Palomar Holdings, Inc. 10-Q

Item 1: Financial Statements ​ Palomar Holdings, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (in thousands, except shares and par value data) ​ ​ ​ ​ ​ ​ ​ ​ March 31, December 31, ​ ​ 2021 ​ 2020 ​ ​ (Unaudited) ​ ​ ​ Assets ​ ​ Investments: ​ ​ Fixed maturity securities available for sale, at fair value (amortized cost: $ 393,419 in 2021; $ 381,279 in 2020) ​ $ 402,281 ​ $ 397,987 Equity securities, at fair value (cost: $ 10,102 in 2021; $ 22,291 in 2020) ​ 10,535 ​ 24,322 Total investments ​ 412,816 ​ 422,309 Cash and cash equivalents ​ 23,577 ​ 33,538 Restricted cash ​ 271 ​ 248 Accrued investment income ​ 2,501 ​ 2,545 Premium receivable ​ 50,205 ​ 48,842 Deferred policy acquisition costs ​ 39,465 ​ 35,481 Reinsurance recoverable on unpaid losses and loss adjustment expenses ​ 188,448 ​ 94,566 Reinsurance recoverable on paid losses and loss adjustment expenses ​ 29,162 ​ 10,162 Ceded unearned premiums ​ 34,156 ​ 35,031 Prepaid expenses and other assets ​ 33,402 ​ 34,119 Property and equipment, net ​ 677 ​ 739 Intangible assets, net ​ 11,186 ​ 11,512 Total assets ​ $ 825,866 ​ $ 729,092 Liabilities and stockholders' equity ​ ​ Liabilities: ​ ​ Accounts payable and other accrued liabilities ​ $ 19,574 ​ $ 20,730 Reserve for losses and loss adjustment expenses ​ 207,464 ​ 129,036 Unearned premiums ​ 195,773 ​ 183,489 Ceded premium payable ​ 17,740 ​ 22,233 Funds held under reinsurance treaty ​ 5,750 ​ 4,515 Deferred tax liabilities, net ​ ​ 3,183 ​ ​ 5,376 Total liabilities ​ 449,484 ​ 365,379 Stockholders' equity: ​ ​ 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 ​ 3 ​ 3 Additional paid-in capital ​ 312,745 ​ 310,507 Accumulated other comprehensive income ​ 7,047 ​ 13,246 Retained earnings ​ 56,587 ​ 39,957 Total stockholders' equity ​ 376,382 ​ 363,713 Total liabilities and stockholders' equity ​ $ 825,866 ​ $ 729,092 ​ See accompanying notes. ​ 3 Table of Contents Palomar Holdings, Inc. and Subsidiaries ​ Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited) (in thousands, except shares and per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ March 31, ​ 2021 2020 Revenues: ​ ​ Gross written premiums ​ $ 103,577 ​ $ 71,494 Ceded written premiums ​ ( 43,364 ) ​ ( 29,495 ) Net written premiums ​ 60,213 ​ 41,999 Change in unearned premiums ​ ( 13,160 ) ​ ​ ( 7,193 ) Net earned premiums ​ 47,053 ​ 34,806 Net investment income ​ 2,219 ​ ​ 2,035 Net realized and unrealized gains (losses) on investments ​ ( 739 ) ​ ​ 440 Commission and other income ​ 711 ​ ​ 738 Total revenues ​ 49,244 ​ 38,019 Expenses: ​ ​ Losses and loss adjustment expenses ​ ​ ( 4,423 ) ​ ​ 1,863 Acquisition expenses ​ ​ 19,313 ​ ​ 13,046 Other underwriting expenses (includes stock-based compensation of $ 938 and $ 442 for the three months ended March 31, 2021 and 2020, respectively) ​ ​ 14,248 ​ ​ 7,951 Total expenses ​ 29,138 ​ 22,860 Income before income taxes ​ 20,106 ​ 15,159 Income tax expense ​ ​ 3,476 ​ ​ 3,384 Net income ​ 16,630 ​ 11,775 Other comprehensive income, net: ​ ​ Net unrealized losses on securities available for sale for the three months ended March 31, 2021 and 2020, respectively ​ ​ ( 6,199 ) ​ ​ ( 5,833 ) Net comprehensive income ​ $ 10,431 ​ $ 5,942 Per Share Data: ​ ​ Basic earnings per share ​ $ 0.65 ​ $ 0.49 Diluted earnings per share ​ $ 0.63 ​ $ 0.48 ​ ​ ​ ​ ​ ​ ​ Weighted-average common shares outstanding: ​ ​ ​ ​ ​ ​ Basic ​ ​ 25,552,629 ​ ​ 24,119,263 Diluted ​ ​ 26,256,281 ​ ​ 24,778,608 ​ See accompanying notes. ​ 4 Table of Contents Palomar Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) (in thousands, except share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Number of ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ Common ​ ​ ​ ​ Additional ​ Other ​ ​ ​ ​ Total ​ ​ Shares ​ Common ​ Paid-In ​ Comprehensive ​ Retained ​ Stockholders' ​ ​ Outstanding ​ Stock ​ Capital ​ Income (Loss) ​ Earnings ​ Equity Balance at December 31, 2019 23,468,750 ​ $ 2 ​ $ 180,012 ​ $ 4,686 ​ $ 33,856 ​ $ 218,556 Other comprehensive income, net of tax — ​ — ​ — ​ ( 5,833 ) ​ — ​ ( 5,833 ) Stock-based compensation — ​ — ​ 442 ​ — ​ — ​ 442 Issuance of common stock in stock offering, net of offering costs ​ 750,000 ​ ​ — ​ ​ 35,464 ​ ​ — ​ ​ — ​ ​ 35,464 Issuance of common stock via employee stock purchase plan ​ 21,111 ​ ​ — ​ ​ 416 ​ ​ — ​ ​ — ​ ​ 416 Net income — ​ — ​ — ​ — ​ 11,775 ​ 11,775 Balance at March 31, 2020 24,239,861 ​ $ 2 ​ $ 216,334 ​ $ ( 1,147 ) ​ $ 45,631 ​ $ 260,820 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balance at December 31, 2020 25,525,796 ​ $ 3 ​ $ 310,507 ​ $ 13,246 ​ $ 39,957 ​ $ 363,713 Other comprehensive income, net of tax — ​ ​ — ​ ​ — ​ ​ ( 6,199 ) ​ ​ — ​ ( 6,199 ) Stock-based compensation — ​ ​ — ​ ​ 938 ​ ​ — ​ ​ — ​ 938 Issuance of common stock via employee stock purchase plan ​ 4,596 ​ ​ — ​ ​ 333 ​ ​ — ​ ​ — ​ ​ 333 Issuance of common stock via equity incentive plan ​ 59,358 ​ ​ — ​ ​ 967 ​ ​ — ​ ​ — ​ ​ 967 Net income — ​ ​ — ​ ​ — ​ ​ — ​ ​ 16,630 ​ 16,630 Balance at March 31, 2021 25,589,750 ​ $ 3 ​ $ 312,745 ​ $ 7,047 ​ $ 56,587 ​ $ 376,382 ​ See accompanying notes. ​ 5 Table of Contents Palomar Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) (in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ March 31, ​ 2021 2020 Operating activities ​ ​ Net cash provided by (used in) operating activities ​ $ ( 13,054 ) ​ $ 21,804 Investing activities ​ ​ ​ ​ Purchases of property and equipment ​ — ​ ( 24 ) Purchases of fixed maturity securities ​ ( 43,768 ) ​ ( 71,442 ) Purchases of equity securities ​ ( 96 ) ​ ( 123 ) Sales and maturities of fixed maturity securities ​ 31,099 ​ 7,740 Sales of equity securities ​ 13,092 ​ — Securities receivable or payable, net ​ ​ 1,500 ​ ​ ( 3,025 ) Payment of additional costs associated with purchase of policy renewal rights ​ ​ ( 11 ) ​ ​ — Net cash provided by (used in) investing activities ​ 1,816 ​ ( 66,874 ) Financing activities ​ ​ Proceeds from stock offering, net of offering costs ​ ​ — ​ ​ 35,464 Proceeds from common stock issued via employee stock purchase plan ​ ​ 333 ​ ​ 416 Proceeds from common stock issued via stock option exercises ​ ​ 967 ​ ​ — Net cash provided by financing activities ​ 1,300 ​ 35,880 Net decrease in cash, cash equivalents and restricted cash ​ ( 9,938 ) ​ ( 9,190 ) Cash, cash equivalents and restricted cash at beginning of period ​ 33,786 ​ 33,349 Cash, cash equivalents and restricted cash at end of period ​ $ 23,848 ​ $ 24,159 Supplementary cash flow information: ​ ​ Cash paid for income taxes ​ $ — ​ $ — Cash paid for interest ​ $ — ​ $ — ​ The following table summarizes our cash and cash equivalents and restricted cash and cash equivalents within the condensed consolidated balance sheets (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ December 31, ​ ​ 2021 ​ 2020 ​ ​ (unaudited) ​ ​ ​ Cash and cash equivalents ​ $ 23,577 ​ $ 33,538 Restricted cash ​ 271 ​ 248 Cash and cash equivalents and restricted cash ​ $ 23,848 ​ $ 33,786 ​ See accompanying notes. ​ 6 Table of Contents Palomar Holdings, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) ​ ​ 1. Summary of Operations and Basis of Presentation Summary of Operations Palomar Holdings, Inc. (“the Company”) is a Delaware incorporated insurance holding company that was founded in 2014. The Company has several wholly owned subsidiaries including an Oregon domiciled insurance company, Palomar Specialty Insurance Company (“PSIC”), a Bermuda based reinsurance company, Palomar Specialty Reinsurance Company Bermuda Ltd. (“PSRE”), an Arizona domiciled surplus lines insurance company, Palomar Excess and Surplus Insurance Company (“PESIC”), and