What changed in this filing

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Item 1. Financial Statements

2021-05-07 compared with 2020-11-13 · 127 added, 212 removed, 316 unchanged (52% of the section changed)

4 unchanged sentences

(in thousands, except shares and par value data)

September 30,

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

15 unchanged sentences

Property and equipment, net

Intangible assets

Intangible assets, net

Liabilities and stockholders' equity

4 unchanged sentences

Funds held under reinsurance treaty

Income and excise taxes payable

Deferred tax liabilities, net

1 unchanged sentence

Stockholders' equity:

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

Common stock, $0.0001 par value, 500,000,000 shares authorized, 25,518,957 and 23,468,750 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively

Preferred stock, $ 0.0001 par value, 5,000,000 shares authorized, 0 shares issued and outstanding as of March 31, 2021 and December 31, 2020

Common stock, $ 0.0001 par value, 500,000,000 shares authorized, 25,589,750 and 25,525,796 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively

Additional paid-in capital

6 unchanged sentences

and Subsidiaries

Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) (Unaudited)

Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)

(in thousands, except shares and per share data)

Three Months Ended

Nine Months Ended

September 30,

Gross written premiums

4 unchanged sentences

Net investment income

Net realized and unrealized gains on investments

Net realized and unrealized gains (losses) on investments

Commission and other income

2 unchanged sentences

Acquisition expenses

Other underwriting expenses (includes stock-based compensation of $551 and $410 for the three months ended September 30, 2020 and 2019, respectively and $1,457 and $23,677 for the nine months ended September 30, 2020 and 2019, respectively)

Interest expense

Other underwriting expenses (includes stock-based compensation of $ 938 and $ 442 for the three months ended March 31, 2021 and 2020, respectively)

Total expenses

Income (loss) before income taxes

Income tax expense (benefit)

Net income (loss)

Income before income taxes

Income tax expense

Other comprehensive income, net:

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

Net comprehensive income (loss)

Net unrealized losses on securities available for sale for the three months ended March 31, 2021 and 2020, respectively

Net comprehensive income

Per Share Data:

12 unchanged sentences

Other comprehensive income, net of tax

Distribution to stockholder

Stock-based compensation

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

Balance at September 30, 2019

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

Issuance of common stock via employee stock purchase plan

Balance at March 31, 2020

Balance at December 31, 2020

1 unchanged sentence

Stock-based compensation

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

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

Issuance of common stock via employee stock purchase plan

Issuance of common stock via equity incentive plan

Balance at September 30, 2020

Balance at March 31, 2021

See accompanying notes.

3 unchanged sentences

(in thousands)

Nine Months Ended

September 30,

Three Months Ended

Operating activities

Net cash provided by operating activities

Net cash provided by (used in) operating activities

Investing activities

5 unchanged sentences

Securities receivable or payable, net

Net cash used in investing activities

Payment of additional costs associated with purchase of policy renewal rights

Net cash provided by (used in) investing activities

Financing activities

Proceeds from initial public offering, net of offering costs

Redemption of Floating Rate Notes

Distribution to stockholder

Proceeds from January 2020 stock offering, net of offering costs

Proceeds from June 2020 stock offering, net of offering costs

Proceeds from stock offering, net of offering costs

Proceeds from common stock issued via employee stock purchase plan

1 unchanged sentence

Net cash provided by financing activities

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

Net decrease in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash at beginning of period

4 unchanged sentences

The following table summarizes our cash and cash equivalents and restricted cash and cash equivalents within the condensed consolidated balance sheets (in thousands):

September 30,

Cash and cash equivalents

16 unchanged sentences

GAAP for complete consolidated financial statements.

For a more complete description of the Company’s business and accounting policies, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

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

8 unchanged sentences

Recent Accounting Pronouncements

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

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

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

Recently adopted accounting pronouncements

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

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

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

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

Recently issued accounting pronouncements not yet adopted

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

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

This guidance was subsequently amended multiple times and offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions.

Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.

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

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

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

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

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

The package of practical expedients relates to the identification and classification of leases and initial direct costs for leases that commenced before the effective date.

