What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-11-13 compared with 2020-08-05 · 318 added, 170 removed, 411 unchanged (54% of the section changed)

2 unchanged sentences

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

The results of operations for the three and six months ended June 30, 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 results of operations for the three and nine months ended September 30, 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.

9 unchanged sentences

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

We provide most of our products on an admitted basis, while having the flexibility to provide certain products on a non-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 business strategy is supported by a comprehensive risk transfer program with reinsurance coverage that we believe reduces earnings volatility and provides appropriate levels of protection 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.

1 unchanged sentence

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 six months ended June 30, 2020, we experienced average monthly premium retention rates above 90% for our Residential Earthquake, All Risk, and Hawaii Hurricane lines and approximately 89% overall across all lines of business, providing strong visibility into future revenue.

For the nine months ended September 30, 2020, we experienced average monthly premium retention rates above 90% for our Residential Earthquake, Flood, 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−” rating from A.M.

7 unchanged sentences

These ratings reflect A.M.

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

Best’s opinion of our subsidiaries’ financial strength, operating performance, and ability to meet obligations to policyholders and are 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.

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.

On January 9, 2020, we, along with certain selling stockholders, sold 5,750,000 shares of common stock at a price of $49.00 per share in an underwritten public offering.

The offering was comprised of 5,000,000 shares sold by

certain selling stockholders and 750,000 shares sold by us.

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

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

1 unchanged sentence

During the second quarter of 2020, we capitalized and received regulatory approval for a newly formed surplus lines insurance company subsidiary named Palomar Excess and Surplus Insurance Company (‘‘PESIC’’).

We believe that the underwriting acumen and market expertise we have established through Palomar Specialty Insurance Company can be applied to the surplus lines market as well, and that PESIC will enable us to serve certain risks that our admitted products cannot currently satisfy.

PESIC is domiciled in the State of Arizona and licensed in Arizona to transact across all of our existing lines of business.

We intend to commence writing surplus lines business, primarily Commercial Earthquake and Commercial All Risk, on a national basis beginning in the second half of 2020.

We have capitalized Palomar Excess and Surplus Insurance Company with approximately $100 million in initial surplus.

We capitalized PESIC with approximately $100 million in initial surplus.

PESIC is domiciled in the State of Arizona and licensed in Arizona to transact across all our existing lines of business.

We believe that the underwriting acumen and market expertise we have established in the admitted insurance market is also applicable to the non-admitted, or surplus lines market, and that PESIC enables us to serve certain risks that our admitted products cannot currently satisfy.

We began writing surplus lines business, notably commercial earthquake, on a national basis during the third quarter of 2020 and have entered into several new partnerships which will enable us to write additional surplus lines business in the future.

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 have significantly impacted financial markets, businesses, households, and communities and have 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, actions taken and restrictions imposed by government and health officials in response, and the impact of the Pandemic and responses to it on businesses and consumers, all of which are uncertain and cannot be predicted.

The COVID-19 Pandemic ("The Pandemic") continues to impact financial markets, businesses, households, and communities.

The Pandemic has impacted our operations and we are taking several actions to protect the health of the public and our employees and comply with directives and advice of governmental and health authorities.

8 unchanged sentences

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.

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

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.

Although we experienced an offsetting increase during the second quarter of 2020, the Pandemic will continue to impact the economy and financial markets in future periods and adverse effects of the Pandemic could reduce our net investment income and result in realized investment losses in future periods.

We have not seen a significant decrease in the growth rate of our gross written premiums since the beginning of the Pandemic and related economic downturn.

However, 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.

During 2020 we have experienced volatility in the fair value of our investment portfolio due to unrealized losses and gains on our fixed income securities.

The economic impacts of the Pandemic could reduce our net investment income and result in realized investment losses in future periods.

We have not seen a significant change in the growth rate of our gross written premiums since the beginning of the Pandemic and related economic downturn.

We cannot anticipate all the ways in which the Pandemic and financial market conditions could adversely impact our business in the future.

3 unchanged sentences

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;

● Volume of new business submissions in existing products or partnerships;

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

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

● Renewal rates of existing policies;

● Average size and premium rate of bound policies.

3 unchanged sentences

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.

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

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

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

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

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

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

In addition, our XOL costs as a percentage of gross earned premiums vary over the life of XOL contracts due to changes of premium in force during the contract period.

Net Earned Premiums

7 unchanged sentences

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;

● The volume and severity of non-catastrophe attritional losses;

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

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

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

Our losses and loss adjustment expenses are generally affected by:

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

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

● The mix of business written by us;

7 unchanged sentences

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.

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

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

Other Underwriting Expenses

1 unchanged sentence

Interest Expense

Interest expense consists of interest expense on our Floating Rate Notes during the three and six months ended June 30, 2019.

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

Interest expense consisted of interest expense on our Floating Rate Notes during the three and nine months ended September 30, 2019.