a California domiciled property and casualty insurance agency, Palomar Insurance Agency, DBA Palomar General Insurance Agency (“PGIA”). Basis of Presentation The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and include the accounts of the Company and its wholly-owned subsidiaries. These condensed consolidated financial statements do not contain all information and footnotes required by U.S. GAAP for complete consolidated financial statements. For a more complete description of the Company’s business and accounting policies, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 9, 2021 (the “2020 Annual Report on Form 10-K”) In the opinion of management, all adjustments necessary for a fair presentation of the condensed consolidated financial statements have been included. Such adjustments consist only of normal recurring items. All intercompany balances and transactions have been eliminated in consolidation. Interim results are not necessarily indicative of results of operations for the full year. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the condensed consolidated financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein. All revisions to accounting estimates are recognized in the period in which the estimates are revised. Significant estimates reflected in the Company’s condensed consolidated financial statements include, but are not limited to, reserves for losses and loss adjustment expenses, reinsurance recoverables on unpaid losses, and the fair values of investments. Recent Accounting Pronouncements Recently adopted accounting pronouncements Income Taxes 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, 7 Table of Contents 2020. The Company adopted this guidance on January 1, 2021 and adoption did not have a material impact on the consolidated financial statements. 2. Investments The Company’s available-for-sale investments are summarized as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Gross Gross ​ ​ ​ ​ Amortized ​ Unrealized ​ Unrealized ​ Fair March 31, 2021 ​ Cost or Cost ​ Gains ​ Losses ​ Value ​ (in thousands) Fixed maturities: ​ ​ ​ ​ ​ U.S. Governments ​ $ 20,431 ​ $ 554 ​ $ ( 143 ) ​ $ 20,842 States, territories, and possessions ​ 6,196 ​ 321 ​ ( 93 ) ​ 6,424 Political subdivisions ​ 2,020 ​ 87 ​ ( 2 ) ​ 2,105 Special revenue excluding mortgage/asset-backed securities ​ 40,261 ​ 902 ​ ( 103 ) ​ 41,060 Industrial and miscellaneous ​ 240,458 ​ 7,147 ​ ( 1,838 ) ​ 245,767 Mortgage/asset-backed securities ​ 84,053 ​ 2,153 ​ ( 123 ) ​ 86,083 Total available-for-sale investments ​ $ 393,419 ​ $ 11,164 ​ $ ( 2,302 ) ​ $ 402,281 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Gross Gross ​ ​ ​ ​ Amortized ​ Unrealized ​ Unrealized ​ Fair December 31, 2020 ​ Cost or Cost ​ Gains ​ Losses ​ Value ​ (in thousands) Fixed maturities: ​ ​ ​ ​ U.S. Governments ​ $ 16,308 ​ $ 756 ​ $ ( 5 ) ​ $ 17,059 States, territories, and possessions ​ 6,208 ​ 428 ​ — ​ 6,636 Political subdivisions ​ 2,027 ​ 125 ​ — ​ 2,152 Special revenue excluding mortgage/asset-backed securities ​ 39,704 ​ 1,525 ​ ( 2 ) ​ 41,227 Industrial and miscellaneous ​ 234,049 ​ 11,602 ​ ( 291 ) ​ 245,360 Mortgage/asset-backed securities ​ 82,983 ​ 2,785 ​ ( 215 ) ​ 85,553 Total available-for-sale investments ​ $ 381,279 ​ $ 17,221 ​ $ ( 513 ) ​ $ 397,987 ​ Security holdings in an unrealized loss position 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. 