What changed in this filing

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Item 1. Financial Statements

2023-08-03 compared with 2023-05-08 · 1275 added, 112 removed, 358 unchanged (79% of the section changed)

Financial Statements

Palomar Holdings, Inc.

Palomar Holdings,  

and Subsidiaries

1 unchanged sentence

(in thousands, except shares and par value data)

December 31 ,

Fixed maturity securities available for sale, at fair value (amortized cost:

1 unchanged sentence

$ 561,580 in 2022)

$ 560,121  

$ 515,064  

Equity securities, at fair value (cost:

1 unchanged sentence

$ 42,352 in 2022)

41,428  

38,576  

Total investments

601,549  

553,640  

Cash and cash equivalents

58,310  

68,108  

Restricted cash

1 unchanged sentence

Premiums receivable

243,002  

162,858  

Deferred policy acquisition costs, net of ceding commissions and fronting fees

55,913  

56,740  

Reinsurance recoverable on paid losses and loss adjustment expenses

39,101  

39,718  

Reinsurance recoverable on unpaid losses and loss adjustment expenses

216,783  

153,895  

Ceded unearned premiums

242,452  

204,084  

Prepaid expenses and other assets

60,125  

44,088  

Deferred tax assets, net

10,617  

10,622  

Property and equipment, net

Intangible assets, net

Goodwill and intangible assets, net

13,095  

$ 1,546,307  

$ 1,306,450  

Liabilities and stockholders' equity

Accounts payable and other accrued liabilities

$ 24,838  

$ 25,760  

Reserve for losses and loss adjustment expenses

298,083  

231,415  

Unearned premiums

528,289  

471,314  

Ceded premium payable

199,611  

146,127  

Funds held under reinsurance treaty

10,378  

10,680  

Borrowings from credit agreements

71,400  

36,400  

Total liabilities

1,132,599  

921,696  

Stockholders' equity:

Preferred stock, $ 0.0001 par value, 5,000,000 shares authorized, 0 shares issued and outstanding as of March 31, 2023 and December 31, 2022

Common stock, $ 0.0001 par value, 500,000,000 shares authorized, 24,942,196 and 25,027,467 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively

Preferred stock, $ 0.0001 par value, 5,000,000 shares authorized, 0 shares issued and outstanding as of June 30, 2023 and December 31, 2022

Common stock, $ 0.0001 par value, 500,000,000 shares authorized, 24,794,269 and 25,027,467 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively

Additional paid-in capital

341,413  

333,558  

Accumulated other comprehensive loss

( 34,726 )  

Retained earnings

107,018  

87,708  

Total stockholders' equity

413,708  

384,754  

Total liabilities and stockholders' equity

$ 1,546,307  

$ 1,306,450  

See accompanying notes.

Palomar Holdings, Inc.

Palomar Holdings,  

and Subsidiaries

2 unchanged sentences

Three Months Ended

Six Months Ended

Gross written premiums

$ 274,296  

$ 218,689  

$ 524,407  

$ 389,623  

Ceded written premiums

( 169,109 )  

( 122,627 )  

( 339,453 )  

Net written premiums

105,187  

96,062  

184,954  

177,444  

Change in unearned premiums

( 22,080 )  

( 15,797 )  

( 18,607 )  

Net earned premiums

83,107  

80,265  

166,347  

156,297  

Net investment income

10,661  

Net realized and unrealized gains (losses) on investments

( 4,735 )  

Commission and other income

Total revenues

90,396  

79,660  

179,597  

157,769  

Losses and loss adjustment expenses

17,905  

14,398  

38,557  

29,351  

Acquisition expenses, net of ceding commissions and fronting fees

26,057  

28,663  

51,736  

56,718  

Other underwriting expenses

22,350  

18,195  

41,572  

34,119  

Interest expense

Total expenses

67,376  

61,367  

133,949  

120,392  

Income before income taxes

23,020  

18,293  

45,648  

37,377  

Income tax expense

10,774  

17,562  

14,589  

34,874  

29,126  

Other comprehensive income (loss), net:

Net unrealized gains (losses) on securities available for sale

( 3,685 )  

( 14,065 )  

Net comprehensive income (loss)

$ 13,877  

$ 36,663  

Per Share Data:

Basic earnings per share

$ 0.71  

$ 0.58  

$ 1.40  

$ 1.15  

Diluted earnings per share

$ 0.69  

$ 0.57  

$ 1.37  

$ 1.13  

Weighted-average common shares outstanding:

24,833,852  

25,211,924  

24,901,403  

25,283,222  

25,309,526  

25,746,780  

25,384,409  

25,817,442  

See accompanying notes.

Palomar Holdings, Inc.

Palomar Holdings,  

and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

Condensed Consolidated Statements of Changes in Stockholders ’

Equity (Unaudited)

(in thousands, except share data)

3 unchanged sentences

Balance at December 31, 2021

25,428,929  

$ 318,902  

$ 5,312  

$ 69,952  

$ 394,169  

Other comprehensive loss, net of tax

( 32,528 )  

Stock-based compensation

1 unchanged sentence

Issuance of common stock via equity incentive plan

132,137  

Repurchases of common stock

Balance at March 31, 2022

( 347,013 )  

( 20,273 )  

29,126  

Balance at June 30, 2022

25,220,131  

$ 326,473  

$ ( 27,216 )  

$ 78,805  

$ 378,065  

Balance at December 31, 2022

25,027,467  

$ 333,558  

$ ( 36,515 )  

$ 87,708  

$ 384,754  

Other comprehensive income, net of tax

2 unchanged sentences

Issuance of common stock via equity incentive plan

60,240  

Repurchases of common stock

Balance at March 31, 2023

( 301,162 )  

( 15,564 )  

34,874  

Balance at June 30, 2023

24,794,269  

$ 341,413  

$ ( 34,726 )  

$ 107,018  

$ 413,708  

See accompanying notes.

Palomar Holdings, Inc.

Palomar Holdings,  

and Subsidiaries

1 unchanged sentence

(in thousands)

Three Months Ended

Six Months Ended

Operating activities

7 unchanged sentences

Change in securities receivable or payable, net

Payment of additional costs associated with purchase of policy renewal rights

Acquisitions, net of cash acquired

Net cash used in investing activities

16 unchanged sentences

See accompanying notes.

Palomar Holdings, Inc.

Palomar Holdings,  

and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

to Condensed Consolidated Financial Statements (Unaudited)

Summary of Operations and Basis of Presentation

Summary of Operations

Palomar Holdings, Inc.

(the “Company”) is a Delaware incorporated insurance holding company that was founded in 2014.

The Company has several wholly owned subsidiaries including an Oregon domiciled insurance company, Palomar Specialty Insurance Company (“PSIC”), a Bermuda based reinsurance company, Palomar Specialty Reinsurance Company Bermuda Ltd.

(“PSRE”), an Arizona domiciled surplus lines insurance company, Palomar Excess and Surplus Insurance Company (“PESIC”), and a California domiciled property and casualty insurance agency, Palomar Insurance Agency, DBA Palomar General Insurance Agency (“PGIA”).

Palomar Holdings, Inc.

(the “Company”) is a Delaware incorporated insurance holding company that was founded in 2014.

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S.

generally accepted accounting principles (“GAAP”) for interim financial information and include the accounts of the Company and its wholly-owned subsidiaries.

generally accepted accounting principles (“GAAP”) for interim financial information and include the accounts of the Company and its wholly‑owned subsidiaries.

These condensed consolidated financial statements do not contain all information and footnotes required by U.S.

GAAP for complete consolidated financial statements.

For a more complete description of the Company’s business and accounting policies, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 1, 2023 (the “2022 Annual Report on Form 10-K”).

For a more complete description of the Company’s business and accounting policies, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10 -K for the year ended December 31, 2022 , filed with the SEC on March 1, 2023 ( the “2022 Annual Report on Form 10 -K”).

In the opinion of management, all adjustments necessary for a fair presentation of the condensed consolidated financial statements have been included.

6 unchanged sentences

All revisions to accounting estimates are recognized in the period in which the estimates are revised.

Significant estimates reflected in the Company’s condensed consolidated financial statements include, but are not limited to, reserves for losses and loss adjustment expenses, reinsurance recoverables on unpaid losses, and the fair values of investments.

Recent Accounting Pronouncements

Recently adopted accounting pronouncements

The Company has not adopted any new accounting guidance during the three months ended March 31, 2023.

The Company has not adopted any new accounting guidance during the six  months ended June 30, 2023 .

Recently issued accounting pronouncements not yet adopted

There are not currently any recent accounting pronouncements or pending accounting guidance that have significance, or potential significance, to the Company’s consolidated financial statements.

The Company’s available-for-sale investments are summarized as follows:

March 31, 2023

There are not currently any recent accounting pronouncements or pending accounting guidance that have significance, or potential significance, to the Company’s consolidated financial statements.

The Company’s available‑for‑sale investments are summarized as follows:

June 30, 2023

Credit Losses

1 unchanged sentence

Fixed maturities:

$ 45,975  

$ ( 2,178 )  

$ 43,797  

States, territories, and possessions

( 457 )  

Political subdivisions

( 479 )  

Special revenue excluding mortgage/asset-backed securities

35,788  

( 3,784 )  

32,073  

Corporate and other

301,975  

( 23,790 )  

( 904 )  

277,701  

Mortgage/asset-backed securities

211,019  

( 14,120 )  

197,150  

Total available-for-sale investments

$ 605,040  

$ ( 44,808 )  

$ ( 904 )  

$ 560,121  

December 31, 2022

2 unchanged sentences

Fixed maturities:

$ 50,802  

$ ( 2,253 )  

$ 48,551  

States, territories, and possessions

( 552 )  

Political subdivisions

( 621 )  

Special revenue excluding mortgage/asset-backed securities

37,260  

( 4,487 )  

32,799  

Corporate and other

278,164  

( 23,912 )  

( 236 )  

254,095  

Mortgage/asset-backed securities

184,578  

( 14,862 )  

169,967  

Total available-for-sale investments

$ 561,580  

$ ( 46,687 )  

$ ( 236 )  

$ 515,064  

Security holdings in an unrealized loss position

As of March 31, 2023, the Company held 538 fixed maturity securities in an unrealized loss position with a total estimated fair value of $ 497.9 million and total gross unrealized losses of $ 40.4 million.

As of December 31, 2022, the Company held 543 fixed maturity securities in an unrealized loss position with a total estimated fair value of $ 484.7 million and total gross unrealized losses of $ 46.9 million.

The aggregate fair value and gross unrealized losses of the Company’s investments aggregated by investment category and the length of time these individual securities have been in a continuous unrealized loss position as of March 31, 2023 and December 31, 2022, are as follows:

As of June 30, 2023 , the Company held 551  fixed maturity securities in an unrealized loss position with a total estimated fair value of $ 508.5  million and total gross unrealized losses of $ 44.8  million.

As of December 31, 2022 , the Company held 543  fixed maturity securities in an unrealized loss position with a total estimated fair value of $ 484.7  million and total gross unrealized losses of $ 46.9  million.