These notes were redeemed in May 2019 and we did not have any debt or incur any interest expense thereafter.

Net Investment Income

14 unchanged sentences

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.

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

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

See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of net income calculated in accordance with GAAP to adjusted net income (loss).

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.

Adjusted return on equity is a non-GAAP financial measure defined as adjusted net income (loss) 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.

6 unchanged sentences

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.

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

See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of diluted earnings per share calculated in accordance with GAAP to diluted adjusted earnings per share.

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

See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of loss ratio calculated using unadjusted GAAP numbers to catastrophe loss ratio.

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

See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of combined ratio calculated using unadjusted GAAP numbers to adjusted combined ratio excluding catastrophe losses.

Adjusted net income excluding catastrophe losses is a non-GAAP financial measure defined as adjusted net income (loss) excluding catastrophe losses, net of tax impact.

See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of income before income taxes calculated in accordance with GAAP to adjusted net income excluding catastrophe losses.

Tangible stockholders’ equity is a non-GAAP financial measure defined as stockholders’ equity less intangible assets.

1 unchanged sentence

Results of Operations

Three months ended June 30, 2020 compared to three months ended June 30, 2019

The following table summarizes our results for the three months ended June 30, 2020 and 2019:

Three months ended September 30, 2020 compared to three months ended September 30, 2019

The following table summarizes our results for the three months ended September 30, 2020 and 2019:

Three months ended

September 30,

($ in thousands, except per share data)

8 unchanged sentences

Other underwriting expenses

Underwriting income (1)

Interest expense

Underwriting income (loss) (1)

Net investment income

1 unchanged sentence

Income before income taxes

Income tax expense

Expenses associated with stock offerings and tax restructuring

Income tax expense (benefit)

Net income (loss)

Expenses associated with IPO, tax restructuring, secondary offerings, and one-time incentive cash bonuses

Stock-based compensation expense

Expenses associated with retirement of debt

Expenses associated with catastrophe bond

Adjusted net income (1)

Adjusted net income (loss) (1)

Key Financial and Operating Metrics

6 unchanged sentences

Diluted adjusted earnings per share (1)

Catastrophe losses (2)

Catastrophe loss ratio (1)

Adjusted combined ratio excluding catastrophe losses (1)

Adjusted net income excluding catastrophe losses (1) (2)

NM- not meaningful

1 unchanged sentence

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

(2) Catastrophe losses above are shown before their tax impact.

Adjusted net income excluding catastrophe losses excludes catastrophe losses net of the estimated tax effect on them.

Gross Written Premiums

Gross written premiums increased $25.5 million, or 43.6% to $83.8 million for the three months ended June 30, 2020 compared to $58.3 million for the three months ended June 30, 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 40.9% of our gross written premiums for the three months ended June 30, 2020, increased by $4.3 million, or 14.2%, for the three months ended June 30, 2020 compared to the same period in the prior year.

● Commercial All Risk, which represented approximately 17.7% of our gross written premiums for the three months ended June 30, 2020, increased by $7.6 million, or 103.6%, for the three months ended June 30, 2020 compared to the same period in the prior year.

● Commercial Earthquake, which represented approximately 14.1% of our gross written premiums for the three months ended June 30, 2020, increased by $3.7 million, or 46.2%, for the three months ended June 30, 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 June 30, 2020, increased by $2.9 million, or 33.8%, for the three months ended June 30, 2020 compared to the same period in the prior year.

● Inland Marine, which represented approximately 4.1% of our gross written premiums for the three months ended June 30, 2020, increased by $3.2 million for the three months ended June 30, 2020 compared to the same period in the prior year.

● Hawaii Hurricane, which represented approximately 3.9% of our gross written premiums for the three months ended June 30, 2020, increased by $0.6 million or 21.2%, for the three months ended June 30, 2020 compared to the same period in the prior year.

● Residential Flood, which represented approximately 2.4% of our gross written premiums for the three months ended June 30, 2020 increased by $0.8 million or 59.9%, for the three months ended June 30, 2020 compared to the same period in the prior year.

Gross written premiums increased $36.8 million, or 55.4% to $103.0 million for the three months ended September 30, 2020 compared to $66.2 million for the three months ended September 30, 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 following table summarizes our gross written premiums by line of business and shows each line’s percentage of total gross written premiums for each period:

Three Months Ended September 30,

($ in thousands)

Residential Earthquake

Commercial Earthquake

Specialty Homeowners

Commercial All Risk

Inland Marine

Hawaii Hurricane

Residential Flood

Total Gross Written Premiums

We experienced the largest percentage increase in our Inland Marine and Commercial Earthquake lines.

Other gross written premiums are comprised of various items including our Assumed Reinsurance program.

Changes to other gross written premiums may not be indicative of future trends.

