What changed in this filing

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Item 1. Financial Statements

2020-08-05 compared with 2020-05-06 · 139 added, 633 removed, 374 unchanged (67% of the section changed)

18 unchanged sentences

Reinsurance recoverable on paid losses and loss adjustment expenses

Prepaid reinsurance premium

Ceded unearned premiums

Prepaid expenses and other assets

11 unchanged sentences

Stockholders' equity:

Preferred stock, $0.0001 par value, 5,000,000 shares authorized as of March 31, 2020 and December 31, 2019, respectively, 0 shares issued and outstanding as of March 31, 2020 and December 31, 2019

Common stock, $0.0001 par value, 500,000,000 shares authorized, 24,239,861 and 23,468,750 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively

Preferred stock, $0.0001 par value, 5,000,000 shares authorized as of June 30, 2020 and December 31, 2019, respectively, 0 shares issued and outstanding as of June 30, 2020 and December 31, 2019

Common stock, $0.0001 par value, 500,000,000 shares authorized, 25,468,321 and 23,468,750 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively

Additional paid-in capital

Accumulated other comprehensive (loss) income

Accumulated other comprehensive income

Retained earnings

7 unchanged sentences

Three Months Ended

Six Months Ended

Gross written premiums

9 unchanged sentences

Acquisition expenses

Other underwriting expenses (includes stock-based compensation of $442 and $22,961 for the three months ended March 31, 2020 and 2019, respectively)

Other underwriting expenses (includes stock-based compensation of $464 and $306 for the three months ended June 30, 2020 and 2019, respectively and $907 and $23,267 for the six months ended June 30, 2020 and 2019, respectively)

Interest expense

4 unchanged sentences

Other comprehensive income, net:

Net unrealized gains (losses) on securities available for sale for the three months ended March 31, 2020 and 2019, respectively

Net unrealized gains on securities available for sale for the three and six months ended June 30, 2020 and 2019, respectively

Net comprehensive income (loss)

6 unchanged sentences

and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’

Equity (Unaudited)

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

(in thousands, except share data)

6 unchanged sentences

Stock-based compensation

Balance at March 31, 2019

Proceeds from common stock sold in initial public offering, net of offering costs

Balance at June 30, 2019

Balance at December 31, 2019

Other comprehensive loss, net of tax

Other comprehensive income, net of tax

Stock-based compensation

Issuance of common stock in stock offering, net of offering costs

Issuance of common stock pursuant to employee stock purchase plan

Balance at March 31, 2020

Issuance of common stock in January 2020 stock offering, net of offering costs

Issuance of common stock in June 2020 stock offering, net of offering costs

Issuance of common stock via employee stock purchase plan

Issuance of common stock via equity incentive plan

Balance at June 30, 2020

See accompanying notes.

3 unchanged sentences

(in thousands)

Three Months Ended

Six Months Ended

Operating activities

7 unchanged sentences

Securities receivable or payable, net

Net cash (used in) provided by investing activities

Net cash used in investing activities

Financing activities

Proceeds from stock offering, net of offering costs

Proceeds from common stock issued under employee stock purchase plan

Proceeds from initial public offering, net of costs

Redemption of Floating Rate Notes

Distribution to stockholder

Net cash provided by (used in) financing activities

Net increase (decrease) in cash, cash equivalents and restricted cash

Proceeds from January 2020 stock offering, net of offering costs

Proceeds from June 2020 stock offering, net of offering costs

Proceeds from common stock issued via employee stock purchase plan

Proceeds from common stock issued via stock option exercises

Net cash provided by financing activities

Net increase in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash at beginning of period

14 unchanged sentences

Palomar Holdings, Inc.

(the Company) is an insurance holding company that was incorporated in Delaware on March 14, 2019.

Prior to incorporation in Delaware, the Company was known as GC Palomar Holdings (GCPH), which was a Cayman Islands incorporated insurance holding company formed on October 4, 2013 when GC Palomar Investor LP (GCPI) acquired control of GCPH.

The Company has several wholly owned subsidiaries including a U.S.

insurance subsidiary, Palomar Specialty Insurance Company (PSIC) and a Bermuda based reinsurance subsidiary, Palomar Specialty Reinsurance (PSRE).

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

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

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

Basis of Presentation

3 unchanged sentences

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, 2019.

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

6 unchanged sentences

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

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

Recent Accounting Pronouncements

The Company currently qualifies as an emerging growth company (“EGC”) under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act.

The Company is currently electing to adopt new or revised accounting guidance within the same time periods as private companies as permitted by its status as an EGC.

The Company will continue to be an EGC for the first five fiscal years after its initial public offering (“IPO”), unless certain changes occur such as becoming a large accelerated filer.

The Company will become a large accelerated filer on December 31, 2020 if the market value of its shares held by non-affiliates exceeds $700 million on June 30, 2020.

If the Company becomes a large accelerated filer, it will no longer have the option to adopt guidance within the same time periods as private companies.

Based on the market value of the Company’s common stock held by non-affiliates as of the last business day of its second fiscal quarter, the Company expects it will become a large accelerated filer on December 31, 2020 and will no longer be permitted to adopt guidance within the same time periods as private companies at that time.

Recently adopted accounting pronouncements

In August 2018, the FASB issued “ASU 2018‑13, Fair Value Measurement (Topic 820):

Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement .

Among other things, this new guidance eliminates the need to disclose transfers between Level 1 and Level 2 of the fair value hierarchy, changes the policy for timing of transfers and the valuation processes for Level 3 fair value measurements and includes requirements to disclose quantitative information about Level 3 measurements.

The Company adopted this guidance on January 1, 2020 and adoption did not have an impact on the Company’s condensed consolidated financial statements.

In August 2018, the FASB issued “ASU 2018-13, Fair Value Measurement (Topic 820):

Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement .” Among other things, this new guidance eliminates the need to disclose transfers between Level 1 and Level 2 of the fair value hierarchy, changes the policy for timing of transfers and the valuation processes for Level 3 fair value measurements and includes requirements to disclose quantitative information about Level 3 measurements.

The Company adopted this guidance on January 1, 2020 and adoption did not have an impact on the Company’s consolidated financial statements.

The Company will continue to monitor the composition of its investment portfolio and will make appropriate disclosures based on this guidance.

Recently issued accounting pronouncements not yet adopted

In February 2016, the FASB issued new guidance for accounting for leases, “ASU 2016‑02, Leases (Topic 842) .”

Under current guidance, leases are only included on the balance sheet if the criteria to classify the agreement as a capital lease are met.

In February 2016, the FASB issued new guidance for accounting for leases, “ASU 2016-02, Leases (Topic 842) .” Under current guidance, leases are only included on the balance sheet if the criteria to classify the agreement as a capital lease are met.

This update will require the recognition of a right-of-use asset and a corresponding lease liability, discounted to the present value, for all leases that extend beyond 12 months.

2 unchanged sentences

This new guidance requires a modified retrospective adoption, applying the new standard to all leases existing at the date of initial application, with early adoption permitted.