The aggregate fair value and gross unrealized losses of the Company’s investments aggregated by investment category and the length of time these individual securities have been in a continuous unrealized loss position as of June 30, 2023 and December 31, 2022 , are as follows:

Less Than 12 Months

More Than 12 Months

March 31, 2023

June 30, 2023

(in thousands)

Fixed maturity securities:

$ 11,832  

$ ( 343 )  

$ 31,166  

$ ( 1,835 )  

$ 42,998  

States, territories, and possessions

( 36 )  

( 421 )  

Political subdivisions

( 478 )  

Special revenue excluding mortgage/asset-backed securities

( 36 )  

27,438  

( 3,749 )  

29,078  

Corporate and other

89,468  

( 3,501 )  

169,532  

( 20,289 )  

259,000  

Mortgage/asset-backed securities

75,525  

( 2,586 )  

94,616  

( 11,534 )  

170,141  

$ 180,176  

$ ( 6,502 )  

$ 328,315  

$ ( 38,306 )  

$ 508,491  

Less Than 12 Months

3 unchanged sentences

Fixed maturity securities:

$ 41,077  

$ ( 1,523 )  

$ 6,853  

$ ( 730 )  

$ 47,930  

States, territories, and possessions

( 552 )  

Political subdivisions

( 621 )  

Special revenue excluding mortgage/asset-backed securities

25,091  

( 3,287 )  

( 1,200 )  

30,171  

Corporate and other

192,185  

( 15,667 )  

55,605  

( 8,481 )  

247,790  

Mortgage/asset-backed securities

118,815  

( 9,908 )  

32,448  

( 4,954 )  

151,263  

$ 384,693  

$ ( 31,558 )  

$ 99,986  

$ ( 15,365 )  

$ 484,679  

The Company reviews all securities with unrealized losses on a quarterly basis to assess whether the decline in the securities fair value necessitates the recognition of an allowance for credit losses.

1 unchanged sentence

The Company has recorded an allowance for credit losses for two investment securities.

Based on the Company’s review as of March 31, 2023, for the remainder of securities, the Company determined that the fixed maturity securities’ unrealized losses were primarily the result of the interest rate environment and not the credit quality of the issuers.

Based on the Company’s review as of June 30, 2023 , for the remainder of securities, the Company determined that the fixed maturity securities’

unrealized losses were primarily the result of the interest rate environment and not the credit quality of the issuers.

The Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before the recovery of their amortized cost basis.

Contractual maturities of available-for-sale fixed maturity securities

The amortized cost and fair value of fixed maturity securities at March 31, 2023, by contractual maturity, are shown below.

Contractual maturities of available ‑

sale fixed maturity securities

The amortized cost and fair value of fixed maturity securities at June 30, 2023 , by contractual maturity, are shown below.

(in thousands)

Due within one year

$ 45,887  

$ 44,464  

Due after one year through five years

167,430  

156,746  

Due after five years through ten years

144,598  

130,308  

Due after ten years

36,106  

31,453  

Mortgage and asset-backed securities

211,019  

197,150  

$ 605,040  

$ 560,121  

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.

2 unchanged sentences

Three Months Ended

Six Months Ended

(in thousands)

Interest income

$ 5,456  

$ 3,082  

$ 10,516  

$ 5,640  

Dividend income

Investment expense

( 125 )  

( 127 )  

( 246 )  

Net investment income

$ 5,541  

$ 3,140  

$ 10,661  

$ 5,719  

Net realized and unrealized investment gains and losses

1 unchanged sentence

Three Months Ended

Six Months Ended

(in thousands)

Realized gains:

4 unchanged sentences

Losses on sales of fixed maturity securities

( 29 )  

( 116 )  

( 32 )  

Losses on sales of equity securities

Total realized losses

( 29 )  

( 116 )  

( 32 )  

Net realized investment gains

( 109 )  

Change in allowance for credit losses

( 667 )  

Net unrealized gains (losses) on equity securities

( 4,626 )  

Net realized and unrealized gains (losses) on investments

$ 1,127  

$ ( 4,735 )  

$ 1,273  

Realized gains and losses on disposition of investments are based on specific identification of the investments sold on the settlement date.

Proceeds from the sale of fixed maturity securities were $ 5.1 million and $ 4.8 million for the three months ended March 31, 2023 and 2022, respectively.

Proceeds from the sale of fixed maturity securities were $ 1.9  million and $ 1.0  million for the three months ended June 30, 2023 and 2022 , respectively.

Proceeds from the sale of fixed maturity securities were $ 7.1  million and $ 5.8  million for the six  months ended June 30, 2023 and 2022 , respectively.

The Company places securities on statutory deposit with certain state agencies to retain the right to do business in those states.

These securities are included in available-for-sale investments on the balance sheet.

As of March 31, 2023 and December 31, 2022, the carrying value of securities on deposit with state regulatory authorities was $ 9.6 million and $ 8.5 million, respectively.

These securities are included in available‑for‑sale investments on the balance sheet.

As of June 30, 2023 and December 31, 2022 , the carrying value of securities on deposit with state regulatory authorities was $ 8.6  million and $ 8.5  million, respectively.

Fair Value Measurements

Fair value is defined as the price that the Company would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment.

The three-tier hierarchy of inputs is summarized in the three broad levels listed below:

Level 1—Unadjusted quoted prices are available in active markets for identical investments as of the reporting date.

Level 2—Pricing inputs are quoted prices for similar investments in active markets;

The three‑tier hierarchy of inputs is summarized in the three broad levels listed below:

1—Unadjusted quoted prices are available in active markets for identical investments as of the reporting date.

2—Pricing inputs are quoted prices for similar investments in active markets;

quoted prices for identical or similar investments in inactive markets;

or valuations based on models where the significant inputs are observable or can be corroborated by observable market data.

Level 3—Pricing inputs into models are unobservable for the investment.

3—Pricing inputs into models are unobservable for the investment.

The unobservable inputs require significant management judgment or estimation.

2 unchanged sentences

The fair values obtained from the outside investment managers are reviewed for reasonableness and any discrepancies are investigated for final valuation.

The fair value of the Company’s investments in fixed maturity securities is estimated using relevant inputs, including available market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing.

An Option Adjusted Spread model is also used to develop prepayment and interest rate scenarios.

1 unchanged sentence

These fair value measurements are estimated based on observable, objectively verifiable market information rather than market quotes.

Therefore, these investments are classified and disclosed in Level 2 of the hierarchy.

The following tables present the hierarchy for financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022.

March 31, 2023

Therefore, these investments are classified and disclosed in Level 

2 of the hierarchy.

The following tables present the hierarchy for financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022 .

June 30, 2023

(in thousands)

Fixed maturity securities

$ 43,797  

States, territories, and possessions

1 unchanged sentence

Special revenue excluding mortgage/asset-backed securities

32,073  

Corporate and other

277,701  

Mortgage/asset-backed securities

197,150  

Equity securities

41,428  

Cash, cash equivalents, and restricted cash

58,604  

$ 100,032  

$ 560,121  

$ 660,153  

December 31, 2022

1 unchanged sentence

Fixed maturity securities

$ 48,551  

States, territories, and possessions

1 unchanged sentence

Special revenue excluding mortgage/asset-backed securities

32,799  

Corporate and other

254,095  

Mortgage/asset-backed securities

169,967  

Equity securities

38,576  

Cash, cash equivalents, and restricted cash

The carrying amounts of financial assets and liabilities reported in the accompanying condensed consolidated balance sheet including cash and cash equivalents, restricted cash, receivables, reinsurance recoverable, and accounts payable and other accrued liabilities approximate fair value due to their short term- maturity.

The carrying amount of the Company’s borrowings under the Federal Home Loan Bank (“FHLB”) line of credit and U.S.

Bank credit agreement (the “Credit Agreement”) approximate fair value as the Company is currently borrowing at a variable rate which frequently reprices at market rates.

68,164  

$ 106,740  

$ 515,064  

$ 621,804  

The carrying amount of the Company’s borrowings under the Federal Home Loan Bank (“FHLB”) line of credit and U.S.

Bank credit agreement (the “Credit Agreement”) approximate fair value as the Company is currently borrowing at a variable rate which frequently reprices at market rates.

Transfers between Level 3 and Level 2 securities result from changes in the availability of observable market inputs and are recorded at the beginning of the reporting period.

As of March 31, 2023 and December 31, 2022, the Company had no fixed income securities classified as Level 3.

As of June 30, 2023 and December 31, 2022 , the Company had no fixed income securities classified as Level 3.

Reserve for Losses and Loss Adjustment Expenses

The following table represents a reconciliation of changes in the ending reserve balances for losses and loss adjustment expenses (“LAE”):

Three Months Ended March 31,

The following table represents a reconciliation of changes in the ending reserve balances for losses and loss adjustment expenses (“LAE”):

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

Reserve for losses and LAE net of reinsurance recoverables at beginning of period

$ 81,366  

$ 51,386  

$ 77,520  

$ 45,419  

Incurred losses and LAE, net of reinsurance, related to:

18,539  

14,350  

35,839  

27,799  

( 634 )  

Total incurred

17,905  

14,398  

38,557  

29,351  

Loss and LAE payments, net of reinsurance, related to:

11,795  

27,208  

13,112  

Total payments

17,971  

10,014  

34,777  

19,001  

Reserve for losses and LAE net of reinsurance recoverables at end of period

81,300  

55,769  

81,300  

55,769  

Reinsurance recoverables on unpaid losses and LAE at end of period

216,783  

107,898  

216,783  

107,898  

Reserve for losses and LAE gross of reinsurance recoverables on unpaid losses and LAE at end of period

$ 298,083  

$ 163,667  

$ 298,083  

$ 163,667  

Considerable variability is inherent in the estimate of the reserve for losses and LAE.

Although management believes the liability recorded for losses and LAE is adequate, the variability inherent in this estimate could result in changes to the ultimate liability, which may be material to stockholders’ equity.

The Company experienced adverse prior year development of $ 3.4 and $ 1.5 million during the three months ended March 31, 2023 and 2022, respectively.

Adverse prior year development during the three months ended March 31, 2023 was primarily due to higher than anticipated severity of attritional losses, offset by lower than anticipated severity of catastrophe losses.

Adverse prior year development during the three months ended March 31, 2022 was primarily due to higher than anticipated severity of attritional losses from prior years.

Stockholders’ Equity

The Company experienced favorable prior year development of $ 0.6  million and insignificant adverse prior year development during the three months June 30, 2023 and 2022 , respectively.

The Company experienced adverse prior year development of $ 2.7  million and adverse prior year development of $ 1.6  million during the six  months June 30, 2023 and 2022 , respectively.

Favorable prior year development during the three months ended June 30, 2023 was primarily due to lower than anticipated severity of catastrophe losses, offset by higher than anticipated severity of attritional losses. Adverse prior year development during the three months ended June 30, 2022 was primarily due to higher than anticipated severity of catastrophe losses from prior years offset by favorable development on attritional losses.

Adverse prior year development during the six  months ended June 30, 2023 was primarily due to higher than anticipated severity of attritional losses, offset by lower than anticipated severity of catastrophe losses. Adverse prior year development during the three months ended June 30, 2022 was primarily due to higher than anticipated severity of attritional and catastrophe losses from prior years.

Stockholders ’

Common stock reserved for future issuance

Common stock reserved for future issuance consists of the following as of March 31, 2023:

Common stock reserved for future issuance consists of the following as of June 30, 2023 :

Stock options outstanding under 2019 Equity Incentive Plan

857,569  

Restricted stock units outstanding under 2019 Equity Incentive Plan

363,242  

Performance stock units outstanding under 2019 Equity Incentive Plan, at target

426,931  

Shares authorized for future issuance under 2019 Equity Incentive Plan

3,132,062  

Shares authorized for future issuance under 2019 Employee Stock Purchase Plan

1,140,126  

5,919,930  

Stock based compensation

The below table summarizes the Company’s stock-based compensation expense for each period presented:

Three months ended March 31,

The below table summarizes the Company’s stock-based compensation expense for each period presented:

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

Stock-Based Compensation

$ 3,697  

$ 2,704  

$ 7,147  

$ 5,463  

Stock-based compensation expense is recognized on a straight-line basis over the vesting period of equity-based awards.