Ceded Written Premiums

Ceded written premiums increased $5.6 million, or 22.6%, to $30.2 million for the three months ended June 30, 2020 from $24.6 million for the three months ended June 30, 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 specialty homeowners and commercial all risk lines.

Ceded written premiums as a percentage of gross written premiums decreased to 36.0% for the three months ended June 30, 2020 from 42.2% for the three months ended June 30, 2019.

This decrease was primarily due to decreased quota share cession on our specialty homeowners and commercial all risk lines as we entered into new ceding arrangements on these lines which increased the percentage of premiums we retained.

Ceded written premiums increased $13.5 million, or 48.1%, to $41.6 million for the three months ended September 30, 2020 from $28.1 million for the three months ended September 30, 2019.

The increase was primarily due to an increase in excess of loss (“XOL”) reinsurance expense commensurate with growth in exposure.

In addition, we had increased quota share cession primarily in our specialty homeowners lines due to higher written premiums in those lines.

Ceded written premiums as a percentage of gross written premiums decreased to 40.4% for the three months ended September 30, 2020 from 42.4% for the three months ended September 30, 2019.

This decrease was primarily due to changes in our quota share agreements in our specialty homeowners and commercial all risk lines as we entered into new ceding arrangements on these lines which increased the percentage of premiums we retained.

Net Written Premiums

Net written premiums increased $19.9 million, or 59.0%, to $53.6 million for the three months ended June 30, 2020 from $33.7 million for the three months ended June 30, 2019.

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

Net written premiums increased $23.2 million, or 60.8%, to $61.4 million for the three months ended September 30, 2020 from $38.2 million for the three months ended September 30, 2019.

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

Net Earned Premiums

Net earned premiums increased $16.1 million, or 69.4%, to $39.3 million for the three months ended June 30, 2020 from $23.2 million for the three months ended June 30, 2019 due primarily to the earning of increased gross written premiums offset by the earning of ceded written premiums under reinsurance agreements.

Net earned premiums increased $14.3 million, or 51.9%, to $42.0 million for the three months ended September 30, 2020 from $27.7 million for the three months ended September 30, 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

September 30,

($ in thousands)

4 unchanged sentences

Commission and Other Income

Commission and other income increased $0.2 million or 30.0% to $0.9 million for the three months ended June 30, 2020 from $0.7 million for the three months ended June 30, 2019 due primarily to an increase in policy related fees associated with an increased volume of premiums written.

Commission and other income increased $0.1 million or 15.1% to $0.8 million for the three months ended September 30, 2020 from $0.7 million for the three months ended September 30, 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 $3.4 million to $4.0 million for the three months ended June 30, 2020 from $0.6 million for the three months ended June 30, 2019.

Losses increased during the three months ended June 30, 2020 primarily 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 percentage of premiums and losses.

Losses and loss adjustment expenses increased $38.7 million to $41.1 million for the three months ended September 30, 2020 from $2.4 million for the three months ended September 30, 2019.

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

Three Months Ended

September 30,

($ in thousands)

Catastrophe losses

Non-catastrophe losses

Total losses and loss adjustment expenses

NM- not meaningful

Our catastrophe loss ratio was 86.9% during the three months ended September 30, 2020.

Catastrophe losses primarily included losses from Hurricanes Hanna, Isaias, Laura, Sally and Beta.

We did not experience any catastrophe losses during the three months ended September 30, 2019.

Our non-catastrophe loss ratio was 10.8% for the three months ended September 30, 2020 compared to 8.8% during the three months ended September 30, 2019.

Non-catastrophe losses increased due mainly to higher attritional loss activity on lines of business subject to attritional losses such as commercial all-risk, specialty homeowners, and inland marine.

Acquisition Expenses

Acquisition expenses increased $5.9 million, or 65.9%, to $14.9 million for the three months ended June 30, 2020 from $9.0 million for the three months ended June 30, 2019.

Acquisition expenses increased $7.8 million, or 75.5%, to $18.0 million for the three months ended September 30, 2020 from $10.2 million for the three months ended September 30, 2019.

The increase was primarily due to higher earned premiums which resulted in higher commissions and premium-related taxes.

Acquisition expenses as a percentage of gross earned premiums were 21.0% for the three months ended June 30, 2020 compared to 19.0% for the three months ended June 30, 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 were 22.6% for the three months ended September 30, 2020 compared to 19.2%

for the three months ended September 30, 2019.

Acquisition expenses as a percentage of gross earned premiums increased due primary to lower earned ceding commissions.

Earned ceding commissions decreased due to changes in our specialty homeowners and all risk ceding arrangements which increased the percentage of premiums we retained and decreased our ceding commissions.

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 increased $1.8 million, or 25.3%, to $9.0 million for the three months ended June 30, 2020 from $7.2 million for the three months ended June 30, 2019.