An entity may choose to use the standard’s effective date, rather than the beginning of the earliest comparative period presented, as the date of initial application.

An entity would record the effects of initially applying the new guidance as a cumulative-effect adjustment to retained earnings.

Consequently, an entity’s reporting for the comparative periods presented in the year of adoption would continue to be in accordance with the current guidance, including the current disclosure requirements.

To facilitate transition, the new guidance includes a package of practical expedients that entities may elect to apply on adoption.

1 unchanged sentence

The new guidance also includes a practical expedient permitting the use of hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset.

Under the Company’s current status as an EGC, this update will be effective for annual reporting periods beginning after December 15, 2020, and interim reporting periods within fiscal years beginning after December 31, 2021 with early adoption permitted.

The Company is currently evaluating the impact that this new guidance will have on its condensed consolidated financial statements.

In June 2016, the FASB issued “ASU 2016‑13, Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments .”

Current guidance delays the recognition of credit losses until it is probable a loss has been incurred.

The Company will adopt this guidance for annual reporting on December 31, 2020 and will account for leases under this guidance beginning with its 2020 Annual Report on Form 10-K.

The Company will adopt this guidance for quarterly reporting beginning the first quarter of fiscal year 2021.

The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements.

In June 2016, the FASB issued “ASU 2016-13, Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments .” Current guidance delays the recognition of credit losses until it is probable a loss has been incurred.

This updated guidance will require financial assets measured at amortized cost to be presented at the net amount expected to be collected by means of an allowance for credit losses that runs through net income.

1 unchanged sentence

In 2019, the FASB issued amendments to this guidance which provide an option to irrevocably elect to measure certain individual financial assets at fair value instead of amortized cost and provide additional clarification and implementation guidance.

Under the Company’s current status as an EGC , this update and its amendments will be effective for annual reporting periods beginning after December 15, 2022, including interim periods within those fiscal years.

Early adoption is permitted, but not before annual reporting periods beginning on or after December 15, 2018.

The Company is currently evaluating the impact that this new guidance will have on its condensed consolidated financial statements.

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

March 31, 2020

The Company will adopt this guidance for annual reporting on December 31, 2020 and will account for potential credit losses under this guidance beginning with its 2020 Annual Report on Form 10-K.

The Company will adopt this guidance for quarterly reporting beginning the first quarter of fiscal year 2021.

The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements.

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

June 30, 2020

(in thousands)

16 unchanged sentences

Security holdings in an unrealized loss position

As of March 31, 2020, the Company held 223 fixed maturity securities in an unrealized loss position with a total estimated fair value of $105.7 million and total gross unrealized losses of $8.0 million.

As of June 30, 2020, the Company held 85 fixed maturity securities in an unrealized loss position with a total estimated fair value of $40.0 million and total gross unrealized losses of $2.0 million.

As of December 31, 2019, the Company held 51 fixed maturity securities in an unrealized loss position with a total estimated fair value of $20.9 million and total gross unrealized losses of $0.1 million.

The aggregate fair value and gross unrealized losses of the Company’s investments aggregated by investment category and the length of time these individual securities have been in a continuous unrealized loss position as of March 31, 2020 and December 31, 2019, are as follows:

The aggregate fair value and gross unrealized losses of the Company’s investments aggregated by investment category and the length of time these individual securities have been in a continuous unrealized loss position as of June 30, 2020 and December 31, 2019, are as follows:

Less Than 12 Months

More Than 12 Months

March 31, 2020

June 30, 2020

(in thousands)

20 unchanged sentences

● A fundamental analysis of the business prospects and financial condition of the issuer,

The Company’s intent to sell the securities as of each reporting date, and

● The Company’s intent to sell the securities as of each reporting date, and

● If the Company does not expect to recover the entire amortized cost basis or cost of the investment.

Based on the Company’s reviews as of March 31, 2020, the Company determined that the fixed maturity securities’

unrealized losses were primarily the result of the widening credit spreads during the three months ended March 31, 2020 which more than offset declines in interest rates during that period.

Based on the Company’s reviews as of June 30, 2020, the Company determined that the fixed maturity securities’ unrealized losses were primarily the result of the widening credit spreads during the six months ended June 30, 2020 which more than offset declines in interest rates during that period.

While the Company held some securities in industries such as energy and airlines, the Company believes it will be able to recover its investment in these securities given the financial condition and near-term prospects 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.

Therefore, none of the fixed maturity securities were written down during the three months ended March 31, 2020.

Therefore, none of the fixed maturity securities were written down during the six months ended June 30, 2020.

Contractual maturities of available-for-sale fixed maturity securities

The amortized cost and fair value of fixed maturity securities at March 31, 2020, by contractual maturity, are shown below.

The amortized cost and fair value of fixed maturity securities at June 30, 2020, by contractual maturity, are shown below.

(in thousands)

8 unchanged sentences

Three Months Ended

Six Months Ended

(in thousands)

Interest income

5 unchanged sentences

Three Months Ended

Six Months Ended

(in thousands)

Realized gains:

9 unchanged sentences

Net realized and unrealized gains on investments

Proceeds from the sale of fixed maturity securities were $0.8 million and $9.9 million for the three months ended March 31, 2020 and 2019, respectively.

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

Proceeds from the sale of fixed maturity securities were $10.5 million and $4.4 million for the three months ended June 30, 2020 and 2019, respectively and $12.9 million and $14.3 million for the six months ended June 30, 2020 and 2019, 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.

At March 31, 2020 and December 31, 2019, the carrying value of securities on deposit with state regulatory authorities was $5.4 million and $5.1 million, respectively.

At June 30, 2020 and December 31, 2019, the carrying value of securities on deposit with state regulatory authorities was $5.9 million and $5.1 million, respectively.

Fair value measurements

1 unchanged sentence

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;

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.

2 unchanged sentences

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

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

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

2 unchanged sentences

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

The following tables present the Company’s fair value hierarchy for financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019.

March 31, 2020

The following tables present the Company’s fair value hierarchy for financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019.

June 30, 2020

(in thousands)

19 unchanged sentences

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

As of March 31, 2020 and December 31, 2019, the Company had $0.5 million and $1.5, respectively of fixed income securities classified as Level 3 due to the availability of market observable inputs.

The $1.5 million of Level 3 securities held at December 31, 2019 was transferred to Level 2 during the three months ended March 31, 2020.

As of June 30, 2020, the Company had no fixed income securities classified as Level 3.

As of December 31, 2019, the Company had $1.5 million of fixed income securities classified as Level 3 due to the availability of market observable inputs which were transferred to Level 2 during the six months ended June 30, 2020.

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:

Three Months Ended March 31,

Three months ended June 30,

Six Months Ended June 30,

(in thousands)

Reserve for losses and loss adjustment expenses net of reinsurance recoverables at beginning of period

7 unchanged sentences

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’

The Company experienced favorable development of $0.3 million in the three months ended March 31, 2020 and adverse development of $0.04 million in the three months ended March 31, 2019 related to prior year losses.

