What changed in this filing

/stocks — the workspaceLOADING

Item 5. Market for Registrant’s Common Equity

2021-03-09 compared with 2020-02-28 · 27 added, 851 removed, 51 unchanged (95% of the section changed)

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common shares began trading on the NASDAQ Global Select Market under the symbol “PLMR”

on April 17, 2019.

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common shares began trading on the NASDAQ Global Select Market under the symbol “PLMR” on April 17, 2019.

Prior to that time, there was no public market for our common shares.

As of February 24, 2020, there were approximately 28 holders of record of our common stock.

Because many of our shares of common stock are held by brokers and other institutions on behalf of our stockholders, this number is not representative of the total number of stockholders represented by these stockholders of record.

As of March 3, 2021, there were approximately 11 holders of record of our common stock.

Because most of our shares of common stock are held by brokers and other institutions on behalf of our stockholders, this number is not representative our total stockholders.

The continued operation and growth of our business will require substantial capital.

We do not intend to declare and pay cash dividends on shares of our common stock in the foreseeable future.

Because we are a holding company with no business operations of our own, our ability to pay dividends to stockholders largely depends on dividends and other distributions from our insurance subsidiaries, Palomar Specialty Insurance Company and Palomar Re.

State insurance laws, including the laws of Oregon and California, and the laws of Bermuda restrict the ability of Palomar

Specialty Insurance Company and Palomar Re, respectively, to declare stockholder dividends.

State insurance regulators require insurance companies to maintain specified levels of statutory capital and surplus.

The maximum dividend distribution absent the approval or non‑disapproval of the insurance regulatory authority in Oregon and California is limited by Oregon law at ORS 732.576 and California law at Cal.

Code 1215.5(g).

Because we are a holding company with no business operations of our own, our ability to pay dividends to stockholders largely depends on dividends and other distributions from our U.S.

subsidiaries, PESIC and PSIC, and our Bermuda subsidiary, PSRE.

State insurance laws, including the laws of Arizona, Oregon and California, and the laws of Bermuda restrict the ability these subsidiaries to declare stockholder dividends.

State insurance regulators require insurance companies to maintain specified levels of statutory capital and surplus and restrict dividend payments.

Dividend payments are further limited to that part of available policyholder surplus that is derived from net profits on our business.

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

Moreover, state insurance regulators that have jurisdiction over the payment of dividends by Palomar Specialty Insurance Company may in the future adopt statutory provisions more restrictive than those currently in effect.

Moreover, state insurance regulators may in the future adopt statutory provisions more restrictive than those currently in effect.

Our Bermuda reinsurance subsidiary is highly regulated and is required to comply with various conditions before it is able to pay dividends or make distributions to us.

Bermuda law, including the Insurance Act 1978, as amended (Insurance Act) and the Companies Act 1981, as amended (Companies Act) impose restrictions on our Bermuda reinsurance subsidiary’s ability to pay dividends to us based on solvency margins and surplus and capital requirements.

Bermuda law, including the Insurance Act 1978, as amended (“Insurance Act”) and the Companies Act 1981, as amended (“Companies Act”) impose restrictions on our Bermuda reinsurance subsidiary’s ability to pay dividends to us based on solvency margins and surplus and capital requirements.

These restrictions, and any other future restrictions adopted by the BMA, could have the effect, under certain circumstances, of significantly reducing dividends or other amounts payable to us by our Bermuda reinsurance subsidiary without affirmative approval of the BMA.

8 unchanged sentences

December 31, 2019

December 31, 2020

Palomar Holdings, Inc

2 unchanged sentences

Selected Consolidated Financial and Other Data

The following tables present our selected consolidated financial and other data as of and for the periods indicated.

The selected consolidated statements of operations data for the fiscal years ended December 31, 2019, 2018 and 2017, and the selected consolidated balance sheet data as of December 31, 2019 and 2018 are derived from our audited consolidated financial statements included elsewhere in this annual report on Form 10-K.

The selected consolidated balance sheet data as of December 31, 2017 is derived from our December 31, 2017 audited consolidated balance sheet which is not included in this annual report on Form 10-K.

Financial Condition and Results of Operations,”

also included elsewhere this Annual Report on Form 10-K.

The following tables present selected consolidated financial and other data as of and for the periods indicated below.

This selected data has been derived from our audited consolidated financial statements.

Our historical results are not necessarily indicative of the results that should be expected in any future period.

You should read this data together with our audited consolidated financial statements and related notes which are included elsewhere in this Annual Report on Form 10-K, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” also included elsewhere this Annual Report on Form 10-K.

Year Ended December 31,

Selected Operating Data and Key Ratios

(in thousands except shares and per share data)

Results of Operations:

Gross written premiums

2 unchanged sentences

Net earned premiums

Commission and other income

Total underwriting revenue (1)

Losses and loss adjustment expenses

Acquisition expenses

Other underwriting expenses

Underwriting income(1)

Interest expense

Net investment income

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

Income before income taxes

Income tax expense (benefit)

Underwriting income (loss) (1)

Adjusted net income (1)

Per Share Data:

Basic earnings per share

Diluted earnings per share

Weighted‑average common shares outstanding:

Adjusted net income reconciliation:

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

Stock‑based compensation expense

Expenses associated with retirement of debt

Adjusted net income(1)

Diluted adjusted earnings per share (1)

Key Financial and Operating Metrics:

4 unchanged sentences

Adjusted combined ratio (1)

Diluted earnings per share

Diluted adjusted earnings per share (1)

Catastrophe losses

Catastrophe loss ratio (1)

Adjusted combined ratio excluding catastrophe losses (1)

NM-Not Meaningful

(1) Indicates non-GAAP financial measure;

see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—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.

Beginning in 2018, we carry our equity securities at fair value with unrealized gains and losses included in this line.

Prior to 2018, unrealized gains and losses on equity securities were included in accumulated other comprehensive income as a separate component of stockholders’

see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—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.