Other underwriting expenses as a percentage of gross earned premiums were 12.7% for the three months ended June 30, 2020 compared to 15.2% for the three months ended June 30, 2019.

Excluding the impact of expenses relating to stock offerings and tax restructuring, stock-based compensation, retirement of debt, and catastrophe bond, other underwriting expenses as a percentage of gross earned premiums were 10.8% for the three months ended June 30, 2020 compared to 12.5% for the three months ended June 30, 2019.

Interest Expense

Interest expense decreased $0.6 million to zero for the three months ended June 30, 2020 from $0.6 million for the three months ended June 30, 2019.

Interest expense decreased as we did not have any debt during the three months ended June 30, 2020 whereas we had outstanding Floating Rate Notes during the three months ended June 30, 2019.

Other underwriting expenses decreased $0.5 million, or 6.3%, to $7.8 million for the three months ended September 30, 2020 from $8.3 million for the three months ended September 30, 2019.

The decrease was primarily due to the company incurring significant expenses in the prior year quarter related to a stock offering and one-time incentive cash bonuses.

Other underwriting expenses as a percentage of gross earned premiums were 9.8% for the three months ended September 30, 2020 compared to 15.6% for the three months ended September 30, 2019.

Excluding the impact of expenses relating to stock offerings and one-time incentive cash bonuses and stock-based compensation, other underwriting expenses as a percentage of gross earned premiums were 9.1% for the three months ended September 30, 2020 compared to 10.5% for the three months ended September 30, 2019.

This percentage decreased due to higher gross earned premiums without a proportional increase to expenses.

Net Investment Income and Net Realized and Unrealized Gains on Investments

Net investment income increased $0.6 million, or 42.5%, to $2.1 million for the three months ended June 30, 2020 from $1.5 million for the three months ended June 30, 2019.

The increase was primarily due to a higher average balance of investments during the three months ended June 30, 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 increased $0.3 million, or 57.8%, to $0.8 million for the three months ended June 30, 2020 from $0.5 million for the three months ended June 30, 2019 due to higher appreciation on our fixed income based equity securities during the period ended June 30, 2020.

Net investment income increased $0.4 million, or 23.7%, to $2.1 million for the three months ended September 30, 2020 from $1.7 million for the three months ended September 30, 2019.

The increase was primarily due to a higher average balance of investments during the three months ended September 30, 2020 due primarily to proceeds from our January and June 2020 stock offerings and the investing of our cash generated from operations, partially offset by lower yields on investments due to a lower interest rate environment.

Net realized and unrealized gains on investments decreased $0.4 million, or 93.4%, to an immaterial amount for the three months ended September 30, 2020 from $0.4 million for the three months ended September 30, 2019 due to lower appreciation on our fixed income based equity securities during the period ended September 30, 2020.

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

2 unchanged sentences

Three Months Ended

September 30,

($ in thousands)

4 unchanged sentences

Net realized and unrealized gains on investments

Income Tax Expense

Income tax expense increased $1.5 million or 84.3% to $3.3 million for the three months ended June 30, 2020 from $1.8 million for the three months ended June 30, 2019 as we had higher pre-tax income during the three months ended June 30, 2020.

During both periods, our income tax rate was approximately equal to the statutory tax rate of 21%.

Six months ended June 30, 2020 compared to six months ended June 30, 2019

The following table summarizes our results for the six months ended June 30, 2020 and 2019:

Six months ended

Income Tax Expense (Benefit)

Income taxes decreased $8.2 million or 408.7% to $6.2 million of benefit for the three months ended September 30, 2020 from $2.0 million of expense for the three months ended September 30, 2019 as we had a pre-tax loss during the three months ended September 30, 2020.

During the three months ended September 30, 2020, our income tax rate differed from the statutory rate of 21% due primarily to the tax impact of the permanent component of employee stock option exercises.

During the three months ended September 30, 2019, our income tax rate was approximately equal to the statutory tax rate of 21%.

Nine months ended September 30, 2020 compared to nine months ended September 30, 2019

The following table summarizes our results for the nine months ended September 30, 2020 and 2019:

Nine months ended

September 30,

($ in thousands, except per share data)

15 unchanged sentences

Net income (loss)

Expenses associated with stock offerings and tax restructuring

Expenses associated with IPO, tax restructuring, secondary offerings, and one-time incentive cash bonuses

Stock-based compensation expense

10 unchanged sentences

Diluted adjusted earnings per share (1)

Catastrophe losses (2)

Catastrophe loss ratio (1)

Adjusted combined ratio excluding catastrophe losses (1)

Adjusted net income excluding catastrophe losses (1) (2)

NM- not meaningful

1 unchanged sentence

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

(2) Catastrophe losses above are shown before their tax impact.

Adjusted net income excluding catastrophe losses excludes catastrophe losses net of the estimated tax effect on them.