Favorable development in the three months ended March 31, 2020 was primarily due to lower than anticipated frequency and severity of claims in the specialty homeowners and residential flood lines of business.

Unfavorable development during for the three months ended March 31, 2019 was primarily due to development of a Hurricane Michael claim offset by favorable development in the Specialty Homeowners line of business due to lower than originally anticipated frequency and severity of claims.

The Company experienced adverse development of $0.09 million in the three months ended June 30, 2020 and favorable development of $0.22 million in the six months ended June 30, 2020 and favorable development of $0.09 million and $0.05 million in the three and six months ended June 30, 2019.

Adverse development in the three months ended June 30, 2020 was primarily due to reported activity in the Assumed Reinsurance line of business.

Favorable development in the six months ended June 30, 2020 was primarily due to lower than anticipated frequency and severity of claims in the specialty homeowners and residential flood lines of business.

Favorable development during for the three and six months ended June 30, 2019 was primarily due to lower than originally anticipated frequency and severity of claims in the Texas homeowners line of business.

Long-term debt

1 unchanged sentence

These Floating Rate Notes were redeemed in May 2019 pursuant to their terms and the Company did not have any debt subsequent to May 2019.

The Company incurred and paid $0.4 million in interest expense related to the Floating Rate Notes for the three months ended March 31, 2019.

The Company recognized a charge of $1.3 million upon redemption with $0.4 million due to the redemption premium and $0.9 million due to the write-off of unamortized debt issuance costs.

The $0.4 million redemption premium was recognized as a component of interest expense and the $0.9 million issuance cost write-off was recognized as a

component of other underwriting expenses in the Company's unaudited condensed consolidated statement of income (loss) and comprehensive income (loss).

The Company incurred and paid $0.7 million and $1.1 million in interest expense related to the Floating Rate Notes for the three and six months ended June 30, 2019.

Prior to March 2019, the Company was a Cayman Islands incorporated holding company with U.K.

1 unchanged sentence

On March 14, 2019, the Company implemented a domestication (“the Domestication”) pursuant to Section 388 of the Delaware General Corporation Law and Section 206 of the Companies Law (2018 Revision), as amended, of the Cayman Islands pursuant to which it became a Delaware corporation and no longer subject to the laws of the Cayman Islands.

Historically, the Company’s Bermuda based subsidiary, PSRE, was not required to pay any taxes on its income or capital gains but was subject to a 1% U.S.

federal excise tax on reinsurance premiums assumed.

The Company intends to make an irrevocable election for PSRE to be taxed as a U.S.

The Company has filed an irrevocable election for PSRE to be taxed as a U.S.

domestic corporation under Section 953(d) of the Code effective January 1, 2019.

1 unchanged sentence

tax attributes due to significant negative evidence, including cumulative U.S.

losses in the most recent three-year period and our assessment that the realization of the net deferred tax assets did not meet the "more likely than not" criteria under ASC 740, Income Taxes .

losses in the most recent three-year period and our assessment that the realization of the net deferred tax assets did not meet the "more likely than not"

criteria under ASC 740, Income Taxes .

Management assessed available positive and negative evidence to estimate whether sufficient future taxable income would be generated to permit use of the existing deferred tax assets.

2 unchanged sentences

Based on this evidence, management determined it was more likely than not that the federal deferred tax assets are recoverable and therefore the associated valuation allowance was released as of March 31, 2019.

State NOL carryforwards, due to the limited carryforward period, do not meet the “more likely than not”

criteria and the Company will continue to maintain a valuation allowance on the associated deferred tax assets.

State NOL carryforwards, due to the limited carryforward period, do not meet the “more likely than not” criteria and the Company will continue to maintain a valuation allowance on the associated deferred tax assets.

The Company decreased the valuation allowance on the federal deferred tax assets by $1.7 million as a result of this analysis.

The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period change or if objective negative evidence in the form of cumulative losses is no longer present.

The tax expense for the three months ended March 31, 2020 differs from the statutory rate of 21% due to miscellaneous differences between taxable income calculated under GAAP and IRS regulations.

The tax expense for the three months ended March 31, 2019 differs significantly the statutory rate of 21% primarily due to a U.S.

tax benefit of $1.7 million for the reversal of a significant portion of the Company’s U.S.

deferred tax valuation allowance offset by tax expense of $4.8 million from the addback related to the stock compensation charge recognized during the quarter that is not deductible for tax purposes.

The tax expense for the three and six months ended June 30, 2020 and for the three months ended June 30, 2019 differs from the statutory rate of 21% due to miscellaneous differences between taxable income calculated under GAAP and IRS regulations.

The tax expense for the six months ended June 30, 2019 differs significantly the statutory rate of 21% primarily due to a U.S.

tax benefit of $1.7 million for the reversal of a significant portion of the Company’s U.S.

deferred tax valuation allowance offset by tax expense of $4.8 million from an addback related to a nondeductible stock compensation charge incurred upon modification of the Company’s management incentive plan in March 2019.

Capital Stock

As of March 31, 2020 and December 31, 2019, the Company has 5,000,000 preferred shares authorized with a par value of $0.0001 and no preferred shares issued and outstanding.

As of March 31, 2020 and December 31, 2019, the Company has 500,000,000 common shares authorized and 24,239,861 and 23,468,750 common shares issued and outstanding, respectively, with a par value of $0.0001.

Additional paid in capital is $216.3 million as of March 31, 2020 and $180.0 million as of December 31, 2019.

As of June 30, 2020 and December 31, 2019, the Company has 5,000,000 preferred shares authorized with a par value of $0.0001 and no preferred shares issued and outstanding.

As of June 30, 2020 and December 31, 2019, the Company has 500,000,000 common shares authorized and 25,468,321 and 23,468,750 common shares issued and outstanding, respectively, with a par value of $0.0001.

Additional paid in capital is $308.1 million as of June 30, 2020 and $180.0 million as of December 31, 2019.

On March 15, 2019, the Company effected a 17,000,000 for one forward stock split in conjunction with domestication in the United States.

All share and per share information included in the condensed consolidated financial statements and notes to the condensed consolidated financial statements have been retroactively adjusted to reflect the stock split for the Company’s common stock for all periods presented.

On April 22, 2019, the Company completed its IPO with the sale of 6,468,750 shares of common stock at a price to the public of $15.00 per share, including 843,750 shares sold upon the exercise in full of the underwriter’s option to purchase additional shares.

After underwriter discounts and commissions and offering expenses, net proceeds from the IPO were approximately $87.4 million.

On January 9, 2020, the Company completed a secondary offering in which the Company sold 750,000 shares of stock to the public at a price of $49.00 per share (along with 5,000,000 shares sold by existing shareholders).

Company received net proceeds of approximately $35.5 million, after deducting underwriting discounts and commissions and offering costs.