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

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

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

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

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

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

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

Credit losses relating to available-for- sale debt securities will also be recorded through an allowance for credit losses, with the amount of the allowance limited to the amount by which fair value is below amortized cost.

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

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

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

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

In December 2019, the FASB issued ASU No.

2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes.

Among other things, ASU 2019-12 eliminates certain exceptions for recognizing deferred taxes for investments, performing intra-period tax allocation and calculating income taxes in interim periods.

ASU 2019-12 also clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill.

ASU 2019-12 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15,

The Company adopted this guidance on January 1, 2021 and adoption did not have a material impact on the consolidated financial statements.

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

September 30, 2020

March 31, 2021

(in thousands)

16 unchanged sentences

Security holdings in an unrealized loss position

As of September 30, 2020, the Company held 145 fixed maturity securities in an unrealized loss position with a total estimated fair value of $96.3 million and total gross unrealized losses of $1.6 million.

As of March 31, 2021, the Company held 167 fixed maturity securities in an unrealized loss position with a total estimated fair value of $ 116.6 million and total gross unrealized losses of $ 2.3 million.

As of December 31, 2020, the Company held 90 fixed maturity securities in an unrealized loss position with a total estimated fair value of $ 41.5 million and total gross unrealized losses of $ 0.5 million.

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

The aggregate fair value and gross unrealized losses of the Company’s investments aggregated by investment category and the length of time these individual securities have been in a continuous unrealized loss position as of March 31, 2021 and December 31, 2020, are as follows:

Less Than 12 Months

More Than 12 Months

September 30, 2020

March 31, 2021

(in thousands)

15 unchanged sentences

Mortgage/asset-backed securities

The Company considers 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,

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

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

Based on the Company’s reviews as of September 30, 2020 and December 31, 2019, the Company determined that the fixed maturity securities’ unrealized losses were primarily the result of the interest rate environment and not the credit quality of the issuers.

None of the fixed maturity securities were determined to be other-than-temporarily impaired.

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

The Company considers numerous factors in its review as described in Footnote 1 of the Notes to the Consolidated Financial Statements in the 2020 Annual Report on Form 10-K.

Based on the Company’s reviews as of March 31, 2021, the Company determined that the fixed maturity securities’ unrealized losses were primarily the result of the interest rate environment and not the credit quality of the issuers.

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

Therefore, none of the fixed maturity securities were written down during the respective periods.

Therefore, the Company did not recognize an allowance for credit losses related to any of these securities during the three months ended March 31, 2021.

Contractual maturities of available-for-sale fixed maturity securities

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

The amortized cost and fair value of fixed maturity securities at March 31, 2021, by contractual maturity, are shown below.

(in thousands)

8 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

(in thousands)

Interest income

5 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

(in thousands)

Realized gains:

6 unchanged sentences

Total realized losses

Net realized investment gains (losses)

Net realized investment gains

Net unrealized gains (losses) on equity securities

Net realized and unrealized gains on investments

Net realized and unrealized gains (losses) on investments

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

Proceeds from the sale of fixed maturity securities were $16.3 million and $28.8 million for the three months ended September 30, 2020 and 2019, respectively and $29.2 million and $88.1 million for the nine months ended September 30, 2020 and 2019, respectively.

Proceeds from the sale of fixed maturity securities were $ 6.2 million and $ 2.3 million for the three months ended March 31, 2021 and 2020, respectively.

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

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

At September 30, 2020 and December 31, 2019, the carrying value of securities on deposit with state regulatory authorities was $6.5 million and $5.1 million, respectively.

At March 31, 2021 and December 31, 2020, the carrying value of securities on deposit with state regulatory authorities was $ 7.5 million.

Fair Value Measurements

15 unchanged sentences

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

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

September 30, 2020

The following tables present the hierarchy for financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020.

March 31, 2021

(in thousands)

19 unchanged sentences

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

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

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

As of March 31, 2021 and December 31, 2020, the Company had no fixed income securities classified as Level 3.