Gross Written Premiums

Gross written premiums increased $42.9 million, or 38.2% to $155.3 million for the six months ended June 30, 2020 compared to $112.4 million for the six months ended June 30, 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 40.6% of our gross written premiums for the six months ended June 30, 2020, increased by $3.7 million, or 6.2%, for the six months ended June 30, 2020 compared to the same period in the prior year.

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

Gross written premiums increased $79.7 million, or 44.6% to $258.3 million for the nine months ended September 30, 2020 compared to $178.6 million for the nine months ended September 30, 2019.

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

Nine Months Ended September 30,

($ in thousands)

Residential Earthquake

Commercial Earthquake

Specialty Homeowners

Commercial All Risk

Inland Marine

Hawaii Hurricane

Residential Flood

Total Gross Written Premiums

NM- not meaningful

During the nine months ended September 30, 2019, we entered into a new Residential Earthquake 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 $15.1 million, or 17.1%.

● Commercial All Risk, which represented approximately 17.6% of our gross written premiums for the six months ended June 30, 2020, increased by $12.4 million, or 83.8%, for the six months ended June 30, 2020 compared to the same period in the prior year.

● Commercial Earthquake, which represented approximately 14.6% of our gross written premiums for the six months ended June 30, 2020, increased by $8.0 million, or 55.1%, for the six months ended June 30, 2020 compared to the same period in the prior year.

● Specialty Homeowners, which represented approximately 13.8% of our gross written premiums for the six months ended June 30, 2020, increased by $5.0 million, or 30.4%, for the six months ended June 30, 2020 compared to the same period in the prior year.

● Hawaii Hurricane, which represented approximately 3.8% of our gross written premiums for the six months ended June 30, 2020, increased by $1.2 million or 25.0%, for the six months ended June 30, 2020 compared to the same period in the prior year.

● Inland Marine, which represented approximately 3.4% of our gross written premiums for the six months ended June 30, 2020, increased by $5.1 million for the six months ended June 30, 2020 compared to the same period in the prior year.

● Residential Flood, which represented approximately 2.3% of our gross written premiums for the six months ended June 30, 2020 increased by $1.5 million or 74.2%, for the six months ended June 30, 2020 compared to the same period in the prior year.

Other gross written premiums are comprised of various items including our Assumed Reinsurance program.

Changes to other gross written premiums may not be indicative of future trends.

Ceded Written Premiums

Ceded written premiums increased $9.0 million, or 17.7%, to $59.7 million for the six months ended June 30, 2020 from $50.7 million for the six months ended June 30, 2019.

Ceded written premiums as a percentage of gross written premiums decreased to 38.4% for the six months ended June 30, 2020 from 45.1% for the six months ended June 30, 2019.

Ceded written premiums increased $22.5 million, or 28.5%, to $101.3 million for the nine months ended September 30, 2020 from $78.8 million for the nine months ended September 30, 2019.

The increase was primarily due to an increase in excess of loss (“XOL”) reinsurance expense commensurate with growth in exposure.

Ceded written premiums as a percentage of gross written premiums decreased to 39.2% for the nine months ended September 30, 2020 from 44.1% for the nine months ended September 30, 2019.

Net Written Premiums

Net written premiums increased $34.0 million, or 55.1%, to $95.6 million for the six months ended June 30, 2020 from $61.6 million for the six months ended June 30, 2019.

Net written premiums increased $57.2 million, or 57.3%, to $157.0 million for the nine months ended September 30, 2020 from $99.8 million for the nine months ended September 30, 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 $32.5 million, or 78.4%, to $74.1 million for the six months ended June 30, 2020 from $41.6 million for the six months ended June 30, 2019 due primarily to the earning of increased gross written premiums offset by the earning of ceded written premiums under reinsurance agreements.

Net earned premiums increased $46.9 million, or 67.8%, to $116.1 million for the nine months ended September 30, 2020 from $69.2 million for the nine months ended September 30, 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:

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

4 unchanged sentences

Commission and Other Income

Commission and other income increased $0.4 million or 28.3% to $1.7 million for the six months ended June 30, 2020 from $1.3 million for the six months ended June 30, 2019 due primarily to an increase in policy related fees associated with an increased volume of premiums written.

Commission and other income increased $0.5 million or 23.5% to $2.5 million for the nine months ended September 30, 2020 from $2.0 million for the nine months ended September 30, 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 $4.8 million to $5.8 million for the six months ended June 30, 2020 from $1.0 million for the six months ended June 30, 2019.

Losses increased during the six months ended June 30, 2020 primarily 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 percentage of premiums and losses.

Losses and loss adjustment expenses increased $43.5 million to $46.9 million for the nine months ended September 30, 2020 from $3.4 million for the nine months ended September 30, 2019.