Common stock reserved for future issuance consists of the following as of March 31, 2020:

On April 22, 2019, the Company completed its IPO with the sale of 6,468,750 shares of common stock at a price to the public of $15.00 per share.

The Company received net proceeds of approximately $87.4 million, after deducting underwriting discounts and commissions and offering costs.

On January 9, 2020, the Company completed a secondary offering in which the Company sold 750,000 shares of common stock to the public at a price of $49.00 per share (along with 5,000,000 shares sold by existing shareholders).

The Company received net proceeds of approximately $35.5 million, after deducting underwriting discounts and commissions and offering costs.

On June 26, 2020, the Company sold 1,150,000 shares of common stock to the public at a price of $82.00 per share in an underwritten public offering.

The Company received net proceeds of approximately $90.2 million, after deducting underwriting discounts and commissions and offering costs.

Common stock reserved for future issuance consists of the following as of June 30, 2020:

Stock options outstanding under 2019 Equity Incentive Plan

3 unchanged sentences

Stock-Based Compensation

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

Three months ended March 31,

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

Three months ended June 30,

Six months ended June 30,

(in thousands)

Stock-Based Compensation

1 unchanged sentence

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 (Loss) and Comprehensive Income (Loss).

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

The Company recognized approximately $23.0 million of stock-based compensation expense in March 2019 relating to the modification of its 2014 Management Incentive Plan.

1 unchanged sentence

Management Incentive Plan prior to IPO

The Company’s former parent, GC Palomar Investor LP, adopted a 2014 Management Incentive Plan (in the form of profits interests) on February 12, 2014 under which certain officers and employees of PSIC and its affiliates were entitled to Class P Units in GC Palomar Investor LP.

Class P unit holders were expected to realize value only upon the occurrence of liquidity events meeting requisite financial thresholds after the Class A unit holders recovered their investment.

2 unchanged sentences

On March 15, 2019, the Company modified its 2014 Management Incentive Plan by eliminating the requirement of a liquidity event to occur for the holders of its Class P units to realize value.

The 12,552,825 Class P units outstanding were modified such that the vesting of each Class P unit holder’s awards was accelerated and their Class P distribution percentages were determined and distributed based on these percentages.

This modification resulted in a stock compensation charge and corresponding increase to additional paid‑in capital of $23.0 million during the quarter ending March 31, 2019.

This modification resulted in a

stock compensation charge and corresponding increase to additional paid-in capital of $23.0 million during the quarter ending March 31, 2019.

2019 Equity Incentive Plan

6 unchanged sentences

Stock Options

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

Stock options vest over a two or four-year period with 25% or 50% vesting on the first anniversary of the grant date and the remainder vesting monthly over the remaining period, subject to continued employment.

Stock options expire ten years after the grant date.

The following table summarizes stock option transactions for the 2019 Plan for the three months ended March 31, 2020:

The following table summarizes stock option transactions for the 2019 Plan for the six months ended June 30, 2020:

Number of shares

6 unchanged sentences

Options canceled

Outstanding at March 31, 2020

Vested and Exercisable at March 31, 2020

As of March 31, 2020, the Company had approximately $2.9 million of total unrecognized stock-based compensation expense related to stock options expected to be recognized over a weighted-average period of 2.03 years.

The fair value of each option granted during the three months ended March 31, 2020 was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions:

Outstanding at June 30, 2020

Vested and Exercisable at June 30, 2020

As of June 30, 2020, the Company had approximately $2.9 million of total unrecognized stock-based compensation expense related to stock options expected to be recognized over a weighted-average period of 2.18 years.

The fair value of each option granted during the six months ended June 30, 2020 was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions:

Risk free rate of return (1)

9 unchanged sentences

(2) Determined based on analysis of the volatility of a peer group of publicly traded companies.

(3) Determined using the “simplified method”

for estimating the expected option life, which is the average of the weighted-average vesting period and contractual term of the option as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its common stock has been publicly traded.

(3) Determined using the “simplified method” for estimating the expected option life, which is the average of the weighted-average vesting period and contractual term of the option as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its common stock has been publicly traded.

(4) Determined to be zero as the Company has not historically issued dividends.

Restricted Stock Units

Restricted stock units are valued on their grant date and will vest on the first anniversary of the grant date.

Restricted stock units are valued on their grant date and generally vest on the first anniversary of the grant date.

The fair value of RSUs is determined using the closing price of the Company's common stock on the grant date.

The following table summarizes RSU transactions for the 2019 Plan for the three months ended March 31, 2020:

The following table summarizes RSU transactions for the 2019 Plan for the six months ended June 30, 2020:

Number of shares

1 unchanged sentence

Non vested outstanding at December 31, 2019

Non vested outstanding at March 31, 2020

As of March 31, 2020, the Company had approximately $0.1 million of total unrecognized stock-based compensation expense related to RSUs expected to be recognized over a weighted-average period of 0.07 years.

Non vested outstanding at June 30, 2020

As of June 30, 2020, the Company had approximately $0.1 million of total unrecognized stock-based compensation expense related to RSUs expected to be recognized over a weighted-average period of 0.89 years.

2019 Employee Stock Purchase Plan

1 unchanged sentence

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.

1 unchanged sentence

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

The Company issued 21,111 shares pursuant to the ESPP during the three months ended March 31, 2020.

The Company issued 21,111 shares pursuant to the ESPP during the six months ended June 30, 2020.

Accumulated Other Comprehensive Income

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

Three Months Ended March 31,

Six Months Ended June 30,

(in thousands)

Beginning Balance

Other comprehensive income (loss) before reclassification

Other comprehensive income before reclassification

Federal income tax (expense) benefit

3 unchanged sentences

Amounts reclassified from AOCI, net of tax

Other comprehensive income (loss)

Other comprehensive income

Balance at end of period

1 unchanged sentence

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

Three months ended March 31,

Three months ended June 30,

Six months ended June 30,

(in thousands, except shares and per share data)

Net income (loss)

3 unchanged sentences

Common share equivalents relate primarily to outstanding stock options and RSUs under the 2019 Plan and unpurchased shares under the 2019 ESPP.

For the six months ended June 30, 2019, there were 64,880 common share equivalents excluded from the calculation of diluted earnings per share as their effects were anti-dilutive.

Cash Distribution

3 unchanged sentences

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

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

($ in thousands)

Residential Earthquake

2 unchanged sentences

Specialty Homeowners

Inland Marine

Hawaii Hurricane

2 unchanged sentences

Gross written premiums by state are as follows:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

($ in thousands)

South Carolina

1 unchanged sentence

Total Gross Written Premiums

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 months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2020, 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 February 28, 2020.

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

and its subsidiaries, unless the context otherwise requires.

We are a rapidly growing and profitable company focused on the provision of specialty property insurance.

We focus on certain markets that we believe are underserved by other insurance companies, such as the markets for earthquake, wind and flood insurance.

We provide specialty property insurance products in our target markets to both individuals and businesses.

We use proprietary data analytics and a modern technology platform to offer our customers flexible products with customized and granular pricing on an admitted basis.