Selected Balance Sheet Data

5 unchanged sentences

Reinsurance recoverable

Prepaid reinsurance premium

Ceded unearned premiums

Accounts payable and other accrued liabilities

3 unchanged sentences

Other liabilities

Long‑term notes payable

Total liabilities

Total stockholders’

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our historical results of operations and our liquidity and capital resources should be read together with the consolidated financial statements and related notes that appear elsewhere in this Annual Report on Form 10-K.

In addition to historical financial information, this Annual Report on Form 10-K contains “forward‑looking statements.”

You should review the “Special Note Regarding Forward‑Looking Statements”

and “Risk Factors”

sections of this Annual Report on Form 10-K for factors and uncertainties that may cause our actual future results to be materially different from those in our forward‑looking statements.

Forward‑looking statements in this Annual Report on Form 10-K are based on information available to us as of the date hereof, and we assume no obligation to update any such forward‑looking statements.

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 of approximately 72%.

For the year ended December 31, 2019, we experienced average monthly premium retention rates above 93% for our Residential Earthquake and Hawaii Hurricane lines and approximately 88% 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.

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

On April 22, 2019, we completed our IPO, and the underwriters in the IPO purchased 6,468,750 shares, including the full exercise of their option to purchase additional shares of common stock.

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

On September 30, 2019, certain selling stockholders completed the September 2019 Secondary Offering of 6,037,500 shares of our common stock.

We did not receive any proceeds from the September 2019 Secondary Offering or incur underwriters’

discounts or commissions on the sale.

On January 9, 2020, we, along with certain selling stockholders, completed the 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 $35.4 million, after deducting underwriting discounts and commissions and offering costs.

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.

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.

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, technology costs, office rent, stock‑based compensation, and professional services fees such as legal, accounting, and actuarial services.

In addition, we incurred expense related to the write‑off of unamortized debt issuance costs on our surplus notes in September 2018 and expense related to the write off of unamortized debt issuance costs on our $20.0 million floating rate senior secured notes (“Floating Rate Notes”) in May 2019.

Interest Expense

Interest expense consists primarily of interest expense on our surplus notes through September 2018 and our Floating Rate Notes after September 2018.

In addition, we incurred interest expense related to prepayment penalties on the payoff of our surplus notes in September 2018 and related to the redemption premium paid on our Floating Rate Notes in 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, and any “other‑than‑temporary”

impairments recognized in earnings.

In addition, beginning in 2018, we carry our equity securities at fair value with unrealized gains and losses included in this line.

Prior to 2018, unrealized gains and losses on equity securities were included in accumulated other comprehensive income as a separate component of stockholders’

Income Tax Expense

Currently our income tax expense consists mainly of federal income taxes imposed on our operations offset by the reversal of our U.S.

federal deferred tax valuation allowance in March 2019.

For 2018 and 2017, our income tax expense consists mainly of refunds of federal AMT credits.

Our income tax expense has also been significantly impacted by the value of our deferred tax assets and liabilities, particularly our U.S.

federal income net operating loss carryforwards which may or may not be realizable.

In addition, tax legislation such as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) significantly impacts our current and future income tax expense.

Among other things, the Tax Act, enacted on December 22, 2017 lowers the U.S.

federal corporate tax rate from 35% to 21% starting January 1, 2018.

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 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 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 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 in accordance with GAAP 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 in accordance with GAAP 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 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 in accordance with GAAP to tangible stockholders’

Results of Operations

Year ended December 31, 2019 compared to year ended December 31, 2018

The following table summarizes our results for the years ended December 31, 2019 and 2018:

($ 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(1)

Interest expense

Net investment income

Net realized and unrealized gains (losses) on investments

Income before income taxes

Income tax expense (benefit)

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

Stock-based compensation expense

Expenses associated with retirement of debt

Adjusted net income(1)

Key Financial and Operating Metrics

Return on equity

Adjusted return on equity(1)

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 were $252.0 million for the year ended December 31, 2019 compared to $154.9 million for the year ended December 31, 2018, an increase of $97.1 million, or 62.7%.

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’

geographic and 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 51.8% of our gross written premiums for the year ended December 31, 2019, increased by $48.8 million, or 59.7%, for the year ended December 31, 2019 compared to the same period in the prior year.

Approximately $19.4 million of this increase was due to a new partnership with a homeowners carrier in which we assumed $6.6 million of unearned premiums and wrote an additional $12.8 million in premiums.

Commercial Earthquake, which represented approximately 15.4% of our gross written premiums for the year ended December 31, 2019, increased by $17.8 million, or 85.0%, for the year ended December 31, 2019 compared to the same period in the prior year.

Specialty Homeowners, which represented approximately 13.0% of our gross written premiums for the year ended December 31, 2019, increased by $5.1 million, or 18.5%, for the year ended December 31, 2019 compared to the same period in the prior year.

Commercial All Risk, which represented approximately 12.0% of our gross written premiums for the year ended December 31, 2019, increased by $16.0 million, or 111.7%, for the year ended December 31, 2019 compared to the same period in the prior year.

Hawaii Hurricane, which represented approximately 4.3% of our gross written premiums for the year ended December 31, 2019, increased by $2.6 million or 32.4%, for the year ended December 31, 2019 compared to the same period in the prior year.

Residential Flood, which represented approximately 2.1% of our gross written premiums for the year ended December 31, 2019 increased by $3.1 million or 146.0%, for the year ended December 31, 2019 compared to the same period in the prior year.

Ceded Written Premiums

Ceded written premiums increased $25.4 million, or 30.6%, to $108.3 million for the year ended December 31, 2019 from $82.9 million for the year ended December 31, 2018.

The increase was primarily due to increased cessions to new quota share reinsurance partners in our Commercial All Risk line.

We also incurred increased excess of loss reinsurance expense commensurate with growth in exposure.

Ceded written premiums as a percentage of gross written premiums decreased to 43.0% for the year ended December 31, 2019 from 53.6% for the year ended December 31, 2018.