8 Table of Contents The aggregate fair value and gross unrealized losses of the Company’s investments aggregated by investment category and the length of time these individual securities have been in a continuous unrealized loss position as of March 31, 2021 and December 31, 2020, are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Less Than 12 Months ​ More Than 12 Months ​ Total ​ Fair Unrealized Fair Unrealized Fair Unrealized March 31, 2021 ​ Value ​ Losses ​ Value ​ Losses ​ Value ​ Losses ​ ​ (in thousands) Fixed maturity securities: ​ ​ ​ ​ ​ ​ U.S. Governments $ 7,462 ​ $ ( 143 ) ​ $ — ​ $ — ​ $ 7,462 ​ $ ( 143 ) States, territories, and possessions ​ 3,278 ​ ​ ( 93 ) ​ — ​ — ​ 3,278 ​ ( 93 ) Political subdivisions ​ 398 ​ ​ ( 2 ) ​ — ​ — ​ 398 ​ ( 2 ) Special revenue excluding mortgage/asset-backed securities ​ 8,964 ​ ​ ( 103 ) ​ — ​ — ​ 8,964 ​ ( 103 ) Industrial and miscellaneous ​ 77,800 ​ ​ ( 1,742 ) ​ 1,120 ​ ( 96 ) ​ 78,920 ​ ( 1,838 ) Mortgage/asset-backed securities ​ 14,527 ​ ​ ( 107 ) ​ 3,007 ​ ( 16 ) ​ 17,534 ​ ( 123 ) Total ​ $ 112,429 ​ $ ( 2,190 ) ​ $ 4,127 ​ $ ( 112 ) ​ $ 116,556 ​ $ ( 2,302 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Less Than 12 Months ​ More Than 12 Months ​ Total ​ Fair Unrealized Fair Unrealized Fair Unrealized December 31, 2020 ​ Value ​ Losses ​ Value ​ Losses ​ Value ​ Losses ​ ​ (in thousands) Fixed maturity securities: ​ ​ ​ ​ ​ ​ U.S. Governments ​ $ 1,496 ​ $ ( 5 ) ​ $ — ​ $ — ​ $ 1,496 ​ $ ( 5 ) States, territories, and possessions ​ — ​ — ​ — ​ — ​ — ​ — Political subdivisions ​ — ​ — ​ — ​ — ​ — ​ — Special revenue excluding mortgage/asset-backed securities ​ 520 ​ ( 2 ) ​ — ​ — ​ 520 ​ ( 2 ) Industrial and miscellaneous ​ 22,718 ​ ( 234 ) ​ 203 ​ ( 57 ) ​ 22,921 ​ ( 291 ) Mortgage/asset-backed securities ​ 16,092 ​ ( 211 ) ​ 496 ​ ( 4 ) ​ 16,588 ​ ( 215 ) Total ​ $ 40,826 ​ $ ( 452 ) ​ $ 699 ​ $ ( 61 ) ​ $ 41,525 ​ $ ( 513 ) ​ 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, the Company did not recognize an allowance for credit losses related to any of these securities during the three months ended March 31, 2021. ​ 9 Table of Contents Contractual maturities of available-for-sale fixed maturity securities The amortized cost and fair value of fixed maturity securities at March 31, 2021, by contractual maturity, are shown below. ​ ​ ​ ​ ​ ​ ​ ​ ​ Amortized Fair ​ ​ Cost ​ Value ​ (in thousands) Due within one year ​ $ 20,999 ​ $ 21,236 Due after one year through five years ​ 146,845 ​ 150,373 Due after five years through ten years ​ 103,649 ​ 106,158 Due after ten years ​ 37,873 ​ 38,431 Mortgage and asset-backed securities ​ 84,053 ​ 86,083 ​ ​ $ 393,419 ​ $ 402,281 ​ Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations. ​ Net investment income summary Net investment income is summarized as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ March 31, ​ 2021 2020 ​ (in thousands) Interest income ​ $ 2,238 ​ $ 2,001 Dividend income ​ 99 ​ 125 Investment expense ​ ( 118 ) ​ ( 91 ) Net investment income ​ $ 2,219 ​ $ 2,035 ​ Net realized and unrealized investment gains and losses The following table presents net realized and unrealized investment gains and losses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ March 31, ​ 2021 2020 ​ ​ ​ (in thousands) Realized gains: ​ ​ ​ Gains on sales of fixed maturity securities ​ ​ $ 52 ​ $ 15 Gains on sales of equity securities ​ ​ 809 ​ — Total realized gains ​ ​ 861 ​ 15 Realized losses: ​ ​ ​ Losses on sales of fixed maturity securities ​ ​ ( 2 ) ​ ​ — Losses on sales of equity securities ​ ​ — ​ ​ — Total realized losses ​ ​ ( 2 ) ​ — Net realized investment gains ​ ​ 859 ​ 15 Net unrealized gains (losses) on equity securities ​ ​ ( 1,598 ) ​ 425 Net realized and unrealized gains (losses) on investments ​ ​ $ ( 739 ) ​ $ 440 ​ Realized gains and losses on disposition of investments are based on specific identification of the investments sold on the settlement date. 10 Table of Contents Proceeds from the sale of fixed maturity securities were $ 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 March 31, 2021 and December 31, 2020, the carrying value of securities on deposit with state regulatory authorities was $ 7.5 million. 