to maintain a balanced investment portfolio predominantly composed of investments that generate predictable and stable returns, augmented by select strategic investments that generate attractive risk-adjusted returns.
For additional information regarding our loss reserves, see Item 7 of this Form 10-K, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - “Results of Operations - Losses and LAE” and “Critical Accounting Policies.” Investments We seek to maintain a balanced investment portfolio predominantly composed of investments that generate predictable and stable returns, augmented by select strategic investments that generate attractive risk-adjusted returns.
We seek to purchase reinsurance from reinsurers that are rated at least “A-” (“Excellent”) or better by A.M. Best. As of December 31, 2022, 99% of our reinsurance recoverables were either derived from reinsurers rated “A-” (Excellent) by A.M. Best, or better, or were collateralized for our reinsurance recoverable by the reinsurer.
As of December 31, 2023, 99% of our reinsurance recoverables were either derived from reinsurers rated “A-” (Excellent) by A.M. Best, or better, or were collateralized for our reinsurance recoverable by the reinsurer. While we only select reinsurers whom we believe to have acceptable credit and A.M.
We principally focus on small to medium sized enterprises with aggregate bond programs up to approximately $60.0 million. Our underwriting and claims professionals differentiate themselves through their technical capabilities and decision making speed. We write this business on an admitted basis and distribute through retail agents and brokers.
Our underwriting and claims professionals differentiate themselves through their technical capabilities and decision making speed. We write this business on an admitted basis and distribute through retail agents and brokers.
We actively manage and monitor our investment risk to balance the goals of stable growth and liquidity with our need to comply with the insurance regulatory and rating agency frameworks within which we operate.
We actively manage and monitor our investment risk to balance the goals of stable growth and liquidity with our need to comply with the insurance regulatory and rating agency frameworks within which we operate. Our portfolio is mainly comprised of cash and cash equivalents and investment-grade fixed-maturity securities, supplemented by additional investments that fit our risk appetite.
Our employees are not subject to any collective bargaining agreement, and we are not aware of any current efforts to implement such an agreement. We believe we have good working relations with our employees. We aim to be an employer of choice, and not just for insurance.
Employees and Human Capital As of December 31, 2023, we had approximately 515 employees. Our employees are not subject to any collective bargaining agreement, and we are not aware of any current efforts to implement such an agreement. We believe we have good working relations with our employees.
Within every underwriting division, our actions are intentional to “Rule Our Niche.” We aim to innovate constantly, and our actions are specific to each of the divisions/markets we serve. Examples include SkyDrive and SkyVantage. 3. Core Transactional Platforms.
Within every underwriting division, our actions are intentional to “Rule Our Niche.” We aim to innovate constantly, and our actions are specific to each of the divisions/markets we serve. 3. Core Transactional Platforms. Our core operating platforms, including our policy administration, billing and claims systems, are intentionally designed to enable nimble scaling and expansion of our business.
Our Programs underwriting division writes property, general liability, commercial auto liability, excess liability, and workers’ compensation lines of business on an E&S and an admitted basis. Surety : Our Surety underwriting division provides contract and commercial surety solutions to a range of trade and services organizations requiring bonding.
Our Captive underwriting division writes group A&H, property, general liability, commercial auto, excess liability, and workers’ compensation lines of business on an E&S and an admitted basis.
As such, we strive to create a culture committed to fostering a rich diversity of thought, background and perspective. Diversity, Equity and Inclusion We embrace diversity, equity and inclusion initiatives as a way to improve workplace culture and demonstrate the importance of valuing our employees as people, not just as workers.
Diversity, Equity and Inclusion We embrace diversity, equity and inclusion initiatives as a way to improve workplace culture and demonstrate the importance of valuing our employees as people, not just as workers. We strive to cultivate an exceptional workforce to perpetuate our ownership culture and continue to achieve superior business results.
We have been successful in building a diversified group of underwriting divisions spanning multiple product lines, industries, geographies and distribution channels. We aim to evolve with, and adapt to, the market growing certain lines of business when market conditions are favorable and limiting our exposure to certain markets when conditions are less favorable.
We aim to evolve with, and adapt to, the market growing certain lines of business when market conditions are favorable and limiting our exposure to certain markets when conditions are less favorable.
Captives : Our Captives underwriting division provides group captive solutions by drawing on our underwriting and claims expertise from other underwriting divisions to create group captives for companies seeking to self-insure.
Captives : Our Captives underwriting division provides group captive solutions by drawing on our underwriting and claims expertise from other underwriting divisions to create group captives for companies seeking to self-insure. By leveraging our underwriting, claims, technology, and analytical expertise across our Company, we are able to broaden our market reach and write additional profitable business with limited additional expense.
Today, in our opinion, the market is experiencing a variety of “micro cycles and micro dislocations” where different pockets of the P&C insurance market experience hardening and softening at different times.
Another such noticeable market trend is the emergence of 4 Table of Contents “micro cycles and micro dislocations” where different pockets of the P&C insurance market experience hardening and softening at different times.
Our Captive underwriting division writes property, general liability, commercial auto, excess liability, and workers’ compensation lines of business on an E& S and an admitted basis. We often administer this business through partnerships with third-party captive managers. Global Property : Our Global Property underwriting division provides property-only solutions to large multi-jurisdictional entities with complex property exposures.
We often administer this business through partnerships with third-party captive managers. 1 Table of Contents Global Property and Agriculture : Our Global Property underwriting unit provides property-only solutions to large multi-jurisdictional entities with complex property exposures. The business is written entirely on an E&S basis. We distribute this product through retail brokers and select wholesale brokers.
Our core platform organization is used for all business except for Accident & Health, Global Property and Surety as the unique features of these underwriting divisions require select dedicated core processing components. Data gathered from our core operating platforms from all divisions flows to our SkyBI platform with comparable data quality and granularity regardless of underwriting division.
We generally use, third-party vendor developed core operating applications that we have customized for our company. Our core platform organization is used for all business except for Accident & Health, Global Property and Surety as the unique features of these underwriting divisions require select dedicated core processing components.
Best, which rates insurance companies based on factors of concern to policyholders. A.M. Best currently assigns 16 ratings to insurance companies, which currently range from “A++” (Superior) to “F” (In Liquidation). The “A-” (Excellent) rating is the fourth highest rating. In evaluating a company’s financial and operating performance, A.M.
Each entity is wholly-owned by its immediate parent: Ratings Our insurance group, Skyward Specialty Insurance Group, Inc. currently has a rating of “A-” (Excellent) with positive outlook from A.M. Best, which rates insurance companies based on factors of concern to policyholders. A.M. Best currently assigns 16 ratings to insurance companies, which currently range from “A++” (Superior) to “F” (In Liquidation).
This environment is not only consistent with our identity as a specialty insurer but also a foundation for our success in attracting great talent and our objective of delivering best-in-class results. 5 Table of Conte nt s High-quality, experienced leadership team that is aligned with our shareholders.
We pride ourselves on maintaining an entrepreneurial environment that encourages and rewards a proactive approach to capitalize on market disruption. This environment is not only consistent with our identity as a specialty insurer but also a foundation for our success in attracting great talent and our objective of delivering best-in-class results.
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 Our insurance group, Skyward Specialty Insurance Group, Inc. currently has a rating of “A-”(Excellent) with a stable outlook from A.M.
Berkley Corporation; American Financial Group Inc.; Tokio Marine Holdings, Inc.; CNA Financial 10 Table of Contents Corporation; Hiscox, Ltd.; RLI Corp.; Intact Finance Corporation; Kinsale Capital Group, Inc.; and James River Group Holdings, Ltd.
Amplifying the expertise of our people with advanced technology and analytics that enable superior risk selection, pricing and claims management; 4. Empowering our underwriting and claims teams with considerable authority to make decisions and apply their expertise; and 5.
Empowering our underwriting and claims teams with considerable authority to make decisions and apply their expertise; and 5.
Success in our target market is determined by technical underwriting, thoughtful coverage provisions and pricing, and high-quality broker service. We access the market in this division exclusively through wholesale brokers. We formed our Transactional E&S division in September 2020 with the hiring of experienced underwriters with whom our leadership team worked at prior companies to build this business.
Success in our target market is determined by technical underwriting, thoughtful coverage provisions and pricing, and high-quality broker service. We access the market in this division exclusively through wholesale brokers. In addition to our continuing business, there are business units and lines of business that we previously exited and placed into run-off.
Key to our culture and operating approach is a flat structure of communication and decision-making. We trust our staff to make decisions that produce or exceed our desired financial results, and we support our staff with a clear system of measurement to gauge performance.
We trust our staff to make decisions that produce or exceed our desired financial results, and we support our staff with a clear system of measurement to gauge performance. We have chosen to adopt a hybrid work schedule which provides our employees with the flexibility for remote working.
This approach allows us to access the business we target effectively and efficiently based on the needs and dynamics of a particular market niche. Retail Agents and Brokers : We primarily distribute our Industry Solutions and Surety products and a portion of our Global Property products through retail agents and brokers.
This approach allows us to access the business we target effectively and efficiently based on the needs and dynamics of a particular market niche. Underwriting Our approach to underwriting is deeply embedded in our “Rule Our Niche” strategy and is core to how we win in the market.
Hence, failure of the reinsurer to honor its obligations could result in losses to us, and therefore, we establish allowances for amounts considered uncollectible. At December 31, 2022 and 2021, there was no allowance for uncollectible reinsurance. The following table sets forth our most significant reinsurers by amount of reinsurance recoverables, as well as the reinsurers A.M.
At December 31, 2023 and 2022, our allowance for uncollectible reinsurance was $2.3 million and $0.0 million, respectively. 8 Table of Contents The following table sets forth our most significant reinsurers by amount of reinsurance recoverables, as well as the reinsurers A.M.
For example, certain of our program administrator partners have developed proprietary technology to optimize risk selection and pricing in specific markets. We believe the combination of our underwriting and claims expertise with their scale and/or technology creates a more powerful partnership than either party could present to the market on its own.
We believe the combination of our underwriting and claims expertise with their scale and/or technology creates a more powerful partnership than either party could present to the market on its own. Our Programs underwriting division writes property, general liability, commercial auto liability, excess liability, and workers’ compensation lines of business on an E&S and an admitted basis.
We deploy technology across our organization to drive competitive advantages in three primary functional ways: 1. Superior Business Intelligence Platform. SkyBI, our business intelligence platform, focuses on providing our senior leadership, as well as our technical teams, with real-time intelligence to drive superior decision making.
SkyBI, our business intelligence platform, focuses on providing our senior leadership, as well as our technical teams, with real-time intelligence to drive superior decision making. SkyBI reflects the best practices our management team has learned from its extensive experience across the P&C insurance and technology sectors.
For additional information about the LPT, see Item 7 of this 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, which we determined do not transfer significant insurance risk, are accounted for using the deposit method of accounting.
For additional information about the LPT, see Item 7 of this Form 10-K, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Losses and LAE.” We seek to purchase reinsurance from reinsurers that are rated at least “A-” (“Excellent”) or better by A.M. Best.
The following key elements underpin our strategy and approach to our business: 1. Providing differentiated products, services and solutions that meet the unique needs of our target markets; 2. Attracting and retaining exceptional underwriting and claims talent and incentivizing our professionals in a manner that aligns with our organization and corporate goals; 3.
We refer to these lines and businesses as our “exited business.” Our Strategy We seek to lead in our chosen market niches and establish sustainable competitive positions in these markets. The following key elements underpin our strategy and approach to our business: 1. Providing differentiated products, services and solutions that meet the unique needs of our target markets; 2.
While we only select reinsurers whom we believe to have acceptable credit and A.M. Best ratings, if our reinsurers are unable to pay the claims for which they are responsible, we ultimately retain primary liability to our policyholders.
Best ratings, if our reinsurers are unable to pay the claims for which they are responsible, we ultimately retain primary liability to our policyholders. Hence, failure of the reinsurer to honor its obligations could result in losses to us, and therefore, we establish allowances for amounts considered uncollectible.
Since 2019, in addition to executing the LPT to limit our exposure to potential loss reserve development primarily associated with certain exited business, we have materially strengthened our claims case reserves practices with the aim to reserve to the expected ultimate loss within 90 days of first notice of loss.
We have strengthened our claims case reserves practices with the aim to reserve to the expected ultimate loss within 90 days of the first notice of loss. In addition, we increase the level of IBNR reserves held above our claims case reserves. We believe our conservative reserve philosophy positions us well for consistently strong underwriting profitability in the future.