The cession percentage was higher in the prior year due to an $11.8 million transfer of unearned premiums in June 2018 related to our entering into a fronting arrangement in our Specialty Homeowners line in the state of Texas.

This fronting arrangement terminated in June 2019 in conjunction with the inception of our Specialty Homeowners Facility (“SHF”).

Net Written Premiums

Net written premiums increased $71.7 million, or 99.6%, to $143.6 million for the year ended December 31, 2019 from $71.9 million for the year ended December 31, 2018.

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

Net Earned Premiums

Net earned premiums increased $30.3 million, or 43.4%, to $100.2 million for the year ended December 31, 2019 from $69.9 million for the year ended December 31, 2018 due primarily to the earned portion of the higher gross written premiums offset by the earned portion of the higher ceded written premiums under reinsurance agreements.

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

($ in thousands)

Gross earned premiums

Ceded earned premiums

Net earned premiums

Commission and Other Income

Commission and other income increased $0.3 million, or 11.1%, to $2.7 million for the year ended December 31, 2019 from $2.4 million for the year ended December 31, 2018 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 decreased $0.7 million, or 10.9%, to $5.6 million for the year ended December 31, 2019 from $6.3 million for the year ended December 31, 2018.

During the year ended December 31, 2019, losses were primarily attributable to windstorm exposure in Japan through our assumed reinsurance portfolio and attritional losses in our commercial all risk and specialty homeowners lines of business.

During the year ended December 31, 2018, losses were primarily attributable to attritional losses in our commercial all risk and specialty homeowners lines of business.

Losses decreased during the year ended December 31, 2019 due to a reduction in the severity of weather‑related losses.

We incurred a loss of $5 million from Hurricane Florence during the year ended December 31, 2018.

Acquisition Expenses

Acquisition expenses increased $9.1 million, or 32.0%, to $37.3 million for the year ended December 31, 2019 from $28.2 million for the year ended December 31, 2018.

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 18.6% for the year ended December 31, 2019 compared to 20.5% for the year ended December 31, 2018.

Acquisition expenses as a percentage of gross earned premiums decreased due to higher earned ceding commissions related to our Specialty Homeowners and Commercial All Risk lines.

Other Underwriting Expenses

Other underwriting expenses increased $33.3 million, or 185.7%, to $51.3 million for the year ended December 31, 2019 from $18.0 million for the year ended December 31, 2018.

During the year ended December 31, 2019, we incurred increased payroll, professional fees, technology expenses, stock‑based compensation and other expenses necessary to support our growth.

During the year ended December 31, 2019, other underwriting expenses included a stock compensation charge of $23.0 million related to the modification of our former parent company’s management incentive plan, $0.4 million of expenses associated with our IPO and tax restructuring, a $0.9 million charge related to the write‑off of debt amortization costs upon redemption of our Floating Rate Notes, and $2.6 million of expenses from one‑time incentive cash bonuses triggered by the September 2019 Secondary Offering and expenses associated with both Secondary Offerings.

During the year ended December 31, 2018, other underwriting expenses included $1.1 million of expenses associated with our IPO and tax restructuring and $0.5 million of expenses related to the repayment of our surplus notes in September 2018.

Other underwriting expenses as a percentage of gross earned premiums were 25.6% for the year ended December 31, 2019 compared to 13.0% for the year ended December 31, 2018.

Excluding the impact of expenses relating to our IPO, tax restructuring, Secondary Offerings, one‑time incentive cash bonuses, stock‑based compensation and retirement of debt, other underwriting expenses as a percentage of gross earned premiums were 11.6% for the year ended December 31, 2019 compared to 12.0% for the year ended December 31, 2018.

Interest Expense

Interest expense decreased $1.2 million, or 53.6%, to $1.1 million for the year ended December 31, 2019 from $2.3 million for the year ended December 31, 2018.

Interest expense decreased as we redeemed our Floating Rate Notes in May 2019 and did not have any long-term debt after May 2019 whereas we had outstanding surplus notes and Floating Rate Notes during the entire year ended December 31, 2018.

In addition, interest expense for the year ended December 31, 2019 includes a $0.4 million charge incurred upon redemption of our Floating Rate Notes in May 2019.

Interest expense for the year ended December 31, 2018 includes a $0.1 million charge incurred upon repayment of our surplus notes in September 2018.

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

Net investment income increased $2.8 million, or 84.5%, to $6.0 million for the year ended December 31, 2019 from $3.2 million for the year ended December 31, 2018.

The increase was primarily due to a higher average balance of investments during the year ended December 31, 2019 due primarily to proceeds from our IPO which were received in April 2019.

Net realized and unrealized gains on investments increased $7.0 million, to a $4.4 million gain for the year ended December 31, 2019 from a $2.6 million loss for the year ended December 31, 2018.

The primary reason for the increase was an improvement in the performance of our equity securities during the year ended December 31, 2019 compared to the year ended December 31, 2018.

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 with the remainder of investments in equity securities.

Our equity securities are comprised of mutual funds that provide

exposure to the U.S.

investment grade bond market.

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

($ in thousands)

Interest income

Dividend income

Investment management fees and expenses

Net investment income

Net realized and unrealized gains (losses) on investments

Income Tax Expense (Benefit)

Income tax expense increased to $7.5 million for the year ended December 31, 2019 from an immaterial amount for the year ended December 31, 2018 as a result of positive taxable income during the year ended December 31, 2019 occurring after our U.S.

domestication in March 2019 partially offset by the benefit from the reduction of the valuation allowance on our federal deferred tax assets.

We are subject to income taxes in certain jurisdictions in which we operate.

subsidiaries are subject to federal and state income taxes.

We earn income in Bermuda, a non‑taxable jurisdiction, primarily as a result of quota share reinsurance agreements between our U.S.

insurance subsidiary and PSRE, and the investment income earned in PSRE.