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

Nine Months Ended

September 30,

($ in thousands)

Catastrophe losses

Non-catastrophe losses

Total losses and loss adjustment expenses

NM- not meaningful

Our catastrophe loss ratio was 31.4% during the nine months ended September 30, 2020.

Catastrophe losses primarily included losses from Hurricanes Hanna, Isaias, Laura, Sally and Beta.

We did not experience any catastrophe losses during the nine months ended September 30, 2019.

Our non-catastrophe loss ratio was 8.9% for the nine months ended September 30, 2020 compared to 4.9% during the nine months ended September 30, 2019.

Acquisition Expenses

Acquisition expenses increased $12.0 million, or 75.2%, to $27.9 million for the six months ended June 30, 2020 from $15.9 million for the six months ended June 30, 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 20.6% for the six months ended June 30, 2020 compared to 18.1% for the six months ended June 30, 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 increased $19.7 million, or 75.3%, to $45.9 million for the nine months ended September 30, 2020 from $26.2 million for the nine months ended September 30, 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 21.3% for the nine months ended September 30, 2020 compared to 18.5% for the nine months ended September 30, 2019.

Acquisition expenses as a percentage of gross earned premiums increased due primary to lower earned ceding commissions.

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 $19.1 million, or 53.0%, to $16.9 million for the six months ended June 30, 2020 from $36.0 million for the six months ended June 30, 2019.

Other underwriting expenses as a percentage of gross earned premiums were 12.5% for the six months ended June 30, 2020 compared to 40.9% for the six months ended June 30, 2019.

Excluding the impact of expenses relating to stock offerings and tax restructuring, stock-based compensation, retirement of debt, and catastrophe bond, other underwriting expenses as a percentage of gross earned premiums were 11.0% for the six months ended June 30, 2020 compared to 13.0% for the six months ended June 30, 2019.

Other underwriting expenses decreased $19.6 million, or 44.2%, to $24.7 million for the nine months ended September 30, 2020 from $44.3 million for the nine months ended September 30, 2019.

This decrease was primarily due to the company incurring significant charges during the prior year nine months associated with an IPO, tax restructuring, secondary offering, retirement of debt, and one-time incentive cash bonuses.

The company also incurred a stock compensation charge of $23.0 million upon modification of its management incentive plan in the prior year.

Other underwriting expenses as a percentage of gross earned premiums were 11.5% for the nine months ended September 30, 2020 compared to 31.3% for the nine months ended September 30, 2019.

Excluding the impact of expenses relating to stock offerings, tax restructuring, and one-time incentive cash bonuses, stock-based compensation, retirement of debt, and catastrophe bond, other underwriting expenses as a percentage of gross earned premiums were 10.3% for the nine months ended September 30, 2020 compared to 12.1% for the nine months ended September 30, 2019.

This percentage decreased due to higher gross earned premiums without a proportional increase to expenses.

Interest Expense

Interest expense decreased $1.1 million to zero for the six months ended June 30, 2020 from $1.1 million for the six months ended June 30, 2019.

Interest expense decreased as we did not have any debt during the six months ended June 30, 2020 whereas we had outstanding Floating Rate Notes during the six months ended June 30, 2019.

Interest expense decreased $1.1 million to zero for the nine months ended September 30, 2020 from $1.1 million for the nine months ended September 30, 2019.

Interest expense decreased as we did not have any debt during the nine months ended September 30, 2020 whereas we had outstanding Floating Rate Notes during a portion of the nine months ended September 30, 2019.

Net Investment Income and Net Realized and Unrealized Gains on Investments

Net investment income increased $1.7 million, or 69.8%, to $4.1 million for the six months ended June 30, 2020 from $2.4 million for the six months ended June 30, 2019.

The increase was primarily due to a higher average balance of investments during the six months ended June 30, 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 $1.7 million, or 58.0%, to $1.2 million for the six months ended June 30, 2020 from $2.9 million for the six months ended June 30, 2019.

Net investment income increased $2.1 million, or 50.7%, to $6.3 million for the nine months ended September 30, 2020 from $4.2 million for the nine months ended September 30, 2019.

The increase was primarily due to a higher average balance of investments during the nine months ended September 30, 2020 due primarily to proceeds from our April 2019 IPO, investing of cash generated from operations, and proceeds from our January 2020 and June 2020 stock offerings, partially offset by lower yields on investments due to a lower interest rate environment.

Net realized and unrealized gains on investments decreased $2.1 million, or 61.9%, to $1.2 million for the nine months ended September 30, 2020 from $3.3 million for the nine months ended September 30, 2019.

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

2 unchanged sentences

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

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

5 unchanged sentences

Income Tax Expense

Income tax expense increased to $6.7 million for the six months ended June 30, 2020 from $1.9 million for the six months ended June 30, 2019 as we had higher pre-tax income during the six months ended June 30, 2020.

For the six months ended June 30, 2019, our income tax expense was significantly impacted by the reversal of our U.S.