For performance stock units (“PSUs”), any changes to expense resulting from differences in actual performance versus target are recognized over the remaining vesting period of the awards.

The Company does not apply a forfeiture rate to unvested awards and accounts for forfeitures as they occur.

All stock-based compensation is included in other underwriting expenses in the Company’s unaudited condensed consolidated statement of income and comprehensive income.

2019 Equity Incentive Plan

On April 16, 2019, the Company's 2019 Equity Incentive Plan (the “2019 Plan”) became effective.

The 2019 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance shares and units, and other cash-based or share-based awards.

On April 16, 2019, the Company's 2019 Equity Incentive Plan (the “2019 Plan”) became effective.

In addition, the 2019 Plan contains a mechanism through which the Company may adopt a deferred compensation arrangement in the future.

3 unchanged sentences

Stock Options

Recipients of stock options can purchase shares of the Company’s common stock at a price equal to the stock's fair market value on the grant date, determined by the closing price of the Company's common stock on the grant date.

Stock options vest over a two to four -year period with a portion vesting on the first anniversary of the grant date and the remainder vesting monthly over the remaining period, subject to continued service.

Stock options expire ten years after the grant date.

The following table summarizes stock option transactions for the three months ended March 31, 2023:

The following table summarizes stock option transactions for the six months ended June 30, 2023 :

Number of shares

3 unchanged sentences

Outstanding at January 1, 2023

882,892  

$ 33.85  

Options granted

Options exercised

( 17,659 )  

Options canceled

Outstanding at March 31, 2023

Vested and Exercisable at March 31, 2023

As of March 31, 2023, the Company had approximately $ 2.9 million of total unrecognized stock-based compensation expense related to stock options expected to be recognized over a weighted-average period of 1.47 years.

( 7,664 )  

Outstanding at June 30, 2023

857,569  

$ 33.86  

$ 24,922  

Vested and Exercisable at June 30, 2023

744,833  

$ 29.30  

$ 24,381  

As of June 30, 2023 , the Company had approximately $ 2.3  million of total unrecognized stock-based compensation expense related to stock options expected to be recognized over a weighted-average period of 1.4  years.

Restricted Stock Units

RSUs are valued using the closing price of the Company’s common stock on their grant date.

The Company has issued RSUs with vesting periods of one to five years.

All vesting is subject to continued service.

The following table summarizes RSU transactions for the three months ended March 31, 2023:

The following table summarizes RSU transactions for the six months ended June 30, 2023 :

Number of shares

1 unchanged sentence

Outstanding at January 1, 2023

Non-vested outstanding at March 31, 2023

As of March 31, 2023, the Company had approximately $ 19.7 million of total unrecognized stock-based compensation expense related to RSUs expected to be recognized over a weighted-average period of 2.8 years.

271,951  

$ 68.90  

142,374  

( 42,581 )  

( 8,502 )  

Non-vested outstanding at June 30, 2023

363,242  

$ 63.39  

As of June 30, 2023 , the Company had approximately $ 18.5  million of total unrecognized stock-based compensation expense related to RSUs expected to be recognized over a weighted-average period of 2.6  years.

Performance Stock Units

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These PSUs are earned based on the achievement of stock price milestones.

If the Company’s stock price reaches and remains at certain milestones for 30 days, the PSUs shall become earned units and will vest upon completion of a requisite service period of approximately five years from the date of grant.

As of March 31, 2023, none of the stock price milestones have been achieved.

For other PSUs outstanding, vesting of PSUs requires a period of future service and the number of shares that vest depends on performance relative to predetermined targets of the Company’s Gross Written Premiums and Adjusted Return on Equity as set by the Compensation Committee.

Prior to 2023, the PSU’s performance period was the fiscal year of the grant.

Beginning in 2023, the PSU’s performance period is primarily a three-year period beginning with the grant date.

As of June 30, 2023 , none of the stock price milestones have been achieved.

Prior to 2023, the PSU’s performance period was the fiscal year of the grant.

Beginning in 2023, the PSU’s performance period is primarily a three -year period beginning with the grant date.

At the end of the performance period, the actual results are measured against the predetermined targets to determine the number of PSUs to be earned as compensation.

The earned PSUs are then subject to a required service period of approximately three years from the grant date before vesting and being issued as common stock.

The following table summarizes PSU transactions for the three months ended March 31, 2023:

The following table summarizes PSU transactions for the three months ended June 30, 2023 :

Number of shares

1 unchanged sentence

Outstanding at January 1, 2023

Non-vested outstanding at March 31, 2023

383,103  

$ 37.62  

46,029  

( 2,201 )  

Non-vested outstanding at June 30, 2023

426,931  

$ 39.01  

The PSU grants above represent the number of shares that would vest based on achievement of all stock price milestones in the 2021 executive stock grants and the 100 % achievement of the predetermined performance conditions for the other PSU grants.

The actual number of PSUs which will vest is subject to adjustment based on the Company’s actual stock price performance and financial performance relative to the predetermined targets.

As of March 31, 2023,

the Company had approximately $ 12.5 million of total unrecognized stock-based compensation expense related to PSUs expected to be recognized over a weighted-average period of 3.23 years.

The actual number of PSUs which will vest is subject to adjustment based on the Company’s actual stock price performance and financial performance relative to the predetermined targets.

As of June 30, 2023 , the Company had approximately $ 11.4 million of total unrecognized stock-based compensation expense related to PSUs expected to be recognized over a weighted-average period of 3.0  years.

2019 Employee Stock Purchase Plan

On April 16, 2019, the Company's 2019 Employee Stock Purchase Plan “the “2019 ESPP”) became effective.

A total of 240,000 shares of common stock are initially authorized and reserved for issuance under the 2019 ESPP.

In addition, the 2019 ESPP provides for annual increases in the number of shares available for issuance on January 1 of each year through 2029, equal to the smaller of 240,000 shares of the Company’s common stock or such other amount as may be determined by the board of directors.

Under the 2019 ESPP, employees can purchase Company stock at a discount via payroll withholdings.

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During each discrete offering period employee funds are withheld, and the stock purchase occurs upon the conclusion of the offering period.

The Company issued 7,724 shares pursuant to the ESPP during the three months ended March 31, 2023.

The Company issued 7,724  shares pursuant to the ESPP during the six  months ended June 30, 2023 .

Share repurchases

In January 2022, the Board of Directors approved a new share repurchase program which replaced the existing program and authorized the repurchase of up to $ 100 million of outstanding shares of common stock over the period ending on March 31, 2024.

The Company purchased 134,680 shares for $ 6.8 million during the three months ended March 31, 2023.

The Company accounts for share repurchases by charging the excess of repurchase price over the common stock’s par value entirely to retained earnings.

In January 2022, the Board of Directors approved a share repurchase program which replaced the existing program and authorized the repurchase of up to $ 100 million of outstanding shares of common stock over the period ending on March 31, 2024.

The Company purchased 301,162  shares for $ 15.6  million at an average price of $ 53.4  per share under this program during the six  months ended June 30, 2023 .

Approximately $ 50.0  million remains available for future repurchases.

The Company accounts for share repurchases by charging the excess of repurchase price over the common stock’s par value entirely to retained earnings.

All repurchased shares are retired and become authorized but unissued shares.

Accumulated Other Comprehensive Income

Changes in accumulated other comprehensive income (loss) (“AOCI”) are as follows:

Three Months Ended March 31,

Changes in accumulated other comprehensive income (loss) (“AOCI”) are as follows:

Six Months Ended June 30,

(in thousands)

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Other comprehensive income (loss) before reclassification

Federal income tax expense

Federal income tax expense (benefit)

Other comprehensive income (loss) before reclassification, net of tax

Amounts reclassified from AOCI

Federal income tax expense

Federal income tax expense (benefit)

Amounts reclassified from AOCI, net of tax

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The Company also writes premiums under fronting agreements where it cedes the majority of the premium and risk in exchange for a fronting fee.

Gross written premiums (“GWP”) by product are presented below:

Three Months Ended March 31,

Gross written premiums (“GWP”) by product are presented below:

Three Months Ended June 30,

Six Months Ended June 30,

($ in thousands)

Fronting Premiums

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Gross written premiums by state are as follows:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

($ in thousands)

Total Gross Written Premiums

Gross written premiums by insurance subsidiary are as follows:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

($ in thousands)

Total Gross Written Premiums

The Company calculates its tax provision in interim periods using its best estimate of the effective tax rate expected for the full year.

During the three months ended March 31, 2023, the Company’s income tax rate of 23.5 % was higher than the statutory rate of 21 % due primarily to non-deductible executive compensation expense.

During the three months ended March 31, 2022, the Company’s income tax rate of 23.8 % was higher than the statutory rate of 21 % also due primarily to non-deductible executive compensation expense.

During the three months ended June 30, 2023 , the Company’s income tax rate of 23.7 % was higher than the statutory rate of 21 % due primarily to non-deductible executive compensation expense.

During the three months ended June 30, 2022 , the Company’s income tax rate of 

20.2 % was lower than the statutory rate of 21 % due primarily to the tax impact of the permanent component of employee stock option exercises.

For the six months ended June 30, 2023 , the Company’s tax rate of 

23.6 % was higher than the statutory rate due primarily to non-deductible executive compensation expense.

For the six months ended June 30, 2022 , the Company’s tax rate of 

22.1 % was higher than the statutory rate also due primarily to non-deductible executive compensation expense.

Earnings Per Share

The following table sets out earnings per share of common stock:

Three months ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands, except shares and per share data)

Weighted average common shares outstanding:

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The Company utilizes both excess of loss (XOL) and quota share reinsurance.

As of March 31, 2023, the Company’s catastrophe event retention is $ 12.5 million for all perils.

As of March 31, 2023, the Company’s XOL reinsurance structure provides protection up to $ 2.15 billion for earthquake events, $ 1.01 billion for Hawaii hurricane events, and $ 250 million for continental U.S.

As of June 30, 2023 , the Company’s catastrophe event retention is $ 17.5 million for all perils and the Company’s XOL reinsurance structure provides protection up to $ 2.66  billion for earthquake events, $ 900 million for Hawaii hurricane events, and $ 100 million for continental U.S.

hurricane events.

2 unchanged sentences

The catastrophe bond was completed through Torrey Pines Re Pte.

(“Torrey Pines Re Pte.”).

Torrey Pines Re Pte.

is a special purpose reinsurance vehicle incorporated in Singapore that provides Palomar with indemnity-based reinsurance covering earthquake events through June 1, 2024.

During the second quarter of 2022, the Company closed a $ 275 million 144A catastrophe bond which became effective June 1, 2022.

During the second quarter of 2023, the Company also closed a $ 200 million 144A catastrophe bond which became effective June 1, 2023.

This catastrophe bond was also completed through Torrey Pines Re Ltd and provides indemnity-based reinsurance covering earthquake events through June 1, 2026.

Credit Agreements

2 unchanged sentences

Bank National Association which provides a revolving credit facility of up to $ 100 million through December 8, 2026.

Interest on the credit facility

accrues on each SOFR rate loan at the applicable SOFR (as defined in the Credit Agreement) plus 1.75 % and on each base rate loan at the applicable Alternate Base Rate (as defined in the Credit Agreement) plus 0.75 %.

A loan may be either a SOFR rate loan or a base rate loan, at the Company’s discretion.

Interest on the credit facility accrues on each SOFR rate loan at the applicable SOFR (as defined in the Credit Agreement) plus 1.75 % and on each base rate loan at the applicable Alternate Base Rate (as defined in the Credit Agreement) plus 0.75 %.

A loan may be either a SOFR rate loan or a base rate loan, at the Company’s discretion.

Outstanding amounts under the Credit Agreement may be prepaid in full or in part at any time with no prepayment premium and may be reduced in full or in part at any time upon prior notice.