Prior to July 1, 2019, our U.S.

insurance subsidiary and PSRE were subject to a quota share reinsurance agreement under which the U.S.

insurance subsidiary ceded 50% of the earthquake and Hawaii hurricane gross premiums earned as well as losses and loss adjustment expenses to PSRE in exchange for a 25% ceding commission.

As a result of our multinational operations our effective tax rate has historically been below that of a fully U.S.

based operation.

All of our operations became subject to U.S.

income tax in 2019 as a result of our domestication to the United States.

Year ended December 31, 2018 compared to year ended December 31, 2017

The following table summarizes our results for the years ended December 31, 2018 and 2017:

Year Ended December 31,

($ 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(1)

Interest expense

Net investment income

Net realized and unrealized (losses) gains on investments

Income before income taxes

Income tax (benefit) expense

Expenses associated with IPO and tax restructuring

Expenses associated with retirement of surplus notes

Adjusted net income(1)

Key Financial and Operating Metrics

Return on equity

Adjusted return on equity(1)

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 were $154.9 million for the year ended December 31, 2018 compared to $120.2 million for the year ended December 31, 2017, an increase of $34.7 million, or 28.8%.

Premium growth in 2018 was due primarily to an increased volume of policies written across our lines of business which was driven by expansion of our product, geographic and distribution footprint as well as strong premium retention rates for our existing book of business.

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

Residential Earthquake, which represented approximately 52.7% of our gross written premiums in 2018, increased by $24.4 million, or 42.5%, for the year ended December 31, 2018 over the prior year.

Specialty Homeowners, which represented approximately 17.9% of our gross written premiums in 2018, increased by $1.2 million, or 4.4%, for the year ended December 31, 2018 over the prior year.

Commercial Earthquake, which represented approximately 13.5% of our gross written premiums in 2018, decreased by $2.1 million, or 9.2%, for the year ended December 31, 2018 over the prior year.

Commercial All Risk, which represented approximately 9.3% of our gross written premiums in 2018, increased by $7.0 million, or 95.8%, for the year ended December 31, 2018 over the prior year.

Hawaii Hurricane, which represented approximately 5.2% of our gross written premiums in 2018, increased by $2.8 million or 52.7%, for the year ended December 31, 2018 over the prior year.

Ceded Written Premiums

Ceded written premiums increased $36.0 million, or 76.7%, to $82.9 million for the year ended December 31, 2018 from $46.9 million for the year ended December 31, 2017.

The increase was primarily due to increased excess of loss reinsurance cost due to higher exposure from the growth of our portfolio, as well as increased ceding of written premium related to our Specialty Homeowners operations in the state of Texas.

As of June 2018, we act as a fronting carrier for these operations and cede substantially all of the risk and premium in exchange for a fronting fee.

Ceded written premiums as a percentage of gross written premiums increased to 53.6% for the year ended December 31, 2018 from 39.0% for the year ended December 31, 2017.

Net Written Premiums

Net written premiums decreased $1.3 million, or 1.8%, to $71.9 million for the year ended December 31, 2018 from $73.3 million for the year ended December 31, 2017.

The decrease was primarily due to higher ceded written premiums under reinsurance agreements.

Net Earned Premiums

Net earned premiums increased $14.4 million, or 25.8%, to $69.9 million for the year ended December 31, 2018 from $55.5 million for the year ended December 31, 2017 due primarily to the earned portion of the higher gross written premiums described above offset by the earned portion of the higher ceded written premiums described above under reinsurance agreements for the year ended December 31, 2018.

The below table shows the amount of premiums we earned on a gross and net basis:

($in thousands)

Gross earned premiums

Ceded earned premiums

Net earned premiums

Commission and Other Income

Commission and other income increased $1.2 million, or 102.4%, to $2.4 million for the year ended December 31, 2018 from $1.2 million for the year ended December 31, 2017 due primarily to an increase in the volume of REI policies written and resulting increase in associated commission income.

Losses and Loss Adjustment Expenses

Losses and loss adjustment expenses decreased $5.9 million, or 48.3%, to $6.3 million for the year ended December 31, 2018 from $12.1 million for the year ended December 31, 2017.

The decrease primarily relates to lower losses, and favorable prior year loss development, net of reinsurance, during 2018 versus 2017.

We incurred $6.5 million of loss due to Hurricane Harvey in 2017.

This event increased our loss ratio by 11.7% for the year end December 31, 2017.

Acquisition Expenses

Acquisition expenses increased $2.7 million, or 10.6%, to $28.2 million for the year ended December 31, 2018 from $25.5 million for the year ended December 31, 2017.

The primary reason for the increase was due to higher earned premiums offset by higher earned ceding commissions on ceded business, as well as a change in the overall mix of business produced.

Acquisition expenses as a percentage of gross earned premiums were 20.5% for the year ended December 31, 2018 and 25.3% for the year ended December 31, 2017.

Other Underwriting Expenses

Other underwriting expenses increased $2.8 million, or 18.6%, to $17.9 million for the year ended December 31, 2018 from $15.1 million for the year ended December 31, 2017.

The increase was primarily due to increased staffing, professional fees and other expenses necessary to support our growth.

Other underwriting expenses as a percentage of gross earned premiums were 13.0% for the year ended December 31, 2018 and 15.0% for the year ended December 31, 2017.

Interest Expense

Interest expense increased $0.6 million, or 32.0%, to $2.3 million for the year ended December 31, 2018 from $1.7 million for the year ended December 31, 2017.

The increase was primarily due to $0.5 million in charges associated with paying off the Surplus Note in September 2018.

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

Net investment income increased $1.1 million, or 52.4%, to $3.2 million for the year ended December 31, 2018 from $2.1 million for the year ended December 31, 2017.

The primary reason for the increase was a higher average balance of investments during the year ended December 31, 2018.

Net realized and unrealized gains on investments decreased $3.2 million, or 52.3%, to a $2.5 million loss for the year ended December 31, 2018 from a gain of $0.6 million for the year ended December 31, 2017.