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

Our business strategy is supported by a comprehensive risk transfer program with reinsurance coverage that we believe provides both consistency of earnings and appropriate levels of protection in the event of a major catastrophe.

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 for the year ended December 31, 2014, our first year of operations, to $252.0 million for the year ended December 31, 2019, a compound annual growth rate (“CAGR”) of approximately 72%.

For the three months ended March 31, 2020, we experienced average monthly premium retention rates above 94% for our Residential Earthquake, Commercial Earthquake, and Hawaii Hurricane lines and approximately 90% overall across all lines of business, providing strong visibility into future revenue.

In February 2014, Palomar Specialty Insurance Company was awarded an “A−”

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

Best Company (A.M.

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

In February 2019, A.M.

Best affirmed our “A−”

(Excellent) (Outlook Stable) rating for Palomar Specialty Insurance Company and affirmed our “A−”

(Excellent) (Outlook Stable) group rating for Palomar Holdings, Inc.

This rating reflects A.M.

Best’s opinion of our financial strength, operating performance and ability to meet obligations to policyholders and is not an evaluation directed towards the protection of investors.

In April 2019, we closed our Initial Public Offering (IPO) and received net proceeds of approximately $87.4 million, after deducting underwriting discounts and commissions and offering costs.

On January 9, 2020, we, along with certain selling stockholders, completed a registered sale (January 2020 Secondary Offering) of 5,750,000 shares of common stock at a public offering price of $49.00 per share.

Of the 5,750,000 shares sold, 750,000 represented the underwriters’

exercise of their option to purchase additional shares.

The offering was comprised of 5,000,000 shares sold by certain selling stockholders and 750,000 shares sold by us.

Our net proceeds from the January 2020 Secondary Offering were approximately $35.5 million, after deducting underwriting discounts and commissions and offering costs.

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

COVID-19 Pandemic and Impact on Palomar

The ongoing COVID-19 Pandemic ("Pandemic") and response thereto has significantly impacted financial markets, businesses, households, and communities and has caused a contraction in business activity and volatility in financial markets.

Continuation of the Pandemic could cause additional reduction in business activity and financial market instability.

The extent of the impact of the Pandemic on our operational and financial performance will depend on several factors, including the duration of the Pandemic and actions taken by government and health officials in response, all of which are uncertain and cannot be predicted.

The most immediate impact of the Pandemic has been on our operations, as we took several actions to protect the health of the public and our employees and comply with directives and advice of governmental authorities.

In March 2020, as more information about the potential impacts of the Pandemic became apparent, we directed the majority of our employees to work from home and put all business travel on hold indefinitely.

We also implemented safeguards for employees who play critical roles to ensure operational reliability, established protocols for employees who interact directly with the public and began providing employees a reimbursement to help manage incremental costs associated with remote work.

In addition, we enacted extra physical security and cybersecurity measures to further safeguard our systems to serve the operational needs of our remote workforce and ensure uninterrupted service to brokers and policyholders.

The initial economic impacts of the Pandemic, as well as the various stay at home orders and mandated closures of certain business, have caused a significant temporary slowdown in certain sectors of the economy and a corresponding increase in unemployment.

We have experienced an increase in the number of business interruption claims related to the Pandemic.

Our all risk and commercial earthquake (Difference in Conditions or “DIC”) policies offer business interruption coverage for insureds for a loss in business income caused by physical damage to the structure.

All of these policies are written on an admitted basis and all of our all risk policies have an Insurance Services Office (ISO) virus exclusion.

Our DIC policies require physical damage to the structure caused by the covered perils, whether it be an earthquake or flood.

We are acknowledging, investigating, assessing and adjudicating each and every one of these claims and providing the policyholder requisite consideration.

We have responded to the hardships many customers are facing and have taken a number of steps to support our customers and communities, including implementing a premium grace period to accommodate late payments across all lines of business in all states where we operate.

Our results of operations depend, in part, on the performance of our investment portfolio.

During the first quarter of 2020, we experienced a decrease in the fair value of our investment portfolio due to unrealized losses on the value of our fixed income securities.

The Pandemic’s impact on the economy and financial markets could reduce our net investment income and result in realized investment losses in future periods.

Adverse events such as health-related concerns about working in our offices, the inability to travel, potential impact on our business partners and customers, and other matters affecting the general work and business environment could harm our business and delay the implementation of our business strategy.

We cannot anticipate all the ways in which the current global health crisis and financial market conditions could adversely impact our business in the future.

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:

New business submissions;

Binding of new business submissions into policies;

Renewals of existing policies;

Average size and premium rate of bound policies.

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

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

Ceded Written Premiums

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

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

Ceded written premiums are earned over the reinsurance contract period in proportion to the period of risk covered.

The volume of our ceded written premiums is impacted by the level of our gross written premiums and any decision we make to increase or decrease limits, retention levels and co-participations.

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

In periods where we start or stop ceding a large volume of our premiums, ceded written premiums may increase or decrease significantly compared to prior periods and these fluctuations may not be indicative of future trends.

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.

Our insurance policies generally have a term of one year and premiums are earned pro rata over the term of the policy.

Commission and Other Income

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

Losses and Loss Adjustment Expenses

Losses and loss adjustment expenses represent the costs incurred for losses.

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.

In general, our losses and loss adjustment expenses are affected by:

The occurrence, frequency and severity of catastrophe events such as earthquakes, hurricanes and floods in the areas where we underwrite polices relating to these perils;

Our net reinsurance recoverables;

The volume and severity of non‑catastrophe attritional losses;

The mix of business written by us;

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.

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 we receive on business ceded under certain reinsurance contracts.

In addition, acquisition expenses include premium‑related taxes.

Acquisition expenses related to each policy we write are deferred and amortized to expense in proportion to the premium earned over the policy life.

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 expense on our Floating Rate Notes during the three months ended March 31, 2019.

We did not have any debt or incur any interest expense after May 2019.

Net Investment Income

We earn investment income on our portfolio of invested assets.

Our invested assets are primarily comprised of fixed maturity securities, and may also include cash and cash equivalents, and equity securities.

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

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

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 as well as any “other‑than‑temporary”

impairments recognized in earnings.

Income Tax Expense

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

Our 2019 income tax expense was significantly impacted by the reversal of our U.S.

federal deferred tax valuation allowance in March 2019, offset by an addback related to a nondeductible stock compensation charge.

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 effective tax rate at the end of each period.

See “Reconciliation of Non‑GAAP Financial Measures”

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

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

equity during the period.

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

equity during the period.

See “Reconciliation of Non‑GAAP Financial Measures”

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

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

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

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

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

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

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

See “Reconciliation of Non‑GAAP Financial Measures”

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

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

See “Reconciliation of Non‑GAAP Financial Measures”

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

Tangible stockholders’

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

equity less intangible assets.