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If an event of default occurs, any debt may be declared immediately due and payable.

As of March 31, 2023, the Company was in compliance with all debt covenants.

As of March 31, 2023, the Company had $ 35.0 million of borrowings outstanding on the Credit Agreement at a rate of 6.55 %.

Interest expense on the Credit Agreement was $ 0.6 million for the three months ended March 31, 2023.

As of June 30, 2023 , the Company was in compliance with all debt covenants.

As of June 30, 2023 , the Company had no  borrowings outstanding on the Credit Agreement.

FHLB Line of Credit

The Company’s PSIC subsidiary is a member of the Federal Home Loan Bank of San Francisco (“FHLB”).

Membership in the FHLB provides PSIC access to collateralized advances, which can be drawn for general corporate purposes and used to enhance liquidity management.

All borrowings are fully secured by a pledge of specific investment securities of PSIC and the borrowing capacity is equal to 5 % of PSIC’s statutory admitted assets.

All borrowings are fully secured by a pledge of specific investment securities of PSIC and the borrowing capacity is equal to 10 % of PSIC’s statutory admitted assets.

All advances have a predetermined term and the interest rate varies based on the term of the advance.

As of March 31, 2023, the Company had $ 36.4 million of borrowings outstanding through the FHLB at the overnight rate of 5.04 %.

Interest expense on the FHLB line of credit was $ 0.4 million for the three months ended March 31, 2023.

As of June 30, 2023 , the Company had $ 71.4 million of borrowings outstanding through the FHLB at the overnight rate of 5.28 %.

Interest expense on the FHLB line of credit was $ 0.8 million and $ 1.3 million for the three and six months ended June 30, 2023 , respectively. 

Management ’

s Discussion and Analysis of Financial Condition and Results of Operations

The discussion and analysis below includes certain forward-looking statements that are subject to risks, uncertainties and other factors described in part II, item 1A of this Quarterly Report.

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors.

The results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2023, or for any other future period.

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report, and in conjunction with our audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K as filed with the SEC on March 1, 2023.

References to the "Company," "Palomar," "we," "us," and "our" are to Palomar Holdings,  

and its subsidiaries, unless the context otherwise requires.

We are a specialty insurance company that provides property and casualty insurance products to individuals and businesses.

We use our underwriting and analytical expertise to provide products for select markets that we believe are underserved by other insurance companies, including the market for earthquake insurance.

We use proprietary data analytics and a modern technology platform to offer our customers flexible products with customized and granular pricing for both the admitted and excess and surplus lines (“E&S”) markets.

We provide admitted insurance products through our Oregon domiciled insurance company, Palomar Specialty Insurance Company (“PSIC”), and E&S insurance products through our Arizona domiciled surplus lines insurance company, Palomar Excess and Surplus Insurance Company (“PESIC”).

Each of our insurance company subsidiaries as carries an “A-“

rating from A.M.

Best Company (“A.M.

Best”), a leading rating agency for the insurance industry.

We distribute our products through multiple channels, including retail agents, program administrators, wholesale brokers, and partnerships with other insurance companies.

Our business strategy is supported by a comprehensive risk transfer program with reinsurance coverage that we believe reduces earnings volatility and provides appropriate levels of protection from catastrophic events.

Our management team combines decades of insurance industry experience across specialty underwriting, reinsurance, program administration, distribution, and analytics.

Founded in 2014, we have significantly grown our business and have generated attractive returns.

We have organically increased gross written premiums from $16.6 million in our first year of operations to $881.9 million for the year ended December 31, 2022, which reflects a compound annual growth rate of approximately 64%.

We have also been profitable since 2016 and our net income growth since 2016 reflects a compound annual growth rate of 41%.

We seek to continuously grow our income by developing product offerings for lines of business that harness our core competencies and where we believe we can generate attractive risk adjusted returns.

Since 2021, we have introduced several new products including General Casualty, Fronting, Professional Liability, and Excess Property to diversify our book of business and broaden our product portfolio.

We believe that our market opportunity, distinctive products, and differentiated business model position us to grow our business profitably.

Components of Our Results of Operations

Gross Written Premiums

Gross written premiums are the amounts received or to be received for insurance policies written or assumed by us during a specific period of time without reduction for policy acquisition costs, reinsurance costs or other deductions.

The volume of our gross written premiums in any given period is generally influenced by:

Volume of new business submissions in existing products or partnerships;

Binding of new business submissions in existing products or partnerships into policies;

Entrance into new partnerships or the offering of new types of insurance products;

Exits from existing partnerships or reducing or ceasing to offer existing insurance products;

Renewal rates of existing policies;

Average size and premium rate of bound policies.

Our gross written premiums are also impacted when we assume unearned in-force premiums due to new partnerships or other business reasons.

In periods where we assume a large volume of unearned premiums, our gross written premiums may increase significantly compared to prior periods and the increase may not be indicative of future trends.

Ceded Written Premiums

Ceded written premiums are the amount of gross written premiums ceded to reinsurers.

We enter into reinsurance contracts to limit our exposure to potential losses and to provide additional capacity for growth.

We cede premiums through excess of loss (“XOL”) agreements, quota share agreements, and fronting agreements.

Ceded written premiums are earned pro-rata over the period of risk covered.

The volume of our ceded written premiums is impacted by the amount of our gross written premiums and our decisions to increase or decrease limits or retention levels in our XOL agreements and co-participation levels in our quota share agreements.

The volume of ceded written premiums is also impacted by the amount of premium we write under fronting agreements.

Our ceded written premiums can be impacted significantly in certain periods due to changes in quota share agreements.

In periods where we modify a quota share agreement, ceded written premiums may increase or decrease significantly compared to prior periods and these fluctuations may not be indicative of future trends.

Our XOL costs as a percentage of gross earned premiums also may vary each period due to changes in cost of XOL between contract periods, changes of premium in-force during the XOL contract period, or due to acceleration of XOL charges or the need to purchase additional reinsurance due to losses.

In addition, the volume of premiums ceded in fronting agreements each period may vary due to the timing of entering new fronting partnerships and terminations of fronting partnerships.

Net Earned Premiums

Net earned premiums represent the earned portion of our gross written premiums, less the earned portion that is ceded to third-party reinsurers under our reinsurance agreements.

The majority of our insurance policies have a term of one year and premiums are earned pro rata over the terms of the policies.

Commission and Other Income

Commission and other income consist of commissions earned on policies written on behalf of third party insurance companies where we have no exposure to the insured risk and certain fees earned in conjunction with underwriting policies.

Commission and other income are earned on the effective date of the underlying policy.

Losses and Loss Adjustment Expenses

Losses and loss adjustment expenses represent the costs incurred for losses, net of any losses ceded to reinsurers.

These expenses are a function of the size and term of the insurance policies we write and the loss experience associated with the underlying coverage.

Certain policies we write subject us to attritional losses such as building fires.

In addition, many of the policies we write subject us to catastrophe losses.

Catastrophe losses are certain losses resulting from events involving multiple claims and policyholders, including earthquakes, hurricanes, floods, convective storms, terrorist acts or other aggregating events.

Our losses and loss adjustment expenses are generally affected by:

The occurrence, frequency, and severity of catastrophe events in the areas where we underwrite policies relating to these perils;

The occurrence, frequency, and severity of non‑catastrophe attritional losses;

The mix of business written by us;

The reinsurance agreements we have in place at the time of a loss;

The geographic location and characteristics of the policies we underwrite;

Changes in the legal or regulatory environment related to the business we write;

Trends in legal defense costs;

Inflation in housing and construction costs;

Increases in amounts awarded by courts and juries.

Losses and loss adjustment expenses are based on an actuarial analysis of the estimated losses, including losses incurred during the period and changes in estimates from prior periods.

Losses and loss adjustment expenses may be paid out over multiple years.

Acquisition Expenses

Acquisition expenses are principally comprised of the commissions we pay retail agents, program administrators and wholesale brokers, net of ceding commissions and fronting fees we receive on business ceded under quota share and fronting reinsurance agreements.

In addition, acquisition expenses include premium‑related taxes and other fees.

Acquisition expenses related to each policy we write are deferred and expensed pro rata over the term of the policy.

We earn fronting fees consistent with how we earn premiums on the underlying insurance policies, on a pro-rata basis over the terms of the policies.

Other Underwriting Expenses

Other underwriting expenses represent the general and administrative expenses of our insurance operations including employee salaries and benefits, software and technology costs, office rent, stock-based compensation, licenses and fees, and professional services fees such as legal, accounting, and actuarial services.

Interest Expense

Interest expense consists of interest incurred on borrowings from our U.S.

Bank credit agreement and FHLB line of credit and the unused line fee and amortization of the commitment fee on our U.S.

Bank credit agreement.

Net Investment Income

We earn investment income on our portfolio of invested assets.

We invest primarily in investment grade fixed maturity securities, including U.S.

government issues, state government issues, mortgage and asset-backed obligations, and corporate bonds with a small portion of our portfolio in equity securities and cash and cash equivalents.

The principal factors that influence net investment income are the size of our investment portfolio, the yield on that portfolio, and investment management expenses.

As measured by amortized cost, which excludes fair value fluctuations from changes in interest rates or other factors, the size of our investment portfolio is mainly a function of our invested capital along with premium we receive from our insureds, less payments on policyholder claims and other operating expenses.

Our balance of invested capital may be impacted in the future by repurchases of shares of our common stock or borrowings under our credit agreements.

Net Realized and Unrealized Gains and Losses on Investments

Net realized and unrealized gains and losses on investments are a function of the difference between the amount received by us on the sale of a security and the security’s cost-basis, mark-to-market adjustments, credit losses recognized in earnings, and unrealized gains and losses on equity securities.

Unrealized gains and losses on fixed maturity securities are recognized as a component of other comprehensive income and do not impact our net income.

Income Tax Expense

Currently our income tax expense consists mainly of federal income taxes imposed on our operations.

Our effective tax rates are dependent upon the components of pretax earnings and the related tax effects.

Key Financial and Operating Metrics

We discuss certain key financial and operating metrics, described below, which provide useful information about our business and the operational factors underlying our financial performance.

Underwriting revenue is a non‑GAAP financial measure defined as total revenue, excluding net investment income and net realized and unrealized gains and losses on investments.

See “Reconciliation of Non‑GAAP Financial Measures”

for a reconciliation of total revenue calculated in accordance with GAAP to underwriting revenue.

Underwriting income is a non‑GAAP financial measure defined as income before income taxes excluding net investment income, net realized and unrealized gains and losses on investments, and interest expense.

See “Reconciliation of Non‑GAAP Financial Measures”

for a reconciliation of income before income taxes calculated in accordance with GAAP to underwriting income.

Adjusted net income is a non‑GAAP financial measure defined as net income excluding the impact of certain items that may not be indicative of underlying business trends, operating results, or future outlook, net of tax impact.

We calculate the tax impact only on adjustments which would be included in calculating our income tax expense using the estimated tax rate at which the company received a deduction for these adjustments.

See “Reconciliation of Non‑GAAP Financial Measures”

for a reconciliation of net income calculated in accordance with GAAP to adjusted net income.

Annualized return on equity is net income expressed on an annualized basis as a percentage of average beginning and ending stockholders’

equity during the period.

Annualized adjusted return on equity is a non‑GAAP financial measure defined as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending stockholders’

equity during the period.

See “Reconciliation of Non‑GAAP Financial Measures”

for a reconciliation of return on equity calculated using unadjusted GAAP numbers to adjusted return on equity.

Loss ratio , expressed as a percentage, is the ratio of losses and loss adjustment expenses, to net earned premiums.