The primary reason for the decrease was $6.0 million of unrealized losses on equity securities offset by $3.5 million of net realized investment gains during the year.

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 with the remainder of investments in equity securities.

The following table summarizes the components of our investment income for the years ended December 31, 2018 and 2017:

($in thousands)

Interest income

Dividend income

investment management fees and expenses

Net investment income

Net realized and unrealized gains (losses) on investments

Income Tax (Benefit) Expense

Income tax (benefit) expense decreased $1.1 million to an immaterial benefit for the year ended December 31, 2018 from a $1.1 million expense for the year ended December 31, 2017.

Income tax expense was higher in the prior year primarily due to the recognition of a $0.9 million valuation allowance on deferred tax assets in 2017.

We recorded a valuation allowance in 2017 due to 3‑year cumulative losses and a large catastrophe event during 2017.

We increased the valuation allowance by $0.7 million in 2018 due to an increase in net deferred tax assets.

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

We are subject to income taxes in certain jurisdictions in which we operate.

We generate taxable income in our U.S.

subsidiaries.

We earn income in Bermuda, a non‑taxable jurisdiction, primarily as a result of quota share reinsurance agreements between our U.S.

insurance subsidiary and Palomar Re, and the investment income earned in Palomar Re.

Effective January 1, 2016, our U.S.

insurance subsidiary and Palomar Re entered into a quota share reinsurance agreement under which the U.S.

insurance subsidiary ceded 35% of the earthquake gross premiums earned as well as losses and loss adjustment expenses to Palomar Re in exchange for a 20% ceding commission.

Effective January 1, 2017, the agreement was amended and the cession was decreased to 26.5% with a 25% ceding commission.

Effective September 1, 2017, the agreement was amended and the cession was decreased to 0%.

Effective January 1, 2018, the agreement was amended, the cession was increased to 50%, and the Hawaii Hurricane gross premiums earned and losses and loss adjustment expenses were added to the lines of business.

As a result of our multinational operations our effective tax rate is currently below that of a fully U.S.

based operation.

Following the domestication transactions, we expect that all of our income will be subject to U.S.

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.

(in thousands)

Total revenue

Net investment income

Net realized and unrealized (gains) losses 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.

(in thousands)

Income before income taxes

Net investment income

Net realized and unrealized (gains) losses on investments

Interest expense

Underwriting income

Adjusted Net Income

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

We 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.

Year Ended December 31,

(in thousands)

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

Stock-based compensation expense

Expenses associated with retirement of debt

Adjusted net income

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 in accordance with GAAP, and other companies may define adjusted return on equity differently.

Year Ended December 31,

($ in thousands)

Adjusted net income

Average stockholder’s equity:

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 in accordance with GAAP, and other companies may define adjusted combined ratio differently.

Year Ended December 31,

($ in thousands)

Sum of losses, loss adjustment expenses, underwriting, acquisition 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

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.

Year Ended December 31,

(in thousands except shares and 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.

(in thousands)

Stockholders’

Intangible assets

Tangible stockholders’

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 policyholders’

surplus as of December 31 of the preceding year or (ii) 100% of their 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 December 31, 2019 and December 31, 2018, 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 December 31, 2019 and December 31, 2018.

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 December 31, 2019 and December 31, 2018, 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

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.

During 2018, our Bermuda subsidiary paid $13.7 million in dividends to the Company, which were approved by the Bermuda Monetary Authority.

There were no dividends approved or paid in 2019.

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

We use our cash flows primarily to pay 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.

We generated positive cash flows from operations for each of the years ended December 31, 2019, 2018 and 2017.

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

The following table summarizes our cash flows for the years ended December 31, 2019, 2018 and 2017:

Year Ended December 31,

($ 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 of the last three years.

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 each of the last three years related primarily to purchases of fixed income and equity securities in excess of sales and maturities.

Cash provided by financing activities for the year ended December 31, 2019 was related to the receipt of $87.4 million in net proceeds from our IPO in April 2019, offset by $20.0 million of 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 provided by financing activities in 2018 was related to the issuance of Floating Rate Notes and the payoff of surplus notes in September 2018.

There was no cash flow from financing activities in 2017.

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 $272.8 million in cash and investment securities available at December 31, 2019.

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

Surplus Notes

Prior to September 2018, the Company had $17.5 million in outstanding surplus notes which had been issued by PSIC on February 3, 2015 for a term of seven years.

The surplus notes bore interest at the rate of LIBOR plus 8.00% and had restrictions as to payments of interest and principal.

Any such payments required the prior approval of the Oregon Insurance Commissioners before such payments could be made.

Such payments could only be made from surplus.

Floating Rate Notes

In September 2018, the Company completed a private placement financing of $20.0 million floating rate senior secured notes (the “Floating Rate Notes”), bearing interest at the three-month treasury rate plus 6.50% per annum.

As part of the financing agreement, the Company immediately used surplus funds to pay down the existing $17.5 million in surplus notes.

As part of this pre‑payment, the Company incurred a penalty of $0.1 million which, along with unamortized debt issuance costs of $0.4 million, was charged to income in 2018.

The Floating Rate Notes were redeemed pursuant to their terms on May 23, 2019, at a redemption price equal to 102% of the principal amount of the Floating Rate Notes, or $20.4 million (plus $0.3 million of accrued and unpaid

interest thereon).

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 consolidated statements of income and comprehensive income.

The Company incurred $1.1 million in interest expense related to the Floating Rate Notes for the year ended December 31, 2019 (inclusive of the $0.4 million redemption premium) and $0.6 million for the year ended December 31, 2018 and paid $1.2 million and $0.5 million for each period, respectively.

The Company incurred $1.2 million and $1.6 million in interest expense related to the surplus notes for the year ended December 31, 2018 and 2017, respectively and paid $1.2 million and $1.6 million in each period, respectively.