Income tax expense decreased $3.4 million or 86.7% to $0.5 million for the nine months ended September 30, 2020 from $3.9 million for the nine months ended September 30, 2019 as we had lower pre-tax income during the nine months ended September 30, 2020.

During the nine months ended September 30, 2020, our income tax rate differed from the statutory rate of 21% due primarily to the tax impact of the permanent component of employee stock option exercises.

For the nine months ended September 30, 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.

3 unchanged sentences

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.

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.

1 unchanged sentence

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

6 unchanged sentences

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.

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.

2 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

5 unchanged sentences

Underwriting income (loss)

Adjusted Net Income

Adjusted Net Income (Loss)

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:

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

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

Other companies may define adjusted net income differently.

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

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

1 unchanged sentence

Net income (loss)

Expenses associated with stock offerings and tax restructuring

Expenses associated with IPO, tax restructuring, secondary offerings, and one-time incentive cash bonuses

Stock-based compensation expense

1 unchanged sentence

Expenses associated with catastrophe bond

Adjusted net income

Adjusted net income (loss)

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.

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 financial statement users 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.

1 unchanged sentence

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

Annualized adjusted net income

Annualized adjusted net income (loss)

Average stockholders' equity

2 unchanged sentences

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.

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

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

1 unchanged sentence

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

4 unchanged sentences

Adjustments to numerator:

Expenses associated with stock offerings and tax restructuring

Expenses associated with IPO, tax restructuring, secondary offerings, and one-time incentive cash bonuses

Stock-based compensation expense

4 unchanged sentences

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.

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

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

1 unchanged sentence

Three Months Ended

Six Months Ended

($ in thousands)

Nine Months Ended

September 30,

(in thousands, except per share data)

Adjusted net income

(in thousands, except per share data)

Adjusted net income (loss)

Weighted-average common shares outstanding, diluted (1)

Diluted adjusted earnings per share

(1) For the nine months ended September 30, 2019, we had a net loss on a GAAP basis.

Therefore, common share equivalents were not included in the denominator for calculating GAAP net loss per share as doing so would be anti-dilutive.

The common share equivalents are included in the above denominator as we had adjusted net income during that period.

Catastrophe Loss Ratio

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

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

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

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

Catastrophe loss ratio is calculated as follows:

Three Months Ended

Nine Months Ended

September 30,

($ in thousands)

Losses and loss adjustment expenses

Net earned premiums

Catastrophe losses

Net earned premiums

Catastrophe loss ratio

Adjusted Combined Ratio Excluding Catastrophe Losses

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

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

Adjusted combined ratio excluding catastrophe losses is calculated as follows:

Three Months Ended

Nine Months Ended

September 30,

($ 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 IPO, tax restructuring, secondary offerings, and one-time incentive cash bonuses

Stock-based compensation expense

Portion of expenses associated with retirement of debt classified as other underwriting expenses

Expenses associated with catastrophe bond

Catastrophe losses

Adjusted combined ratio excluding catastrophe losses

Adjusted Net Income Excluding Catastrophe Losses

Adjusted net income excluding catastrophe losses is defined as adjusted net income excluding catastrophe losses, net of tax impact.

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

Other companies may define adjusted net income excluding catastrophe losses differently.

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

Three Months Ended

Nine Months Ended

September 30,

(in thousands)

Net income (loss)

Expenses associated with IPO, tax restructuring, secondary offerings, and one-time incentive cash bonuses

Stock-based compensation expense

Expenses associated with retirement of debt

Expenses associated with catastrophe bond

Catastrophe losses

Adjusted net income excluding catastrophe losses

Tangible Stockholders’ Equity

3 unchanged sentences

Stockholders’ equity calculated in accordance with GAAP reconciles to tangible stockholders’ equity as follows:

September 30,

(in thousands)

28 unchanged sentences

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

The following table summarizes our cash flows for the six months ended June 30, 2020 and 2019:

Six months ended

The following table summarizes our cash flows for the nine months ended September 30, 2020 and 2019:

Nine months ended

September 30,

($ in thousands)

7 unchanged sentences

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 six months ended June 30, 2020 and 2019 related primarily to purchases of fixed income and equity securities in excess of sales and maturities.

Cash provided by financing activities for six months ended June 30, 2020 was related to the receipt of $35.5 million in net proceeds from the January 2020 Secondary Offering, the receipt of $90.2 million in net proceeds from the June 2020 public offering, the receipt of $0.4 million in proceeds related to the issuance of common stock via our employee stock purchase plan, and the receipt of $1.0 million related to the issuance of common stock via stock option exercises.

Cash provided by financing activities for the six months ended June 30, 2019 was related to the receipt of $87.4 million in net proceeds from our IPO in April 2019, offset by $20.0 million cash paid to redeem our Floating Rate Notes in May 2019 and a one-time cash distribution of $5.1 million to our then sole stockholder, GC Palomar Investor LP in March 2019.