Expense ratio, expressed as a percentage, is the ratio of acquisition and other underwriting expenses, net of commission and other income to net earned premiums.

Combined ratio is defined as the sum of the loss ratio and the expense ratio.

A combined ratio under 100% generally indicates an underwriting profit.

A combined ratio over 100% generally indicates an underwriting loss.

Adjusted combined ratio is a non‑GAAP financial measure defined as the sum of the loss ratio and the expense ratio calculated excluding the impact of certain items that may not be indicative of underlying business trends, operating results, or future outlook.

See “Reconciliation of Non‑GAAP Financial Measures”

for a reconciliation of combined ratio calculated using unadjusted GAAP numbers to adjusted combined ratio.

Diluted adjusted earnings per share  is a non‑GAAP financial measure defined as adjusted net income divided by the weighted-average common shares outstanding for the period, reflecting the dilution which could occur if equity-based awards are converted into common share equivalents as calculated using the treasury stock method. See “Reconciliation of Non‑GAAP Financial Measures”

for a reconciliation of diluted earnings per share calculated in accordance with GAAP to diluted adjusted earnings per share.

Catastrophe loss ratio is a non‑GAAP financial measure defined as the ratio of catastrophe losses to net earned premiums.

See “Reconciliation of Non‑GAAP Financial Measures”

for a reconciliation of loss ratio calculated using unadjusted GAAP numbers to catastrophe loss ratio.

Adjusted combined ratio excluding catastrophe losses is a non‑GAAP financial measure defined as adjusted combined ratio excluding the impact of catastrophe losses.

See “Reconciliation of Non‑GAAP Financial Measures”

for a reconciliation of combined ratio calculated using unadjusted GAAP numbers to adjusted combined ratio excluding catastrophe losses.

Adjusted underwriting income  is a non-GAAP financial measure defined as underwriting income excluding the impact of certain items that may not be indicative of underlying business trends, operating results, or future outlook.

See “Reconciliation of Non-GAAP Financial Measures”

for a reconciliation of income before income taxes calculated in accordance with GAAP to adjusted underwriting income.

Tangible stockholders ’

equity is a non‑GAAP financial measure defined as stockholders’

equity less intangible assets.

See “Reconciliation of Non‑GAAP Financial Measures”

for a reconciliation of stockholders’

equity calculated in accordance with GAAP to tangible stockholders’

Results of Operations

months ended June 30, 2023 compared to three  

months ended June 30, 2022

The following table summarizes our results for the three months ended June 30, 2023 and 2022:

Three Months Ended

($ in thousands, except per share data)

Gross written premiums

Ceded written premiums

Net written premiums

Net earned premiums

Commission and other income

Total underwriting revenue (1)

Losses and loss adjustment expenses

Acquisition expenses, net of ceding commissions and fronting fees

Other underwriting expenses

Underwriting income (1)

Interest expense

Net investment income

Net realized and unrealized gains (losses) on investments

Income before income taxes

Income tax expense

Net realized and unrealized (gains) losses on investments (2)

Stock-based compensation expense

Amortization of intangibles

Expenses associated with catastrophe bond

Adjusted net income (1)(2)

Key Financial and Operating Metrics

Annualized return on equity

Annualized adjusted return on equity (1)

Expense ratio

Combined ratio

Adjusted combined ratio (1)

Diluted earnings per share

Diluted adjusted earnings per share (1)

Catastrophe losses

Catastrophe loss ratio (1)

Adjusted combined ratio excluding catastrophe losses (1)

Adjusted underwriting income (1)

Indicates non-GAAP financial measure;

see “Reconciliation of Non‑GAAP Financial Measures” for a reconciliation of the non‑GAAP financial measures to their most directly comparable financial measures prepared in accordance with GAAP.

We now include the impact of net realized and unrealized losses and gains on investments as an adjustment to our net income.

As this balance is primarily driven by equity market fluctuations rather than our underlying business performance, we believe adding this adjustment provides a more meaningful comparison of our performance.

We have also changed the prior year adjusted net income to conform to this presentation.

Gross Written Premiums

Gross written premiums increased $55.6 million, or 25.4% to $274.3 million for the three months ended June 30, 2023 compared to $218.7 million for the three months ended June 30, 2022.

Premium growth was primarily due to an increased volume of policies written across our lines of business which was driven by new business generated with existing partners, strong premium retention rates for existing business, expansion of our distribution footprint, and new partnerships.

The following table summarizes our gross written premiums by line of business and shows each line’s percentage of total gross written premiums for each period:

Three Months Ended June 30,

($ in thousands)

Fronting Premiums

Residential Earthquake

Commercial Earthquake

Inland Marine

Commercial All Risk

Hawaii Hurricane

Residential Flood

Specialty Homeowners

Total Gross Written Premiums

During the fourth quarter of 2021, we launched our fronting business, known as PLMR-FRONT.

In a fronting agreement, we write the premium and then cede the majority of the premium and risk in exchange for a fronting fee, which is our primary source of profit in the arrangement.

We have subsequently entered several fronting partnerships which drove the above increase in premiums.

The volume of fronting premiums written each period may vary due to the timing of entering new fronting partnerships and terminations of existing fronting partnerships.

During the second quarter of 2022, we ceased writing Specialty Homeowners business outside of Texas and converted our Texas Specialty Homeowners business to a fronting arrangement beginning June 1, 2022.

These underwriting changes caused the decline in Specialty Homeowners premiums and contributed to the increase in Fronting premiums shown above. 

In addition, we have recently made underwriting changes to reduce our exposure to continental U.S.

hurricane events. 

These underwriting changes contributed to the decline in Commercial All Risk premiums shown above.

The following table summarizes our gross written premiums by insurance subsidiary:

Three Months Ended June 30,

($ in thousands)

Total Gross Written Premiums

Ceded Written Premiums

Ceded written premiums increased $46.5 million, or 37.9%, to $169.1 million for the three months ended June 30, 2023 from $122.6 million for the three months ended June 30, 2022.

The increase was primarily due to increased premiums ceded under quota share and fronting agreements due to growth in the volume of written premiums subject to quota share or fronting agreements.

In addition, we incurred increased excess of loss (“XOL”) reinsurance expense primarily due to growth in exposure, in addition to higher rates on XOL reinsurance.

Ceded written premiums as a percentage of gross written premiums increased to 61.7% for the three months ended June 30, 2023 from 56.1% for the three months ended June 30, 2022.

This increase was primarily due to increased fronting and quota share cessions as previously described.

Net Written Premiums

Net written premiums increased $9.1 million, or 9.5%, to $105.2 million for the three months ended June 30, 2023 from $96.1 million for the three months ended June 30, 2022.

The increase was primarily due to an increase in gross written premiums, primarily in our Residential Earthquake and Inland Marine lines partially offset by increased ceded written premiums.

Net Earned Premiums

Net earned premiums increased $2.8 million, or 3.5%, to $83.1 million for the three months ended June 30, 2023 from $80.3 million for the three months ended June 30, 2022 due primarily to the earning of increased gross written premiums offset by the earning of ceded written premiums under reinsurance agreements.

The table below shows the amount of premiums we earned on a gross and net basis and net earned premiums as a percentage of gross earned premiums in each period presented:

Three Months Ended

($ in thousands)

Gross earned premiums

Ceded earned premiums

Net earned premiums

Net earned premium ratio

The decline in net earned premium ratio shown above was primarily caused by an increase to fronting premiums whereby the majority of premium and exposure is ceded in exchange for a fronting fee which is recognized as an offset to acquisition expenses.

Commission and Other Income

Commission and other income decreased $0.4 million to $0.6 million for the three months ended June 30, 2023 from $1.0 million for the three months ended June 30, 2022.

The balance decreased due to a decrease in commissions from a lower volume of policies written through our internal managing general agency, Palomar Insurance Agency.

Losses and Loss Adjustment Expenses

Losses and loss adjustment expenses increased $3.5 million, or 24.4% to $17.9 million for the three months ended June 30, 2023 from $14.4 million for the three months ended June 30, 2022.

Losses and loss adjustment expenses consisted of the following elements during the respective periods:

Three Months Ended

($ in thousands)

Catastrophe losses

Non-catastrophe losses

Total losses and loss adjustment expenses

Our catastrophe loss ratio was 2.6% during the three months ended June 30, 2023.

Catastrophe losses for the quarter were primarily related to severe convective storms, offset by favorable development on prior year catastrophe events.

Our catastrophe loss ratio was 0.7% during the three months ended June 30, 2022.

Catastrophe losses were related to unfavorable development on prior year catastrophe events.

Our non-catastrophe loss ratio was 18.9% for the three months ended June 30, 2023 compared to 17.2% during the three months ended June 30, 2022.

Non-catastrophe losses increased due mainly to higher attritional losses on lines of business subject to attritional losses such as Commercial All Risk, Casualty, and Inland Marine.

Acquisition Expenses

Acquisition expenses decreased $2.6 million, or 9.1%, to $26.1 million for the three months ended June 30, 2023 from $28.7 million for the three months ended June 30, 2022.

The decrease was primarily due to higher earned ceding commissions and fronting fees due to an increase in premiums subject to a quota share or fronting agreement.

This was partially offset by higher commissions and premium-related taxes resulting from higher gross earned premiums.

Acquisition expenses as a percentage of gross earned premiums were 10.8% for the three months ended June 30, 2023 compared to 18.1% for the three months ended June 30, 2022.

Acquisition expenses as a percentage of gross earned premiums decreased due to the recognition of higher ceding commission and fronting fee income as a percentage of gross earned premiums resulting from changes in mix of business produced.

Other Underwriting Expenses

Other underwriting expenses increased $4.2 million, or 22.8%, to $22.4 million for the three months ended June 30, 2023 from $18.2 million for the three months ended June 30, 2022.

The increase was primarily due to the Company incurring higher payroll, technology, and stock-based compensation expenses associated with growth of the Company.

Other underwriting expenses as a percentage of gross earned premiums were 9.2% for the three months ended June 30, 2023 compared to 11.5% for the three months ended June 30, 2022.

Excluding the impact of expenses relating to transactions, stock-based compensation, amortization of intangibles, and catastrophe bonds, other underwriting expenses as a percentage of gross earned premiums were 6.9% for the three months ended June 30, 2023 compared to 8.5% for the three months ended June 30, 2022.

This percentage decreased due to an increase in earned premiums without a corresponding increase in operating expenses.

Other underwriting expenses as a percentage of gross earned premiums may fluctuate period over period based on timing of certain expenses relative to premium growth.

Net Investment Income and Net Realized and Unrealized Gains (Losses) on Investments

Net investment income increased $2.4 million, or 76.5%, to $5.5 million for the three months ended June 30, 2023 from $3.1 million for the three months ended June 30, 2022.

The increase was primarily due to a higher average balance of investments during the three months ended June 30, 2023 and higher yields on invested assets.

The Company incurred $1.1 million of net realized and unrealized gains on investments for the three months ended June 30, 2023 compared to $4.7 million of net realized and unrealized losses for the three months ended June 30, 2022 due primarily to gains on our equity securities during the period ended June 30, 2023 versus losses during the period ended June 30, 2022.

Unrealized gains and losses on fixed maturity securities are recognized as a component of other comprehensive income and do not impact our net income.

The following table summarizes the components of our investment income for each period presented:

Three Months Ended

($ in thousands)

Interest income

Dividend income

Investment management fees and expenses

Net investment income

Net realized and unrealized gains (losses) on investments

NM- not meaningful

Income Tax Expense

Income tax expense increased $1.8 million, or 47.4% to $5.5 million for the three months ended June 30, 2023 from $3.7 million for the three months ended June 30, 2022 due to higher pre-tax income and a higher tax rate for the period ended June 30, 2023.