Contractual Obligations and Commitments

The following table illustrates our contractual obligations and commercial commitments by due date as of December 31, 2019:

(in thousands)

Reserves for losses and loss adjustment expenses

Operating lease obligations

The reserve for losses and loss adjustment expenses represent management’s estimate of the ultimate cost of settling losses.

As more fully discussed in “—Critical Accounting Policies—Reserve for Losses and Loss Adjustment Expenses”

below, the estimation of the reserve for losses and loss adjustment expenses is based on various complex and subjective judgments.

Actual losses paid may differ, perhaps significantly, from the reserve estimates reflected in our consolidated financial statements.

Similarly, the timing of payment of our estimated losses is not fixed and there may be significant changes in actual payment activity.

The assumptions used in estimating the likely payments due by period are based on our historical claims payment experience and industry payment patterns, but due to the inherent uncertainty in the process of estimating the timing of such payments, there is a risk that the amounts paid can be significantly different from the amounts disclosed above.

The amounts in the above table represent our gross estimates of known liabilities as of December 31, 2019 and do not include any allowance for claims for future events within the time period specified.

Accordingly, it is highly likely that the total amounts of obligations paid by us in the time periods shown will be greater than those indicated in the table.

Financial Condition

Stockholders’

At December 31, 2019 total stockholders’

equity was $218.6 million and tangible stockholders’

equity was $217.8 million, compared to total stockholders’

equity of $96.3 million and tangible stockholders’

equity of $95.5 million as of December 31, 2018.

Stockholders’

equity increased for the year ended December 31, 2019 primarily due to the receipt of $87.4 million in net proceeds from our IPO.

Stockholders’

equity also increased due to $24.1 million stock‑based compensation expense, which was treated as additional paid in capital.

In addition, stockholder’s equity increased due to $10.6 of net income and $5.2 million of unrealized gain on fixed maturity investments.

These items were offset by a $5.1 million cash distribution to our principal stockholder.

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 December 31, 2019, the majority of our investment portfolio, or $217.2 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 $22.3 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 $33.1 million at December 31,2019.

Our fixed maturity securities, including cash equivalents, had a weighted average effective duration of 3.49 and 3.93 years and an average rating of A1/A+ and “Aa3/AA−”

at December 31, 2019 and December 31, 2018, respectively.

Our fixed income investment portfolio had a book yield of 2.9% as of December 31, 2019, compared to 3.0% as of December 31, 2018.

At December 31, 2019 and December 31, 2018 the amortized cost and fair value on available‑for‑sale securities were as follows:

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

December 31, 2018

($ 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 December 31, 2019 and December 31, 2018:

December 31, 2019

($ in thousands)

December 31, 2018

($ in thousands)

The amortized cost and fair value of our available‑for‑sale investments in fixed maturity securities summarized by contractual maturity as of December 31, 2019 were as follows:

December 31, 2019

($ 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.

See “Critical Accounting Policies and Estimates- Investment Valuation and Impairment”

for discussion of investment valuation and impairment considerations.

Critical Accounting Policies and Estimates

We identified the accounting estimates below as 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 which 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 consolidated financial statements.

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

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

We evaluate our

estimates regularly using information that we believe to be relevant.

For a detailed discussion of our accounting policies, see the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

Reserve for Losses and Loss Adjustment Expenses

The reserve for losses and loss adjustment expenses represents our estimated ultimate cost of all reported and unreported losses and loss adjustment expenses incurred and unpaid at the balance sheet date.

We do not discount this reserve.

We seek to establish reserves that will ultimately prove to be adequate.

We categorize our reserves for unpaid losses and loss adjustment expenses into two types:

case reserves and reserves for incurred but not yet reported losses (“IBNR”).

Through our TPAs, we generally are notified of losses by our insureds or their agents or brokers.

Based on the information provided by the TPAs, we establish initial case reserves by estimating the ultimate losses from the claim, including administrative costs associated with the ultimate settlement of the claim.

Our claims department personnel use their knowledge of the specific claim along with internal and external experts, including underwriters and legal counsel, to estimate the expected ultimate losses.

With the assistance of an independent, actuarial firm, we also use statistical analysis to estimate the cost of losses and loss adjustment expenses related to IBNR.

Those estimates are based on our historical information, industry information and estimates of trends that may affect the ultimate frequency of incurred but not reported claims and changes in ultimate claims severity.

We regularly review our reserve estimates and adjust them as necessary as experience develops or as new information becomes known to us.

Such adjustments are included in current operations.

During the loss settlement period, if we have indications that claims frequency or severity exceeds our initial expectations, we generally increase our reserves for losses and loss adjustment expenses.

Conversely, when claims frequency and severity trends are more favorable than initially anticipated, we generally reduce our reserves for losses and loss adjustment expenses once we have sufficient data to confirm the validity of the favorable trends.

Even after such adjustments, the ultimate liability may exceed or be less than the revised estimates.

Accordingly, the ultimate settlement of losses and the related loss adjustment expenses may vary significantly from the estimate included in our consolidated financial statements.

The following tables summarize our gross and net reserves for unpaid losses and loss adjustment expenses at December 31, 2019 and 2018.

December 31, 2019

Loss and Loss Adjustment Reserves

($ in thousands)

Case reserves

Total reserves

December 31, 2018

Loss and Loss Adjustment Reserves

Case reserves

Total reserves

The process of estimating the reserves for losses and loss adjustment expenses requires a high degree of judgment and is subject to several variables.

On a quarterly basis, we perform an analysis of our loss development and select the expected ultimate loss ratio for each of our product lines by accident year.

In our actuarial analysis, we use input from our TPAs and our underwriting and claims departments, including premium pricing assumptions and historical experience.

Multiple actuarial methods are used to estimate the reserve for losses and loss adjustment expenses.

These methods utilize, to varying degrees, the initial expected loss ratio, detailed statistical analysis of past claims reporting and payment patterns, claims frequency and severity, paid loss experience, industry loss experience, and

changes in market conditions, policy forms, exclusions, and exposures.