Each of our eight distinct underwriting divisions has dedicated underwriting leadership supported by high-quality technical staff with deep experience in their respective niches. We believe this structure and expertise allow us to serve the needs of our customers effectively and be a value-add partner to our distributors, while earning attractive risk-adjusted returns.
We believe this structure and expertise allow us to serve the needs of our customers effectively and be a value-add partner to our distributors, while earning attractive risk-adjusted returns. For the year ended December 31, 2023, 43% of our gross written premiums were written on an admitted basis and 57% were non-admitted.
Moreover, when our insureds are sued or presented with a claim against them, we retain specialized independent legal counsel to defend and represent them. We vet both individual attorneys, and their law firms, to ensure they have the experience and expertise required to defend our insureds effectively and efficiently.
When the retention of counsel is warranted for a liability claim made against an insured, we retain independent legal counsel to defend and represent an insured. We select defense counsel based on their geographical location and expertise to ensure that they have the requisite experience and legal knowledge to defend our insureds effectively and efficiently.
By way of example, for commercial auto, we have implemented “quick strike” response to claims events that deploys an experienced investigator at the scene of an accident within two hours of the event, regardless of the location, to access, and if appropriate, to resolve quickly any third-party claims.
For example, for commercial auto, we have implemented a “quick strike” program to respond to claim reports. This program involves deploying experienced investigators and other appropriate vendors to the scene of a reported auto accident, ideally within two hours of the accident, regardless of the location.
Examples of our utilization of technology include our use of SkyDrive in our Specialty Trucking unit and deployment of SkyVantage in our A&H line. Diversified business that allows us to respond to, and capitalize on, changes in market conditions across P&C cycles.
Diversified business that allows us to respond to, and capitalize on, changes in market conditions across P&C cycles. We have been successful in building a diversified group of underwriting divisions spanning multiple product lines, industries, geographies and distribution channels.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeAdverse economic factors, including recession, inflation, periods of high unemployment or lower economic activity could result in the sale of fewer policies than expected or an increase in frequency or severity of claims and premium defaults or both, which, in turn, could affect our growth and profitability. • If claims were to become more frequent, even if we had no liability for those claims, the cost of evaluating such potential claims could escalate beyond the amount of the reserves we have established.
Biggest changeAdverse economic factors, including recession, inflation, periods of high unemployment or lower economic activity could result in the sale of fewer policies than expected or an increase in frequency or severity of claims and premium defaults or both, which, in turn, could affect our growth and profitability. • Increased cost due to “social inflation,” including continued increase of medical costs, more costly technology in vehicles, supply chain disruptions, more involvement of attorneys in claims matters, third-party financing of litigation, lawsuit abuse and other factors, all of which could increase the frequency and severity of claims and affect the adequacy of our loss reserves. • If claims were to become more frequent, even if we had no liability for those claims, the cost of evaluating such potential claims could escalate beyond the amount of the reserves we have established.
We will need to continue to dedicate internal resources, potentially engage outside consultants, adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting.
We will need to continue to dedicate internal resources, engage outside consultants, adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting.
The failure of any of the loss limitations or exclusions we employ, or changes in other claims or coverage issues, could have a material adverse effect on our financial condition or results of operations.” • Volatility in the financial markets, economic events and other external factors may result in an increase in the number of claims and/or severity of the claims reported.
The failure of any of the loss limitations or exclusions we employ, or changes in other claims or coverage issues, could have a material adverse effect on our financial condition or results of operations. • Volatility in the financial markets, economic events and other external factors may result in an increase in the number of claims and/or severity of the claims reported.
Our business is exposed to the risk of severe weather conditions, earthquakes and man-made catastrophes. Catastrophes can be caused by various events, including natural events such as severe winter weather, tornadoes, windstorms, earthquakes, hailstorms, severe thunderstorms and fires, or man-made events such as explosions, war, terrorist attacks and riots.
Our business is exposed to the risk of severe weather conditions, earthquakes and man-made catastrophes. Catastrophes can be caused by various events, including natural events such as severe winter weather, severe convective storms/tornadoes, windstorms, earthquakes, hailstorms, severe thunderstorms and fires, or man-made events such as explosions, war, terrorist attacks and riots.
Our anti-takeover provisions: • permit the Board of Directors to establish the number of directors and fill any vacancies and newly created directorships; • provide that our Board of Directors will be classified into three classes with staggered, three-year terms and that directors may only be removed for cause; • require super-majority voting to amend provisions in our certificate of incorporation and bylaws; • include blank-check preferred stock, the preference rights and other terms of which may be set by the Board of Directors and could delay or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise benefit our stockholders; • eliminate the ability of our stockholders to call special meetings of stockholders; • specify that special meetings of our stockholders can be called only by our Board of Directors, the chairman of our Board of Directors, or our chief executive officer; • prohibit stockholder consent action by other than unanimous written consent; • provide that vacancies on our Board of Directors may be filled only by a majority of directors then in office, even though less than a quorum; • prohibit cumulative voting in the election of directors; and • establish advance notice requirements for nominations for election to our Board of Directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.
Among other things, our charter documents: • permit the Board of Directors to establish the number of directors and fill any vacancies and newly created directorships; • provide that our Board of Directors will be classified into three classes with staggered, three-year terms and that directors may only be removed for cause; • require super-majority voting to amend provisions in our certificate of incorporation and bylaws; • include blank-check preferred stock, the preference rights and other terms of which may be set by the Board of Directors and could delay or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise benefit our stockholders; • eliminate the ability of our stockholders to call special meetings of stockholders; • specify that special meetings of our stockholders can be called only by our Board of Directors, the chairman of our Board of Directors, or our chief executive officer; • prohibit stockholder consent action by other than unanimous written consent; • provide that vacancies on our Board of Directors may be filled only by a majority of directors then in office, even though less than a quorum; • prohibit cumulative voting in the election of directors; and • establish advance notice requirements for nominations for election to our Board of Directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.
Should the recent rate increases cease or decline, including as a result of steps taken by the federal government to slow inflation, such as the passage of the Inflation Reduction Act of 2022, a low interest rate environment would continue to place pressure on our net investment income, particularly as it relates to these securities and short-term investments, which, in turn, may adversely affect our operating results.
Should the recent rate increases decline, including as a result of steps taken by the federal government to slow inflation, such as the passage of the Inflation Reduction Act of 2022, a low interest rate environment would place pressure on our net investment income, particularly as it relates to these securities and short-term investments, which, in turn, may adversely affect our operating results.
Among others, these risks relate to: • our financial condition and results of operations could be materially adversely affected if we do not accurately assess our underwriting risk; • competition for business in our industry is intense; • because our business depends on insurance retail agents and brokers, wholesalers and program administrators, we are exposed to certain risks arising out of our reliance on these distribution channels that could adversely affect our results; • we may be unable to purchase third-party reinsurance in amounts we desire on commercially acceptable terms or on terms that adequately protect us, and this inability may materially adversely affect our business, financial condition and results of operations; • our losses and loss expense reserves may be inadequate to cover our actual losses, which could have a material adverse effect on our financial condition, results of operations and cash flows; • a decline in our financial strength rating may adversely affect the amount of business we write; • unexpected changes in the interpretation of our coverage or provisions, including loss limitations and exclusions, in our policies could have a material adverse effect on our financial condition and results of operations; • our reinsurers may not reimburse us for claims on a timely basis, or at all, which may materially adversely affect our business, financial condition and results of operations; • our 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, periods of high unemployment or lower economic activity could result in the sale of fewer policies than expected or an increase in the frequency of claims and premium defaults, and even the falsification of claims, or a combination of these effects, which, in turn, could affect our growth and profitability; • the insurance business is historically cyclical in nature and we believe we are currently experiencing a relatively hard market cycle, which may affect our financial performance and cause our operating results to vary from quarter to quarter and may not be indicative of future performance; • we are subject to extensive regulation, which may adversely affect our ability to achieve our business objectives; failure to comply with these regulations could subject us to penalties, including fines and suspensions, which may adversely affect our financial condition and results of operations; • we could be adversely affected by the loss of one or more key personnel or by an inability to attract and retain qualified personnel; • if we fail to achieve and maintain effective internal controls, our operating results and financial condition could be impacted and the market price of our common stock may be negatively affected; and • our costs will increase significantly as a result of operating as a public company, and our management will be required to devote substantial time to complying with public company regulations. 16 Table of Conte nt s Risks Related to Our Business and Industry Our financial condition and results of operations could be materially adversely affected if we do not accurately assess our underwriting risk.
Among others, these risks relate to: • our financial condition and results of operations could be materially adversely affected if we do not accurately assess our underwriting risk; • competition for business in our industry is intense; • because our business depends on insurance retail agents and brokers, wholesalers and program administrators, we are exposed to certain risks arising out of our reliance on these distribution channels that could adversely affect our results; 13 Table of Contents • we may be unable to purchase third-party reinsurance in amounts we desire on commercially acceptable terms or on terms that adequately protect us, and this inability may materially adversely affect our business, financial condition and results of operations; • our losses and loss expense reserves may be inadequate to cover our actual losses, which could have a material adverse effect on our financial condition, results of operations and cash flows; • a decline in our financial strength rating may adversely affect the amount of business we write; • unexpected changes in the interpretation of our coverage or provisions, including loss limitations and exclusions, in our policies could have a material adverse effect on our financial condition and results of operations; • our reinsurers may not reimburse us for claims on a timely basis, or at all, which may materially adversely affect our business, financial condition and results of operations; • our 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, periods of high unemployment or lower economic activity could result in the sale of fewer policies than expected or an increase in the frequency of claims and premium defaults, and even the falsification of claims, or a combination of these effects, which, in turn, could affect our growth and profitability; • the insurance business is historically cyclical in nature, which may affect our financial performance and cause our operating results to vary from quarter to quarter and may not be indicative of future performance; • we are subject to extensive regulation, which may adversely affect our ability to achieve our business objectives; failure to comply with these regulations could subject us to penalties, including fines and suspensions, which may adversely affect our financial condition and results of operations; • we could be adversely affected by the loss of one or more key personnel or by an inability to attract and retain qualified personnel; • if we fail to achieve and maintain effective internal controls, our operating results and financial condition could be impacted and the market price of our common stock may be negatively affected; and • our costs will increase significantly as a result of operating as a public company, and our management will be required to devote substantial time to complying with public company regulations.
In addition, state insurance regulators have broad discretion to deny or revoke licenses for various reasons, including the violation of regulations. In some instances, where there is uncertainty as to applicability, we follow practices based on our interpretations of regulations or practices that we believe generally to be followed by the industry.
In addition, state insurance regulators have broad discretion to deny or revoke licenses for various reasons, including the violation of regulations. In some instances, where there is uncertainty as to applicability, we follow practices based on 21 Table of Contents our interpretations of regulations or practices that we believe generally to be followed by the industry.
The market price of our common stock could be subject to significant fluctuations after this offering in response to the factors described in this “Risk Factors” section and other factors, many of which are beyond our control.
The market price of our common stock could be subject to significant fluctuations in response to the factors described in this “Risk Factors” section and other factors, many of which are beyond our control.
We are a new public company and the market price of our common stock has been and is likely to continue to be highly volatile and may fluctuate substantially due to many factors, many of which are beyond our control. In addition, securities markets worldwide have experienced, and are likely to continue to experience, significant price and volume fluctuations.
As a public company the market price of our common stock has been and is likely to continue to be highly volatile and may fluctuate substantially due to many factors, many of which are beyond our control. In addition, securities markets worldwide have experienced, and are likely to continue to experience, significant price and volume fluctuations.
Despite our efforts, there is a risk that neither we nor our independent registered public accounting firm will be able to conclude within the prescribed timeframe that our internal control over financial reporting is effective as required by Section 404 of the Sarbanes-Oxley Act.
Despite our efforts, there is a risk that neither we nor our independent registered public accounting firm will be able to conclude within the prescribed timeframe that our internal control over financial reporting is effective as required by 25 Table of Contents Section 404 of the Sarbanes-Oxley Act.
In addition, while we generally monitor vendor risk, including the security and stability of our critical vendors, we may fail to properly assess and understand the risks and costs involved in the third-party relationships, and our financial condition and results of operations could be materially and adversely affected.