Reserve for Losses and Loss Adjustment Expenses

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

Three months ended September 30,

Nine Months Ended September 30,

(in thousands)

Three Months Ended March 31,

(in thousands)

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

Incurred losses and loss adjustment expenses, net of reinsurance, related to:

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

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

Total incurred

Loss and loss adjustment expense payments, net of reinsurance, related to:

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

Total payments

Reserve for losses and loss adjustment expense net of reinsurance recoverables at end of period

Reinsurance recoverables on unpaid losses and loss adjustment expenses at end of period

Reserve for losses and loss adjustment expenses gross of reinsurance recoverables on unpaid losses and loss adjustment expenses at end of period

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

Reinsurance recoverables on unpaid losses and LAE at end of period

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

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

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

The Company experienced adverse development of $0.3 million and $0.03 million in the three and nine months ended September 30, 2020 and favorable development of $0.2 million and $0.3 million in the three and nine months ended September 30, 2019.

Adverse development in the three and nine months ended September 30, 2020 was primarily due to reported activity in the assumed reinsurance line of business, partially offset by favorable development in the specialty homeowners line of business.

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

Long-term Debt

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

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

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

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

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

The Company incurred and paid $1.1 million and $1.2 million in interest related to the Floating Rate Notes for the nine months ended September 30, 2019.

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.

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

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

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 released the associated $1.7 million valuation allowance as of March 31, 2019.

The Company will continue to have a valuation allowance on deferred tax assets associated with state net operating loss carryforwards as they do not meet the “more likely than not” criteria due to the limited carryforward period.

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

The tax expense for the three and nine months ended September 30, 2020 differs from the statutory rate of 21% due primarily to the tax impact of the permanent component of employee stock option exercises.

For the three months ended September 30, 2019 differs from the statutory rate of 21% due to miscellaneous differences between taxable income calculated under GAAP and IRS regulations.

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

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

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

Capital Stock

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

As of September 30, 2020 and December 31, 2019, the Company has 500,000,000 common shares authorized and 25,518,957 and 23,468,750 common shares issued and outstanding, respectively, with a par value of $0.0001.

Additional paid in capital is $309.5 million as of September 30, 2020 and $180.0 million as of December 31, 2019.

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

All share and per share information included in the condensed consolidated financial

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

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

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

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

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

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

The Company received net proceeds of approximately $90.1 million, after deducting underwriting discounts and commissions and offering costs.

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

The Company experienced favorable prior year development of $ 2.7 million and $ 0.3 million during the three months ended March 31, 2021 and March 31, 2020, respectively.

Favorable prior year development during the three months ended March 31, 2021 was primarily due to lower than anticipated severity of catastrophe losses associated with certain hurricanes which occurred during the second half of 2020 primarily in the Company’s Specialty Homeowners line of business.

Favorable prior year development during the three months ended March 31, 2020 was primarily due to lower than anticipated frequency and severity of claims in the Specialty Homeowners and Residential Flood lines of business.

Stockholders’ Equity

Common stock reserved for future issuance

Common stock reserved for future issuance consists of the following as of March 31, 2021:

Stock options outstanding under 2019 Equity Incentive Plan

Restricted stock units outstanding under 2019 Equity Incentive Plan

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

Shares authorized for future issuance under 2019 Equity Incentive Plan

2 unchanged sentences

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

Three months ended September 30,

Nine months ended September 30,

(in thousands)

Three months ended March 31,

(in thousands)

1 unchanged sentence

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

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

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

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

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

The Company began recognizing stock-based compensation expense relating to its 2019 Equity Incentive Plan and the 2019 Employee Stock Purchase Plan upon their inception and initial stock grants in April 2019 and all stock based compensation expense recognized subsequent to April 2019 relates to the 2019 Equity Incentive Plan and 2019 Employee Stock Purchase Plan.

Management Incentive Plan prior to IPO

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

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

The Class P unit holders had no voting rights.

The Company did not record stock-based compensation expense related to this plan prior to 2019 because no liquidity events were probable of occurring.

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

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

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

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

2019 Equity Incentive Plan

7 unchanged sentences

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

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

Stock options vest over a two to four-year period with 25 % or 50 % vesting on the first anniversary of the grant date and the

remainder vesting monthly over the remaining period , subject to continued service .

Stock options expire ten years after the grant date.