Cash used in investing activities for the nine months ended September 30, 2020 and 2019 related primarily to purchases of fixed income and equity securities in excess of sales and maturities.

Cash provided by financing activities for nine months ended September 30, 2020 was related to the receipt of $35.5 million in net proceeds from the January 2020 stock offering, the receipt of $90.1 million in net proceeds from the June 2020 stock offering, the receipt of $0.7 million in proceeds related to the issuance of common stock via our employee stock purchase plan, and the receipt of $1.7 million related to the issuance of common stock via stock option exercises.

Cash provided by financing activities for the nine months ended September 30, 2019 was related to the receipt of $87.4 million in net proceeds from our IPO in April 2019, offset by $20.0 million cash paid to redeem our Floating Rate Notes in May 2019 and 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 $430.4 million in cash and investment securities available at June 30, 2020.

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

To the extent our future operating cash flows are insufficient to cover our net losses from catastrophic events, we had $450.0 million in cash and investment securities available at September 30, 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.

3 unchanged sentences

Stockholders’ Equity

At June 30, 2020 total stockholders’ equity was $375.2 million and tangible stockholders’ equity was $374.5 million, compared to total stockholders’ equity of $218.6 million and tangible stockholders’ equity of $217.8 million as of December 31, 2019.

At September 30, 2020 total stockholders’ equity was $361.9 million and tangible stockholders’ equity was $361.2 million, compared to total stockholders’ equity of $218.6 million and tangible stockholders’ equity of $217.8 million as of December 31, 2019.

Stockholder’s equity increased primarily due to net income, receipt of proceeds from our January 2020 and June 2020 common stock offerings, and unrealized gains on fixed maturity securities.

8 unchanged sentences

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

As of June 30, 2020, the majority of our investment portfolio, or $282.9 million, was comprised of fixed maturity securities that are classified as available-for-sale and carried at fair value with unrealized gains and losses on these securities, net of applicable taxes, reported as a separate component of accumulated other comprehensive income.

As of September 30, 2020, the majority of our investment portfolio, or $390.8 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 $45.0 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 $109.3 million at June 30, 2020.

Our fixed maturity securities, including cash equivalents, had a weighted average effective duration of 4.00 and 3.49 years and an average rating of “A1/A+” and “A1/A+” at June 30, 2020 and December 31, 2019, respectively.

Our fixed income investment portfolio had a book yield of 2.83% as of June 30, 2020, compared to 2.90% as of December 31, 2019.

At June 30, 2020 and December 31, 2019 the amortized cost and fair value on available-for-sale securities were as follows:

June 30, 2020

In addition, we maintained a non-restricted cash and cash equivalent balance of $14.0 million at September 30, 2020.

Our fixed maturity securities, including cash equivalents, had a weighted average effective duration of 4.06 and 3.49 years and an average rating of “A1/A” and “A1/A+” at September 30, 2020 and December 31, 2019, respectively.

Our fixed income investment portfolio had a book yield of 2.33% as of September 30, 2020, compared to 2.90% as of December 31, 2019.

At September 30, 2020 and December 31, 2019 the amortized cost and fair value on available-for-sale securities were as follows:

September 30, 2020

($ in thousands)

15 unchanged sentences

Total available-for-sale investments

The following tables provide the credit quality of investment securities as of June 30, 2020 and December 31, 2019:

June 30, 2020

The following tables provide the credit quality of investment securities as of September 30, 2020 and December 31, 2019:

September 30, 2020

($ in thousands)

1 unchanged sentence

($ in thousands)

The amortized cost and fair value of our available-for-sale investments in fixed maturity securities summarized by contractual maturity as of June 30, 2020 were as follows:

June 30, 2020

The amortized cost and fair value of our available-for-sale investments in fixed maturity securities summarized by contractual maturity as of September 30, 2020 were as follows:

September 30, 2020

($ in thousands)

18 unchanged sentences

During the second quarter of 2020, we procured approximately $200 million of incremental limit for California earthquakes, approximately $300 million of incremental limit for all earthquake zones, and approximately $80 million of incremental windstorm limit.

Effective June 1, 2020, our reinsurance coverage now exhausts at $1.4 billion for earthquake events and $600 million for hurricane events, providing coverage in excess of our 1:250 year peak zone PML.

Effective June 1, 2020, our reinsurance coverage exhausts at $1.4 billion for earthquake events and $600 million for hurricane events, providing coverage in excess of our 1:250 year peak zone PML.

As of June 30, 2020, a modeled earthquake equivalent to the 1906 San Francisco or 1994 Northridge earthquake would generate a gross loss of $883 million or $848 million, respectively.

19 unchanged sentences

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 2. Management’s Discussion and Analysis