In addition, 24 Table of Contents while we generally monitor vendor risk, including the security and stability of our critical vendors, we may fail to properly assess and understand the risks and costs involved in the third-party relationships, and our financial condition and results of operations could be materially and adversely affected.
While these limitations and exclusions help us assess and mitigate our loss exposure, it is possible that a court or regulatory authority could nullify or void a limitation or exclusion or legislation could be enacted modifying or barring the use of such limitations or exclusions.
While these limitations and exclusions help us assess and mitigate our loss exposure, it is possible that a court or regulatory authority could nullify or void a limitation or exclusion or legislation could be enacted 17 Table of Contents modifying or barring the use of such limitations or exclusions.
In addition, our inability to obtain reinsurance coverage at reasonable rates and in amounts adequate to mitigate the risks associated with severe weather conditions and other catastrophes could have a material adverse effect on our business and results of operations.
In addition, our inability to obtain reinsurance coverage at reasonable rates and in amounts adequate to mitigate the risks associated 18 Table of Contents with severe weather conditions and other catastrophes could have a material adverse effect on our business and results of operations.
We will cease to be an emerging growth company upon the earliest of: (i) the last day of the fiscal year in which we have total annual gross revenues of $1.235 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of the IPO; 29 Table of Conte nt s (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; and (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.
We will cease to be an emerging growth company upon the earliest of: (i) the last day of the fiscal year in which we have total annual gross revenues of $1.235 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of the IPO; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; and (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.
As of the date of this filing, A.M. Best has assigned a financial strength rating of “A-” (Excellent) with a stable outlook to us. A.M.
As of the date of this filing, A.M. Best has assigned a financial strength rating of “A-” (Excellent) with positive outlook to us. A.M.
In addition to potentially requiring that growth be slowed in the affected markets, our business could suffer from decreased quality of claims work which, in turn, could adversely affect our operating margins. 20 Table of Conte nt s Severe weather conditions, including the effects of climate change, catastrophes, pandemic, as well as man-made event events may adversely affect our business, results of operations and financial condition.
In addition to potentially requiring that growth be slowed in the affected markets, our business could suffer from decreased quality of claims work which, in turn, could adversely affect our operating margins. Severe weather conditions, including the effects of climate change, catastrophes, pandemic, as well as man-made event events may adversely affect our business, results of operations and financial condition.
To the extent that cash flows generated by our 25 Table of Conte nt s operations are insufficient to fund future operating requirements and cover claim losses, or that our capital position is adversely impacted by a decline in the fair value of our investment portfolio, losses from catastrophe events or otherwise, we may need to raise additional funds through financings or curtail our growth.
To the extent that cash flows generated by our operations are insufficient to fund future operating requirements and cover claim losses, or that our capital position is adversely impacted by a decline in the fair value of our investment portfolio, losses from catastrophe events or otherwise, we may need to raise additional funds through financings or curtail our growth.
You should consider an investment in our common stock to be risky, and you should invest in our common stock only if you can withstand a significant loss and wide fluctuation in the market value of your investment.
You should consider an investment in our common stock to be risky, and you should invest in our common stock only if you can withstand a significant loss and wide 26 Table of Contents fluctuation in the market value of your investment.
A downgrade or withdrawal of our rating could result in any of the following consequences, among others: • Causing our current and future distribution partners and insureds to choose other, more highly-rated competitors; 19 Table of Conte nt s • Increasing the cost or reducing the availability of reinsurance to us; or • Severely limiting or preventing us from writing new and renewal insurance contracts.
A downgrade or withdrawal of our rating could result in any of the following consequences, among others: • causing our current and future distribution partners and insureds to choose other, more highly-rated competitors; • increasing the cost or reducing the availability of reinsurance to us; or • severely limiting or preventing us from writing new and renewal insurance contracts.
As a result, we may make fundamental changes to our operations without stockholder approval, which could result in our pursuing a strategy or implementing underwriting guidelines that may be materially different from the strategy or underwriting guidelines described in the section entitled “Business” or elsewhere in this filing.
As a result, we may make fundamental changes to our operations without 27 Table of Contents stockholder approval, which could result in our pursuing a strategy or implementing underwriting guidelines that may be materially different from the strategy or underwriting guidelines described in the section entitled “Business” or elsewhere in this filing.
Best reviews, including capital adequacy, operating performance, operating profile and Enterprise Risk Management, as well as other factors that could affect their analyses such as: • If we change our business practices from our organizational business plan in a manner that no longer supports A.M.
Best reviews, including capital adequacy, operating performance, operating profile and ERM, as well as other factors that could affect their analyses such as: • if we change our business practices from our organizational business plan in a manner that no longer supports A.M.
As we enter new lines of business, or as a result of new theories of claims, we may encounter an increase in claims frequency and greater claims handling costs than we had anticipated.
As we enter new lines of 16 Table of Contents business, or as a result of new theories of claims, we may encounter an increase in claims frequency and greater claims handling costs than we had anticipated.
Sales could result in significant realized losses depending on the conditions of the general market, interest rates and credit issues with individual securities. 23 Table of Conte nt s Risks Related to the Regulatory Environment We are subject to extensive regulation, which may adversely affect our ability to achieve our business objectives.
Sales could result in significant realized losses depending on the conditions of the general market, interest rates and credit issues with individual securities. Risks Related to the Regulatory Environment We are subject to extensive regulation, which may adversely affect our ability to achieve our business objectives.
In addition, integration of new third-party software may require significant work and 27 Table of Conte nt s require substantial investment of our time and resources. Our use of additional or alternative third-party software would require us to enter into license agreements with third parties, which may not be available on commercially reasonable terms or at all.
In addition, integration of new third-party software may require significant work and require substantial investment of our time and resources. Our use of additional or alternative third-party software would require us to enter into license agreements with third parties, which may not be available on commercially reasonable terms or at all.
Disclosure controls and procedures means our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within 28 Table of Conte nt s the time periods specified in the rules and forms of the SEC.
Disclosure controls and procedures means our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC.
The impact of changes in current accounting practices and future pronouncements cannot be 21 Table of Conte nt s predicted but may affect the calculation of net income, shareholder’s equity and other relevant financial statement line items. Our insurance subsidiaries are required to comply with statutory accounting principles, or SAP.
The impact of changes in current accounting practices and future pronouncements cannot be predicted but may affect the calculation of net income, shareholder’s equity and other relevant financial statement line items. Our insurance subsidiaries are required to comply with statutory accounting principles, or SAP.
Some of these systems may include or rely on third- 26 Table of Conte nt s party systems not located on our premises or under our control. Events such as natural catastrophes, terrorist attacks, industrial accidents, computer viruses and other cyber-attacks may cause our systems to fail or be inaccessible for extended periods of time.
Some of these systems may include or rely on third-party systems not located on our premises or under our control. Events such as natural catastrophes, terrorist attacks, industrial accidents, computer viruses and other cyber-attacks may cause our systems to fail or be inaccessible for extended periods of time.
In an economic downturn that is characterized by higher unemployment, declining spending, and reduced corporate revenue, the demand for insurance products is generally adversely affected, which directly affects our premium levels and profitability.
In an economic downturn that is characterized by higher unemployment, declining spending, and reduced corporate revenue, the demand for insurance products is generally adversely affected, which directly affects our premium levels and 19 Table of Contents profitability.
Accordingly, there is uncertainty as to whether a court would enforce such provision, and our stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder.
Accordingly, there is uncertainty as to whether a court would enforce such provision, and our stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and 28 Table of Contents regulations thereunder.
If we are unable to renew our expiring contracts, enter into new reinsurance arrangements on acceptable terms or expand our coverage, our loss exposure could increase, which would increase our potential losses related to loss events.
If we are unable to renew our expiring contracts, enter into new reinsurance arrangements on 15 Table of Contents acceptable terms or expand our coverage, our loss exposure could increase, which would increase our potential losses related to loss events.
As of December 31, 2022, we had gross federal income tax net operating losses, or NOLs, of approximately $71.3 million available to offset our future taxable income, if any, prior to consideration of annual limitations that may be imposed under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, or otherwise.
As of December 31, 2023, we had gross federal income tax net operating losses, or NOLs, of approximately $49.4 million available to offset our future taxable income, if any, prior to consideration of annual limitations that may be imposed under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, or otherwise.
Any disputes with reinsurers regarding coverage under reinsurance contracts could be time consuming, costly, and uncertain of success. These risks could cause us to incur increased net losses, and, therefore, adversely affect our financial condition. As of December 31, 2022, we had $581.4 million of aggregate reinsurance recoverables.
Any disputes with reinsurers regarding coverage under reinsurance contracts could be time consuming, costly, and uncertain of success. These risks could cause us to incur increased net losses, and, therefore, adversely affect our financial condition. As of December 31, 2023, we had $596.3 million of aggregate reinsurance recoverables.
If we cannot obtain adequate capital on favorable terms or at all, we may not have sufficient funds to implement our operating plans and our business, financial condition or results of operations could be materially adversely affected. Our debt obligations could impair our financial condition and limit our operating flexibility.
If we cannot obtain adequate capital on favorable terms or at all, we may not have sufficient funds to implement our operating plans and our business, financial condition or results of operations could be materially adversely affected.
Among the factors that could affect our stock price are: • market conditions in the broader stock market; • actual or anticipated fluctuations in our quarterly financial and operating results; • introduction of new products or services by us or our competitors; • issuance of new or changed securities analysts’ reports or recommendations; • results of operations that vary from expectations of securities analysts and investors; • short sales, hedging and other derivative transactions in our common stock; • guidance, if any, that we provide to the public, any changes in this guidance or our failure to meet this guidance; • strategic actions by us or our competitors; • announcement by us, our competitors or our acquisition targets; • sales, or anticipated sales, of large blocks of our stock, including by our directors, executive officers and principal stockholders; • additions or departures in our Board or Directors, senior management or other key personnel; • regulatory, legal or political developments; • public response to press releases or other public announcements by us or third parties, including our filings with the SEC; • litigation and governmental investigations; • changing economic conditions; • changes in accounting principles; • any indebtedness we may incur or securities we may issue in the future; • default under agreements governing our indebtedness; • exposure to capital and credit market risks that adversely affect our investment portfolio or our capital resources; • changes in our credit ratings; and • other events or factors, including those from natural disasters, war, actors of terrorism or responses to these events. 30 Table of Conte nt s The securities markets have from time to time experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of particular companies.
Among the factors that could affect our stock price are: • market conditions in the broader stock market; • actual or anticipated fluctuations in our quarterly financial and operating results; • introduction of new products or services by us or our competitors; • issuance of new or changed securities analysts’ reports or recommendations; • results of operations that vary from expectations of securities analysts and investors; • short sales, hedging and other derivative transactions in our common stock; • guidance, if any, that we provide to the public, any changes in this guidance or our failure to meet this guidance; • strategic actions by us or our competitors; • announcement by us, our competitors or our acquisition targets; • sales, or anticipated sales, of large blocks of our stock, including by our directors, executive officers and principal stockholders; • additions or departures in our Board or Directors, senior management or other key personnel; • regulatory, legal or political developments; • public response to press releases or other public announcements by us or third parties, including our filings with the SEC; • litigation and governmental investigations; • changing economic conditions, including social inflation; • changes in accounting principles; • any indebtedness we may incur or securities we may issue in the future; • default under agreements governing our indebtedness; • exposure to capital and credit market risks that adversely affect our investment portfolio or our capital resources; • changes in our credit ratings; and • other events or factors, including those from natural disasters, war, actors of terrorism or responses to these events.
SAP and various components of SAP are subject to constant review by the National Association of Insurance Commissioners (“NAIC”) and its task forces and committees, as well as state insurance departments, in an effort to address emerging issues and otherwise improve financial reporting.
SAP and various components of SAP are subject to constant review by the NAIC and its task forces and committees, as well as state insurance departments, in an effort to address emerging issues and otherwise improve financial reporting.
In addition, the federal securities laws, including the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and rules and regulations subsequently implemented by the SEC and Nasdaq have imposed various requirements on public companies, including requirements to file annual, quarterly and event-driven reports with respect to their business and financial condition, and to establish and maintain effective disclosure and financial controls and corporate governance practices.
In addition, the federal securities laws, including the Sarbanes-Oxley Act, the Dodd-Frank Act, and rules and regulations subsequently implemented by the SEC and Nasdaq have imposed various requirements on public companies, including requirements to file annual, quarterly and event-driven reports with respect to our business and financial condition, and to establish and maintain effective disclosure and financial controls and corporate governance practices.