The actuarial methods used to estimate loss and loss adjustment expenses reserves are:

Reported and/or Paid Loss Development Methods —Ultimate losses are estimated based on historical reported and/or paid loss reporting patterns.

Reported losses are the sum of paid and case losses.

Industry development patterns are substituted for historical development patterns when sufficient historical data is not available.

Reported Bornhuetter‑Ferguson Severity Method —Under this method, ultimate losses are estimated as the sum of cumulative reported losses and estimated IBNR losses.

IBNR losses are estimated based on expected average severity, estimated ultimate claim counts and the historical development patterns of reported losses.

Paid Bornhuetter‑Ferguson Pure Premium Method —Under this method, ultimate losses are estimated as the sum of cumulative reported losses and estimated IBNR losses.

IBNR losses are estimated based on expected pure premium and on the historical development patterns of reported losses.

The method(s) used vary based on the line of business and the loss event.

Considering each of the alternative ultimate estimates, we select an estimate of ultimate loss for each line of business.

For Earthquake and “Difference in Conditions”

policies, more emphasis is placed on reported methods.

For the remainder, a weighted average is selected.

Loss Adjustment Expense reserves were estimated based on the ratio of paid loss adjustment expense to paid loss, which was estimated for Wellington, York (Commercial All Risk, DIC, Flood, Inland Marine -Builders Risk), and Cabrillo claims separately as well as split by hurricane and excluding hurricane.

We then applied this ratio to our estimated unpaid loss, by multiplying the ratio times 50% of loss case reserves and 100% of loss IBNR reserves.

This was applied by line of business and accident year to arrive at estimated unpaid loss adjustment expense on a gross basis.

We then added the estimated unpaid loss adjustment expense on a gross basis to the paid loss adjustment expense to calculate estimated ultimate loss adjustment expense.

On a quarterly basis, the Chief Executive Officer, President, Chief Risk Officer, Chief Financial Officer, Chief Accounting Officer, and Vice President Legal—Compliance & Claims, meet to review the recommendations made by the independent actuarial consultant and use their best judgment to determine the best estimate to be recorded for the reserve for losses and loss adjustment expenses on our balance sheet.

Our reserves are driven by several important factors, including litigation and regulatory trends, legislative activity, climate change, social and economic patterns and claims inflation assumptions.

Our reserve estimates reflect current inflation in legal claims’

settlements and assume we will not be subject to losses from significant new legal liability theories.

Our reserve estimates assume that there will not be significant changes in the regulatory and legislative environment.

The impact of potential changes in the regulatory or legislative environment is difficult to quantify in the absence of specific, significant new regulation or legislation.

In the event of significant new regulation or legislation, we will attempt to quantify its impact on our business, but no assurance can be given that our attempt to quantify such inputs will be accurate or successful.

The table below quantifies the impact of potential reserve deviations from our carried reserve at December 31, 2019.

We applied sensitivity factors to incurred losses for the three most recent accident years and to the carried reserve

for all prior accident years combined.

We believe that potential changes such as these would not have a material impact on our liquidity.

Potential Impact

December 31, 2019

Pre‑tax

Stockholders’

Incurred LLAE

($ in thousands)

Sample increases

Sample decreases

* Effective tax rate estimated to be 21%

The amount by which estimated losses differ from those originally reported for a period is known as “development.”

Development is unfavorable when the losses ultimately settle for more than the amount reserved or subsequent estimates indicate a basis for reserve increases on unresolved claims.

Development is favorable when losses ultimately settle for less than the amount reserved, or subsequent estimates indicate a basis for reducing loss reserves on unresolved claims.

We reflect favorable or unfavorable development of loss reserves in the results of operations in the period the estimates are changed.

The following tables present the development of our loss reserves by accident year on a gross basis and net of reinsurance recoveries during each of the below calendar years:

Gross Ultimate Loss and LAE

Development- (Favorable) Unfavorable

Calendar Year

Accident Year

(in thousands)

Net Ultimate Loss and LAE

Development- (Favorable) Unfavorable

Calendar Year

Accident Year

(in thousands)

During the year ended December 31, 2019, our gross incurred losses for accident years 2018 and prior developed favorably by $1.0 million.

This favorable development was due to reported losses emerging at a lower level than expected, primarily in our Specialty Homeowners business.

The net favorable development of $0.2 million reflects the effect of our reinsurance program.

During the year ended December 31, 2018, our gross incurred losses for accident years 2017 and prior developed favorably by $3.2 million.

This favorable development was due to reported losses emerging at a lower level

than expected, primarily in our Specialty Homeowners business.

The net favorable development of $1.9 million reflects the effect of our reinsurance program.

During the year ended December 31, 2017, our gross incurred losses for accident years 2016 and prior developed favorably by $1.0 million.

This favorable development was due to reported losses emerging at a lower level than expected, primarily in our Specialty Homeowners business.

The net favorable development of $0.1 million reflects the effect of our reinsurance program.

Although we believe that our reserve estimates are reasonable, it is possible that our actual loss experience may not conform to our assumptions.

Specifically, our actual ultimate loss ratio could differ from our initial expected loss ratio or our actual reporting and payment patterns could differ from our expected reporting and payment patterns, which are based on our own data and industry data.

Accordingly, the ultimate settlement of losses and the related loss adjustment expenses may vary significantly from the estimates included in our financial statements.

We regularly review our estimates and adjust them as necessary as experience develops or as new information becomes known to us.

Such adjustments are included in the results of current operations.

Investment Valuation and Impairment

Fair value measurements

We invest in a variety of investment grade fixed maturity securities, including U.S.

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

All of our investments in fixed maturity securities and equity securities are carried at fair value, defined as the price that we would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment.

Market participants are assumed to be independent, knowledgeable, able and willing to transact an exchange and not acting under duress.

In our disclosure of the fair value of our investments, we utilize a hierarchy based on the quality of inputs used to measure fair value.