3. Fair Value Measurements Fair value is defined as the price that the Company would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment. The three-tier hierarchy of inputs is summarized in the three broad levels listed below: Level 1—Unadjusted quoted prices are available in active markets for identical investments as of the reporting date. Level 2—Pricing inputs are quoted prices for similar investments in active markets; quoted prices for identical or similar investments in inactive markets; or valuations based on models where the significant inputs are observable or can be corroborated by observable market data. Level 3—Pricing inputs into models are unobservable for the investment. The unobservable inputs require significant management judgment or estimation. To measure fair value, the Company obtains quoted market prices for its investment securities from its outside investment managers. If a quoted market price is not available, the Company uses prices of similar securities. The fair values obtained from the outside investment managers are reviewed for reasonableness and any discrepancies are investigated for final valuation. The fair value of the Company’s investments in fixed maturity securities is estimated using relevant inputs, including available market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. An Option Adjusted Spread model is also used to develop prepayment and interest rate scenarios. Industry standard models are used to analyze and value securities with embedded options or prepayment sensitivities. These fair value measurements are estimated based on observable, objectively verifiable market information rather than market quotes. Therefore, these investments are classified and disclosed in Level 2 of the hierarchy. 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 Level 1 Level 2 Level 3 Total ​ (in thousands) Assets: ​ ​ ​ ​ Fixed maturity securities ​ ​ ​ ​ U.S. Governments ​ $ — ​ $ 20,842 ​ $ — ​ $ 20,842 States, territories, and possessions ​ — ​ 6,424 ​ — ​ 6,424 Political subdivisions ​ — ​ 2,105 ​ — ​ 2,105 Special revenue excluding mortgage/asset-backed securities ​ — ​ 41,060 ​ — ​ 41,060 Industrial and miscellaneous ​ — ​ 245,767 ​ — ​ 245,767 Mortgage/asset-backed securities ​ — ​ 86,083 ​ — ​ 86,083 Equity securities ​ 10,535 ​ — ​ — ​ 10,535 Cash, cash equivalents, and restricted cash ​ 23,848 ​ — ​ — ​ 23,848 Total assets ​ $ 34,383 ​ $ 402,281 ​ $ — ​ $ 436,664 ​ 11 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2020 Level 1 Level 2 Level 3 Total ​ (in thousands) Assets: ​ ​ ​ ​ Fixed maturity securities ​ ​ ​ ​ U.S. Governments ​ $ — ​ $ 17,059 ​ $ — ​ $ 17,059 States, territories, and possessions ​ — ​ 6,636 ​ — ​ 6,636 Political subdivisions ​ — ​ 2,152 ​ — ​ 2,152 Special revenue excluding mortgage/asset-backed securities ​ — ​ 41,227 ​ — ​ 41,227 Industrial and miscellaneous ​ — ​ 245,360 ​ — ​ 245,360 Mortgage/asset-backed securities ​ — ​ 85,553 ​ — ​ 85,553 Equity securities ​ 24,322 ​ — ​ — ​ 24,322 Cash, cash equivalents, and restricted cash ​ 33,786 ​ — ​ — ​ 33,786 Total assets ​ $ 58,108 ​ $ 397,987 ​ $ — ​ $ 456,095 ​ ​ ​ ​ ​ ​ The carrying amounts of financial assets and liabilities reported in the accompanying condensed consolidated balance sheet including cash and cash equivalents, restricted cash, receivables, reinsurance recoverable, and accounts payable and other accrued liabilities approximate fair value due to their short term-maturity. Transfers between Level 3 and Level 2 securities result from changes in the availability of market observable inputs and are recorded at the beginning of the reporting period. As of March 31, 2021 and December 31, 2020, the Company had no fixed income securities classified as Level 3. 