During the three months ended June 30, 2023, our income tax rate of 23.7% was higher than the statutory rate of 21% due primarily to non-deductible executive compensation expense.

During the three months ended June 30, 2022, our income tax rate of 20.2% was lower than the statutory rate of 21% due primarily to the permanent component of employee stock option exercises.

Results of Operations

Six months ended June 30, 2023 compared to six months ended June 30, 2022

The following table summarizes our results for the six months ended June 30, 2023 and 2022:

Six Months Ended

($ in thousands, except per share data)

Gross written premiums

Ceded written premiums

Net written premiums

Net earned premiums

Commission and other income

Total underwriting revenue (1)

Losses and loss adjustment expenses

Acquisition expenses, net of ceding commissions and fronting fees

Other underwriting expenses

Underwriting income (1)

Interest expense

Net investment income

Net realized and unrealized gains (losses) on investments

Income before income taxes

Income tax expense

Net realized and unrealized (gains) losses on investments (2)

Expenses associated with transactions

Stock-based compensation expense

Amortization of intangibles

Expenses associated with catastrophe bond

Adjusted net income (1)(2)

Key Financial and Operating Metrics

Annualized return on equity

Annualized adjusted return on equity (1)

Expense ratio

Combined ratio

Adjusted combined ratio (1)

Diluted earnings per share

Diluted adjusted earnings per share (1)

Catastrophe losses

Catastrophe loss ratio (1)

Adjusted combined ratio excluding catastrophe losses (1)

Adjusted underwriting income (1)

Indicates non-GAAP financial measure;

see “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of the non-GAAP financial measures to their most directly comparable financial measures prepared in accordance with GAAP.

We now include the impact of net realized and unrealized losses and gains on investments as an adjustment to our net income.

We have also changed the prior year adjusted net income to conform to this presentation.

Gross Written Premiums

Gross written premiums increased $134.8 million, or 34.6% to $524.4 million for the six months ended June 30, 2023 compared to $389.6 million for the six months ended June 30, 2022.

The following table summarizes our gross written premiums by line of business and shows each line’s percentage of total gross written premiums for each period:

Six Months Ended June 30,

($ in thousands)

Fronting Premiums

Residential Earthquake

Commercial Earthquake

Inland Marine

Commercial All Risk

Hawaii Hurricane

Residential Flood

Specialty Homeowners

Total Gross Written Premiums

During the fourth quarter of 2021, we launched our fronting business, known as PLMR-FRONT.

In a fronting agreement, we write the premium and then cede the majority of the premium and risk in exchange for a fronting fee, which is our primary source of profit in the arrangement.

We expect to continue to write fronting premiums for the foreseeable future.

The volume of fronting premiums written each period may vary due to the timing of entering new fronting partnerships and terminations of fronting partnerships.

These underwriting changes caused the decline in Specialty Homeowners premiums and contributed to the increase in Fronting premiums shown above. In addition, we have recently made underwriting changes to reduce our exposure to continental U.S.

hurricane events. 

These underwriting changes contributed to the decline in Commercial All Risk premiums shown above.

The following table summarizes our gross written premiums by insurance subsidiary:

Six Months Ended June 30,

($ in thousands)

Total Gross Written Premiums

Ceded Written Premiums

Ceded written premiums increased $127.3 million, or 60.0%, to $339.5 million for the six months ended June 30, 2023 from $212.2 million for the six months ended June 30, 2022.

The increase was primarily due to increased premium ceded under fronting agreements due to growth in fronting premiums written and growth in the volume of written premiums subject to quota shares.

In addition, we incurred increased XOL reinsurance expense due to growth in exposure, in addition to higher rates on XOL reinsurance. 

Ceded written premiums as a percentage of gross written premiums increased to 64.7% for the six months ended June 30, 2023 from 54.5% for the six months ended June 30, 2022.

This increase was primarily due to increased quota share and fronting cessions as previously described.

Net Written Premiums

Net written premiums increased $7.5 million, or 4.2%, to $185.0 million for the six months ended June 30, 2023 from $177.4 million for the six months ended June 30, 2022.

The increase was primarily due to an increase in gross written premiums, primarily in our Commercial Earthquake and Inland Marine lines, partially offset by increased ceded written premiums.

Net Earned Premiums

Net earned premiums increased $10.1 million, or 6.4%, to $166.3 million for the six months ended June 30, 2023 from $156.3 million for the six months ended June 30, 2022 due primarily to the earning of increased gross written premiums offset by the earning of ceded written premiums under reinsurance agreements.

The table below shows the amount of premiums we earned on a gross and net basis and net earned premiums as a percentage of gross earned premiums in each period presented.

Six Months Ended

($ in thousands)

Gross earned premiums

Ceded earned premiums

Net earned premiums

Net earned premium ratio

The decline in earned premium ratio shown above was primarily caused by an increase to fronting premiums whereby the majority of premium and exposure is ceded in exchange for a fronting fee which is recognized as an offset to acquisition expenses.

Commission and Other Income

Commission and other income decreased by $0.5 million, or 25.5%, to $1.3 million for the six months ended June 30, 2023, from $1.8 million for the six months ended June 30, 2022.

The balance decreased due to a decrease in commissions from a lower volume of policies written through our internal managing general agency, Palomar Insurance Agency.

Losses and Loss Adjustment Expenses

Losses and loss adjustment expenses increased $9.2 million to $38.6 million for the six months ended June 30, 2023 from $29.4 million for the six months ended June 30, 2022.

Losses and loss adjustment expenses consisted of the following elements during the respective periods:

Six Months Ended

($ in thousands)

Catastrophe losses

Non-catastrophe losses

Total losses and loss adjustment expenses

Our catastrophe loss ratio was 2.4% during the six months ended June 30, 2023.

Catastrophe losses were related to floods occurring during the first quarter and severe convective storms occurring during the second quarter.

Our catastrophe loss ratio was 0.7% during the six months ended June 30, 2022.

Catastrophe losses were related to unfavorable development on prior year catastrophe events.

Our non-catastrophe loss ratio was 20.8% for the six months ended June 30, 2023 compared to 18.1% during the six months ended June 30, 2022.

Non-catastrophe losses increased due mainly to higher attritional losses on lines of business subject to attritional losses such as Commercial All Risk, Casualty, and Inland Marine.

Acquisition Expenses

Acquisition expenses decreased $5.0 million, or 8.8%, to $51.7 million for the six months ended June 30, 2023 from $56.7 million for the six months ended June 30, 2022.

The decrease was primarily due to higher earned ceding commissions and fronting fees due to an increase in premiums subject to a quota share or fronting agreement.

This was partially offset by higher commissions and premium-related taxes resulting from higher gross earned premiums.

Acquisition expenses as a percentage of gross earned premiums were 11.1% for the six months ended June 30, 2023 compared to 19.1% for the six months ended June 30, 2022.

Other Underwriting Expenses

Other underwriting expenses increased $7.5 million, or 21.8%, to $41.6 million for the six months ended June 30, 2023 from $34.1 million for the six months ended June 30, 2022.

The increase was primarily due to the Company incurring higher payroll, technology, stock-based compensation, and professional fees expenses associated with growth of the Company.

Other underwriting expenses as a percentage of gross earned premiums were 8.9% for the six months ended June 30, 2023 compared to 11.5% for the six months ended June 30, 2022.

Excluding the impact of expenses relating to transactions, stock-based compensation, amortization of intangibles, and catastrophe bonds, other underwriting expenses as a percentage of gross earned premiums were 6.9% for the six months ended June 30, 2023 compared to 8.7% for the six months ended June 30, 2022.

This percentage decreased due to an increase in earned premiums without a corresponding increase in operating expenses.

Other underwriting expenses as a percentage of gross earned premiums may fluctuate period over period based on timing of certain expenses relative to premium growth.

Net Investment Income and Net Realized and Unrealized Gains (Losses) on Investments

Net investment income increased $4.9 million, or 86.4%, to $10.7 million for the six months ended June 30, 2023 from $5.7 million for the six months ended June 30, 2022.

The increase was primarily due to a higher average balance of investments during the six months ended June 30, 2023 and higher yields on invested assets.

The Company incurred $1.3 million of net realized and unrealized gains on investments for the six months ended June 30, 2023 compared to $6.0 million of net realized and unrealized losses for the six months ended June 30, 2022 due primarily to gains on our equity securities during the period ended June 30, 2023 compared to losses during the period ended June 30, 2022.

Unrealized gains and losses on fixed maturity securities are recognized as a component of other comprehensive income and do not impact our net income.

The following table summarizes the components of our investment income for each period presented:

Six Months Ended

($ in thousands)

Interest income

Dividend income

Investment management fees and expenses

Net investment income

Net realized and unrealized gains (losses) on investments

Income Tax Expense

Income tax expense increased $2.5 million or 30.6% to $10.8 million for the six months ended June 30, 2023 from $8.3 million for the six months ended June 30, 2022 due to higher pre-tax income and a higher effective tax rate during the six months ended June 30, 2023.

During the six months ended June 30, 2023, our income tax rate of 23.6% was higher than the statutory rate of 21% due primarily to non-deductible executive compensation expense.

For the six months ended June 30, 2022 our income tax rate of 22.1% was higher than the statutory rate also due primarily to non-deductible executive compensation expense.

Reconciliation of Non ‑

GAAP Financial Measures

Underwriting Revenue

We define underwriting revenue as total revenue excluding net investment income and net realized and unrealized gains and losses on investments.

Underwriting revenue represents revenue generated by our underwriting operations and allows us to evaluate our underwriting performance without regard to investment results.

We use this metric as we believe it gives our management and other users of our financial information useful insight into our underlying business performance.

Underwriting revenue should not be viewed as a substitute for total revenue calculated in accordance with GAAP, and other companies may define underwriting revenue differently.

Total revenue calculated in accordance with GAAP reconciles to underwriting revenue as follows:

Three Months Ended

Six Months Ended

(in thousands)

Total revenue

Net investment income

Net realized and unrealized (gains) losses on investments

Underwriting revenue

Underwriting Income and Adjusted Underwriting Income

We define underwriting income as income before income taxes excluding net investment income, net realized and unrealized gains and losses on investments, and interest expense.

Underwriting income represents the pre‑tax profitability of our underwriting operations and allows us to evaluate our underwriting performance without regard to investment results.

We use this metric as we believe it gives our management and other users of our financial information useful insight into our underlying business performance.

Underwriting income should not be viewed as a substitute for pre‑tax income calculated in accordance with GAAP, and other companies may define underwriting income differently.

We define adjusted underwriting income as underwriting income excluding the impact of certain items that may not be indicative of underlying business trends, operating results, or future outlook.

We use this metric as we believe it gives our management and other users of our financial information useful insight into our underlying business performance.

Adjusted underwriting income should not be viewed as a substitute for pre‑tax income calculated in accordance with GAAP.

Other companies may define adjusted underwriting income differently.

Income before income taxes calculated in accordance with GAAP reconciles to underwriting income and adjusted underwriting income as follows:

Three Months Ended

Six Months Ended

(in thousands)

Income before income taxes

Net investment income

Net realized and unrealized (gains) losses on investments

Interest expense

Underwriting income

Expenses associated with transactions

Stock-based compensation expense

Amortization of intangibles

Expenses associated with catastrophe bond

Adjusted underwriting income

Adjusted Net Income

We define adjusted net income as net income excluding the impact of certain items that may not be indicative of underlying business trends, operating results, or future outlook, net of tax impact.

We use adjusted net income as an internal performance measure in the management of our operations because we believe it gives our management and financial statement users useful insight into our results of operations and our underlying business performance.

Adjusted net income does not reflect the overall profitably of our business and should not be viewed as a substitute for net income calculated in accordance with GAAP.