The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

Adjustments to transaction prices or quoted market prices may be required in illiquid or disorderly markets in order to estimate fair value.

The three levels of the fair value hierarchy are described below:

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

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

quoted prices for identical or similar investments in inactive markets;

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

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

The unobservable inputs require significant management judgment or estimation.

We use independent pricing sources to obtain the estimated fair values of investments.

The fair value is based on quoted market prices, where available.

In cases where quoted market prices are not available, the fair value is based on a variety of valuation techniques depending on the type of investment.

The fair values obtained from independent pricing sources are reviewed for reasonableness and any discrepancies are investigated for final valuation.

The fair value of our 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.

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

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

The fair value of our investments in equity securities is based on quoted prices available in active markets and classified and disclosed in Level 1 of the hierarchy.

Investment securities are subject to fluctuations in fair value due to changes in issuer‑specific circumstances, such as credit rating, and changes in industry‑specific circumstances, such as movements in credit spreads based on the market’s perception of industry risks.

In addition, fixed maturities are subject to fluctuations in fair value due to changes in interest rates.

As a result of these potential fluctuations, it is possible to have significant unrealized gains or losses on a security.

Unrealized gains and losses on our fixed maturity securities are included in accumulated other comprehensive income as a separate component of total stockholders’

Equity securities are carried at fair value with unrealized gains and losses included as a component of net income on the Company’s consolidated statement of income.

Prior to 2018, unrealized gains and losses on equity securities were included in accumulated other comprehensive income as a separate component of stockholders’

We review all securities with unrealized losses on a quarterly basis to assess whether the decline in the securities fair value is deemed to be other‑than‑temporary.

This decision requires judgement and we consider the following factors in determining whether declines in the fair value of investments are other‑than‑temporary:

The significance of the decline in fair value compared to the cost basis;

The time period during which there has been a significant decline in fair value;

Whether the unrealized loss is credit‑driven or a result of changes in market interest rates;

A fundamental analysis of the business prospects and financial condition of the issuer;

Our intent to sell the securities as of each reporting date;

If we do not expect to recover the entire amortized cost basis or cost of the investment;

Other‑than‑temporary declines in fair value of fixed maturity securities are evaluated for amounts considered credit losses by comparing the expected present value of cash flows to be collected to the amortized cost of the security.

Once the amount of other‑than‑temporary impairment (“OTTI”) related to the credit loss is determined, the unrealized loss is then bifurcated into the credit‑related loss and the loss related to all other factors.

The credit‑related OTTI loss is recognized as a realized loss in the statement of comprehensive income and the cost basis of the security is reduced.

The OTTI related to other factors remain in accumulated other comprehensive income.

Other‑than‑temporary declines in the fair value of equity securities are recorded as realized losses in the consolidated statement of comprehensive income and the cost basis of the security is reduced.

In our review as of December 31, 2019 and 2018, we determined that, for fixed maturity securities in an unrealized loss position, the unrealized losses were primarily the result of the interest rate environment and not the credit quality of the issuers.

None of the fixed maturity securities were determined to be other‑than‑temporarily impaired;

therefore, none of the fixed maturity securities were written down during the respective years.

In our review as of December 31, 2017, we determined that the unrealized losses of the equity securities lots were considered to be temporary due to the severity of the declines therefore, none of the equity securities were written down, and any remaining unrealized losses of equity securities at that time were recognized to retained earnings upon adoption of ASU 2016‑01 on January 1, 2018.

See “Note 2—Recent Accounting Pronouncements”

in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for a discussion of accounting pronouncements recently adopted and recently issued accounting pronouncements not yet adopted and their potential impact to our financial statements.

Deferred Income Taxes

We account for taxes under the asset and liability method, under which we record deferred income taxes as assets or liabilities on our balance sheet to reflect the net tax effect of the temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their respective tax bases.

Deferred tax assets and liabilities are measured by applying enacted tax rates in effect for the years in which such differences are expected to reverse.

Our deferred tax assets result from temporary differences primarily attributable to unearned premiums and net operating losses.

Our deferred tax liabilities result primarily from deferred acquisition costs and unrealized gains in the investment portfolio.

On a quarterly basis, we review our deferred tax assets and, if we determine that it is more likely than not that some portion or all of the deferred tax assets will not be realized, we reduce our deferred tax asset with a valuation allowance.

The assessment requires significant judgement.

We recorded a valuation allowance in 2017 due to 3‑year cumulative losses and a large catastrophe event during 2017.

We increased the valuation allowance by $0.7 million in 2018.

On December 22, 2017, the President of the United States signed into law the Tax Act.

The legislation significantly changes U.S.

tax law by, among other things, lowering corporate income tax rates from 35% to 21%, effective January 1, 2018.

GAAP requires companies to recognize the effect of tax law changes in the period of enactment.

We evaluated all available information and made reasonable estimates of the impact of tax reform to substantially all components of our net deferred tax assets as of December 31, 2017.

We finalized our accounting for the Tax Act during 2018 with no significant impact to earnings or deferred taxes.

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

tax residency.

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.

As a result of the Domestication, PSRE’s income is subject to U.S.

federal income tax in 2019.

Prior to 2019, the Company maintained a valuation allowance on the U.S.

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 .

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.

The projected reversal of temporary differences, the Domestication, and projected future operating income in the U.S.

represents significant positive evidence, which outweighed the historical negative evidence.

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 we will continue to maintain a valuation allowance on the associated deferred tax assets.

We 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.

For the year ended December 31, 2019 tax expense differs from the expected tax computed at the statutory tax rate of 21% primarily due to a U.S.

tax benefit of $1.7 million for the reversal of a significant portion of our 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 first quarter that is not deductible for tax purposes.

Recent Accounting Pronouncements

See “Note 2—Recent Accounting Pronouncements”

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.

Total stockholders’ equity

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-K

Item 5. Market for Registrant’s Common Equity