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

The following table summarizes stock option transactions for the three months ended March 31, 2021:

Number of shares

2 unchanged sentences

Aggregate intrinsic value (in thousands)

Outstanding at December 31, 2019

Outstanding at January 1, 2021

Options granted

Options exercised

Options canceled

Outstanding at September 30, 2020

Vested and Exercisable at September 30, 2020

As of September 30, 2020, the Company had approximately $3.7 million of total unrecognized stock-based compensation expense related to stock options expected to be recognized over a weighted-average period of 2.27 years.

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

Options cancelled

Outstanding at March 31, 2021

Vested and Exercisable at March 31, 2021

As of March 31, 2021, the Company had approximately $ 4.5 million of total unrecognized stock-based compensation expense related to stock options expected to be recognized over a weighted-average period of 2.39 years.

The fair value of each option granted during the three months ended March 31, 2021 was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions:

Risk free rate of return (1)

3 unchanged sentences

Expected life in years (3)

5.63 - 6.08 years

Dividend yield (4)

6 unchanged sentences

Restricted Stock Units

Restricted stock units are valued on their grant date and generally vest either on the first anniversary of the grant date or over a three-year period with one third vesting on each anniversary date, subject to continued service.

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

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

RSUs are valued using the closing price of the Company’s common stock on their grant date and generally vest either on the first anniversary of the grant date or over a three-year period with one third vesting on each anniversary date thereafter, subject to continued service.

The following table summarizes RSU transactions for the three months ended March 31, 2021:

Number of shares

Weighted-average grant date fair value

Non vested outstanding at December 31, 2019

Non vested outstanding at September 30, 2020

As of September 30, 2020, the Company had approximately $1.3 million of total unrecognized stock-based compensation expense related to RSUs expected to be recognized over a weighted-average period of 2.66 years.

Non vested outstanding at January 1, 2021

Non vested outstanding at March 31, 2021

As of March 31, 2021, the Company had approximately $ 3.5 million of total unrecognized stock-based compensation expense related to RSUs expected to be recognized over a weighted-average period of 2.59 years.

Performance Stock Units

During the three months ended March 31, 2021, the Company began issuing PSUs to certain employees.

PSUs are generally valued using the closing price of the Company’s common stock on the grant date with vesting conditions described below.

Vesting of PSUs requires a period of future service and the number of shares which vests depends on performance relative to predetermined targets of the Company’s Gross Written Premiums and Adjusted Return on Equity as set by the Compensation Committee.

The PSU’s performance period is the fiscal year of the grant.

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

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

The following table summarizes PSU transactions for the three months ended March 31, 2021:

Number of shares

Weighted-average grant date fair value

Non vested outstanding at January 1, 2021

Non vested outstanding at March 31, 2021

The PSU grants above represent shares that would vest based on achievement of the predetermined targets and do not reflect potential increases or decreases resulting from the Company’s actual performance relative to the predetermined targets.

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

As of March 31, 2021, the Company had approximately $ 0.7 million of total unrecognized stock-based compensation expense related to PSUs expected to be recognized over a weighted-average period of 2.75 years.

2019 Employee Stock Purchase Plan

1 unchanged sentence

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

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

In addition, the 2019 ESPP provides for annual increases in the number of shares available for issuance on January 1 of

each year through 2029, equal to the smaller of 240,000 shares of the Company’s common stock or such other amount as may be determined by the board of directors.

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

1 unchanged sentence

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

The Company issued 28,367 shares pursuant to the ESPP during the nine months ended September 30, 2020.

The Company issued 4,596 shares pursuant to the ESPP during the three months ended March 31, 2021.

Share repurchases

On March 29, 2021, the Company’s Board of Directors approved the adoption of a share repurchase program which became effective March 31, 2021.

The program authorizes the repurchase by the Company of up to $ 40 million of its outstanding shares of common stock through the period ending on March 31, 2023.

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

The Company did not purchase any shares under this program during the three months ended March 31, 2021.

Accumulated Other Comprehensive Income

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

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands)

8 unchanged sentences

Balance at end of period

Earnings Per Share

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

Three months ended September 30,

Nine months ended September 30,

(in thousands, except shares and per share data)

Net income (loss)

Weighted average common shares outstanding:

Common Share equivalents

Earnings per share:

Common share equivalents relate primarily to outstanding stock options and RSUs under the 2019 Plan and unpurchased shares under the 2019 ESPP and are calculated using the treasury stock method.