The legality of cannabis could be reversed in one or more states, which might force businesses, including our customers, to cease operations in one or 24 Table of Conte nt s more states entirely.
The legality of cannabis could be reversed in one or more states, which might force businesses, including our customers, to cease operations in one or more states entirely.
See the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Investments - Market Risk.” A significant amount of our investment portfolio is invested in fixed maturity securities, or separately managed accounts and limited partnerships invested primarily in fixed maturity securities.
Our primary market risk exposures are to changes in interest rates and equity prices. See the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Investments - Market Risk.” A significant amount of our investment portfolio is invested in fixed maturity securities, or separately managed accounts and limited partnerships invested primarily in fixed maturity securities.
Following these periodic reviews, we may restrict such distributors’ access to certain types of products or terminate our relationship with them, subject to applicable contractual and regulatory requirements that limit our ability to terminate agents or require us to renew policies.
Following these periodic reviews, we may restrict such distributors’ access to certain types of products or terminate our relationship with them, subject to applicable contractual and regulatory requirements that limit our ability to terminate agents or require us to renew policies. Even through the utilization of these measures, we may not achieve the desired results.
We expect our quarterly results will continue to fluctuate in the future due to a number of factors, including the general economic conditions in the markets where we operate, the frequency of occurrence or severity of catastrophe or other insured events, fluctuating interest rates, claims exceeding our loss reserves, competition in our industry, deviations from expected premium retention rates of our existing policies and contracts, adverse investment performance, and the cost of reinsurance coverage. 22 Table of Conte nt s Performance of our investment portfolio is subject to a variety of investment risks that may adversely affect our financial results.
We expect our quarterly results will continue to fluctuate in the future due to a number of factors, including the general economic conditions in the markets where we operate, the frequency of occurrence or severity of catastrophe or other insured events, fluctuating interest rates, claims exceeding our loss reserves, competition in our industry, deviations from expected premium retention rates of our existing policies and contracts, adverse investment performance, and the cost of reinsurance coverage.
Pursuant to Section 404 of the Sarbanes-Oxley Act, we will be required to furnish a report by our management on our internal control over financial reporting, including an attestation report on internal control over financial reporting issued by our independent registered public accounting firm, beginning with the first full year after July 1, 2019.
Pursuant to Section 404 of the Sarbanes-Oxley Act, we will be required to furnish a report by our management on our internal control over financial reporting, including an attestation report on internal control over financial reporting issued by our independent registered public accounting firm, beginning January 18, 2024.
Further, we are also dependent on the relationships our wholesalers and program administrators maintain with the agents and brokers from whom they source their business. Our relationship with our retail agents, brokers, wholesalers and program administrators may be discontinued at any time. Even if the relationships do continue, they may not be on terms that are profitable for us.
Our relationship with our retail agents, brokers, wholesalers and program administrators may be discontinued at any time. Even if the relationships do continue, they may not be on terms that are profitable for us.
For example, there has been an increase in capital-raising by companies with whom we compete, which could result in new entrants to our markets and an excess of capital in the industry. Additionally, the possibility of federal regulatory reform of the insurance industry could increase competition from standard carriers.
For example, there has been an increase in capital-raising by companies with whom we compete, which could result in new entrants to our markets and an excess of capital in the industry.
We rely on these systems to interact with brokers and insureds, to underwrite business, to prepare policies and process premiums, to perform actuarial and other modeling functions, to process claims and make claims payments, and to prepare internal and external financial statements.
Our business is highly dependent upon our information technology and telecommunications systems, including our underwriting systems. We rely on these systems to interact with brokers and insureds, to underwrite business, to prepare policies and process premiums, to perform actuarial and other modeling functions, to process claims and make claims payments, and to prepare internal and external financial statements.
The insurance business is historically cyclical in nature and we believe we are currently experiencing a relatively hard market cycle, which may affect our financial performance and cause our operating results to vary from quarter to quarter and may not be indicative of future performance.
The insurance business is historically cyclical in nature, which may affect our financial performance and cause our operating results to vary from quarter to quarter and may not be indicative of future performance.
Our underwriting success is dependent on our ability to accurately assess the risks associated with the business we write and retain. We rely on the experience of our underwriting staff in assessing those risks. If we misunderstand the nature or extent of the risks, we may fail to establish appropriate premium rates which could adversely affect our financial results.
We rely on the experience of our underwriting staff in assessing those risks. If we misunderstand the nature or extent of the risks, we may fail to establish appropriate premium rates which could adversely affect our financial results.
As a public company with SEC reporting obligations, we will be required to document and test our internal control procedures to satisfy the requirements of Section 404(a) of the Sarbanes-Oxley Act, which will require annual assessments by management of the effectiveness of our internal control over financial reporting beginning with the annual report for our fiscal year ended December 31, 2023.
As a public company with SEC reporting obligations, we are required to document and test our internal control procedures to satisfy the requirements of Section 404(a) of the Sarbanes-Oxley Act, which requires annual assessments by management of the effectiveness of our internal control over financial reporting.
Should any of our key personnel terminate their employment with us, or if we are unable to retain and attract talented personnel, we may be unable to maintain our current competitive position in the specialized markets in which we operate, which could adversely affect our results of operations.
Should any of our key personnel terminate their employment with us, or if we are unable to retain and attract talented personnel, we may be unable to maintain our current competitive position in the specialized markets in which we operate, which could adversely affect our results of operations. 23 Table of Contents Security breaches, loss of data, cyberattacks, and other information technology failures could disrupt our operations, damage our reputation, and adversely affect our business, operations, and financial results.
We may not be able to continue to compete successfully in the insurance markets. Increased competition in these markets could result in a change in the supply and demand for insurance, affect our ability to price our products at risk-adequate rates and retain existing business, or underwrite new business on favorable terms.
Increased competition in these markets could result in a change in the supply and demand for insurance, affect our ability to price our products at risk-adequate rates and retain existing business, or underwrite new business on favorable terms. If this increased competition so limits our ability to transact business, our operating results could be adversely affected.
We depend on our ability to attract and retain experienced and seasoned personnel who are knowledgeable about our business. The pool of talent from which we actively recruit is limited and may fluctuate based on market dynamics specific to our industry and independent of overall economic conditions.
The pool of talent from which we actively recruit is limited and may fluctuate based on market dynamics specific to our industry and independent of overall economic conditions.
Even through the utilization of these measures, we may not achieve the desired results. 17 Table of Conte nt s Because we rely on these distributors as our sales channel, any deterioration in the relationships with our distributors or failure to provide competitive compensation could lead our distributors to place more premium with other carriers and less premium with us.
Because we rely on these distributors as our sales channel, any deterioration in the relationships with our distributors or failure to provide competitive compensation could lead our distributors to place more premium with other carriers and less premium with us.
As a result of these factors, investors in our common stock may not be able to resell their shares at or above the initial offering price. These broad market fluctuations, as well as general market, economic and political conditions, such as recessions, loss of investor confidence or interest rate changes, may negatively affect the market price of our common stock.
These broad market fluctuations, as well as general market, economic and political conditions, such as recessions, loss of investor confidence or interest rate changes, may negatively affect the market price of our common stock.
State insurance laws, including the laws of Texas restrict the ability of HSIC, IIC and GMIC to determine how we declare stockholder dividends. 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 that is derived from net profits on our business.
State insurance laws, including the laws of Texas restrict the ability of HSIC, IIC and GMIC to determine how we declare stockholder dividends. State insurance regulators require insurance companies to maintain specified levels of statutory capital and surplus.
Risks Related to Ownership of Our Common Stock We have and expect to continue to incur increased costs as a result of operating as a public company, and our management devotes substantial time to new compliance initiatives.
Risks Related to Ownership of Our Common Stock We have and expect to continue to incur increased costs as a result of operating as a public company, and our management devotes substantial time to compliance initiatives. We are subject to financial reporting and other requirements for which our accounting and other management systems and resources may not be adequately prepared.
These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a period of time. 31 Table of Conte nt s Our certificate of incorporation and bylaws provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our certificate of incorporation and bylaws provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
We are subject to financial reporting and other requirements for which our accounting and other management systems and resources may not be adequately prepared. As a public company, and particularly after we are no longer an emerging growth company, we incur and will continue to incur significant legal, accounting and other expenses.
As a public company, and particularly after we are no longer an emerging growth company, we have incurred and will continue to incur significant legal, accounting and other expenses.
Our results of operations depend, in part, on the performance of our investment portfolio. We seek to hold a diversified portfolio of investments that is managed by professional investment advisory management firms in accordance with our investment policy and routinely reviewed by our Investment Committee.
We seek to hold a diversified portfolio of investments that is managed by professional investment advisory management firms in accordance with our investment policy and routinely reviewed by our Investment Committee. However, our investments are subject to general economic conditions and market risks as well as risks inherent to specific securities.
If this increased competition so limits our ability to transact business, our operating results could be adversely affected. Because our business depends on insurance retail agents, brokers, wholesalers and program administrators, we are exposed to certain risks arising out of our reliance on these distribution channels that could adversely affect our results.
Because our business depends on insurance retail agents, brokers, wholesalers and program administrators, we are exposed to certain risks arising out of our reliance on these distribution channels that could adversely affect our results. Substantially all of our products are ultimately distributed through independent retail agents and brokers who have the principal relationships with policyholders.
Substantially all of our products are ultimately distributed through independent retail agents and brokers who have the principal relationships with policyholders. Retail agents and brokers generally own the “renewal rights,” and thus our business model is dependent on our relationships with, and the success of, the retail agents and brokers with whom we do business.
Retail agents and brokers generally own the “renewal rights,” and thus our business model is dependent on our relationships with, and the success of, the retail agents and brokers with whom we do business. Further, we are also dependent on the relationships our wholesalers and program administrators maintain with the agents and brokers from whom they source their business.
There is, however, no precise 18 Table of Conte nt s method for evaluating the impact of any specific factor on the adequacy of loss reserves, and actual results may deviate, perhaps substantially, from our reserve estimates.
This process assumes that past experience, adjusted for the effects of current developments, anticipated trends and market conditions, is an appropriate basis for predicting future events. There is, however, no precise method for evaluating the impact of any specific factor on the adequacy of loss reserves, and actual results may deviate, perhaps substantially, from our reserve estimates.
Some fixed income securities have call or prepayment options, which create possible reinvestment risk in declining rate environments. Other fixed income securities, such as mortgage-backed and asset-backed securities, carry prepayment risk or, in a rising interest rate environment, may not prepay as quickly as expected.
Some fixed income securities have call or prepayment options, which create possible reinvestment risk in declining rate environments.
In addition, we may enter into debt agreements in the future that may contain similar or more burdensome terms and covenants, including financial covenants. Risks Related to Our Operations We could be adversely affected by the loss of one or more key personnel or by an inability to attract and retain qualified personnel.
Risks Related to Our Operations We could be adversely affected by the loss of one or more key personnel or by an inability to attract and retain qualified personnel. We depend on our ability to attract and retain experienced and seasoned personnel who are knowledgeable about our business.
All of our fixed maturity securities, including those held in separately managed accounts and limited partnerships, are subject to credit risk.
Other fixed income securities, such as mortgage-backed and other asset-backed securities, carry prepayment risk or, in a rising interest rate environment, may not prepay as quickly as expected. 20 Table of Contents All of our fixed maturity securities, including those held in separately managed accounts and limited partnerships, are subject to credit risk.
In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law.
In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a period of time.
Removed
This process assumes that past experience, adjusted for the effects of current developments, anticipated trends and market conditions, is an appropriate basis for predicting future events.
Added
Risks Related to Our Business and Industry Our financial condition and results of operations could be materially adversely affected if we do not accurately assess our underwriting risk. Our underwriting success is dependent on our ability to accurately assess the risks associated with the business we write and retain.
Removed
However, our investments are subject to general economic conditions and market risks as well as risks inherent to specific securities. Our primary market risk exposures are to changes in interest rates and equity prices.
Added
Additionally, the possibility of federal regulatory reform of the insurance industry could increase competition from standard carriers. 14 Table of Contents We may not be able to continue to compete successfully in the insurance markets.
Removed
In recent years, interest rates have been at or near historic lows, however, for the year ended December 31, 2022, interest rates have steadily risen.