Other companies may define adjusted net income differently.

Net income calculated in accordance with GAAP reconciles to adjusted net income as follows:

Three Months Ended

Six Months Ended

(in thousands)

Net realized and unrealized (gains) losses on investments

Expenses associated with transactions

Stock-based compensation expense

Amortization of intangibles

Expenses associated with catastrophe bond

Adjusted net income

Annualized Adjusted Return on Equity

We define annualized adjusted return on equity as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending stockholders’

equity during the period.

We use annualized adjusted return on equity as an internal performance measure in the management of our operations because we believe it gives our management and financial statement users useful insight into our results of operations and our underlying business performance.

Annualized adjusted return on equity should not be viewed as a substitute for return on equity calculated using unadjusted GAAP numbers, and other companies may define adjusted return on equity differently.

Annualized adjusted return on equity is calculated as follows:

Three Months Ended

Six Months Ended

(in thousands)

Annualized adjusted net income

Average stockholders' equity

Annualized adjusted return on equity

Adjusted Combined Ratio

We define adjusted combined ratio as the sum of the loss ratio and the expense ratio calculated excluding the impact of certain items that may not be indicative of underlying business trends, operating results, or future outlook.

We use adjusted combined ratio as an internal performance measure in the management of our operations because we believe it gives our management and financial statement users useful insight into our results of operations and our underlying business performance.

Adjusted combined ratio should not be viewed as a substitute for combined ratio calculated using unadjusted GAAP numbers, and other companies may define adjusted combined ratio differently.

Adjusted combined ratio is calculated as follows:

Three Months Ended

Six Months Ended

(in thousands)

Sum of losses and loss adjustment expenses, acquisition expenses, and other underwriting expenses, net of commission and other income

Net earned premiums

Combined ratio

Adjustments to numerator:

Expenses associated with transactions

Stock-based compensation expense

Amortization of intangibles

Expenses associated with catastrophe bond

Adjusted combined ratio

Diluted Adjusted Earnings Per Share

We define diluted adjusted earnings per share as adjusted net income divided by the weighted-average common shares outstanding for the period, reflecting the dilution which could occur if equity-based awards are converted into common share equivalents as calculated using the treasury stock method.

We use diluted adjusted earnings per share as an internal performance measure in the management of our operations because we believe it gives our management and financial statement users useful insight into our results of operations and our underlying business performance.

Diluted adjusted earnings per share should not be viewed as a substitute for diluted earnings per share calculated in accordance with GAAP, and other companies may define diluted adjusted earnings per share differently.

Diluted adjusted earnings per share is calculated as follows:

Three Months Ended

Six Months Ended

(in thousands, except per share data)

Adjusted net income

Weighted-average common shares outstanding, diluted

Diluted adjusted earnings per share

Catastrophe Loss Ratio

Catastrophe loss ratio is defined as the ratio of catastrophe losses to net earned premiums.

Although we are inherently subject to catastrophe losses, the frequency and severity of catastrophe losses is unpredictable and their impact on our operating results may vary significantly between periods and obscure other trends in our business. 

Therefore, we are providing this metric because we believe it gives our management and other financial statement users useful insight into our results of operations and trends in our financial performance without the volatility caused by catastrophe losses.

Catastrophe loss ratio should not be viewed as a substitute for loss ratio calculated using unadjusted GAAP numbers, and other companies may define catastrophe loss ratio differently.

Loss ratio and catastrophe loss ratio are calculated as follows:

Three Months Ended

Six Months Ended

(in thousands)

Losses and loss adjustment expenses

Net earned premiums

Catastrophe losses

Net earned premiums

Catastrophe loss ratio

Adjusted Combined Ratio Excluding Catastrophe Losses

Adjusted combined ratio excluding catastrophe losses is defined as adjusted combined ratio excluding the impact of catastrophe losses.

Adjusted combined ratio excluding catastrophe losses should not be viewed as a substitute for combined ratio calculated using unadjusted GAAP numbers, and other companies may define adjusted combined ratio excluding catastrophe losses differently.

Adjusted combined ratio excluding catastrophe losses is calculated as follows:

Three Months Ended

Six Months Ended

(in thousands)

Sum of losses and loss adjustment expenses, acquisition expenses, and other underwriting expenses, net of commission and other income

Net earned premiums

Combined ratio

Adjustments to numerator:

Expenses associated with transactions

Stock-based compensation expense

Amortization of intangibles

Expenses associated with catastrophe bond

Catastrophe losses

Adjusted combined ratio excluding catastrophe losses

Tangible Stockholders ’

We define tangible stockholders’

equity as stockholders’

equity less intangible assets.

Our definition of tangible stockholders’

equity may not be comparable to that of other companies, and it should not be viewed as a substitute for stockholders’

equity calculated in accordance with GAAP.

We use tangible stockholders’

equity internally to evaluate the strength of our balance sheet and to compare returns relative to this measure.

Stockholders’

equity calculated in accordance with GAAP reconciles to tangible stockholders’

equity as follows:

(in thousands)

Stockholders' equity

Goodwill and intangible assets

Tangible stockholders' equity

Liquidity and Capital Resources

Sources and Uses of Funds

We operate as a holding company with no business operations of our own.

Consequently, our ability to pay dividends to stockholders and pay taxes and administrative expenses is largely dependent on dividends or other distributions from our subsidiaries and affiliates, whose ability to pay us is highly regulated.

The Company’s U.S.

insurance company subsidiaries, PSIC and PESIC, are restricted by the statutes as to the amount of dividends that they may pay without prior approval by state insurance commissioners.

Under California and Oregon statute which govern PSIC, dividends paid in a consecutive twelve month period cannot exceed the greater of (i) 10% of an insurance company’s statutory policyholders’

surplus as of December 31 of the preceding year or (ii) 100% of its statutory net income for the preceding calendar year.

Any dividends or distributions in excess of these amounts would require regulatory approval.

In addition, under Oregon statute PSIC may only declare a dividend from earned surplus, which does not include contributed capital.

Surplus arising from unrealized capital gains or revaluation of assets is not considered part of earned surplus.

Based on the above restrictions, PSIC may pay a dividend or distribution of no greater than $78.2 million in 2023 without approval by the California and Oregon Insurance Commissioners.

Under Arizona statute which governs PESIC, dividends paid in a consecutive twelve month period cannot exceed the lesser of (i) 10% of an insurance company’s statutory policyholders’

surplus as of December 31 of the preceding year or (ii) 100% of its statutory net income for the preceding calendar year.

Based on the above restrictions, PESIC may not pay a dividend or distribution in 2023 without approval of the Arizona Insurance Commissioner due to incurring a statutory net loss in 2022.

State insurance regulators have broad powers to prevent the reduction of statutory surplus to inadequate levels, and there is no assurance that dividends up to the maximum amounts calculated under any applicable formula would be permitted.

In addition, state insurance regulators may adopt statutory provisions and dividend limitations more restrictive than those currently in effect in the future.

Bermuda regulations limit the amount of dividends and return of capital paid by a regulated entity.

A Class 3A insurer is prohibited from declaring or paying a dividend if it is in breach of its minimum solvency margin, its enhanced capital requirement, or its minimum liquidity ratio, or if the declaration or payment of such dividend would cause such a breach.

If a Class 3A insurer has failed to meet its minimum solvency margin on the last day of any financial year, it will also be prohibited, without the approval of the BMA, from declaring or paying any dividends during the next financial year.

Furthermore, the Insurance Act limits the ability of PSRE to pay dividends or make capital distributions by stipulating certain margin and solvency requirements and by requiring approval from the BMA prior to a reduction of 15% or more of a Class 3A insurer’s total statutory capital as reported on its prior year statutory balance sheet.

Moreover, an insurer must submit an affidavit to the BMA, sworn by at least two directors and the principal representative in Bermuda of the Class 3A insurer, at least seven days prior to payment of any dividend which would exceed 25% of that insurer’s total statutory capital and surplus as reported on its prior year statutory balance sheet.

The affidavit must state that in the opinion of those swearing the declaration of such dividend has not caused the insurer to fail to meet its relevant margins.

Further, under the Companies Act, PSRE may only declare or pay a dividend, or make a distribution out of contributed surplus, if it has no reasonable grounds for believing that:

(1) it is, or would after the payment be, unable to pay its liabilities as they become due or (2) the realizable value of its assets would be less than its liabilities.

Pursuant to Bermuda regulations, the maximum amount of dividends and return of capital available to be paid by a reinsurer is determined pursuant to a formula.

Under this formula, the maximum amount of dividends and return of capital available from PSRE during 2023 is calculated to be approximately $3.9 million.

However, this dividend amount is subject to annual enhanced solvency requirement calculations. 

One of our insurance company subsidiaries, PSIC, is a member of the Federal Home Loan Bank of San Francisco (FHLB).

Membership allows PSIC access to collateralized advances, which may be used to support and enhance liquidity management.

The amount of advances that may be taken is dependent on statutory admitted assets.

Our primary sources of cash flow are written premiums, investment income, reinsurance recoveries, sales and redemptions of investments, and proceeds from borrowings on our lines of credit.

We use our cash flows primarily to pay reinsurance premiums, operating expenses, losses and loss adjustment expenses, and income taxes.

Our cash flows from operations may differ substantially from our net income due to non‑cash charges or due to changes in balance sheet accounts.

The timing of our cash flows from operating activities can also 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.

Therefore, their timing can influence cash flows from operating activities in any given period.

The potential for a large claim under an insurance or reinsurance contract means that our insurance subsidiaries may need to make substantial payments within relatively short periods of time, which would have a negative impact on our operating cash flows.

Management believes that our current liquidity and cash receipts from written premiums, investment income, proceeds from investment sales and redemptions, and reinsurance recoveries, if necessary, are sufficient to cover cash outflows for each of the Company’s insurance subsidiaries in the foreseeable future.

The following table summarizes our cash flows for the six months ended June 30, 2023 and 2022:

Six Months Ended

($ in thousands)

Cash provided by (used in):

Operating activities

Investing activities

Financing activities

Change in cash, cash equivalents, and restricted cash

Our cash flow from operating activities was positive during the six months ended June 30, 2023 and 2022 due to net income and a decrease in net operating assets in each period.

Variations in operating cash flow between periods are primarily driven by variations in our gross and ceded written premiums and the volume and timing of premium receipts, claim payments, reinsurance payments, and reinsurance recoveries on paid losses.

In addition, fluctuations in losses and loss adjustment expenses and other insurance operating expenses impact operating cash flows.

Cash used in investing activities for the three months ended June 30, 2023 and 2022 related primarily to purchases of fixed maturity securities in excess of sales and maturities in each period.

Cash provided by financing activities for three months ended June 30, 2023 was related to $35.0 million in borrowings from our lines of credit, the receipt of $0.3 million in proceeds from stock option exercises and the receipt of $0.4 million in proceeds from our employee stock purchase plan, offset by the repurchase of $15.6 million of our common stock.

Cash provided by financing activities for three months ended June 30, 2022 was related to $23.0 million in borrowings from our FHLB line of credit, the receipt of $1.8 million in proceeds from stock option exercises and the receipt of $0.3 million in proceeds from our employee stock purchase plan, offset by the repurchase of $20.3 million of our common stock.

We do not have any current plans for material capital expenditures other than current operating requirements.

We believe that we will generate sufficient cash flows from operations to satisfy our liquidity requirements for at least the next 12 months and beyond.

The key factor that will affect our future operating cash flows is the frequency and severity of catastrophe losses.

To the extent our future operating cash flows are insufficient to cover our net losses from catastrophic events, we had $660.2 million in cash and investment securities available at June 30, 2023.