For the respective three months ended September 31, 2020 and nine months ended September 30, 2019, there were 761,337 and 196,741 common share equivalents excluded from the calculation of diluted earnings per share as their effects were anti-dilutive due to the net loss reported in these periods.

Cash Distribution

In March 2019, the Company made a one-time cash distribution totaling approximately $5.1 million to its then-sole stockholder, GC Palomar Investor LP, enabling it to distribute funds to its partners in order to allow such partners to satisfy tax obligations incurred as a result of the Domestication transactions.

Underwriting Information

The Company has a single reportable segment and offers primarily earthquake, wind, and flood insurance products.

The Company has a single reportable segment and offers primarily earthquake, wind, inland marine, and flood insurance products.

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

Three Months Ended September 30,

Nine Months Ended September 30,

($ in thousands)

Three Months Ended March 31,

($ in thousands)

8 unchanged sentences

Gross written premiums by state are as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

($ in thousands)

Three Months Ended March 31,

($ in thousands)

South Carolina

North Carolina

Total Gross Written Premiums

Subsequent Events

On November 10, 2020, the Company announced that its wholly-owned subsidiary, PSIC, had entered into a Renewal Rights Agreement, dated as of November 9, 2020, with GeoVera Holdings Inc.

(“GeoVera”), pursuant to which GeoVera agreed to sell, and the Company’s PSIC subsidiary agreed to purchase, the renewal rights to GeoVera’s Hawaii residential Hurricane policies.

The sale was consummated on November 9, 2020.

As part of this agreement, the Company has the ability to gain approximately $17 million of written premiums over the next 12 months.

There is no guarantee that current GeoVera policyholders will renew their Hurricane policies with the Company;

therefore, the ultimate impact to the Company’s written premiums is uncertain.

During the three months ended March 31, 2021, PSIC accounted for $ 79.8 million or approximately 77 % of our gross written premiums and PESIC accounted for $ 23.8 million or approximately 23 % of our gross written premiums.

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

The tax rate for the three months ended March 31, 2021 differs from the statutory rate of 21 % due primarily to the tax impact of the permanent component of employee stock option exercises.

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

Earnings Per Share

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

Three months ended March 31,

(in thousands, except shares and per share data)

Weighted average common shares outstanding:

Common Share equivalents

Earnings per share:

Common share equivalents relate primarily to outstanding stock options and RSUs under the 2019 Plan and unpurchased shares under the 2019 ESPP and are calculated using the treasury stock method.

The Company utilizes reinsurance in order to limit its exposure to losses and enable it to underwrite policies with sufficient limits to meet policyholder needs.

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

As of March 31, 2021, the Company’s catastrophe event retention is $ 10 million for all perils and $ 1 million as a vertical co-participation in selected layers.

As of March 31, 2021, the Company’s XOL reinsurance structure provides protection up to $ 1.4 billion for earthquake events and $ 600 million for hurricane events.

In addition to reinsurance purchased from traditional reinsurers, the Company has historically incorporated collateralized protection from the insurance linked securities market (i.e.

catastrophe bonds).

During the first quarter of 2021, the Company closed a $ 400 million 144A catastrophe bond which will be effective June 1, 2021.

The catastrophe bond was completed through Torrey Pines Re Pte.

(“Torrey Pines Re”).

Torrey Pines Re.

is a special purpose insurer established in Singapore whereby Torrey Pines Re provides Palomar with indemnity-based reinsurance covering earthquake events.

For the period ended March 31, 2021, the Company recorded net expenses of $ 1.7 million in its Condensed Consolidated Statements of Income related to issuance of the catastrophe bond comprised of $ 3.2 million in gross expenses, offset by a $ 1.5 million grant receivable from the Monetary Authority of Singapore.

As of March 31, 2021, the $ 1.5 million grant receivable is presented on the Condensed Consolidated Balance Sheet within Prepaid expenses and other assets.

The Company believes it has fulfilled all requisite conditions of the Monetary Authority of Singapore for grant recognition.

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

What changed 10-Q

Item 1. Financial Statements