Added
Performance of our investment portfolio is subject to a variety of investment risks that may adversely affect our financial results. Our results of operations depend, in part, on the performance of our investment portfolio.
Removed
The NOLs will begin to expire in 2033.
Added
Interest rates rose materially during 2022 and 2023.
Removed
Our indebtedness under our credit agreement, (“Credit Agreement”), and our other financial obligations could: • impair our ability to obtain financing or additional debt in the future for working capital, capital expenditures, acquisitions or general corporate purposes; • impair our ability to access capital and credit markets on terms that are favorable to us; • have a material adverse effect on us if we fail to comply with financial and affirmative and restrictive covenants in our Credit Agreement and an event of default occurs as a result of a failure that is not cured or waived; • require us to dedicate a portion of our cash flow for interest payments on our indebtedness and other financial obligations, thereby reducing the availability of our cash flow to fund working capital and capital expenditures; and • limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.
Added
These NOLs are set to expire beginning in 2030.
Removed
Our financial covenants in the Credit Agreement require us to maintain certain minimum fixed charges coverage ratio and total adjusted capital of our subsidiaries. If we breach these covenants, the lender will have the right to accelerate repayment of the outstanding amounts.
Added
Dividend payments are further limited to that part of available policyholder surplus that is 22 Table of Contents derived from net profits on our business.
Removed
In the event that the lender accelerates the repayment of our indebtedness, there can be no assurance that we will have sufficient cash on hand to satisfy such obligations and our business operations may be materially harmed.
Added
The securities markets have from time to time experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of particular companies. As a result of these factors, investors in our common stock may not be able to resell their shares at or above the their purchase price.
Removed
Furthermore, there is no guarantee that we will be able to pay the principal and interest under the Credit Agreement or that future working capital, borrowings or equity financing will be available to repay or refinance any amounts outstanding under the Credit Agreement.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeItem 2. Properties Our primary executive offices and insurance operations are in Houston, Texas which occupy approximately 40,000 square feet of office space. The lease for this space expires in 2029. Management considers our office facilities suitable and adequate for our current levels of operations.
Biggest changeItem 2. Properties We lease our primary executive offices and insurance operations in Houston, Texas, and occupy approximately 20,000 square feet of office space. The lease for this space expires in 2029. We lease additional office space where appropriate. Management considers our office facilities suitable and adequate for our current levels of operations.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeItem 3. Legal Proceedings We are periodically party to legal proceedings which arise in the ordinary course of business. Currently, we are not involved in any legal proceedings which we believe could have a material adverse effect on our business or results of operation.
Biggest changeItem 3. Legal Proceedings We are periodically party to legal proceedings which arise in the ordinary course of business. Currently, we are not involved in any legal proceedings which we believe could have a material adverse effect on our business or results of operation. Item 4. Mine Safety Disclosures - Not applicable. 30 Table of Contents Part II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeGrants of Stock Awards and Issuance of Shares During the period covered by this Annual Report on Form 10-K, pursuant to the Company’s 2020 Long-Term Incentive Plan, we granted 198,842 shares of restricted stock and restricted stock units at a weighted average price of $14.17 per share to certain employees and directors.
Biggest changeGrants of Stock Awards and Issuance of Shares During the period covered by this Annual Report on Form 10-K, pursuant to the Company’s 2020 Long-Term Incentive Plan, we granted 1,101,856 shares of restricted stock restricted stock units at a weighted average price of $16.07 per share and 759,990 stock options with a strike price of $15.00 to certain employees and directors.
The issuance of such common shares was exempt from the registration requirements of the Securities Act, pursuant to Section 3(a)(9) of the Securities Act, involving an exchange of securities exchanged by the issuer with its existing security holders exclusively where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange.
The issuance of such common shares was exempt from the registration requirements of the Securities Act, pursuant to Section 3(a)(9) of the Securities Act, involving an exchange of securities exchanged by the issuer with its existing security holders exclusively where no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange.
Consequently, investors may need to sell all or part of their holdings of our common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking immediate cash dividends should not purchase our common stock. Item 6. [Reserved] - Not applicable.
Consequently, investors may need to sell all or part of their holdings of our common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking immediate cash dividends should not purchase our common stock.
Securities Authorized for Issuance Under Equity Compensation Plans Information about our equity compensation plans will be included in our definitive proxy statement to be filed with the SEC with respect to our 2023 Annual Meeting of Stockholders (“2023 Proxy Statement”) and is incorporated herein by reference.
Securities Authorized for Issuance Under Equity Compensation Plans Information about our equity compensation plans will be included in our definitive proxy statement to be filed with the SEC with respect to our 2024 Annual Meeting of Stockholders (“2024 Proxy Statement”) and is incorporated herein by reference.
Issuer Purchases of Equity Securities We did not purchase any of our equity securities during the period covered by this Annual Report on Form 10-K. 33 Table of Conte nt s Dividends We do not currently intend to pay any cash dividends on our common stock in the foreseeable future.
Issuer Purchases of Equity Securities We did not purchase any of our equity securities during the period covered by this Annual Report on Form 10-K. 31 Table of Contents Dividends We do not currently intend to pay any cash dividends on our common stock in the foreseeable future.
As of March 22, 2023, there were approximately 171 holders of record of our common stock. Because many of our shares of common stock are held by brokers and other institutions on behalf of our stockholders, this number is not representative of the total number of stockholders represented by these stockholders of record.
As of March 27, 2024, there were approximately 15 holders of record of our common stock. Because many of our shares of common stock are held by brokers and other institutions on behalf of our stockholders, this number is not representative of the total number of stockholders represented by these stockholders of record.
Removed
There has been no material change in the planned use of proceeds from our IPO as described in our prospectus dated January 12, 2023 and filed with the SEC on January 13, 2023 in connection with our IPO.
Added
All the proceeds from the IPO have been distributed to the Company’s insurance company subsidiaries.
Added
Performance Graph The following performance graph compares the cumulative total shareholder return of an investment in (1) our common stock, (2) the cumulative total returns to the Nasdaq Composite Index and (3) the cumulative total returns to the Nasdaq Insurance Index, for the period beginning January 13, 2023 (the date our common stock began trading on Nasdaq) through December 31, 2023.
Added
The graph assumes an initial investment of $100. Such returns are based on historical results and are not indicative of future performance.
Added
This graph shall not be deemed “soliciting material” or be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act.
Added
January 13, 2023 December 31, 2023 Skyward Specialty Insurance Group, Inc. $ 100.00 $ 177.38 Nasdaq Composite Index $ 100.00 $ 135.49 Nasdaq Insurance Index $ 100.00 $ 103.37 Item 6. [Reserved] - Not applicable.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeWe consistently strive for excellence in risk selection, pricing, and claims outcomes, and to amplify these critical functions with the use of advanced technology and analytics. 34 Table of Conte nt s Results of Operations The following table summarizes our results for the years ended December 31, 2022 and 2021: ($ 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 Reconciliation of Non-GAAP Financial Measures Adjusted Operating Income (Loss) The following table provides a reconciliation of adjusted operating income to net income for the years ended December 31, 2022 and 2021: 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 35 Table of Conte nt s Underwriting income (loss) The following table provides a reconciliation of underwriting income (loss) to income (loss) before federal income tax for the years ended December 31, 2022 and 2021: ($ 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 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, 2022 and 2021: ($ 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 The following table provides a reconciliation of tangible stockholders’ equity to stockholders’ equity for the years ended December 31, 2022 and 2021: ($ 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 The following table provides a reconciliation of adjusted return on equity to return on equity for the years ended December 31, 2022 and 2021: ($ 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 % 36 Table of Conte nt s Return on Tangible Equity Return on tangible equity for the years ended December 31, 2022 and 2021 reconciles to return on equity as follows: ($ 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 Adjusted return on tangible equity for the years ended December 31, 2022 and 2021 reconciles to return on equity as follows: ($ 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 Premiums The following table presents gross written premiums by underwriting division for the years ended December 31, 2022 and 2021: ($ 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 % The year over year increase in gross written premiums, when compared to 2021, was driven by double-digit premium growth in each of our eight underwriting divisions.
Biggest changeResults of Operations The following table summarizes our results for the years ended December 31, 2023 and 2022: ($ in thousands) 2023 2022 Gross written premiums $ 1,459,829 $ 1,143,952 Ceded written premiums (549,138) (468,409) Net written premiums $ 910,691 $ 675,543 Net earned premiums $ 829,143 $ 615,994 Commission and fee income 6,064 5,199 Losses and LAE 515,237 402,512 Underwriting, acquisition and insurance expenses 243,444 182,171 Underwriting income (1) $ 76,526 $ 36,510 Net investment income $ 40,322 $ 36,931 Net investment gains (losses) $ 11,072 $ (15,705) Income before income taxes $ 110,102 $ 49,783 Net income $ 85,984 $ 39,396 Adjusted operating income (1) $ 80,847 $ 58,574 Loss and LAE ratio 62.1 % 65.3 % Expense ratio 28.6 % 28.7 % Combined ratio 90.7 % 94.0 % Adjusted loss and LAE ratio (1) 62.3 % 63.9 % Expense ratio 28.6 % 28.7 % Adjusted combined ratio (1) 90.9 % 92.6 % Return on equity 15.9 % 9.3 % Return on tangible equity (1) 19.0 % 11.8 % Adjusted return on equity (1) 14.9 % 13.8 % Adjusted return on tangible equity (1) 17.9 % 17.6 % (1) See “Reconciliation of Non-GAAP Financial Measures” in this Item 7 33 Table of Contents 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, 2023 and 2022: 2023 2022 ($ in thousands) Before Income Taxes After Income Taxes Before Income Taxes After Income Taxes Income as reported $ 110,102 $ 85,984 $ 49,783 $ 39,396 Less (Add): Net impact of LPT 1,427 1,127 (8,572) (6,772) Net investment gains (losses) 11,072 8,747 (15,705) (12,407) Other (loss) income (632) (499) 1 1 Other expenses (5,364) (4,238) — — Adjusted operating income $ 103,599 $ 80,847 $ 74,059 $ 58,574 Underwriting income (loss) The following table provides a reconciliation of underwriting income to income before federal income tax for the years ended December 31, 2023 and 2022: ($ in thousands) 2023 2022 Income before federal income tax $ 110,102 $ 49,783 Add: Interest expense 10,024 6,407 Amortization expense 1,798 1,547 Other expenses 5,364 — Less (Add): Net investment income 40,322 36,931 Net investment gains (losses) 11,072 (15,705) Other (loss) income (632) 1 Underwriting income $ 76,526 $ 36,510 34 Table of Contents 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, 2023 and 2022: ($ in thousands) 2023 2022 Net earned premiums $ 829,143 $ 615,994 Losses and LAE 515,237 402,512 Pre-tax net impact of loss portfolio transfer (1,427) 8,572 Adjusted losses and LAE $ 516,664 $ 393,940 Loss ratio 62.1 % 65.3 % Net impact of LPT (0.2) % 1.4 % Adjusted loss ratio 62.3 % 63.9 % Combined ratio 90.7 % 94.0 % Net impact of LPT (0.2) % 1.4 % Adjusted combined ratio 90.9 % 92.6 % Tangible Stockholders’ Equity The following table provides a reconciliation of tangible stockholders’ equity to stockholders’ equity as of December 31, 2023 and 2022: ($ in thousands) 2023 2022 Stockholders’ equity $ 661,031 $ 421,662 Less: goodwill and intangible assets 88,435 89,870 Tangible stockholders’ equity $ 572,596 $ 331,792 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, 2023 and 2022: ($ in thousands) 2023 2022 Numerator: adjusted operating income $ 80,847 $ 58,574 Denominator: average stockholders’ equity $ 541,347 $ 423,871 Adjusted return on equity 14.9 % 13.8 % Return on Tangible Equity Return on tangible equity for the years ended December 31, 2023 and 2022 reconciles to return on equity as follows: ($ in thousands) 2023 2022 Numerator: net income $ 85,984 $ 39,396 Denominator: average tangible stockholders’ equity $ 452,194 $ 333,268 Return on tangible equity 19.0 % 11.8 % 35 Table of Contents Adjusted Return on Tangible Equity Adjusted return on tangible equity for the years ended December 31, 2023 and 2022 reconciles to return on equity as follows: ($ in thousands) 2023 2022 Numerator: adjusted operating income $ 80,847 $ 58,574 Denominator: average tangible stockholders’ equity $ 452,194 $ 333,268 Adjusted return on tangible equity 17.9 % 17.6 % Underwriting Results Premiums The following table presents gross written premiums by underwriting division for the years ended December 31, 2023 and 2022: ($ in thousands) 2023 2022 % Change Industry Solutions $ 305,476 $ 267,628 14.1 % Global Property & Agriculture 273,191 205,081 33.2 % Programs 178,726 163,653 9.2 % Captives 167,624 124,286 34.9 % Professional Lines 154,565 93,011 66.2 % Accident & Health 151,701 130,808 16.0 % Transactional E&S 122,508 75,098 63.1 % Surety 106,056 79,062 34.1 % Total continuing business $ 1,459,847 $ 1,138,627 28.2 % Exited business (18) 5,325 (100.3) % Total gross written premiums $ 1,459,829 $ 1,143,952 27.6 % The year over year increase in gross written premiums, when compared to 2022, was driven by double-digit premium growth in nearly all of our underwriting divisions, five of which grew over 30%.
Consequently, at the Inception Date, the cash remitted to the third party reinsurer for the cession of the Net LPT reserves was $53.6 million (reflecting the $158.6 million of Net LPT Reserves less the $105 million cash deductible).
Consequently, at the Inception Date, the cash remitted to the third party reinsurer for the cession of the Net LPT reserves was $53.6 million (reflecting the $158.6 million of Net LPT Reserves less the $105.0 million cash deductible).
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, 2022 or 2021.
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, 2023 or 2022.
We believe purchasing this coverage reduces the volatility associated with the covered business produced in 2017 and prior, and has allowed our management team to focus on the continuing business which we believe provide the best path for continued profitable growth.
We believe purchasing this coverage reduces the volatility associated with the covered business produced in 2017 and prior, and has allowed our management team to focus on the continuing business which we believe provides the best path for continued profitable growth.
Loss Portfolio Transfer On April 1, 2020, with a valuation date of June 30, 2019, we entered into a LPT retroactive reinsurance agreement with R&Q Bermuda (SAC) Limited, a third party reinsurer domiciled in Bermuda that specializes in assuming legacy blocks of insurance business and running them off.
Loss Portfolio Transfer On April 1, 2020 (“Inception Date”), with a valuation date of June 30, 2019 (“Valuation Date”), we entered into a LPT retroactive reinsurance agreement with R&Q Bermuda (SAC) Limited, a third party reinsurer domiciled in Bermuda that specializes in assuming legacy blocks of insurance business and running them off.
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.
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 48 Table of Contents and payment patterns, claims frequency and severity, paid loss experience, industry loss experience, and changes in market conditions, policy forms, exclusions, and exposures.
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.
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 47 Table of Contents using information that we believe to be relevant.
The sole asset of the Trust consists of Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Trust Preferred”) with a principal amount of $59.8 million issued by us and cash of $1.8 million from the issuance of Trust common shares purchased by us equal to 3% of the Trust capitalization.
The sole asset of the Trust consists of Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Debentures”) with a principal amount of $59.8 million issued by us and cash of $1.8 million from the issuance of Trust common shares purchased by us equal to 3% of the Trust capitalization.
During 2021, we initiated 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. We continued this strategy in 2022 and as of December 31, 2022, the annual cost of the strategy was approximately $3.0 million.
During 2021, we initiated 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. We continued this strategy in 2023 and as of December 31, 2023, the annual cost of the strategy was approximately $1.0 million.
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, commercial auto, group accident and health, property, surety and workers’ compensation; we insure both short and medium duration liabilities; and our business mix is balanced between E&S and admitted markets.
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 insurance), commercial auto, group accident and health, property, agriculture, surety and workers’ compensation; we insure both short and medium duration liabilities; and our business mix is balanced between E&S and admitted markets.
See Note 14, “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, 2022 and 2021.
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, 2023 and 2022.
We also perform, along with our reinsurance broker, periodic credit reviews of our reinsurers. At December 31, 2022, 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.
We also perform, along with our reinsurance broker, periodic credit reviews of our reinsurers. At December 31, 2023, 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.
Reinsurance balances recoverable on reserves for paid and unpaid losses and LAE totaled $581.4 million and $536.3 million at December 31, 2022 and December 31, 2021, respectively. Critical Accounting Policies and Estimates We identified the accounting estimates below as critical to the understanding of our financial position and results of operations.
Reinsurance balances recoverable on reserves for paid and unpaid losses and LAE totaled $596.3 million and $581.4 million at December 31, 2023 and December 31, 2022, respectively. Critical Accounting Policies We identified the accounting estimates below as critical to the understanding of our financial position and results of operations.
We also may use the proceeds from these sources 43 Table of Conte nt s 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.
We also may use the proceeds from these sources 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.
At December 31, 2022, our core fixed income portfolio had an average rating of “AA,” with approximately 81% of securities in that portfolio rated “A” or better by at least one nationally recognized rating organization.
At December 31, 2023, our core fixed income portfolio had an average rating of “AA-,” with approximately 82% of securities in that portfolio rated “A” or better by at least one nationally recognized rating organization.
The duration of loss reserves was 2.2 years as of December 31, 2022. Our Reserve Committee includes our Chief Actuary, Chief Risk Officer, Chief Financial Officer and Chief Claims Officer.
The duration of loss reserves was 2.3 years as of December 31, 2023. Our Reserve Committee includes our Chief Actuary, Chief Risk Officer, Chief Financial Officer and Chief Claims Officer.
Our internal claims managers oversee TPA activities and monitor their individual claim handling activities to our prescribed standards. 46 Table of Conte nt s Our IBNR reserves are developed in accordance with Actuarial Standards of Practice promulgated by the American Academy of Actuaries.
Our internal claims managers oversee TPA activities and monitor their individual claim handling activities to our prescribed standards. Our IBNR reserves are developed in accordance with Actuarial Standards of Practice promulgated by the American Academy of Actuaries.
Investments are backed by a significant amount of collateral and contain strong covenants with a typical loan-to-value of 66% or better. The limited partnerships are subject to future increases or decreases in asset value and may exhibit volatile results as asset values are monetized and the resultant income is distributed.
Investments contain strong covenants and are backed by a significant amount of collateral with a weighted average loan-to-value of 74%. The limited partnerships are subject to future increases or decreases in asset value and may exhibit volatile results as asset values are monetized and the resultant income is distributed.
At December 31, 2022, approximately 16.4% of the fair value of our investment portfolio (excluding cash and cash equivalents and short-term investments) was invested in equity securities.
At December 31, 2023, approximately 11.4% of the fair value of our investment portfolio (excluding cash and cash equivalents and short-term investments) was invested in equity securities.
We believe the ratio of paid losses and LAE to total incurred losses and LAE of 63.5% as of December 31, 2022, on policies covered under Section A of the LPT, in combination with the age of the policies (primarily policy years 2011 and prior) and the declining number of open claims (Section A open claims have been reduced by 51.8% since the Valuation Date), underscores the strength of our reserve position on Section A.
We believe the ratio of paid losses and LAE to total incurred losses and LAE of 65.1% as of December 31, 2023, on policies covered under Section A of the LPT, in combination with the age of the policies (primarily policy years 2011 and prior) and the declining number of open claims (Section A open claims have been reduced by 68.9% since the Valuation Date), underscores the strength of our reserve position on Section A.
The remaining $8.4 million of net adverse development was from various other accident years. 38 Table of Conte nt s Within multi-line solutions, favorable development of $10.8 million was from the 2020 through 2021 accident years and was primarily driven by a reduction in frequency of claims in commercial auto and general liability.
The remaining $8.4 million of net adverse development was from other accident years. 37 Table of Contents Within multi-line solutions, favorable development of $10.8 million was from the 2020 through 2021 accident years and was driven by a reduction in frequency of claims in commercial auto and general liability.
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%.
The Debentures are an unsecured obligation, are redeemable, and have a maturity date of September 15, 2036. Interest on the Trust Preferred is payable quarterly at an annual rate based on the three-month LIBOR (5.59% and 4.77% at December 31, 2023 and 2022, 46 Table of Contents respectively), plus 3.4%.
As with Section A, we believe that the Section B ratio of paid losses and LAE to total incurred losses and LAE of 74.6% as of December 31, 2022 in combination with and the rapidly declining number of open claims (reduced by 74.2%) since the Valuation Date underscores the strength of our reserve position on Section B.
As with Section A, we believe that the Section B ratio of paid losses and LAE to total incurred losses and LAE of 85.7% as of December 31, 2023 in combination with and the rapidly declining number of open claims (reduced by 81.9%) since the Valuation Date underscores the strength of our reserve position on Section B.
We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.235 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of the completion of this offering; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; and (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.
We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.235 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of the completion of this offering; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; and (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC. 49 Table of Contents In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326).
As of December 31, 2022, total incurred losses and LAE (including claims paid, case reserves and IBNR) were $34.7 million, which is $4.7 million in excess of our reinsurance coverage under Section A of the LPT.
As of December 31, 2023, total incurred losses and LAE (including claims paid, case reserves and IBNR) were $38.2 million, which is $8.2 million in excess of our reinsurance coverage under Section A of the LPT.
As of December 31, 2022, paid losses and LAE on policies subject to Section B were $164.0 million, which is $92.0 million below our total reinsurance coverage under Section B, which includes the co-participation amounts.
As of December 31, 2023, paid losses and LAE on policies subject to Section B were $188.5 million, which is $67.5 million below our total reinsurance coverage under Section B, which includes the co-participation amounts.
Section B Based on the reserves on the Valuation Date, we ceded $130.9 million of net reserves related to Section B, subject to the aggregate cash deductible. The LPT provides 100% reinsurance coverage on the first $19.1 million of incurred losses and LAE above the ceded net reserves for Section B.
Section A Based on the reserves on the Valuation Date, we ceded $22.2 million of net reserves related to Section A, subject to the aggregate cash deductible. The LPT provides 100% reinsurance coverage on the first $2.8 million of incurred losses and LAE above the ceded net reserves for Section A.
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 8 years and 8.25% fixed thereafter.
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 8 years and 8.25% fixed thereafter.
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, combined with our underwriting and claims expertise, will produce strong growth and consistent profitability across P&C insurance pricing cycles. We seek to lead in our chosen market niches and establish sustainable competitive positions in these markets.
All of these factors enable us to respond to market opportunities and 32 Table of Contents dislocations by deploying capital with attractive risk-adjusted returns. We believe this diversification, combined with our underwriting and claims expertise, will produce strong growth and consistent profitability across P&C insurance pricing cycles.
Above the $19.1 million layer, a further $70.0 million of reinsurance coverage is provided, for which we have a 50% co-participation on the incurred losses and LAE in the layer. There is a further $36.0 million of reinsurance that provides 100% coverage above the $70.0 million layer.
The LPT provides 100% reinsurance coverage on the first $19.1 million of incurred losses and LAE above the ceded net reserves for Section B. Above the $19.1 million layer, a further $70.0 million of reinsurance coverage is provided, for which we have a 50% co-participation on the incurred losses and LAE in the layer.
The following table sets forth the components of our equities portfolio by security type at December 31, 2022 and 2021: 2022 2021 ($ 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 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 following table sets forth the components of our equities portfolio by security type at December 31, 2023 and 2022: 2023 2022 ($ in thousands) Fair Value % of Total Fair Value Fair Value % of Total Fair Value Domestic common equities $ 71,502 46.7 % $ 76,929 48.8 % International common equities 39,389 25.7 % 34,468 21.9 % Preferred stock 7,358 4.8 % 8,772 5.6 % Other (1) 34,883 22.8 % 37,337 23.7 % Equities $ 153,132 100.0 % $ 157,506 100.0 % (1) Other includes limited partnerships, limited liability companies and other equity interests 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.
As of December 31, 2022, paid losses and LAE on policies subject to Section A of the LPT were $22.0 million, which is $8.0 million below our total reinsurance coverage under Section A.
As of December 31, 2023, paid losses and LAE on policies subject to Section A of the LPT were $24.9 million, which is $5.1 million below our total reinsurance coverage under Section A.
As of December 31, 2022, total incurred losses and LAE (including claims paid, case reserves and IBNR) were $220.0 million with the entire $36.0 million of 100% coverage layer are available should new claims arise or existing claims develop adversely.