We also have the ability to access additional capital through pursuing third‑party borrowings, sales of our equity or debt securities or entrance into a reinsurance arrangement.

Share Repurchases

We also have implemented a share repurchase plan and have used and may use our cash in the future to purchase outstanding shares of our common stock.

Under our current share repurchase program, shares may be repurchased from time to time in the open market or negotiated transactions at prevailing market rates, or by other means in accordance with federal securities laws.

We purchased 301,162 shares for $15.6 million under this program during the six months ended June 30, 2023 and $50.0 million remains available for future repurchases.

Credit Agreements

We have the ability to access additional capital through multiple credit agreements.

In December 2021, we entered into a Credit Agreement (the “Credit Agreement”) with U.S.

Bank National Association which provides a revolving credit facility of up to $100 million through December 8, 2026.

Interest on the credit facility accrues on each SOFR rate loan at the applicable SOFR (as defined in the Credit Agreement) plus 1.75% and on each base rate loan at the applicable Alternate Base Rate (as defined in the Credit Agreement) plus 0.75%.

A loan may be either a SOFR rate loan or a base rate loan, at our discretion.

Outstanding amounts under the Credit Agreement may be prepaid in full or in part at any time with no prepayment premium and may be reduced in full or in part at any time upon prior notice.

As of June 30, 2023, we had no borrowings outstanding through the Credit Agreement.

Our PSIC subsidiary is a member of the Federal Home Loan Bank of San Francisco (“FHLB”).

Membership in the FHLB provides PSIC access to collateralized advances, which can be drawn for general corporate purposes and used to enhance liquidity management.

All borrowings are fully secured by a pledge of specific investment securities of PSIC and the borrowing capacity is equal to 10% of PSIC’s statutory admitted assets.

All advances have predetermined term and the interest rate varies based on the term of the advance.

As of June 30, 2023, we had $71.4 million of borrowings outstanding through the FHLB line of credit.

Stockholders ’

At June 30, 2023 total stockholders’

equity was $413.7 million and tangible stockholders’

equity was $400.6 million, compared to total stockholders’

equity of $384.8 million and tangible stockholders’

equity of $376.5 million as of December 31, 2022.

Stockholder’s equity increased primarily due to net income earned for the period, activity related to stock-based compensation, and unrealized gains on fixed maturity securities and was partially offset by share repurchases made during the period.

Tangible stockholders’

equity is a non‑GAAP financial measure.

See “Reconciliation of Non‑GAAP Financial Measures”

for a reconciliation of stockholders’

equity in accordance with GAAP to tangible stockholders’

Investment Portfolio

Our primary investment objectives are to maintain liquidity, preserve capital and generate a stable level of investment income.

We purchase securities that we believe are attractive on a relative value basis and seek to generate returns in excess of predetermined benchmarks.

Our Board of Directors approves our investment guidelines in compliance with applicable regulatory restrictions on asset type, quality and concentration.

Our current investment guidelines allow us to invest in taxable and tax‑exempt fixed maturities, as well as publicly traded mutual funds and common stock of individual companies.

Our cash and invested assets consist of cash and cash equivalents, fixed maturity securities, and equity securities.

As of June 30, 2023, the majority of our investment portfolio, or $560.1 million, was comprised of fixed maturity securities that are classified as available‑for‑sale and carried at fair value with unrealized gains and losses on these securities, net of applicable taxes, reported as a separate component of accumulated other comprehensive income.

Also included in our investment portfolio were $41.4 million of equity securities.

In addition, we maintained a non‑restricted cash and cash equivalent balance of $58.3 million at June 30, 2023.

Our fixed maturity securities, including cash equivalents, had a weighted average effective duration of 3.86 and 3.81 years and an average rating of “A1/A+”

and “A1/A+”

at June 30, 2023 and December 31, 2022, respectively.

Our fixed income investment portfolio had a book yield of 3.60% as of June 30, 2023, compared to 3.30% as of December 31, 2022.

At June 30, 2023 and December 31, 2022 the amortized cost and fair value on available‑for‑sale securities were as follows:

June 30, 2023

($ in thousands)

Fixed maturities:

States, territories, and possessions

Political subdivisions

Special revenue excluding mortgage/asset-backed securities

Corporate and other

Mortgage/asset-backed securities

Total available-for-sale investments

December 31, 2022

($ in thousands)

Fixed maturities:

States, territories, and possessions

Political subdivisions

Special revenue excluding mortgage/asset-backed securities

Corporate and other

Mortgage/asset-backed securities

Total available-for-sale investments

The following tables provide the credit quality of investment securities as of June 30, 2023 and December 31, 2022:

June 30, 2023

($ in thousands)

December 31, 2022

($ in thousands)

The amortized cost and fair value of our available‑for‑sale investments in fixed maturity securities summarized by contractual maturity as of June 30, 2023 were as follows:

June 30, 2023

($ in thousands)

Due within one year

Due after one year through five years

Due after five years through ten years

Due after ten years

Mortgage and asset-backed securities

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.

We purchase a significant amount of reinsurance from third parties that we believe enhances our business by reducing our exposure to potential catastrophe losses, limiting volatility in our underwriting performance, and providing us with greater visibility into our future earnings.

Reinsurance involves transferring, or ceding, a portion of our risk exposure on policies that we write to another insurer, the reinsurer, in exchange for a premium.

To the extent that our reinsurers are unable to meet the obligations they assume under our reinsurance agreements, we remain liable for the entire insured loss;

see “Risk Factors—Risks Related to Our Business and Industry—We may be unable to purchase third party reinsurance or otherwise expand our catastrophe coverage 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.”

We use treaty reinsurance and, on a limited basis, facultative reinsurance coverage.

Treaty coverage refers to a reinsurance contract that is applied to a group or class of business where all the risks written meet the criteria for that class.

Our treaty reinsurance program primarily consists of catastrophe XOL coverage, in which the reinsurer(s) agree to assume all or a portion of the ceding company’s losses relating to a group of policies occurring in relation to specified events, subject to customary exclusions, in excess of a specified amount.

Additionally, we buy program specific reinsurance coverage for specific lines of business on a quota share, property per risk or a facultative basis.

In quota share reinsurance, the reinsurer agrees to assume a specified percentage of the ceding company’s losses arising out of a defined class of business in exchange for a corresponding percentage of premiums, net of a ceding commission.

Property per risk coverage is similar to catastrophe XOL coverage except that the treaty applies in individual property losses rather than in the aggregate for all claims associated with a single catastrophic loss occurrence.

Facultative coverage refers to a reinsurance contract on individual risks as opposed to a group or class of business.

We use facultative reinsurance selectively to supplement limits or to cover risks or perils excluded from other reinsurance contracts.

We have a robust program utilizing a mix of traditional reinsurers and insurance linked securities.

We currently purchase reinsurance from over 100 reinsurers, who either have an “A−”

(Excellent) (Outlook Stable) or better financial strength rating by A.M.

Best or post collateral.

Our reinsurance contracts include special termination provisions that allow us to cancel and replace any participating reinsurer that is downgraded below a rating of “A−”

(Excellent) (Outlook Stable) from A.M.

Best, or whose surplus drops by more than 20%.

In addition to reinsurance purchased from traditional reinsurers, the Company has historically incorporated collateralized protection from the insurance linked securities market via catastrophe bonds. During the first quarter of 2021, the Company closed a $400 million 144A catastrophe bond which became effective June 1, 2021.

The catastrophe bond was completed through Torrey Pines Re Pte.

(“Torrey Pines Re Pte.”).

Torrey Pines Re Pte.

is a special purpose reinsurance vehicle incorporated in Singapore that provides Palomar with indemnity-based reinsurance covering earthquake events through June 1, 2024.

During the second quarter of 2022, the Company closed a $275 million 144A catastrophe bond which became effective June 1, 2022.

This catastrophe bond was completed through Torrey Pines Re Ltd., a Bermuda-domiciled special purpose insurer that provides indemnity-based reinsurance covering earthquake events through June 1, 2025. During the second quarter of 2023, the Company also closed a $200 million 144A catastrophe bond which became effective June 1, 2023.

This catastrophe bond was also completed through Torrey Pines Re Ltd and provides indemnity-based reinsurance covering earthquake events through June 1, 2026.

Our catastrophe event retention is currently $17.5 million for all perils.

Our reinsurance coverage exhausts at $2.66 billion for earthquake events, $900 million for Hawaii hurricane events, and $100 million for continental U.S.

hurricane events, providing coverage in excess of our 1 in 250 year peak zone PML and in excess of our A.M.

Best requirement.

In addition, we maintain reinsurance coverage equivalent to or better than the 1 in 250 year PML for our other lines.

In the event that multiple catastrophe events occur in a period, many of our contracts include the right to reinstate reinsurance limits for potential future recoveries during the same contract year and preserve our limit for subsequent events.

This feature for subsequent event coverage is known as a “reinstatement.”

Critical Accounting Estimates

We identified the accounting estimates which are critical to the understanding of our financial position and results of operations.

Critical accounting estimates are defined as those estimates that are both important to the portrayal of our financial condition and results of operations and require us to exercise significant judgment.

We use significant judgment concerning future results and developments in applying these critical accounting estimates and in preparing our condensed consolidated financial statements.

These judgments and estimates affect our reported amounts of assets, liabilities, revenues and expenses and the disclosure of our material contingent assets and liabilities.

Actual results may differ materially from the estimates and assumptions used in preparing the condensed consolidated financial statements.

We evaluate our estimates regularly using information that we believe to be relevant.

Our critical accounting policies and estimates are described in our annual consolidated financial statements and the related notes in our 2022 Annual Report on Form 10-K.

There have been no significant changes in our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Operations included in our 2022 Annual Report on Form 10-K

Quantitative and Qualitative Disclosures About Market Risk

Market risk is a general term describing the potential economic loss associated with adverse changes in the fair value of financial instruments.

Our condensed consolidated balance sheets include assets and liabilities with estimated fair values that are subject to market risk.

Our primary market risks have been equity price risk associated with investments in equity securities and interest rate risk associated with investments in fixed maturities.

Credit risk is the potential loss resulting from adverse changes in an issuer’s ability to repay its debt obligations.

In general, we manage the exposure to credit risk in our investment portfolio by investing in high quality securities and by diversifying our holdings.

We monitor our investment portfolio to ensure that credit risk does not exceed prudent levels.

The majority of our investment portfolio is invested in high credit quality, investment grade fixed maturity securities.

We also invest in higher yielding fixed maturities and equity securities.

Our fixed maturity portfolio has an average rating by at least one nationally recognized rating organization of “AA−,”

with approximately 78.9% rated “A−”

At June 30, 2023, 1.6% of our fixed maturity portfolio was unrated or rated below investment grade.

Our fixed maturity portfolio includes some securities issued with financial guaranty insurance.

We purchase fixed maturities based on our assessment of the credit quality of the underlying assets without regard to insurance.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports we file under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required financial disclosure.

As of the end of the period covered by this Quarterly Report on Form 10‑Q, we carried out an evaluation, under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures defined under Rules 13a‑15(e) and 15d‑15(e) under the Exchange Act.

Based upon this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective.

Changes in Internal Controls over Financial Reporting

No changes in our internal control over financial reporting (as defined in Rules 13a‑15(f) and 15d‑15(f) under the Exchange Act) occurred during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

The effectiveness of any system of controls and procedures is subject to certain limitations, and, as a result, there can be no assurance that our controls and procedures will detect all errors or fraud.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be attained.

OTHER INFORMATION

Legal Proceedings

We are party to legal proceedings which arise in the ordinary course of business.

We believe that the outcome of such matters, individually and in the aggregate, will not have a material adverse effect on our condensed consolidated financial position.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements