Palomar Holdings, Inc. 10-Q

Item 1: Financial Statements   Palomar Holdings,   Inc. and Subsidiaries   Condensed Consolidated Balance Sheets   (in thousands, except shares and par value data)       September 30,     December 31,       2023     2022       (Unaudited)           Assets                 Investments:                 Fixed maturity securities available for sale, at fair value (amortized cost: $ 647,579 in 2023; $ 561,580 in 2022)   $ 591,907     $ 515,064   Equity securities, at fair value (cost: $ 43,002 in 2023; $ 42,352 in 2022)     39,835       38,576   Equity method investment     2,923       —   Total investments     634,665       553,640   Cash and cash equivalents     53,026       68,108   Restricted cash     262       56   Accrued investment income     4,864       3,777   Premiums receivable     242,082       162,858   Deferred policy acquisition costs, net of ceding commissions and fronting fees     58,967       56,740   Reinsurance recoverable on paid losses and loss adjustment expenses     48,004       39,718   Reinsurance recoverable on unpaid losses and loss adjustment expenses     232,170       153,895   Ceded unearned premiums     259,760       204,084   Prepaid expenses and other assets     65,753       44,088   Deferred tax assets, net     13,643       10,622   Property and equipment, net     433       603   Goodwill and intangible assets, net     12,705       8,261   Total assets   $ 1,626,334     $ 1,306,450   Liabilities and stockholders' equity                 Liabilities:                 Accounts payable and other accrued liabilities   $ 32,532     $ 25,760   Reserve for losses and loss adjustment expenses     324,348       231,415   Unearned premiums     570,453       471,314   Ceded premium payable     211,025       146,127   Funds held under reinsurance treaty     14,042       10,680   Borrowings from credit agreements     52,600       36,400   Total liabilities     1,205,000       921,696   Stockholders' equity:                 Preferred stock, $ 0.0001 par value, 5,000,000 shares authorized, 0 shares issued and outstanding as of September 30, 2023 and December 31, 2022     —       —   Common stock, $ 0.0001 par value, 500,000,000 shares authorized, 24,730,885 and 25,027,467 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively     3       3   Additional paid-in capital     345,673       333,558   Accumulated other comprehensive loss     ( 43,221 )     ( 36,515 ) Retained earnings     118,879       87,708   Total stockholders' equity     421,334       384,754   Total liabilities and stockholders' equity   $ 1,626,334     $ 1,306,450     See accompanying notes.   3 Table of Contents     Palomar Holdings,   Inc. and Subsidiaries   Condensed Consolidated Statements of Income and Comprehensive Income (Loss) (Unaudited)   (in thousands, except shares and per share data)       Three Months Ended     Nine Months Ended       September 30,     September 30,       2023     2022     2023     2022   Revenues:                                 Gross written premiums   $ 313,998     $ 253,128     $ 838,406     $ 642,751   Ceded written premiums     ( 203,336 )     ( 161,930 )     ( 542,789 )     ( 374,109 ) Net written premiums     110,662       91,198       295,617       268,642   Change in unearned premiums     ( 24,845 )     ( 13,256 )     ( 43,453 )     ( 34,403 ) Net earned premiums     85,817       77,942       252,164       234,239   Net investment income     6,029       3,744       16,690       9,462   Net realized and unrealized losses on investments     ( 1,376 )     ( 2,356 )     ( 103 )     ( 8,369 ) Commission and other income     465       1,362       1,781       3,129   Total revenues     90,935       80,692       270,532       238,461   Expenses:                                 Losses and loss adjustment expenses     16,139       30,900       54,696       60,251   Acquisition expenses, net of ceding commissions and fronting fees     27,004       27,210       78,740       83,928   Other underwriting expenses     22,390       17,114       63,962       51,233   Interest expense     867       270       2,952       475   Total expenses     66,400       75,494       200,350       195,887   Income before income taxes     24,535       5,198       70,182       42,574   Income tax expense     6,103       912       16,877       9,163   Net income     18,432       4,286       53,305       33,411   Other comprehensive income (loss), net:                                 Net unrealized losses on securities available for sale     ( 8,494 )     ( 15,412 )     ( 6,706 )     ( 47,941 ) Net comprehensive income (loss)   $ 9,938     $ ( 11,126 )   $ 46,599     $ ( 14,530 ) Per Share Data:                                 Basic earnings per share   $ 0.75     $ 0.17     $ 2.15     $ 1.32   Diluted earnings per share   $ 0.73     $ 0.17     $ 2.10     $ 1.29                                     Weighted-average common shares outstanding:                                 Basic     24,740,455       25,209,368       24,847,164       25,258,333   Diluted     25,244,828       25,787,625       25,340,602       25,808,387     See accompanying notes.   4 Table of Contents     Palomar Holdings,   Inc. and Subsidiaries   Condensed Consolidated Statements of Changes in Stockholders ’ Equity (Unaudited)   (in thousands, except share data)       Number of                     Accumulated                       Common             Additional     Other             Total       Shares     Common     Paid-In     Comprehensive     Retained     Stockholders'       Outstanding     Stock     Capital     Income (Loss)     Earnings     Equity   Balance at December 31, 2021     25,428,929     $ 3     $ 318,902     $ 5,312     $ 69,952     $ 394,169   Other comprehensive loss, net of tax     —       —       —       ( 47,941 )     —       ( 47,941 ) Stock-based compensation     —       —       8,556       —       —       8,556   Issuance of common stock via employee stock purchase plan     13,990       —       759       —       —       759   Issuance of common stock via equity incentive plan     185,765       —       2,164       —       —       2,164   Repurchases of common stock     ( 399,198 )     —       —       —       ( 23,273 )     ( 23,273 ) Net income     —       —       —       —       33,411       33,411   Balance at September 30, 2022     25,229,486     $ 3     $ 330,381     $ ( 42,629 )   $ 80,090     $ 367,845                                                     Balance at December 31, 2022     25,027,467     $ 3     $ 333,558     $ ( 36,515 )   $ 87,708     $ 384,754   Other comprehensive loss, net of tax     —       —       —       ( 6,706 )     —       ( 6,706 ) Stock-based compensation     —       —       10,737       —       —       10,737   Issuance of common stock via employee stock purchase plan     17,080       —       799       —       —       799   Issuance of common stock via equity incentive plan     105,239       —       579       —       —       579   Repurchases of common stock     ( 418,901 )     —       —       —       ( 22,134 )     ( 22,134 ) Net income     —       —       —       —       53,305       53,305   Balance at September 30, 2023     24,730,885     $ 3     $ 345,673     $ ( 43,221 )   $ 118,879     $ 421,334     See accompanying notes.   5 Table of Contents     Palomar Holdings,   Inc. and Subsidiaries   Condensed Consolidated Statements of Cash Flows (Unaudited)   (in thousands)       Nine Months Ended       September 30,       2023     2022   Operating activities                 Net cash provided by operating activities   $ 93,836     $ 94,544   Investing activities                 Purchases of property and equipment     ( 15 )     ( 307 ) Capitalized software costs     ( 5,324 )     ( 4,138 ) Purchases of fixed maturity securities     ( 190,560 )     ( 279,064 ) Purchases of equity securities     ( 945 )     ( 10,277 ) Purchase of equity method investment     ( 3,000 )     —   Sales and maturities of fixed maturity securities     104,505       172,380   Sales of equity securities     295       —   Change in securities receivable or payable, net     ( 3,576 )     —   Acquisitions, net of cash acquired     ( 5,536 )     ( 16 ) Net cash used in investing activities     ( 104,156 )     ( 121,422 ) Financing activities                 Proceeds from line of credit, net of repayments     16,200       26,400   Proceeds from common stock issued via employee stock purchase plan     799       2,164   Proceeds from common stock issued via stock option exercises     579       760   Repurchases of common stock     ( 22,134 )     ( 23,273 ) Net cash (used in) provided by financing activities     ( 4,556 )     6,051   Net decrease in cash, cash equivalents and restricted cash     ( 14,876 )     ( 20,827 ) Cash, cash equivalents and restricted cash at beginning of period     68,164       50,371   Cash, cash equivalents and restricted cash at end of period   $ 53,288     $ 29,544   Supplementary cash flow information:                 Cash paid for income taxes   $ 21,093     $ 18,870   Cash paid for interest   $ 2,428     $ 351     The following table summarizes our cash and cash equivalents and restricted cash and cash equivalents within the condensed consolidated balance sheets (in thousands):       September 30,     December 31,       2023     2022       (unaudited)           Cash and cash equivalents   $ 53,026     $ 68,108   Restricted cash     262       56   Cash and cash equivalents and restricted cash   $ 53,288     $ 68,164     See accompanying notes.   6 Table of Contents   Palomar Holdings,   Inc. and Subsidiaries   Notes   to Condensed Consolidated Financial Statements (Unaudited)     1. 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”), a California domiciled property and casualty insurance agency, Palomar Insurance Agency, DBA Palomar General Insurance Agency (“PGIA”), and a Delaware incorporated management company, Palomar Underwriters Exchange Organization, Inc. ("PUEO"), that provides services to Laulima Exchange (“Laulima”), a Hawaii domiciled reciprocal exchange, as its attorney-in-fact.   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. The condensed consolidated financial statements also include the accounts of Laulima, as Laulima is a variable interest entity ("VIE") for which the Company is the primary beneficiary.  Currently Laulima does not hold a material amount of assets or liabilities.   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”). In the opinion of management, all adjustments necessary for a fair presentation of the condensed consolidated financial statements have been included. Such adjustments consist only of normal recurring items. All intercompany balances and transactions have been eliminated in consolidation. Interim results are not necessarily indicative of results of operations for the full year.   Use of Estimates   The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the condensed consolidated financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein. 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 nine  months ended September 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.   7 Table of Contents     2. Investments   The Company’s available‑for‑sale investments are summarized as follows:               Gross     Gross     Allowance               Amortized     Unrealized     Unrealized     for     Fair   September 30, 2023   Cost or Cost     Gains     Losses     Credit Losses     Value       (in thousands)   Fixed maturities:                                         U.S. Governments   $ 44,783     $ —     $ ( 2,093 )   $ —     $ 42,690   States, territories, and possessions     5,842       —       ( 629 )     —       5,213   Political subdivisions     4,433       —       ( 585 )     —       3,848   Special revenue excluding mortgage/asset-backed securities     33,236       —       ( 5,368 )     —       27,868   Corporate and other     305,998       175       ( 28,336 )     ( 904 )     276,933   Mortgage/asset-backed securities     253,287       316       ( 18,248 )     —       235,355   Total available-for-sale investments   $ 647,579     $ 491     $ ( 55,259 )   $ ( 904 )   $ 591,907                 Gross     Gross     Allowance               Amortized     Unrealized     Unrealized     for     Fair   December 31, 2022   Cost or Cost     Gains     Losses     Credit Losses     Value       (in thousands)   Fixed maturities:                                         U.S. Governments   $ 50,802     $ 2     $ ( 2,253 )   $ —     $ 48,551   States, territories, and possessions     5,857       49       ( 552 )     —       5,354   Political subdivisions     4,919       —       ( 621 )     —       4,298   Special revenue excluding mortgage/asset-backed securities     37,260       26       ( 4,487 )     —       32,799   Corporate and other     278,164       79       ( 23,912 )     ( 236 )     254,095   Mortgage/asset-backed securities     184,578       251       ( 14,862 )     —       169,967   Total available-for-sale investments   $ 561,580     $ 407     $ ( 46,687 )   $ ( 236 )   $ 515,064     Security holdings in an unrealized loss position   As of September 30, 2023 , the Company held 578  fixed maturity securities in an unrealized loss position with a total estimated fair value of $ 549.4  million and total gross unrealized losses of $ 55.3  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.   8 Table of Contents   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 September 30, 2023 and December 31, 2022 , are as follows:       Less Than 12 Months     More Than 12 Months     Total       Fair     Unrealized     Fair     Unrealized     Fair     Unrealized   September 30, 2023   Value     Losses     Value     Losses     Value     Losses       (in thousands)   Fixed maturity securities:                                                 U.S. Governments   $ 2,338     $ ( 12 )   $ 40,352     $ ( 2,081 )   $ 42,690     $ ( 2,093 ) States, territories, and possessions     2,041       ( 30 )     3,172       ( 599 )     5,213       ( 629 ) Political subdivisions     —       —       3,848       ( 585 )     3,848       ( 585 ) Special revenue excluding mortgage/asset-backed securities     2,617       ( 148 )     25,251       ( 5,220 )     27,868       ( 5,368 ) Corporate and other     66,836       ( 3,296 )     197,097       ( 25,040 )     263,933       ( 28,336 ) Mortgage/asset-backed securities     88,543       ( 2,414 )     117,318       ( 15,834 )     205,861       ( 18,248 ) Total available-for-sale investments   $ 162,375     $ ( 5,900 )   $ 387,038     $ ( 49,359 )   $ 549,413     $ ( 55,259 )       Less Than 12 Months     More Than 12 Months     Total       Fair     Unrealized     Fair     Unrealized     Fair     Unrealized   December 31, 2022   Value     Losses     Value     Losses     Value     Losses       (in thousands)   Fixed maturity securities:                                                 U.S. Governments   $ 41,077     $ ( 1,523 )   $ 6,853     $ ( 730 )   $ 47,930     $ ( 2,253 ) States, territories, and possessions     3,227       ( 552 )     —       —       3,227       ( 552 ) Political subdivisions     4,298       ( 621 )     —       —       4,298       ( 621 ) Special revenue excluding mortgage/asset-backed securities     25,091       ( 3,287 )     5,080       ( 1,200 )     30,171       ( 4,487 ) Corporate and other     192,185       ( 15,667 )     55,605       ( 8,481 )     247,790       ( 24,148 ) Mortgage/asset-backed securities     118,815       ( 9,908 )     32,448       ( 4,954 )     151,263       ( 14,862 ) Total available-for-sale investments   $ 384,693     $ ( 31,558 )   $ 99,986     $ ( 15,365 )   $ 484,679     $ ( 46,923 )   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. The Company considers numerous factors in its review as described in Footnote 1 of the Notes to the Consolidated Financial Statements in the 2022 Annual Report on Form 10 -K.   The Company has recorded an allowance for credit losses for two investment securities. Based on the Company’s review as of September 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.   9 Table of Contents   Contractual maturities of available ‑ for ‑ sale fixed maturity securities   The amortized cost and fair value of fixed maturity securities at September 30, 2023 , by contractual maturity, are shown below.       Amortized     Fair       Cost     Value       (in thousands)   Due within one year   $ 42,127     $ 40,783   Due after one year through five years     183,123       170,789   Due after five years through ten years     131,751       114,833   Due after ten years     37,291       30,147   Mortgage and asset-backed securities     253,287       235,355       $ 647,579     $ 591,907     Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.   Net investment income summary   Net investment income is summarized as follows:       Three Months Ended     Nine Months Ended       September 30,     September 30,       2023     2022     2023     2022       (in thousands)     (in thousands)   Interest income   $ 5,952     $ 3,688     $ 16,468     $ 9,328   Dividend income     211       178       602       518   Investment expense     ( 134 )     ( 122 )     ( 380 )     ( 384 ) Net investment income   $ 6,029     $ 3,744     $ 16,690     $ 9,462     Net realized and unrealized investment gains and losses   The following table presents net realized and unrealized investment gains and losses:       Three Months Ended     Nine Months Ended       September 30,     September 30,       2023     2022     2023     2022       (in thousands)     (in thousands)   Realized gains:                                 Gains on sales of fixed maturity securities   $ —     $ 2     $ 65     $ 10   Gains on sales of equity securities     —       —       —       —   Total realized gains     —       2       65       10   Realized losses:                                 Losses on sales of fixed maturity securities     —       ( 195 )     ( 32 )     ( 309 ) Losses on sales of equity securities     —       —       —       —   Total realized losses     —       ( 195 )     ( 32 )     ( 309 ) Net realized investment gains     —       ( 193 )     33       ( 299 ) Change in allowance for credit losses     —       —       ( 667 )     —   Net unrealized (losses) gains on equity securities     ( 1,299 )     ( 2,163 )     608       ( 8,070 ) Net unrealized losses on equity method investment     ( 77 )     —       ( 77 )     —   Net realized and unrealized gains (losses) on investments   $ ( 1,376 )   $ ( 2,356 )   $ ( 103 )   $ ( 8,369 )   Realized gains and losses on disposition of investments are based on specific identification of the investments sold on the settlement date.   10 Table of Contents   Proceeds from the sale of fixed maturity securities were insignificant for the three months ended September 30, 2023 and 2022 , respectively.   Proceeds from the sale of fixed maturity securities were $ 9.8  million and $ 5.8  million for the nine  months ended September 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 September 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.     3. 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; 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. The unobservable inputs require significant management judgment or estimation.   To measure fair value, the Company obtains quoted market prices for its investment securities from its outside investment managers. If a quoted market price is not available, the Company uses prices of similar securities. 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. Industry standard models are used to analyze and value securities with embedded options or prepayment sensitivities. 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.   11 Table of Contents   The following tables present the hierarchy for financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022 .   September 30, 2023   Level 1     Level 2     Level 3     Total       (in thousands)   Assets:                                 Fixed maturity securities                                 U.S. Governments   $ —     $ 42,690     $ —     $ 42,690   States, territories, and possessions     —       5,213       —       5,213   Political subdivisions     —       3,848       —       3,848   Special revenue excluding mortgage/asset-backed securities     —       27,868       —       27,868   Corporate and other     —       276,933       —       276,933   Mortgage/asset-backed securities     —       235,355       —       235,355   Equity securities     39,835       —       —       39,835   Cash, cash equivalents, and restricted cash     53,288       —       —       53,288   Total assets   $ 93,123     $ 591,907     $ —     $ 685,030     December 31, 2022   Level 1     Level 2     Level 3     Total       (in thousands)   Assets:                                 Fixed maturity securities                                 U.S. Governments   $ —     $ 48,551     $ —     $ 48,551   States, territories, and possessions     —       5,354       —       5,354   Political subdivisions     —       4,298       —       4,298   Special revenue excluding mortgage/asset-backed securities     —       32,799       —       32,799   Corporate and other     —       254,095       —       254,095   Mortgage/asset-backed securities     —       169,967       —       169,967   Equity securities     38,576       —       —       38,576   Cash, cash equivalents, and restricted cash     68,164       —       —       68,164   Total assets   $ 106,740     $ 515,064     $ —     $ 621,804     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.   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 September 30, 2023 and December 31, 2022 , the Company had no fixed income securities classified as Level 3.   12 Table of Contents     4. 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 September 30,     Nine Months Ended September 30,       2023     2022     2023     2022       (in thousands)     (in thousands)   Reserve for losses and LAE net of reinsurance recoverables at beginning of period   $ 81,300     $ 55,769     $ 77,520     $ 45,419   Add: Incurred losses and LAE, net of reinsurance, related to:                                 Current year     15,116       30,904       50,954       58,703   Prior years     1,023       ( 4 )     3,742       1,548   Total incurred     16,139       30,900       54,696       60,251   Deduct: Loss and LAE payments, net of reinsurance, related to:                                 Current year     6,646       7,873       14,215       13,762   Prior years     ( 1,385 )     4,548       25,823       17,660   Total payments     5,261       12,421       40,038       31,422   Reserve for losses and LAE net of reinsurance recoverables at end of period     92,178       74,248       92,178       74,248   Add: Reinsurance recoverables on unpaid losses and LAE at end of period     232,170       131,575       232,170       131,575   Reserve for losses and LAE gross of reinsurance recoverables on unpaid losses and LAE at end of period   $ 324,348     $ 205,823     $ 324,348     $ 205,823     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 $ 1.0  million and insignificant prior year development during the three months ended  September 30, 2023 and 2022 , respectively.   The Company experienced adverse prior year development of $ 3.7  million and adverse prior year development of $ 1.5  million during the nine  months ended  September 30, 2023 and 2022 , respectively.   Adverse prior year development during the three months ended September 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 nine  months ended September 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 nine months ended September 30, 2022 was primarily due to higher than anticipated severity of attritional and catastrophe losses.     5. Stockholders ’ Equity   Common stock reserved for future issuance   Common stock reserved for future issuance consists of the following as of September 30, 2023 :   Stock options outstanding under 2019 Equity Incentive Plan     838,706   Restricted stock units outstanding under 2019 Equity Incentive Plan     339,505   Performance stock units outstanding under 2019 Equity Incentive Plan, at target     424,393   Shares authorized for future issuance under 2019 Equity Incentive Plan     3,134,739   Shares authorized for future issuance under 2019 Employee Stock Purchase Plan     1,130,770   Total     5,868,113     13 Table of Contents   Stock based compensation   The below table summarizes the Company’s stock-based compensation expense for each period presented:       Three Months Ended September 30,     Nine Months Ended September 30,       2023     2022     2023     2022       (in thousands)     (in thousands)   Stock-Based Compensation   $ 3,589     $ 3,092     $ 10,737     $ 8,556     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. In addition, the 2019 Plan contains a mechanism through which the Company may adopt a deferred compensation arrangement in the future.   A total of 2,400,000 shares of common stock were initially authorized and reserved for issuance under the 2019 Plan. This reserve increases on January 1 of each year through 2029 by an amount equal to the smaller of: 3 % of the number of shares of common stock issued and outstanding on the immediately preceding December 31, or an amount determined by the board of directors.   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 nine  months ended September 30, 2023 :       Number of shares     Weighted-average exercise price     Weighted-average remaining contractual term (in years)     Aggregate intrinsic value (in thousands)   Outstanding at January 1, 2023     882,892     $ 33.85       —     $ —   Options granted     —       —                   Options exercised     ( 32,882 )     17.61                   Options canceled     ( 11,304 )     66.08                   Outstanding at September 30, 2023     838,706     $ 34.05       6.0     $ 19,368   Vested and Exercisable at September 30, 2023     753,678     $ 30.74       5.8     $ 19,308     As of September 30, 2023 , the Company had approximately $ 1.8  million of total unrecognized stock-based compensation expense related to stock options expected to be recognized over a weighted-average period of 1.2  years.   14 Table of Contents   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 nine  months ended September 30, 2023 :       Number of shares     Weighted-average grant date fair value   Outstanding at January 1, 2023     271,951     $ 68.90   Granted     157,972       51.34   Released     ( 72,357 )     66.37   Forfeited     ( 18,061 )     52.27   Non-vested outstanding at September 30, 2023     339,505     $ 62.15     As of September 30, 2023 , the Company had approximately $ 16.8  million of total unrecognized stock-based compensation expense related to RSUs expected to be recognized over a weighted-average period of 2.3  years.   Performance Stock Units   The Company issues PSUs with a combination of service, performance, and market conditions.   The majority of PSUs were issued via grants made to certain executives during 2021. 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 September 30, 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. 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 September 30, 2023 :       Number of shares     Weighted-average grant date fair value   Outstanding at January 1, 2023     383,103     $ 37.62   Granted     46,029       51.36   Vested     —       —   Forfeited     ( 4,739 )     54.30   Non-vested outstanding at September 30, 2023     424,393     $ 38.93     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 September 30, 2023 , the Company had approximately $ 10.2 million of total unrecognized stock-based compensation expense related to PSUs expected to be recognized over a weighted-average period of 2.7  years.   15 Table of Contents   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. The 2019 ESPP is administered through employee participation in discrete offering periods. During each discrete offering period employee funds are withheld, and the stock purchase occurs upon the conclusion of the offering period. The Company issued 17,080 shares pursuant to the ESPP during the nine  months ended September 30, 2023 .   Share repurchases   In January 2022, Company's 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 418,901  shares for $ 22.1  million at an average price of $ 54.4  per share under this program during the nine  months ended September 30, 2023 . Approximately $ 43.5  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.     6. Accumulated Other Comprehensive Income   Changes in accumulated other comprehensive income (loss) (“AOCI”) are as follows:       Nine Months Ended September 30,       2023     2022       (in thousands)   Beginning Balance   $ ( 36,515 )   $ 5,312                     Other comprehensive (loss) before reclassification     ( 8,453 )     ( 60,983 ) Federal income tax (benefit) expense     1,775       12,806   Other comprehensive (loss) before reclassification, net of tax     ( 6,678 )     ( 48,177 )                   Amounts reclassified from AOCI     ( 36 )     299   Federal income tax expense (benefit)     8       ( 63 ) Amounts reclassified from AOCI, net of tax     ( 28 )     236                     Other comprehensive (loss)     ( 6,706 )     ( 47,941 ) Balance at end of period   $ ( 43,221 )   $ ( 42,629 )   16 Table of Contents     7. Underwriting Information   The Company has a single reportable segment and offers primarily property and casualty insurance products. 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 September 30,     Nine Months Ended September 30,       2023     2022     2023     2022       ($ in thousands)     ($ in thousands)               % of             % of             % of             % of       Amount     GWP     Amount     GWP     Amount     GWP     Amount     GWP   Product                                                                 Fronting Premiums   $ 106,581       33.9 %   $ 82,232       32.5 %   $ 278,548       33.2 %   $ 154,232       24.0 % Residential Earthquake     69,220       22.0 %     59,569       23.5 %     190,048       22.7 %     159,995       24.9 % Commercial Earthquake     44,166       14.1 %     32,647       12.9 %     124,763       14.9 %     90,894       14.1 % Inland Marine     37,252       11.9 %     30,842       12.2 %     103,841       12.4 %     72,214       11.2 % Casualty     20,165       6.4 %     12,888       5.1 %     50,144       6.0 %     25,697       4.0 % Hawaii Hurricane     11,051       3.5 %     9,425       3.7 %     28,718       3.4 %     24,579       3.8 % Commercial All Risk     6,624       2.1 %     9,224       3.6 %     26,769       3.2 %     41,647       6.5 % Residential Flood     5,259       1.7 %     3,871       1.5 %     14,964       1.8 %     10,448       1.6 % Specialty Homeowners     ( 2 )     ( 0.0 )%     ( 94 )     ( 0.0 )%     ( 99 )     ( 0.0 )%     30,082       4.7 % Other     13,682       4.4 %     12,524       5.0 %     20,710       2.4 %     32,963       5.2 % Total Gross Written Premiums   $ 313,998       100.0 %   $ 253,128       100.0 %   $ 838,406       100.0 %   $ 642,751       100.0 %   Gross written premiums by state are as follows:       Three Months Ended September 30,     Nine Months Ended September 30,       2023     2022     2023     2022       ($ in thousands)     ($ in thousands)               % of             % of             % of             % of       Amount     GWP     Amount     GWP     Amount     GWP     Amount     GWP   State                                                                 California   $ 163,806       52.2 %   $ 131,016       51.8 %   $ 450,752       53.8 %   $ 292,865       45.6 % Texas     24,336       7.7 %     26,234       10.4 %     72,777       8.7 %     71,499       11.1 % Washington     17,792       5.7 %     13,573       5.4 %     43,409       5.2 %     29,391       4.6 % Hawaii     13,490       4.3 %     10,998       4.3 %     35,824       4.3 %     29,729       4.6 % Florida     11,549       3.7 %     7,445       2.9 %     36,309       4.3 %     27,216       4.2 % Oregon     8,536       2.7 %     7,738       3.1 %     21,223       2.5 %     16,483       2.6 % Illinois     6,502       2.1 %     4,204       1.7 %     15,675       1.9 %     13,153       2.0 % Tennessee     5,562       1.8 %     1,810       0.7 %     9,233       1.1 %     4,247       0.7 % Other     62,425       19.8 %     50,110       19.8 %     153,204       18.2 %     158,168       24.6 % Total Gross Written Premiums   $ 313,998       100.0 %   $ 253,128       100.0 %   $ 838,406       100.0 %   $ 642,751       100.0 %   Gross written premiums by insurance subsidiary are as follows:       Three Months Ended September 30,     Nine Months Ended September 30,       2023     2022     2023     2022       ($ in thousands)     ($ in thousands)               % of             % of             % of             % of       Amount     GWP     Amount     GWP     Amount     GWP     Amount     GWP   Subsidiary                                                                 PSIC   $ 186,693       59.5 %   $ 136,814       54.0 %   $ 497,216       59.3 %   $ 357,156       55.6 % PESIC     127,305       40.5 %     116,314       46.0 %     341,190       40.7 %     285,595       44.4 % Total Gross Written Premiums   $ 313,998       100.0 %   $ 253,128       100.0 %   $ 838,406       100.0 %   $ 642,751       100.0 %   17 Table of Contents     8. Income Taxes   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 September 30, 2023 , the Company’s income tax rate of 24.9 % was higher than the statutory rate of 21 % due primarily to non-deductible executive compensation expense. During the three months ended September 30, 2022 , the Company’s income tax rate of  17.5 % 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 nine  months ended September 30, 2023 , the Company’s tax rate of  24.0 % was higher than the statutory rate due primarily to non-deductible executive compensation expense. For the nine  months ended September 30, 2022 , the Company’s tax rate of  21.5 % was higher than the statutory rate also due primarily to non-deductible executive compensation expense.     9. Earnings Per Share   The following table sets out earnings per share of common stock:       Three Months Ended September 30,     Nine Months Ended September 30,       2023     2022     2023     2022       (in thousands, except shares and per share data)     (in thousands, except shares and per share data)   Net income   $ 18,432     $ 4,286     $ 53,305     $ 33,411   Weighted average common shares outstanding:                                 Basic     24,740,455       25,209,368       24,847,164       25,258,333   Common Share equivalents     504,373       578,257       493,438       550,054   Diluted     25,244,828       25,787,625       25,340,602       25,808,387                                     Earnings per share:                                 Basic   $ 0.75     $ 0.17     $ 2.15     $ 1.32   Diluted   $ 0.73     $ 0.17     $ 2.10     $ 1.29     Common share equivalents relate primarily to outstanding stock options, RSUs and PSUs under the 2019 Plan and unpurchased shares under the 2019 ESPP and are calculated using the treasury stock method.     10. Reinsurance   The Company utilizes reinsurance in order to limit its exposure to losses and enable it to underwrite policies with sufficient limits to meet policyholder needs. The Company utilizes both excess of loss (XOL) and quota share reinsurance.   As of September 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 $ 2.68 billion for earthquake events, $ 900 million for Hawaii hurricane events, and $ 100 million for continental U.S. hurricane events.   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. Ltd. (“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.     11. Credit Agreements   U.S. Bank Credit Agreement   In December 2021, the Company entered into a 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 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. In addition to interest on funds borrowed, the Company must pay an unused line fee of 0.25 % on any amounts not borrowed.   18 Table of Contents   The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among other things, financial covenants, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness and dividends and other distributions. The financial covenants include requirements to maintain a permissible debt to capital ratio, a minimum consolidated net worth, a minimum risk based capital ratio and minimum A.M. Best financial strength rating. The Credit Agreement also contains customary events of default, such as non-compliance with financial covenants. If an event of default occurs, any debt may be declared immediately due and payable. As of September 30, 2023 , the Company was in compliance with all debt covenants.   As of September 30, 2023  and  December 31, 2022 , 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 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 September 30, 2023 , the Company had $ 52.6 million of borrowings outstanding through the FHLB at the overnight rate of 5.69 %. Interest expense on the FHLB line of credit was $ 0.8 million and $ 2.1  million for the three and  nine  months ended September 30, 2023 , respectively.  As of December 31, 2022 , the Company had $ 36.4  million of borrowings outstanding through the FHLB at the overnight rate of  4.65 %. Interest expense on the FHLB Line of Credit was $ 0.2  million for the three and nine months ended September 30, 2022.   19 Table of Contents     Item   2. 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 nine months ended September 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,   Inc. and its subsidiaries, unless the context otherwise requires.   Overview   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;   20 Table of Contents     ● 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; and     ● 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;   21 Table of Contents     ● 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; and     ● 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.   22 Table of Contents   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 and equity method investments. 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.   23 Table of Contents   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’ equity.   24 Table of Contents   Results of Operations   Three   months ended September 30, 2023 compared to three   months ended September 30, 2022   The following table summarizes our results for the three months ended September 30, 2023 and 2022:       Three Months Ended                       September 30,                       2023     2022     Change     % Change       ($ in thousands, except per share data)   Gross written premiums   $ 313,998     $ 253,128     $ 60,870       24.0 % Ceded written premiums     (203,336 )     (161,930 )     (41,406 )     25.6 % Net written premiums     110,662       91,198       19,464       21.3 % Net earned premiums     85,817       77,942       7,875       10.1 % Commission and other income     465       1,362       (897 )     (65.9 )% Total underwriting revenue (1)     86,282       79,304       6,978       8.8 % Losses and loss adjustment expenses     16,139       30,900       (14,761 )     (47.8 )% Acquisition expenses, net of ceding commissions and fronting fees     27,004       27,210       (206 )     (0.8 )% Other underwriting expenses     22,390       17,114       5,276       30.8 % Underwriting income (1)     20,749       4,080       16,669       NM   Interest expense     (867 )     (270 )     (597 )     221.1 % Net investment income     6,029       3,744       2,285       61.0 % Net realized and unrealized losses on investments     (1,376 )     (2,356 )     980       (41.6 )% Income before income taxes     24,535       5,198       19,337       NM   Income tax expense     6,103       912       5,191       NM   Net income   $ 18,432     $ 4,286     $ 14,146       NM   Adjustments:                                 Net realized and unrealized losses on investments (2)     1,376       2,356       (980 )     (41.6 )% Expenses associated with transactions     229       45       184       NM   Stock-based compensation expense     3,589       3,092       497       16.1 % Amortization of intangibles     390       313       77       24.6 % Tax impact     (725 )     (871 )     146       (16.8 )% Adjusted net income (1)(2)   $ 23,291     $ 9,221     $ 14,070       152.6 % Key Financial and Operating Metrics                                 Annualized return on equity     17.7 %     4.6 %                 Annualized adjusted return on equity (1)     22.3 %     9.9 %                 Loss ratio     18.8 %     39.6 %                 Expense ratio     57.0 %     55.1 %                 Combined ratio     75.8 %     94.8 %                 Adjusted combined ratio (1)     70.9 %     90.3 %                 Diluted earnings per share   $ 0.73     $ 0.17                   Diluted adjusted earnings per share (1)   $ 0.92     $ 0.36                   Catastrophe losses   $ (533 )   $ 12,500                   Catastrophe loss ratio (1)     (0.6 )%     16.0 %                 Adjusted combined ratio excluding catastrophe losses (1)     71.5 %     74.3 %                 Adjusted underwriting income (1)   $ 24,957     $ 7,530     $ 17,427       231.4 % NM - not meaningful                                     (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.     (2) 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.   25 Table of Contents   Gross Written Premiums   Gross written premiums increased $60.9 million, or 24.0% to $314.0 million for the three months ended September 30, 2023 compared to $253.1 million for the three months ended September 30, 2022. Premium growth was primarily due to an increased volume of policies written across our lines of business which was driven by new business generated with existing partners, strong premium retention rates for existing business, expansion of our distribution footprint, and new partnerships. The following table summarizes our gross written premiums by line of business and shows each line’s percentage of total gross written premiums for each period:       Three Months Ended September 30,                       2023     2022                       ($ in thousands)                       % of             % of             %       Amount     GWP     Amount     GWP     Change     Change   Product                                                 Fronting Premiums   $ 106,581       33.9 %   $ 82,232       32.5 %   $ 24,349       29.6 % Residential Earthquake     69,220       22.0 %     59,569       23.5 %     9,651       16.2 % Commercial Earthquake     44,166       14.1 %     32,647       12.9 %     11,519       35.3 % Inland Marine     37,252       11.9 %     30,842       12.2 %     6,410       20.8 % Casualty     20,165       6.4 %     12,888       5.1 %     7,277       56.5 % Hawaii Hurricane     11,051       3.5 %     9,425       3.7 %     1,626       17.3 % Commercial All Risk     6,624       2.1 %     9,224       3.6 %     (2,600 )     (28.2 )% Residential Flood     5,259       1.7 %     3,871       1.5 %     1,388       35.9 % Other     13,680       4.4 %     12,430       5.0 %     1,250       10.1 % Total Gross Written Premiums   $ 313,998       100.0 %   $ 253,128       100.0 %   $ 60,870       24.0 %   Fronting premiums represent premium where we subsequently cede the majority of the premium and risk in exchange for a fronting fee, which is our primary source of profit in the arrangement.  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.   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 September 30,                       2023     2022                       ($ in thousands)                       % of             % of             %       Amount     GWP     Amount     GWP     Change     Change   Subsidiary                                                 PSIC   $ 186,693       59.5 %   $ 136,814       54.0 %   $ 49,879       36.5 % PESIC     127,305       40.5 %     116,314       46.0 %     10,991       9.4 % Total Gross Written Premiums   $ 313,998       100.0 %   $ 253,128       100.0 %   $ 60,870       24.0 %   26 Table of Contents   Ceded Written Premiums   Ceded written premiums increased $41.4 million, or 25.6%, to $203.3 million for the three months ended September 30, 2023 from $161.9 million for the three months ended September 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 XOL reinsurance expense due to growth in exposure and higher rates on XOL reinsurance.    Ceded written premiums as a percentage of gross written premiums increased to 64.8% for the three months ended September 30, 2023 from 64.0% for the three months ended September 30, 2022. This increase was primarily due to increased fronting and quota share cessions as previously described.   Net Written Premiums   Net written premiums increased $19.5 million, or 21.3%, to $110.7 million for the three months ended September 30, 2023 from $91.2 million for the three months ended September 30, 2022. The increase was primarily due to an increase in gross written premiums, primarily in our Residential and Commercial Earthquake lines partially offset by increased ceded written premiums.   Net Earned Premiums   Net earned premiums increased $7.9 million, or 10.1%, to $85.8 million for the three months ended September 30, 2023 from $77.9 million for the three months ended September 30, 2022 due primarily to the earning of increased gross written premiums offset by the earning of ceded written premiums under reinsurance agreements. The table below shows the amount of premiums we earned on a gross and net basis and net earned premiums as a percentage of gross earned premiums in each period presented:       Three Months Ended                       September 30,                       2023     2022     Change     % Change       ($ in thousands)   Gross earned premiums   $ 271,786     $ 186,938     $ 84,848       45.4 % Ceded earned premiums     (185,969 )     (108,996 )     (76,973 )     70.6 % Net earned premiums   $ 85,817     $ 77,942     $ 7,875       10.1 %                                   Net earned premium ratio     31.6 %     41.7 %                   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 $0.9 million to $0.5 million for the three months ended September 30, 2023 from $1.3 million for the three months ended September 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.   27 Table of Contents   Losses and Loss Adjustment Expenses   Losses and loss adjustment expenses decreased $14.8 million, or 47.8% to $16.1 million for the three months ended September 30, 2023 from $30.9 million for the three months ended September 30, 2022. Losses and loss adjustment expenses consisted of the following elements during the respective periods:       Three Months Ended                       September 30,                       2023     2022     Change     % Change       ($ in thousands)   Catastrophe losses   $ (533 )   $ 12,500     $ (13,033 )     (104.3 )% Non-catastrophe losses     16,672       18,400       (1,728 )     (9.4 )% Total losses and loss adjustment expenses   $ 16,139     $ 30,900     $ (14,761 )     (47.8 )%   Our catastrophe loss ratio was -0.6% during the three months ended September 30, 2023. Catastrophe loss activity for the quarter was primarily related to favorable development on severe convective storms that occurred during the second quarter of 2023 and favorable development on prior year hurricanes.   Our catastrophe loss ratio was 16.0% during the three months ended September 30, 2022. Catastrophe losses for the quarter were related to Hurricane Ian which primarily impacted our Commercial All Risk line of business.   Our non-catastrophe loss ratio was 19.4% for the three months ended September 30, 2023 compared to 23.6% during the three months ended September 30, 2022. Non-catastrophe losses decreased due mainly to lower attritional losses on lines of business subject to attritional losses such as Commercial All Risk, Casualty, and Inland Marine.   Acquisition Expenses   Acquisition expenses decreased $0.2 million, or 0.8%, to $27.0 million for the three months ended September 30, 2023 from $27.2 million for the three months ended September 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 9.9% for the three months ended September 30, 2023 compared to 14.6% for the three months ended September 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 $5.3 million, or 30.8%, to $22.4 million for the three months ended September 30, 2023 from $17.1 million for the three months ended September 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 8.2% for the three months ended September 30, 2023 compared to 9.2% for the three months ended September 30, 2022. Excluding the impact of expenses relating to transactions, stock-based compensation, and amortization of intangibles, other underwriting expenses as a percentage of gross earned premiums were 6.7% for the three months ended September 30, 2023 compared to 7.3% for the three months ended September 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.   28 Table of Contents   Net Investment Income and Net Realized and Unrealized Gains (Losses) on Investments   Net investment income increased $2.3 million, or 61.0%, to $6.0 million for the three months ended September 30, 2023 from $3.7 million for the three months ended September 30, 2022. The increase was primarily due to a higher average balance of investments during the three months ended September 30, 2023 and higher yields on invested assets.   The Company incurred $1.4 million of net realized and unrealized losses on investments for the three months ended September 30, 2023 compared to $2.4 million of net realized and unrealized losses for the three months ended September 30, 2022 In both periods, the balance was primarily driven by unrealized losses on our equity securities. Unrealized gains and losses on fixed maturity securities are recognized as a component of other comprehensive income and do not impact our net income. The following table summarizes the components of our investment income for each period presented:       Three Months Ended                       September 30,                       2023     2022     Change     % Change       ($ in thousands)   Interest income   $ 5,952     $ 3,688     $ 2,264       61.4 % Dividend income     211       178       33       18.5 % Investment management fees and expenses     (134 )     (122 )     (12 )     9.8 % Net investment income     6,029       3,744       2,285       61.0 % Net realized and unrealized losses on investments     (1,376 )     (2,356 )     980       (41.6 )% Total   $ 4,653     $ 1,388     $ 3,265       235.2 %   Income Tax Expense   Income tax expense increased $5.2 million to $6.1 million for the three months ended September 30, 2023 from $0.9 million for the three months ended September 30, 2022 due to higher pre-tax income and a higher tax rate for the period ended September 30, 2023. During the three months ended September 30, 2023, our income tax rate of 24.9% was higher than the statutory rate of 21% due primarily to non-deductible executive compensation expense. During the three months ended September 30, 2022, our income tax rate of 17.5% was lower than the statutory rate of 21% due primarily to the permanent component of employee stock option exercises.   29 Table of Contents   Results of Operations   Nine months ended September 30, 2023 compared to nine months ended September 30, 2022   The following table summarizes our results for the nine months ended September 30, 2023 and 2022:       Nine Months Ended                       September 30,                       2023     2022     Change     % Change       ($ in thousands, except per share data)   Gross written premiums   $ 838,406     $ 642,751     $ 195,655       30.4 % Ceded written premiums     (542,789 )     (374,109 )     (168,680 )     45.1 % Net written premiums     295,617       268,642       26,975       10.0 % Net earned premiums     252,164       234,239       17,925       7.7 % Commission and other income     1,781       3,129       (1,348 )     (43.1 )% Total underwriting revenue (1)     253,945       237,368       16,577       7.0 % Losses and loss adjustment expenses     54,696       60,251       (5,555 )     (9.2 )% Acquisition expenses, net of ceding commissions and fronting fees     78,740       83,928       (5,188 )     (6.2 )% Other underwriting expenses     63,962       51,233       12,729       24.8 % Underwriting income (1)     56,547       41,956       14,591       34.8 % Interest expense     (2,952 )     (475 )     (2,477 )     NM   Net investment income     16,690       9,462       7,228       76.4 % Net realized and unrealized losses on investments     (103 )     (8,369 )     8,266       (98.8 )% Income before income taxes     70,182       42,574       27,608       64.8 % Income tax expense     16,877       9,163       7,714       84.2 % Net income   $ 53,305     $ 33,411     $ 19,894       59.5 % Adjustments:                                 Net realized and unrealized losses on investments (2)     103       8,369       (8,266 )     (98.8 )% Expenses associated with transactions     229       130       99       76.2 % Stock-based compensation expense     10,737       8,556       2,181       25.5 % Amortization of intangibles     1,092       942       150       15.9 % Expenses associated with catastrophe bond     1,640       1,992       (352 )     (17.7 )% Tax impact     (1,582 )     (3,153 )     1,571       (49.8 )% Adjusted net income (1)(2)   $ 65,524     $ 50,247     $ 15,277       30.4 % Key Financial and Operating Metrics                                 Annualized return on equity     17.6 %     11.7 %                 Annualized adjusted return on equity (1)     21.7 %     17.6 %                 Loss ratio     21.7 %     25.7 %                 Expense ratio     55.9 %     56.4 %                 Combined ratio     77.6 %     82.1 %                 Adjusted combined ratio (1)     72.1 %     77.1 %                 Diluted earnings per share   $ 2.10     $ 1.29                   Diluted adjusted earnings per share (1)   $ 2.59     $ 1.95                   Catastrophe losses   $ 3,432     $ 13,529                   Catastrophe loss ratio (1)     1.4 %     5.8 %                 Adjusted combined ratio excluding catastrophe losses (1)     70.8 %     71.4 %                 Adjusted underwriting income (1)   $ 70,245     $ 53,576     $ 16,669       31.1 % NM- not meaningful                                     (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.   (2) 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. 30 Table of Contents   Gross Written Premiums   Gross written premiums increased $195.7 million, or 30.4% to $838.4 million for the nine months ended September 30, 2023 compared to $642.8 million for the nine months ended September 30, 2022. Premium growth was primarily due to an increased volume of policies written across our lines of business which was driven by new business generated with existing partners, strong premium retention rates for existing business, expansion of our distribution footprint, and new partnerships. The following table summarizes our gross written premiums by line of business and shows each line’s percentage of total gross written premiums for each period:       Nine Months Ended September 30,                       2023     2022                       ($ in thousands)                       % of             % of                     Amount     GWP     Amount     GWP     Change     Change   Product                                                 Fronting Premiums   $ 278,548       33.2 %   $ 154,232       24.0 %   $ 124,316       80.6 % Residential Earthquake     190,048       22.7 %     159,995       24.9 %     30,053       18.8 % Commercial Earthquake     124,763       14.9 %     90,894       14.1 %     33,869       37.3 % Inland Marine     103,841       12.4 %     72,214       11.2 %     31,627       43.8 % Casualty     50,144       6.0 %     25,697       4.0 %     24,447       95.1 % Hawaii Hurricane     28,718       3.4 %     24,579       3.8 %     4,139       16.8 % Commercial All Risk     26,769       3.2 %     41,647       6.5 %     (14,878 )     (35.7 )% Residential Flood     14,964       1.8 %     10,448       1.6 %     4,516       43.2 % Specialty Homeowners     (99 )     (0.0 )%     30,082       4.7 %     (30,181 )     (100.3 )% Other     20,710       2.4 %     32,963       5.2 %     (12,253 )     (37.2 )% Total Gross Written Premiums   $ 838,406       100.0 %   $ 642,751       100.0 %   $ 195,655       30.4 %   Fronting premiums represent premium where we subsequently cede the majority of the premium and risk in exchange for a fronting fee, which is our primary source of profit in the arrangement.  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:       Nine Months Ended September 30,                       2023     2022                       ($ in thousands)                       % of             % of             %       Amount     GWP     Amount     GWP     Change     Change   Subsidiary                                                 PSIC   $ 497,216       59.3 %   $ 357,156       55.6 %   $ 140,060       39.2 % PESIC     341,190       40.7 %     285,595       44.4 %     55,595       19.5 % Total Gross Written Premiums   $ 838,406       100.0 %   $ 642,751       100.0 %   $ 195,655       30.4 %   31 Table of Contents   Ceded Written Premiums   Ceded written premiums increased $168.7 million, or 45.1%, to $542.8 million for the nine months ended September 30, 2023 from $374.1 million for the nine months ended September 30, 2022. The increase was primarily due to increased premiums 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 and higher rates on XOL reinsurance.    Ceded written premiums as a percentage of gross written premiums increased to 64.7% for the nine months ended September 30, 2023 from 58.2% for the nine months ended September 30, 2022. This increase was primarily due to increased quota share and fronting cessions as previously described.   Net Written Premiums   Net written premiums increased $27.0 million, or 10.0%, to $295.6 million for the nine months ended September 30, 2023 from $268.6 million for the nine months ended September 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 $17.9 million, or 7.7%, to $252.2 million for the nine months ended September 30, 2023 from $234.2 million for the nine months ended September 30, 2022 due primarily to the earning of increased gross written premiums offset by the earning of ceded written premiums under reinsurance agreements. The table below shows the amount of premiums we earned on a gross and net basis and net earned premiums as a percentage of gross earned premiums in each period presented.       Nine Months Ended                       September 30,                       2023     2022     Change     % Change       ($ in thousands)   Gross earned premiums   $ 739,219     $ 484,005     $ 255,214       52.7 % Ceded earned premiums     (487,055 )     (249,766 )     (237,289 )     95.0 % Net earned premiums   $ 252,164     $ 234,239     $ 17,925       7.7 %                                   Net earned premium ratio     34.1 %     48.4 %                   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 $1.3 million, or 43.1%, to $1.8 million for the nine months ended September 30, 2023, from $3.1 million for the nine months ended September 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.   32 Table of Contents   Losses and Loss Adjustment Expenses   Losses and loss adjustment expenses decreased $5.6 million to $54.7 million for the nine months ended September 30, 2023 from $60.3 million for the nine months ended September 30, 2022. Losses and loss adjustment expenses consisted of the following elements during the respective periods:       Nine Months Ended                       September 30,                       2023     2022     Change     % Change       ($ in thousands)   Catastrophe losses   $ 3,432     $ 13,529     $ (10,097 )     (74.6 )% Non-catastrophe losses     51,264       46,722       4,542       9.7 % Total losses and loss adjustment expenses   $ 54,696     $ 60,251     $ (5,555 )     (9.2 )%   Our catastrophe loss ratio was 1.4% during the nine months ended September 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 5.8% during the nine months ended September 30, 2022. Catastrophe losses were primarily related to Hurricane Ian which primarily impacted our Commercial All Risk line of business.   Our non-catastrophe loss ratio was 20.3% for the nine months ended September 30, 2023 compared to 19.9% during the nine months ended September 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 $5.2 million, or 6.2%, to $78.7 million for the nine months ended September 30, 2023 from $83.9 million for the nine months ended September 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 10.7% for the nine months ended September 30, 2023 compared to 17.3% for the nine months ended September 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 due to changes in mix of business produced.   Other Underwriting Expenses   Other underwriting expenses increased $12.7 million, or 24.8%, to $64.0 million for the nine months ended September 30, 2023 from $51.2 million for the nine months ended September 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 8.7% for the nine months ended September 30, 2023 compared to 10.6% for the nine months ended September 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 6.8% for the nine months ended September 30, 2023 compared to 8.2% for the nine months ended September 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.   33 Table of Contents   Net Investment Income and Net Realized and Unrealized Gains (Losses) on Investments   Net investment income increased $7.2 million, or 76.4%, to $16.7 million for the nine months ended September 30, 2023 from $9.5 million for the nine months ended September 30, 2022. The increase was primarily due to a higher average balance of investments during the nine months ended September 30, 2023 and higher yields on invested assets.   The Company incurred $0.1 million of net realized and unrealized losses on investments for the nine months ended September 30, 2023 compared to $8.4 million of net realized and unrealized losses for the nine months ended September 30, 2022. In both periods, the balance was primarily driven by unrealized losses on our equity securities. Unrealized gains and losses on fixed maturity securities are recognized as a component of other comprehensive income and do not impact our net income. The following table summarizes the components of our investment income for each period presented:       Nine Months Ended                       September 30,                       2023     2022     Change     % Change       ($ in thousands)   Interest income   $ 16,468     $ 9,328     $ 7,140       76.5 % Dividend income     602       518       84       16.2 % Investment management fees and expenses     (380 )     (384 )     4       (1.0 )% Net investment income     16,690       9,462       7,228       76.4 % Net realized and unrealized losses on investments     (103 )     (8,369 )     8,266       (98.8 )% Total   $ 16,587     $ 1,093     $ 15,494       NM     Income Tax Expense   Income tax expense increased $7.7 million or 84.2% to $16.9 million for the nine months ended September 30, 2023 from $9.2 million for the nine months ended September 30, 2022 due to higher pre-tax income and a higher effective tax rate during the nine months ended September 30, 2023. During the nine months ended September 30, 2023, our income tax rate of 24.0% was higher than the statutory rate of 21% due primarily to non-deductible executive compensation expense. For the nine months ended September 30, 2022 our income tax rate of 21.5% was higher than the statutory rate also due primarily to non-deductible executive compensation expense.   34 Table of Contents   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     Nine Months Ended       September 30,     September 30,       2023     2022     2023     2022       (in thousands)     (in thousands)   Total revenue   $ 90,935     $ 80,692     $ 270,532     $ 238,461   Net investment income     (6,029 )     (3,744 )     (16,690 )     (9,462 ) Net realized and unrealized losses on investments     1,376       2,356       103       8,369   Underwriting revenue   $ 86,282     $ 79,304     $ 253,945     $ 237,368     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     Nine Months Ended       September 30,     September 30,       2023     2022     2023     2022       (in thousands)     (in thousands)   Income before income taxes   $ 24,535     $ 5,198     $ 70,182     $ 42,574   Net investment income     (6,029 )     (3,744 )     (16,690 )     (9,462 ) Net realized and unrealized losses on investments     1,376       2,356       103       8,369   Interest expense     867       270       2,952       475   Underwriting income   $ 20,749     $ 4,080     $ 56,547     $ 41,956   Expenses associated with transactions     229       45       229       130   Stock-based compensation expense     3,589       3,092       10,737       8,556   Amortization of intangibles     390       313       1,092       942   Expenses associated with catastrophe bond     —       —       1,640       1,992   Adjusted underwriting income   $ 24,957     $ 7,530     $ 70,245     $ 53,576     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 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. 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.   35 Table of Contents   Net income calculated in accordance with GAAP reconciles to adjusted net income as follows:       Three Months Ended     Nine Months Ended       September 30,     September 30,       2023     2022     2023     2022       (in thousands)     (in thousands)   Net income   $ 18,432     $ 4,286     $ 53,305     $ 33,411   Adjustments:                                 Net realized and unrealized losses on investments     1,376       2,356       103       8,369   Expenses associated with transactions     229       45       229       130   Stock-based compensation expense     3,589       3,092       10,737       8,556   Amortization of intangibles     390       313       1,092       942   Expenses associated with catastrophe bond     —       —       1,640       1,992   Tax impact     (725 )     (871 )     (1,582 )     (3,153 ) Adjusted net income   $ 23,291     $ 9,221     $ 65,524     $ 50,247     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     Nine Months Ended       September 30,     September 30,       2023     2022     2023     2022       (in thousands)     (in thousands)                                     Annualized adjusted net income   $ 93,164     $ 36,884     $ 87,365     $ 66,996   Average stockholders' equity   $ 417,521     $ 372,955     $ 403,044     $ 381,007   Annualized adjusted return on equity     22.3 %     9.9 %     21.7 %     17.6 %   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.   36 Table of Contents   Adjusted combined ratio is calculated as follows:       Three Months Ended     Nine Months Ended       September 30,     September 30,       2023     2022     2023     2022       (in thousands)     (in thousands)   Numerator: Sum of losses and loss adjustment expenses, acquisition expenses, and other underwriting expenses, net of commission and other income   $ 65,068     $ 73,862     $ 195,617     $ 192,283   Denominator: Net earned premiums   $ 85,817     $ 77,942     $ 252,164     $ 234,239   Combined ratio     75.8 %     94.8 %     77.6 %     82.1 % Adjustments to numerator:                                 Expenses associated with transactions   $ (229 )   $ (45 )   $ (229 )   $ (130 ) Stock-based compensation expense     (3,589 )     (3,092 )     (10,737 )     (8,556 ) Amortization of intangibles     (390 )     (313 )     (1,092 )     (942 ) Expenses associated with catastrophe bond     —       —       (1,640 )     (1,992 ) Adjusted combined ratio     70.9 %     90.3 %     72.1 %     77.1 %   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     Nine Months Ended       September 30,     September 30,       2023     2022     2023     2022       (in thousands, except per share data)     (in thousands, except per share data)                                     Adjusted net income   $ 23,291     $ 9,221     $ 65,524     $ 50,247   Weighted-average common shares outstanding, diluted     25,244,828       25,787,625       25,340,602       25,808,387   Diluted adjusted earnings per share   $ 0.92     $ 0.36     $ 2.59     $ 1.95     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.   37 Table of Contents   Loss ratio and catastrophe loss ratio are calculated as follows:       Three Months Ended     Nine Months Ended       September 30,     September 30,       2023     2022     2023     2022       (in thousands)     (in thousands)   Numerator: Losses and loss adjustment expenses   $ 16,139     $ 30,900     $ 54,696     $ 60,251   Denominator: Net earned premiums   $ 85,817     $ 77,942     $ 252,164     $ 234,239   Loss ratio     18.8 %     39.6 %     21.7 %     25.7 %                                   Numerator: Catastrophe losses   $ (533 )   $ 12,500     $ 3,432     $ 13,529   Denominator: Net earned premiums   $ 85,817     $ 77,942     $ 252,164     $ 234,239   Catastrophe loss ratio     (0.6 )%     16.0 %     1.4 %     5.8 %   Adjusted Combined Ratio Excluding Catastrophe Losses   Adjusted combined ratio excluding catastrophe losses is defined as adjusted combined ratio excluding the impact of catastrophe losses. 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. 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     Nine Months Ended       September 30,     September 30,       2023     2022     2023     2022       (in thousands)     (in thousands)   Numerator: Sum of losses and loss adjustment expenses, acquisition expenses, and other underwriting expenses, net of commission and other income   $ 65,068     $ 73,862     $ 195,617     $ 192,283   Denominator: Net earned premiums   $ 85,817     $ 77,942     $ 252,164     $ 234,239   Combined ratio     75.8 %     94.8 %     77.6 %     82.1 % Adjustments to numerator:                                 Expenses associated with transactions   $ (229 )   $ (45 )   $ (229 )   $ (130 ) Stock-based compensation expense     (3,589 )     (3,092 )     (10,737 )     (8,556 ) Amortization of intangibles     (390 )     (313 )     (1,092 )     (942 ) Expenses associated with catastrophe bond     —       —       (1,640 )     (1,992 ) Catastrophe losses     533       (12,500 )     (3,432 )     (13,529 ) Adjusted combined ratio excluding catastrophe losses     71.5 %     74.3 %     70.8 %     71.4 %   Tangible Stockholders ’ Equity   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:       September 30,     December 31,       2023     2022       (in thousands)   Stockholders' equity   $ 421,334     $ 384,754   Goodwill and intangible assets     (12,705 )     (8,261 ) Tangible stockholders' equity   $ 408,629     $ 376,493     38 Table of Contents   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.   39 Table of Contents   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.   Cash Flows   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 nine months ended September 30, 2023 and 2022:       Nine Months Ended       September 30,       2023     2022       ($ in thousands)   Cash provided by (used in):                 Operating activities   $ 93,836     $ 94,544   Investing activities     (104,156 )     (121,422 ) Financing activities     (4,556 )     6,051   Change in cash, cash equivalents, and restricted cash   $ (14,876 )   $ (20,827 )   Our cash flow from operating activities was positive during the nine months ended September 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.   40 Table of Contents   Cash used in investing activities for the nine months ended September 30, 2023 and 2022 related primarily to purchases of fixed maturity securities in excess of sales and maturities in each period.   Cash used in financing activities for nine months ended September 30, 2023 was related to $16.2 million in borrowings from our lines of credit, the receipt of $0.6 million in proceeds from stock option exercises and the receipt of $0.8 million in proceeds from our employee stock purchase plan, offset by the repurchase of $22.1 million of our common stock. Cash provided by financing activities for nine months ended September 30, 2022 was related to $26.4 million in borrowings from our FHLB line of credit, the receipt of $0.8 million in proceeds from stock option exercises and the receipt of $2.2 million in proceeds from our employee stock purchase plan, offset by the repurchase of $23.3 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 $688.0 million in cash and investment securities available at September 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 418,901 shares for $22.1 million under this program during the nine months ended September 30, 2023 and $43.5 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 September 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 September 30, 2023, we had $52.6 million of borrowings outstanding through the FHLB line of credit.   Stockholders ’ Equity   At September 30, 2023 total stockholders’ equity was $421.3 million and tangible stockholders’ equity was $408.6 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.   41 Table of Contents   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’ equity.   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 September 30, 2023, the majority of our investment portfolio, or $591.9 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 $39.8 million of equity securities and $2.9 million of equity method investments. In addition, we maintained a non‑restricted cash and cash equivalent balance of $53.0 million at September 30, 2023. Our fixed maturity securities, including cash equivalents, had a weighted average effective duration of 3.61 and 3.81 years and an average rating of “Aa3/A+” and “A1/A+” at September 30, 2023 and December 31, 2022, respectively. Our fixed income investment portfolio had a book yield of 3.90% as of September 30, 2023, compared to 3.30% as of December 31, 2022.   At September 30, 2023 and December 31, 2022 the amortized cost and fair value on available‑for‑sale securities were as follows:       Amortized     Fair     % of Total   September 30, 2023   Cost or Cost     Value     Fair Value       ($ in thousands)   Fixed maturities:                         U.S. Governments   $ 44,783     $ 42,690       7.2 % States, territories, and possessions     5,842       5,213       0.9 % Political subdivisions     4,433       3,848       0.6 % Special revenue excluding mortgage/asset-backed securities     33,236       27,868       4.7 % Corporate and other     305,998       276,933       46.8 % Mortgage/asset-backed securities     253,287       235,355       39.8 % Total available-for-sale investments   $ 647,579     $ 591,907       100.0 %       Amortized     Fair     % of Total   December 31, 2022   Cost or Cost     Value     Fair Value       ($ in thousands)   Fixed maturities:                         U.S. Governments   $ 50,802     $ 48,551       9.4 % States, territories, and possessions     5,857       5,354       1.0 % Political subdivisions     4,919       4,298       0.9 % Special revenue excluding mortgage/asset-backed securities     37,260       32,799       6.4 % Corporate and other     278,164       254,095       49.3 % Mortgage/asset-backed securities     184,578       169,967       33.0 % Total available-for-sale investments   $ 561,580     $ 515,064       100.0 %   42 Table of Contents   The following tables provide the credit quality of investment securities as of September 30, 2023 and December 31, 2022:       Estimated     % of   September 30, 2023   Fair Value     Total       ($ in thousands)   Rating                 AAA   $ 91,315       15.4 % AA     193,822       32.7 % A     186,750       31.6 % BBB     110,265       18.6 % BB     6,491       1.1 % B     1,703       0.3 % CCC & Below     1,561       0.3 %     $ 591,907       100.0 %       Estimated     % of   December 31, 2022   Fair Value     Total       ($ in thousands)   Rating                 AAA   $ 182,620       35.4 % AA     55,438       10.8 % A     171,292       33.3 % BBB     95,402       18.5 % BB     10,047       1.9 % B     236       0.1 % CCC & Below     29       — %     $ 515,064       100.0 %   The amortized cost and fair value of our available‑for‑sale investments in fixed maturity securities summarized by contractual maturity as of September 30, 2023 were as follows:       Amortized     Fair     % of Total   September 30, 2023   Cost     Value     Fair Value       ($ in thousands)   Due within one year   $ 42,127     $ 40,783       6.9 % Due after one year through five years     183,123       170,789       28.9 % Due after five years through ten years     131,751       114,833       19.4 % Due after ten years     37,291       30,147       5.1 % Mortgage and asset-backed securities     253,287       235,355       39.8 %     $ 647,579     $ 591,907       100.0 %   Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.   43 Table of Contents   Reinsurance   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. Ltd. (“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.     44 Table of Contents   Our catastrophe event retention is currently $17.5 million for all perils. Our reinsurance coverage exhausts at $2.68 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   Item   3: 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 79.7% rated “A−” or better. At September 30, 2023, 1.7% 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.   45 Table of Contents   Item   4. 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 September 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.   46 Table of Contents      PART   II. OTHER INFORMATION   Item   1. 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.