See “Reconciliation of Non‑GAAP Financial Measures”

for a reconciliation of stockholders’

equity calculated in accordance with GAAP to tangible stockholders’

Results of Operations

Three months ended March 31, 2020 compared to three months ended March 31, 2019

The following table summarizes our results for the three months ended March 31, 2020 and 2019:

Three months ended

($ in thousands, except per share data)

Gross written premiums

Ceded written premiums

Net written premiums

Net earned premiums

Commission and other income

Total underwriting revenue (1)

Losses and loss adjustment expenses

Acquisition expenses

Other underwriting expenses

Underwriting income (loss) (1)

Interest expense

Net investment income

Net realized and unrealized gains on investments

Income (loss) before income taxes

Income tax expense

Net income (loss)

Expenses associated with stock offerings and tax restructuring

Stock-based compensation expense

Adjusted net income (1)

Key Financial and Operating Metrics

Annualized return on equity

Annualized adjusted return on equity

Expense ratio

Combined ratio

Adjusted combined ratio (1)

Diluted earnings per share

Diluted adjusted earnings per share (1)

NM- not meaningful

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.

Gross Written Premiums

Gross written premiums increased $17.5 million, or 32.3% to $71.5 million for the three months ended March 31, 2020 compared to $54.0 million for the three months ended March 31, 2019.

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 products’

distribution footprint, and new partnerships.

The changes in gross written premiums were most notable in the following lines of business:

Residential Earthquake, which represented approximately 40.2% of our gross written premiums for the three months ended March 31, 2020, decreased by $0.6 million, or 1.9%, for the three months ended March 31, 2020 compared to the same period in the prior year.

During the prior year three month period, we entered into a new homeowners carrier partnership in which we assumed $6.6 million of unearned premiums.

Excluding the impact of this unearned premium assumption, our Residential Earthquake gross written premiums increased by $6.1 million, or 26.7%.

Commercial All Risk, which represented approximately 17.4% of our gross written premiums for the three months ended March 31, 2020, increased by $4.9 million, or 64.7%, for the three months ended March 31, 2020 compared to the same period in the prior year.

Commercial Earthquake, which represented approximately 15.2% of our gross written premiums for the three months ended March 31, 2020, increased by $4.3 million, or 66.1%, for the three months ended March 31, 2020 compared to the same period in the prior year.

Specialty Homeowners, which represented approximately 13.8% of our gross written premiums for the three months ended March 31, 2020, increased by $2.1 million, or 26.5%, for the three months ended March 31, 2020 compared to the same period in the prior year.

Hawaii Hurricane, which represented approximately 3.8% of our gross written premiums for the three months ended March 31, 2020, increased by $0.6 million or 29.9%, for the three months ended March 31, 2020 compared to the same period in the prior year.

Residential Flood, which represented approximately 2.1% of our gross written premiums for the three months ended March 31, 2020 increased by $0.8 million or 97.7%, for the three months ended March 31, 2020 compared to the same period in the prior year.

Other gross written premiums consist of premiums related to our Assumed Reinsurance program and our Inland Marine products.

The increase was primarily due to premiums from our Assumed Reinsurance program and may not be indicative of trends in future periods.

Ceded Written Premiums

Ceded written premiums increased $3.4 million, or 13.0%, to $29.5 million for the three months ended March 31, 2020 from $26.1 million for the three months ended March 31, 2019.

The increase was primarily due to an increase in excess of loss (XOL) reinsurance expense commensurate with growth in exposure, offset by decreased quota share cession primarily in our commercial all risk line.

Ceded written premiums as a percentage of gross written premiums decreased to 41.3% for the three months ended March 31, 2020 from 48.3% for the three months ended March 31, 2019.

This decrease was due to the decreased quota share cession on our commercial all risk line and due to the increase in gross written premiums in our residential earthquake and commercial earthquake lines, which are not subject to quota share reinsurance agreements.

Net Written Premiums

Net written premiums increased $14.1 million, or 50.4%, to $42.0 million for the three months ended March 31, 2020 from $27.9 million for the three months ended March 31, 2019.

The increase was primarily due to an increase in gross written premiums, primarily in our commercial all risk and commercial earthquake lines, offset by increased ceded written premiums.

Net Earned Premiums

Net earned premiums increased $16.4 million, or 89.7%, to $34.8 million for the three months ended March 31, 2020 from $18.4 million for the three months ended March 31, 2019 due primarily to the earning of increased gross written premiums offset by the earning of ceded written premiums under reinsurance agreements.

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

Three Months Ended

($ in thousands)

Gross earned premiums

Ceded earned premiums

Net earned premiums

Net earned premium ratio

Commission and Other Income

Commission and other income increased $0.1 million or 25.9% to $0.7 million for the three months ended March 31, 2020 from $0.6 million for the three months ended March 31, 2019 due primarily to an increase in policy related fees associated with an increased volume of premiums written.

Losses and Loss Adjustment Expenses

Losses and loss adjustment expenses increased $1.5 million, or 489.6%, to $1.9 million for the three months ended March 31, 2020 from $0.3 million for the three months ended March 31, 2019.

Losses increased during the three months ended March 31, 2020 due to higher attritional losses on our commercial all risk and specialty homeowners lines of business due to the growth of those lines and changes in quota share agreements whereby we retained a higher amount of premiums and losses.

Acquisition Expenses

Acquisition expenses increased $6.0 million, or 87.0%, to $13.0 million for the three months ended March 31, 2020 from $7.0 million for the three months ended March 31, 2019.

The primary reason for the increase was higher earned premiums which resulted in higher commissions and premium-related taxes.

Acquisition expenses as a percentage of gross earned premiums were 20.1% for the three months ended March 31, 2020 compared to 17.1% for the three months ended March 31, 2019.

Acquisition expenses as a percentage of gross earned premiums increased due to lower earned ceding commissions primarily related to our commercial all risk line.

Acquisition expenses as a percentage of gross earned premiums fluctuates based on mix of business produced and quota share arrangements in place.

Other Underwriting Expenses

Other underwriting expenses decreased $20.9 million, or 72.4%, to $8.0 million for the three months ended March 31, 2020 from $28.9 million for the three months ended March 31, 2019.

Other underwriting expenses as a percentage of gross earned premiums were 12.2% for the three months ended March 31, 2020 compared to 70.6% for the three months ended March 31, 2019.

Excluding the impact of expenses relating to stock offerings and tax restructuring and stock-based compensation, other underwriting expenses as a percentage of gross earned premiums were 11.2% for the three months ended March 31, 2020 compared to 13.5% for the three months ended March 31, 2019.

Interest Expense

Interest expense decreased $0.4 million to zero for the three months ended March 31, 2020 from $0.4 million for the three months ended March 31, 2019.

Interest expense decreased as we did not have any debt during the three months ended March 31, 2020 whereas we had outstanding Floating Rate Notes during the three months ended March 31, 2019.

Net Investment Income and Net Realized and Unrealized Gains on Investments

Net investment income increased $1.0 million, or 112.0%, to $2.0 million for the three months ended March 31, 2020 from $1.0 million for the three months ended March 31, 2019.