There is a further $36.0 million of reinsurance that provides 100% coverage above the $70.0 million layer. As of December 31, 2023, total incurred losses and LAE (including claims paid, case reserves and IBNR) were $220.0 million with the entire $36.0 million of 100% coverage layer available should new claims arise or existing claims develop adversely.
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, 2022, approximately 4.4% of our core fixed income portfolio was unrated or rated below investment-grade.
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.
The LPT provides 100% reinsurance coverage on the first $2.8 million of incurred losses and LAE above the ceded net reserves for Section A. Above the $2.8 million coverage layer is a further $5.0 million of reinsurance coverage for which we retain 50% of the incurred losses and LAE.
Above the $2.8 million coverage layer is a further $5.0 million of reinsurance coverage for which we retain 50% of the incurred losses and LAE.
At December 31, 2022 and December 31, 2021, the ratio of total debt outstanding, including the Term Loan, the Revolver, the Trust Preferred and the Notes, to total capitalization (defined as total debt plus stockholders’ equity, plus any temporary equity) was 23.4% and 23.2%, respectively.
At December 31, 2023 the ratio of total debt outstanding, including the Revolving Credit Facility, the Trust Preferred and the Notes, to total capitalization (defined as total debt plus stockholders’ equity) was 16.3% and at December 31, 2022, the ratio of total debt outstanding, including the Term Loan, the Revolver, the Trust Preferred and the Notes, to total capitalization was 23.4%.
The following chart sets forth the Section B reinsurance structure, the paid and incurred losses and LAE positions within the structure as of December 31, 2022, and the reduction in open claims from the Valuation Date through December 31, 2022: Expense Ratio The following table sets forth the components of the expense ratio for the years ended December 31, 2022 and 2021: 2022 2021 ($ 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 % The expense ratio increased 1.8 points when compared to the same 2021 period.
The following chart sets forth the Section B reinsurance structure, the paid and incurred losses and LAE positions within the structure as of December 31, 2023, and the reduction in open claims from the Valuation Date through December 31, 2023: 39 Table of Contents Expense Ratio The following table sets forth the components of the expense ratio for the years ended December 31, 2023 and 2022: 2023 2022 ($ in thousands) Expenses % of Net Earned Premiums Expenses % of Net Earned Premiums Net policy acquisition expenses $ 108,514 13.0 % $ 65,695 10.6 % Other operating and general expenses 134,930 16.3 % 116,476 18.9 % Underwriting, acquisition and insurance expenses 243,444 29.3 % 182,171 29.5 % Less: commission and fee income (6,064) (0.7) % (5,199) (0.8) % Total net expenses $ 237,380 28.6 % $ 176,972 28.7 % The expense ratio was flat when compared to the same 2022 period.
The effective tax rate may vary slightly from the statutory rate due to tax adjustments for tax-exempt income and dividends-received deduction.
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.
The following table sets forth our cash flows for the years ended December 31, 2022 and 2021: ($ 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) 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.
The following table sets forth our cash flows for the years ended December 31, 2023 and 2022: ($ in thousands) 2023 2022 Cash and cash equivalents provided by (used in): Operating activities $ 338,187 $ 208,938 Investing activities (493,809) (193,381) Financing activities 130,947 2,180 Change in cash and cash equivalents $ (24,675) $ 17,737 The increase in cash provided by operating activities in 2023 and 2022 was primarily due to the growth of the business, timing of premium receipts, claim payments and reinsurance activity.
See Note 25, “Regulatory Matters” to our consolidated financial statements included in Item 8 of this Form 10-K for further information regarding our insurance companies. As of December 31, 2022, our holding company had $8.9 million in cash and investments compared to $6.0 million as of December 31, 2021.
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, 2023, our holding company had $3.0 million in cash and investments compared to $8.9 million at December 31, 2022.
For additional information regarding out reinsurance programs, see the discussion included in “Item 1 Business - Reinsurance ”. 37 Table of Conte nt s Losses and LAE The following table sets forth the components of the loss and LAE ratio and adjusted loss and LAE ratio for the years ended December 31, 2022 and 2021: 2022 2021 ($ 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 The loss and LAE ratio improved 5.6 points when compared to the same 2021 period.
For additional information regarding our reinsurance programs, see the discussion included in “Item 1 Business - Reinsurance ”. 36 Table of Contents Losses and LAE The following table sets forth the components of the loss and LAE ratio and adjusted loss and LAE ratio for the years ended December 31, 2023 and 2022: 2023 2022 ($ 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) $ 504,664 60.9 % $ 387,440 62.8 % Cat loss and LAE (1) 12,000 1.4 % 6,500 1.1 % Prior accident year development - LPT (1,427) (0.2) % 8,572 1.4% Total losses and LAE $ 515,237 62.1 % $ 402,512 65.3 % Adjusted losses and LAE (2) : Non-cat loss and LAE (1) $ 504,664 60.9 % $ 387,440 62.8 % Cat loss and LAE (1) 12,000 1.4 % 6,500 1.1 % Total adjusted losses and LAE (2) $ 516,664 62.3 % $ 393,940 63.9 % (1) Current accident year (2) See "Reconciliation of Non-GAAP Financial Measures" included in this Item 7 The loss ratio for the year ended 2023 improved 3.2 points when compared to the same 2022 period.
The following table sets forth the credit quality of our core fixed income portfolio at December 31, 2022 and 2021, as rated by Standard & Poor’s or equivalent designation: 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 % Opportunistic fixed income The opportunistic fixed income portfolio is managed by Arena which is affiliated with Westaim, our largest shareholder.
The following table sets forth the credit quality of our core fixed income portfolio at December 31, 2023 and 2022, as rated by Standard & Poor’s or equivalent designation: 2023 2022 ($ in thousands) Fair Value % of Total Fair Value % of Total AAA $ 493,252 48.6 % $ 283,733 46.7 % AA 105,906 10.4 % 74,604 12.3 % A 233,487 22.9 % 134,175 22.1 % BBB 154,096 15.1 % 88,369 14.5 % BB and Lower 30,910 3.0 % 26,691 4.4 % Total core fixed income $ 1,017,651 100.0 % $ 607,572 100.0 % Opportunistic fixed income The opportunistic fixed income portfolio is managed by Arena which is affiliated with Westaim, our largest shareholder.
The average duration of the portfolio was approximately 4.3 years and 4.3 years, respectively, as of December 31, 2022 and 2021. 40 Table of Conte nt s The following table sets forth the components of our core fixed income portfolio at December 31, 2022 and 2021: 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 % The weighted average credit rating of the portfolio was “AA” by Standard & Poor’s Financial Services, LLC (“Standard & Poor’s”) at December 31, 2022 and 2021.
The average duration of the portfolio was approximately 4.4 years and 4.3 years, respectively, as of December 31, 2023 and 2022. 41 Table of Contents The following table sets forth the components of our core fixed income portfolio at December 31, 2023 and 2022: 2023 2022 ($ in thousands) Fair Value % of Total Fair Value Fair Value % of Total Fair Value U.S. government securities $ 44,166 4.3 % $ 48,541 8.0 % Corporate securities and miscellaneous 383,420 37.7 % 235,129 38.7 % Municipal securities 92,778 9.1 % 57,727 9.5 % Residential mortgage-backed securities 281,626 27.7 % 119,856 19.7 % Commercial mortgage-backed securities 29,934 2.9 % 36,495 6.0 % Other asset-backed securities 185,727 18.3 % 109,824 18.1 % Core fixed income securities, available for sale $ 1,017,651 100.0 % $ 607,572 100.0 % The weighted average credit rating of the portfolio was “AA-” by Standard & Poor’s Financial Services, LLC (“Standard & Poor’s”) at December 31, 2023 and “AA” by Standard & Poor’s at December 31, 2022.
The remaining $2.3 million of net adverse development was from various other accident years. There was no net development in short tail/monoline specialty lines.
The remaining $2.3 million of net adverse development was from various other accident years.
Catastrophe losses from Hurricane Ian and Winter Storm Elliott added 1.1 points to the loss and LAE ratio compared to the same 2021 period, which was impacted by 2.4 points of catastrophe losses from tornadoes in the Midwest, Hurricane Ida and the first quarter winter storms.
Catastrophe losses from second and third quarter convective storms and first quarter wind and hail events, including tornadoes, added 1.4 points to the loss ratio compared to 2022, which was impacted by 1.1 points of catastrophe losses from Hurricane Ian and Winter Storm Elliott.
The following table sets forth our gross and net reserves for unpaid losses and LAE at December 31, 2022 and 2021: 2022 2021 ($ 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 % Case reserves are established for individual claims that have been reported to us.
The following table sets forth our gross and net reserves for unpaid losses and LAE at December 31, 2023 and 2022: 2023 2022 ($ in thousands) Gross % of Total Net % of Total Gross % of Total Net % of Total Case reserves $ 561,474 42.7 % $ 318,863 37.1 % $ 485,143 42.5 % $ 269,273 38.2 % IBNR 753,027 57.3 % 540,154 62.9 % 656,614 57.5 % 436,498 61.8 % Total $ 1,314,501 100.0 % $ 859,017 100.0 % $ 1,141,757 100.0 % $ 705,771 100.0 % Case reserves are established for individual claims that have been reported to us.
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326). ASU 2016-13 requires organizations to estimate credit losses on certain types of financial instruments, including receivables and available-for-sale debt securities, by introducing an approach based on expected losses.
ASU 2016-13 requires organizations to estimate credit losses on certain types of financial instruments, including receivables and available-for-sale debt securities, by introducing an approach based on expected losses. The expected loss approach will require entities to incorporate considerations of historical information, current information, and reasonable and supportable forecasts.
The following table sets forth the components of our opportunistic fixed income portfolio by industry sector at December 31, 2022 and 2021: 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.
The diversified asset based lending portfolio includes floating rate senior secured asset-based loans with significant amounts of collateral and strong covenants. 42 Table of Contents The following table sets forth the components of our opportunistic fixed income portfolio by industry sector at December 31, 2023 and 2022: 2023 2022 ($ in thousands) Fair Value % of Total Fair Value % of Total Real Estate $ 88,964 51.5 % $ 90,370 46.1 % Oil & Gas 15,991 9.3 % 20,725 10.6 % Banking, Finance & Insurance 11,425 6.6 % 13,870 7.1 % Other sectors (1) 28,747 16.7 % 34,072 17.4 % Cash and cash equivalents (2) 27,518 15.9 % 36,984 18.8 % Opportunistic fixed income $ 172,645 100.0 % $ 196,021 100.0 % (1) Other sectors primarily includes Aerospace & Defense, Business Services, Retail, Commercial & Industrial and Environmental.
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.
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.
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.
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. 44 Table of Contents Other Items Income Taxes Income tax expense was $24.1 million for the year ended December 31, 2023 compared to $10.4 million for the year ended December 31, 2022.
The change in net cash used in investing activities from 2022 to 2021 was primarily driven by increases in the purchases of fixed maturities. 44 Table of Conte nt s Credit Agreements On December 11, 2019, we entered into a credit agreement with Prosperity Bank which provided us with a $50.0 million term loan (the “Term Loan”) and a $50.0 million revolving line of credit (the “Revolver”) with additional capacity up to $75.0 million.
Term Loan On December 11, 2019, we entered into a credit agreement with Prosperity Bank which provided us with a $50.0 million term loan (the “Term Loan”) and a $50.0 million revolving line of credit (the “Revolver”) with additional capacity up to $75.0 million.
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.
At December 31, 2023, approximately 3.0% of our core fixed income portfolio 43 Table of Contents 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.
The loss and LAE ratio for the year ended 2022 was impacted by 1.4 points of LPT prior accident year development compared to 3.2 points for the same 2021 period. Additional information regarding the LPT can be found in the “Loss Portfolio Transfer” discussion included in this Item 7.
The loss ratio for the year ended 2022 included 1.4 points from the net impact of LPT reserve strengthening. Additional information regarding the LPT can be found in the “Loss Portfolio Transfer” discussion included in this Item 7.
The following chart sets forth the Section A reinsurance structure, the paid and incurred losses and LAE positions within the structure as of December 31, 2022, and the reduction in open claims from the Valuation Date through December 31, 2022.
The following chart sets forth the Section A reinsurance structure, the paid and incurred losses and LAE positions within the structure as of December 31, 2023, and the reduction in open claims from the Valuation Date through December 31, 2023. 38 Table of Contents Section B Based on the reserves on the Valuation Date, we ceded $130.9 million of net reserves related to Section B, subject to the aggregate cash deductible.