The increase was primarily due to a higher average balance of investments during the three months ended March 31, 2020 due primarily to proceeds from our April 2019 IPO, investing of cash generated from operations, and proceeds from our January 2020 secondary offering.

Net realized and unrealized gains on investments decreased $2.0 million, or 81.8%, to $0.4 million for the three months ended March 31, 2020 from $2.4 million for the three months ended March 31, 2019.

We had a higher balance of equity securities during the prior year period and saw appreciation on those equity securities during that period.

Currently, we mainly invest in investment grade fixed maturity securities, including U.S.

government issues, state government issues, mortgage and asset-backed obligations, and corporate bonds.

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

Three Months Ended

($ in thousands)

Interest income

Dividend income

Investment management fees and expenses

Net investment income

Net realized and unrealized gains on investments

Income Tax Expense

Income tax expense increased to $3.4 million for the three months ended March 31, 2020 from $0.1 million for the three months ended March 31, 2019 as we had higher pre-tax income during the three months ended March 31, 2020.

For the three months ended March 31, 2019, our income tax expense was significantly impacted by the reversal of our U.S.

federal deferred tax valuation allowance in March 2019, offset by an addback related to a nondeductible stock compensation charge related to the modification of our management incentive plan in March 2019.

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 income.

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

(in thousands)

Total revenue

Net investment income

Net realized and unrealized gains on investments

Underwriting revenue

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 income.

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.

Income (loss) before income taxes calculated in accordance with GAAP reconciles to underwriting income as follows:

Three Months Ended

(in thousands)

Income (loss) before income taxes

Net investment income

Net realized and unrealized gains on investments

Interest expense

Underwriting income (loss)

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 effective tax rate at the end of each period.

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

Adjusted net income should not be viewed as a substitute for net income calculated in accordance with GAAP, and other companies may define adjusted net income differently.

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

Three Months Ended

(in thousands)

Net income (loss)

Expenses associated with stock offerings and tax restructuring

Stock-based compensation expense

Adjusted net income

Annualized Adjusted Return on Equity

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

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

($ in thousands)

Annualized adjusted net income

Average stockholders' equity

Annualized adjusted return on equity

Adjusted Combined Ratio

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

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

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

Adjusted combined ratio is calculated as follows:

Three Months Ended

($ in thousands)

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

Net earned premiums

Combined ratio

Adjustments to numerator:

Expenses associated with stock offerings and tax restructuring

Stock-based compensation expense

Adjusted combined ratio

Diluted adjusted earnings per share

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

We use diluted adjusted earnings per share as an internal performance measure in the management of our operations because we believe it gives our management and other users of our financial information 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

($ in thousands, except per share data)

Adjusted net income

Weighted-average common shares outstanding, diluted

Diluted adjusted earnings per share

Tangible Stockholders’

We define tangible stockholders’

equity as stockholders’

equity less intangible assets.

Our definition of tangible stockholders’

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

equity calculated in accordance with GAAP.

We use tangible stockholders’

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

Stockholders’

equity calculated in accordance with GAAP reconciles to tangible stockholders’

equity as follows:

(in thousands)

Stockholders' equity

Intangible assets

Tangible stockholders' equity

Liquidity and Capital Resources

Sources and Uses of Funds

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

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

insurance company subsidiary is restricted by statute as to the amount of dividends that it may pay without the prior approval of the Oregon and California Insurance Commissioners.

Generally, insurers may pay dividends without advance regulatory approval only from earned surplus and only to the extent that all dividends paid in the twelve months ending on the date of the proposed dividend do not exceed the greater of (i) 10% of their statutory policyholders’

surplus as of December 31 of the preceding year or (ii) 100% of their statutory net income (excluding realized investment gains or losses) for the calendar year preceding the year in which the value is being determined.

In addition, a domestic insurer may only declare a dividend from earned surplus, which does not include surplus arising from unrealized capital gains or revaluation of assets.

A domestic insurer may declare a dividend from other than earned surplus only if the Insurance Commissioner approves the declaration prior to payment of the dividend.

insurance company subsidiary may pay a dividend or distribution no greater than $10.3 million to us in 2020 without the prior approval of the Oregon and California Insurance Commissioners due to our U.S.

Insurance Company Subsidiary’s earned surplus of $10.3 million as of December 31, 2019.

In addition, there is no assurance that dividends of the maximum amount calculated under any applicable formula would be permitted by state insurance regulators.

In the future, state insurance regulatory authorities may adopt statutory provisions more restrictive than those currently in effect.

Insurance companies in the United States are also required by state law to maintain a minimum level of policyholder’s surplus.

Oregon and California’s state insurance regulators have a risk‑based capital standard designed to identify property and casualty insurers that may be inadequately capitalized based on inherent risks of the insurer’s assets and liabilities and its mix of net written premium.

Insurers falling below a calculated threshold may be subject to varying degrees of regulatory action.

As of March 31, 2020 and December 31, 2019, the total adjusted capital of our U.S.

insurance subsidiary was in excess of its respective prescribed risk‑based capital requirements.

Under the Insurance Act and related regulations, our Bermuda reinsurance subsidiary is required to maintain certain solvency and liquidity levels, which it maintained as of March 31, 2020 and December 31, 2019.

Our Bermuda reinsurance subsidiary maintains a Class 3A license and thus must maintain a minimum liquidity ratio in which the value of its relevant assets is not less than 75% of the amount of its relevant liabilities for general business.

Relevant assets include cash and cash equivalents, fixed maturity securities, accrued interest income, premiums receivable, losses recoverable from reinsurers, and funds withheld.

The relevant liabilities include total general business insurance reserves and total other liabilities, less sundry liabilities.

As of March 31, 2020 and December 31, 2019, we met the minimum liquidity ratio requirement.

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 our Bermuda reinsurance subsidiary to pay dividends or make capital distributions by stipulating certain margin and solvency requirements and by requiring approval from the BMA prior to a reduction of 15% or more of a Class 3A insurer’s total statutory capital as reported on its prior year statutory balance sheet.

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

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

Further, under the Companies Act, our Bermuda reinsurance subsidiary 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 our Bermuda subsidiary during 2020 is calculated to be approximately $5.7 million.

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

There were no dividends approved or paid in 2019 and there have been no dividends approved or paid in 2020.

Our primary sources of cash flow are written premiums, investment income, reinsurance recoveries, sales and redemptions of investments, and proceeds from offerings of equity securities.

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 cash receipts from written premiums, investment income, proceeds from investment sales and redemptions, and reinsurance recoveries, if necessary, are sufficient to cover cash outflows in the foreseeable future.

The following table summarizes our cash flows for the three months ended March 31, 2020 and 2019:

Three months ended

($ in thousands)

Cash provided by (used in):

Operating activities

Investing activities

Financing activities

Change in cash, cash equivalents, and restricted cash

Our cash flow from operating activities has been positive in each period shown above.