Within exited lines, adverse development of $14.5 million was from the 2019 accident year primarily driven by increased frequency and severity in general and professional liability.
During the year ended December 31, 2022, net incurred losses for accident years 2021 and prior developed adversely by $14.4 million which was related to losses subject to the LPT. Within exited lines, adverse development of $14.5 million was from the 2019 accident year primarily driven by increased frequency and severity in general and professional liability.
We manage this interest rate risk by investing in securities with varied maturity dates and by managing the duration of our 42 Table of Conte nt s investment portfolio in directional relation to the duration of our reserves.
We manage this interest rate risk by investing in securities with varied maturity dates and by managing the duration of our investment portfolio in directional relation to the duration of our reserves. Expressed in years, duration is the weighted average payment period of cash flows, where the weighting is based on the present value of the cash flows.
The adjusted loss and LAE ratio improved 3.8 points when compared to the same 2021 period. The improvement was primarily driven by (i) a shift in the mix of business, (ii) continued run-off of exited business, and (iii) lower catastrophe losses.
The non-cat loss and LAE ratio improved 1.9 points when compared to the same 2022 period, driven by the shift in the mix of business and continued run-off of exited business.
Investments Composition of Investment Portfolio The following table sets forth the components of our investment portfolio at carrying value at December 31, 2022 and 2021: 2022 2021 ($ 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 Our fixed maturity securities, comprised of both core fixed income and opportunistic fixed income, comprised 71.2% and 63.2% of our total investment portfolio as of December 31, 2022 and 2021, respectively, and had a weighted average effective duration of 3.1 years and 2.8 years as of December 31, 2022 and 2021, respectively, and an average core fixed income credit rating of “AA” (Standard & Poor’s) as of December 31, 2022 and 2021, respectively.
Investments Composition of Investment Portfolio The following table sets forth the components of our investment portfolio at carrying value at December 31, 2023 and 2022: 2023 2022 ($ in thousands) Fair Value % of Total Fair Value % of Total Short-term and money market investments $ 270,259 16.7 % $ 121,268 11.2 % Core fixed income 1,017,651 63.1 % 607,572 56.1 % Opportunistic fixed income 172,645 10.7 % 196,021 18.1 % Equities 153,132 9.5 % 157,506 14.6 % Total investment portfolio $ 1,613,687 100.0 % $ 1,082,367 100.0 % Our fixed maturity securities, comprised of both core fixed income and opportunistic fixed income, comprised 73.8% and 74.2% of our total investment portfolio as of December 31, 2023 and 2022, respectively, and had a weighted average effective duration of 3.2 years and 3.1 years as of December 31, 2023 and 2022, respectively, and an average core fixed income credit rating of “AA-” and “AA” (Standard & Poor’s) as of December 31, 2023 and 2022, respectively.
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 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.
The increase in net investment income was driven by (i) a larger asset base in our core fixed income portfolio as we increase our allocation to this part of our investment portfolio, (ii) higher net investment yields in our core fixed income portfolio of 3.0% compared to 2.3% for the same 2021 period, and (iii) an increase in income from the opportunistic fixed income portfolio due to market appreciation of underlying investments.
The increase in income from our core fixed income portfolio for the year ended 2023, when compared to the same 2022 period, was due to (i) a larger asset base as we continued to increase our allocation to this part of our investment portfolio and (ii) a higher book yield of 4.5% at December 31, 2023 compared to 3.7% at December 31, 2022.
The Term Loan 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,” which is defined as 1.65%, or the Highest Lawful Rate.
At December 31, 2022, the interest rate on the Term Loan was the one-month LIBOR (4.39% on December 31, 2022) plus the “Applicable Margin,” which was defined as 1.65%. In connection with our entry into the Revolving Credit Facility, we terminated the existing term loan and revolving line of credit.
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.
We had fixed income securities that were subject to interest rate risk with a fair value of $1,017.7 million at December 31, 2023. Our opportunistic fixed income securities are excluded from our interest rate sensitivity analysis as they are primarily floating rate and treated as held to maturity securities.
The average duration of the portfolio is approximately 1.4 years and 1.5 years as of December 31, 2022 and 2021, respectively. 41 Table of Conte nt s Equities The equities portfolio primarily consists of domestic preferred stocks, common equities, exchange traded funds, limited partnerships, limited liability corporations and other types of equity interests 76.3% of which are publicly traded.
Equities The equities portfolio primarily consists of domestic preferred stocks, common equities, exchange traded funds, limited partnerships, limited liability corporations and other types of equity interests, 77.2% of which are publicly traded.
Losses and LAE Development The following table sets forth the presentation of the development of the ultimate liability by accident year for the years ended December 31, 2022 and 2021: ($ 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 $ — $ — During the year ended December 31, 2022, our net incurred losses for accident years 2021 and prior developed unfavorably by $14.4 million which was related to losses subject to the LPT.
Losses and LAE Development The following table sets forth the presentation of the development of the ultimate liability by accident year for the years ended December 31, 2023 and 2022: ($ in thousands) Development (Favorable) Adverse Accident Year 2023 2022 Prior $ 10,132 $ 30,141 2020 7,903 (6,756) 2021 (27,312) (9,000) 2022 9,277 — Total $ — $ 14,385 Reserve development on losses subject to LPT $ — $ 14,385 Reserve development on losses excluding losses subject to LPT $ — $ — For the year ended December 31, 2023, the Company recognized favorable development related to prior years’ loss and loss expense reserves of $9.2 million in short tail/monoline specialty lines and adverse development of $11.9 million in multi-line solutions, respectively.
The increase in the expense ratio was primarily driven by changes in our mix of business resulting in higher net policy acquisition expenses combined with higher operating expenses due to our continued investment in new underwriters and underwriting teams. 39 Table of Conte nt s Investment Results The following table sets forth the components of net investment income and net investment (losses) gains for the years ended December 31, 2022 and 2021: 2022 2021 ($ 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 Net investment income was $36.9 million for the year ended December 31, 2022, compared to $24.6 million for the same 2021 period.
The increase in the net policy and acquisition expense ratio, when compared to the same 2022 period, was primarily driven by the shift in our mix of business offset by an improved other operating and general expense ratio, when compared to the same 2022 period, due to the increase in earned premiums. 40 Table of Contents Investment Results The following table sets forth the components of net investment income and net investment (losses) gains for the years ended December 31, 2023 and 2022: ($ in thousands) 2023 2022 Cash and short-term investments (1) $ 11,353 $ 1,427 Core fixed income 32,572 16,544 Opportunistic fixed income (6,844) 16,784 Equities 2,682 2,160 Net investment income (1) $ 39,763 $ 36,915 Net unrealized gains (losses) on securities still held $ 11,130 $ (15,058) Net realized losses (58) (647) Net investment gains (losses) $ 11,072 $ (15,705) (1) excludes income from operating cash for the years ended December, 31, 2023 and 2022.
Cash flows from operations in each of the past two years were used primarily to fund investing activities.
Cash flows from operations in each of the past two years were used primarily to fund investing activities. The change in net cash used in investing activities from 2023 to 2022 was primarily driven by an increase in the purchases of fixed maturity securities and short-term investments.
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, 2022: ($ 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 % 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.
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, 2023: ($ in thousands) Estimated Fair Value Estimated Change in Fair Value Estimated % Increase (Decrease) in Fair Value 300 basis point increase $ 887,124 $ (130,527) (12.8) % 200 basis point increase $ 929,996 $ (87,655) (8.6) % 100 basis point increase $ 973,505 $ (44,146) (4.3) % No change $ 1,017,651 $ — 0.0 % 100 basis point decrease $ 1,062,433 $ 44,782 4.4 % 200 basis point decrease $ 1,107,852 $ 90,201 8.9 % 300 basis point decrease $ 1,153,908 $ 136,257 13.4 % 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.
The change in our effective tax rate in 2022 when 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.
Our effective tax rate was 21.9% for the year ended December 31, 2023, compared to 20.9% for the year ended December 31, 2022. The change in our effective tax rate in 2023, when compared to 2022, was primarily due to the relationship of taxable to non-taxable income.
Recent Accounting Pronouncements We currently qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act.
A 5% change in net IBNR would result in a $27.0 million change in our reserves for losses and LAE and a $21.3 million change in net income and stockholders’ equity. Recent Accounting Pronouncements We currently qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act.
As of December 31, 2022, the opportunistic fixed income portfolio consisted of three components: diversified asset based lending (54.6%), commercial mortgage loans (26.5%) and cash and cash equivalents (18.9%). The diversified asset based lending portfolio includes floating rate senior secured asset-based loans with significant amounts of collateral and strong covenants.
As of December 31, 2023, the opportunistic fixed income portfolio consisted of three components: diversified asset based lending (55.1%), commercial mortgage loans (29.0%) and cash and cash equivalents (15.9%).
Contractual Obligations and Commitments The following table sets forth our contractual obligations and commercial commitments by due date as of December 31, 2022: Payments due by period ($ 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 45 Table of Conte nt s Reserves for losses and LAE represent our best estimate of the ultimate cost of settling reported and unreported claims and related expenses.
Contractual Obligations and Commitments The following table sets forth our contractual obligations and commercial commitments by due date as of December 31, 2023: Payments due by period ($ in thousands) Total Less Than One Year One Year or More Reserves for losses and LAE $ 1,314,501 $ 579,852 $ 734,649 Long-term debt 129,794 59,794 70,000 Interest on debt obligations 109,196 10,408 98,788 Operating lease obligations 5,784 1,671 4,113 Total $ 1,559,275 $ 651,725 $ 907,550 Reserves for losses and LAE represent our best estimate of the ultimate cost of settling reported and unreported claims and related expenses.
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.
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. 45 Table of Contents The timing of our cash flows from operating activities can vary among periods due to the timing by which payments are made or received.
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.
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 3.2 years as of December 31, 2023.
The Company expects to recognize an increase in the allowance for uncollectible reinsurance of approximately $2.3 million an d an increase in accumulated deficit of approximately $2.3 million, net of tax.
The adoption of ASU 2016-13 resulted in the Company recognizing an increase in the allowance for uncollectible reinsurance of $2.3 million an d an increase, net of tax, in accumulated deficit of $2.3 million. In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures (Topic 280).
As of December 31, 2022, our net loss reserves subject to the LPT were $68.6 million. We materially strengthened our reserves subject to the LPT in line with the in depth actuarial and claims analyses performed specific to our business subject to the LPT.
As of December 31, 2023, our net loss reserves subject to the LPT were $44.8 million compared to $68.6 million as of December 31, 2022. During 2022 we materially strengthened our reserves subject to the LPT. Since the inception of the LPT, as of December 31, 2023 we have reduced the number of open claims by 79.5%.
Net earned premiums were $616.0 million for the year ended December 31, 2022, compared to $499.8 million for the same 2021 period, an increase of $116.2 million or 23.2%. The increase in net earned premiums was primarily driven by the same reasons that drove the increase in gross written premiums discussed above.
The increase in net earned premiums was primarily driven by the same reasons that drove the increase in gross written premiums discussed above.
Any amounts drawn on the LOCs must either be repaid, or the balance constitutes additional borrowings under the Revolver. As of December 31, 2022, there were no LOCs issued. Trust Preferred In August 2006, we received $58.0 million of proceeds from a debenture offering through a statutory trust, Delos Capital Trust (the “Trust”).
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 gross written premium increases were primarily driven by (i) retention, (ii) rate increases, and (iii) new business. Growth was also impacted by the addition of new products and expanded coverage offerings, new underwriting teams and new tech-enabled partnerships. Partially offsetting the increase in gross written premiums was the continued impact of the run-off of exited business.
The gross written premium increases were primarily driven by (i) new business, (ii) rate increases, and (iii) retention.
(2) Includes cash on settlements that have not yet been redeployed.
(2) Includes cash on settlements that have not yet been redeployed. The average duration of the portfolio is approximately 1.3 years and 1.4 years as of December 31, 2023 and 2022, respectively.
Removed
During the year ended December 31, 2021, our net incurred losses and LAE for accident years 2020 and prior developed adversely by $28.0 million driven by $28.8 million of adverse development in exited lines and $4.8 million of adverse development in multi-line solutions, partially offset by $5.6 million of favorable development in short tail lines.

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