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, and reinsurance payments.

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

Cash used in investing activities for the three months ended March 31, 2020 related primarily to purchases of fixed income and equity securities in excess of sales and maturities.

Cash provided by investing activities for the three months ended March 31, 2019 related primarily to sales and maturities of fixed income and equity securities in excess of purchases.

Cash provided by financing activities for three months ended March 31, 2020 was related to the receipt of $35.5 million in net proceeds from the January 2020 Secondary Offering and the receipt of $0.4 million in proceeds related to the issuance of common stock pursuant to our employee stock purchase plan.

Cash used in financing activities for the three months ended March 31, 2019 was related to a one‑time cash distribution of $5.1 million to our then sole stockholder, GC Palomar Investor LP in March 2019.

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 catastrophic loss events.

To the extent our future operating cash flows are insufficient to cover our net losses from catastrophic events, we had $320.4 million in cash and investment securities available at March 31, 2020.

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.

Notes Payable

In September 2018, the Company completed a private placement financing of $20.0 million floating rate senior secured notes (Floating Rate Notes).

These Floating Rate Notes were redeemed in May 2019 pursuant to their terms and the Company did not have any debt subsequent to May 2019.

The Company incurred and paid $0.4 million in interest expense related to the Floating Rate Notes for the three months ended March 31, 2019

Stockholders’

At March 31, 2020 total stockholders’

equity was $260.8 million and tangible stockholders’

equity was $260.1 million, compared to total stockholders’

equity of $218.6 million and tangible stockholders’

equity of $217.8 million as of December 31, 2019.

Stockholders’

equity increased for the three months ended March 31, 2020 primarily due to the receipt of $35.5 million in net proceeds from our January 2020 Secondary Offering.

In addition, it increased due to $11.8 million in net income and $0.4 million related to the issuance of common stock pursuant to our employee stock purchase plan.

Finally, it increased due to $0.4 million stock-based compensation expense, which was treated as additional paid in capital.

These items were offset by a $5.8 million decrease to other comprehensive income caused by unrealized losses on fixed maturity investments.

Tangible stockholders’

equity is a non‑GAAP financial measure.

See “Reconciliation of Non‑GAAP Financial Measures”

for a reconciliation of stockholders’

equity in accordance with GAAP to tangible stockholders’

Investment Portfolio

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

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

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

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

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

As of March 31, 2020, the majority of our investment portfolio, or $273.4 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 $22.9 million of equity securities, primarily comprised of mutual funds that provide exposure to the U.S.

investment-grade bond market.

In addition, we maintained a non‑restricted cash and cash equivalent balance of $23.8 million at March 31, 2020.

Our fixed maturity securities, including cash equivalents, had a weighted average effective duration of 3.81 and 3.49 years and an average rating of “A1/A+”

and “A1/A+”

at March 31, 2020 and December 31, 2019, respectively.

Our fixed income investment portfolio had a book yield of 2.85% as of March 31, 2020, compared to 2.9% as of December 31, 2019.

At March 31, 2020 and December 31, 2019 the amortized cost and fair value on available‑for‑sale securities were as follows:

March 31, 2020

($ in thousands)

Fixed maturities:

States, territories, and possessions

Political subdivisions

Special revenue excluding mortgage/asset-backed securities

Industrial and miscellaneous

Mortgage/asset-backed securities

Total available-for-sale investments

December 31, 2019

($ in thousands)

Fixed maturities:

States, territories, and possessions

Political subdivisions

Special revenue excluding mortgage/asset-backed securities

Industrial and miscellaneous

Mortgage/asset-backed securities

Total available-for-sale investments

The following tables provide the credit quality of investment securities as of March 31, 2020 and December 31, 2019:

March 31, 2020

($ in thousands)

December 31, 2019

($ in thousands)

The amortized cost and fair value of our available‑for‑sale investments in fixed maturity securities summarized by contractual maturity as of March 31, 2020 were as follows:

March 31, 2020

($ in thousands)

Due within one year

Due after one year through five years

Due after five years through ten years

Due after ten years

Mortgage and asset-backed securities

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

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

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

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

see “Risk Factors—Risks Related to Our Business and Industry—We may be unable to purchase third‑party reinsurance or otherwise expand our catastrophe coverage in amounts we desire on commercially acceptable terms or on terms that adequately protect us, and this inability may materially adversely affect our business, financial condition and results of operations.”

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

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

Our treaty reinsurance program primarily consists of catastrophe excess of loss (“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.

As of January 1, 2020, we purchased reinsurance from over 85 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%.

Torrey Pines Re Ltd., the special purpose insurer established in Bermuda, comprises $166 million or 12.7% of total catastrophe XOL limit we have in effect.

Torrey Pines Re Ltd.

was funded by over 25 different investors, with the largest investor representing less than 2% of our total catastrophe XOL reinsurance limit.

Our largest single XOL reinsurer comprises 5.9% of the total catastrophe XOL reinsurance limit we have in effect.

In addition to ceding risk to traditional reinsurers, we purchase collateralized limit from the insurance linked securities (“ILS”) market.

Currently, we retain $5 million of risk per earthquake or wind event, inclusive of any amounts retained through our Bermuda reinsurance subsidiary, and our reinsurance program currently provides for coverage up to $1.2 billion for earthquake events, subject to customary exclusions.

Currently, our first event retention represents 1.9% of our stockholders’

We believe our current reinsurance program provides coverage well in excess of our theoretical losses from any recorded historical event.

We regularly model our hypothetical losses from historically significant catastrophes, including the 1906 San Francisco and 1994 Northridge earthquakes.

Under our current reinsurance program, should an event equivalent to either of these two events recur, our hypothetical net loss would be capped at our current net retention of $5 million per such event.

To mitigate potential volatility in reinsurance market conditions, we currently purchase XOL reinsurance coverage at two different renewals during the year, on January 1st and on June 1st.

Additionally, we divide our catastrophe XOL treaty into multiple layers and place many of the layers on alternating 24 month contracts.

At each reinsurance treaty renewal, we consider any plans to change the underlying insurance coverage we offer, our current capital, our risk appetite, and the cost and availability of reinsurance coverage.

Many of our reinsurance contracts have multi‑year terms and additional features, such as expanded coverage windows for catastrophe events, that we believe provide us with significant protection and flexibility should market conditions change.

In the event of a catastrophe that impacts our reinsurance contracts, our contracts typically include prepaid reinstatements that limits our net loss to $5 million retention per event.

For layers that are not reinstateable (commonly known as “single shot”) such as Torrey Pines Re, the we have arranged cascading coverage that drops down in order to eliminate any potential gap in coverage in the catastrophe program for subsequent event(s).

Off‑Balance Sheet Arrangements

We do not have any off‑balance sheet arrangements (as defined by applicable regulations of the SEC) that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

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 2019 Annual Report on Form 10-K filed with the SEC on February 28, 2020.

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 2019 Annual Report on Form 10-K

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

What changed 10-Q

Item 1. Financial Statements