4. Reserve for Losses and Loss Adjustment Expenses The following table represents a reconciliation of changes in the ending reserve balances for losses and loss adjustment expenses (“LAE”): ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, ​ 2021 2020 ​ ​ (in thousands) Reserve for losses and LAE net of reinsurance recoverables at beginning of period ​ $ 34,470 ​ $ 3,869 Add: Incurred losses and LAE, net of reinsurance, related to: ​ ​ ​ ​ ​ ​ Current year ​ ( 1,696 ) ​ ​ 2,179 Prior years ​ ( 2,727 ) ​ ​ ( 316 ) Total incurred ​ ( 4,423 ) ​ 1,863 Deduct: Loss and LAE payments, net of reinsurance, related to: ​ ​ Current year ​ ​ 1,680 ​ ​ 351 Prior years ​ ​ 9,351 ​ ​ 883 Total payments ​ 11,031 ​ 1,234 Reserve for losses and LAE net of reinsurance recoverables at end of period ​ 19,016 ​ 4,498 Add: Reinsurance recoverables on unpaid losses and LAE at end of period ​ ​ 188,448 ​ ​ 13,854 Reserve for losses and LAE gross of reinsurance recoverables on unpaid losses and LAE at end of period ​ $ 207,464 ​ $ 18,352 ​ 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 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. ​ 12 Table of Contents 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. ​ 5. 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 1,004,643 Restricted stock units outstanding under 2019 Equity Incentive Plan 41,467 Performance stock units outstanding under 2019 Equity Incentive Plan, at target 8,040 Shares authorized for future issuance under 2019 Equity Incentive Plan 2,619,608 Shares authorized for future issuance under 2019 Employee Stock Purchase Plan 687,037 Total 4,360,795 ​ Stock based compensation The below table summarizes the Company’s stock-based compensation expense for each period presented: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended March 31, ​ 2021 2020 ​ (in thousands) Stock-Based Compensation ​ $ 938 ​ $ 442 ​ Stock-based compensation expense is recognized on a straight-line basis over the vesting period of equity-based awards. For performance stock units (“PSUs”), any changes to expense resulting from differences in actual performance versus target are recognized over the remaining vesting period of the awards. The Company does not apply a forfeiture rate to unvested awards and accounts for forfeitures as they occur. All stock-based compensation is included in other underwriting expenses in the Company’s unaudited condensed consolidated statement of income and comprehensive income. 2019 Equity Incentive Plan On April 16, 2019, the Company's 2019 Equity Incentive Plan (“the 2019 Plan”) became effective. The 2019 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance shares and units, and other cash-based or share-based awards. In addition, the 2019 Plan contains a mechanism through which the Company may adopt a deferred compensation arrangement in the future. A total of 2,400,000 shares of common stock were initially authorized and reserved for issuance under the 2019 Plan. This reserve increases on January 1 of each year through 2029 by an amount equal to the smaller of: 3 % of the number of shares of common stock issued and outstanding on the immediately preceding December 31, or an amount determined by the board of directors. Stock Options Recipients of stock options can purchase shares of the Company’s common stock at a price equal to the stock's fair market value on the grant date, determined by the closing price of the Company's stock on the grant date. 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 13 Table of Contents 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 three months ended March 31, 2021: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Number of shares ​ ​ Weighted-average exercise price ​ Weighted average remaining contractual term (in years) ​ ​ Aggregate intrinsic value (in thousands) Outstanding at January 1, 2021 1,008,648 ​ $ 23.92 ​ 8.43 ​ $ 66,028 Options granted 57,353 ​ ​ 99.39 ​ ​ ​ ​ ​ Options exercised ( 59,233 ) ​ ​ 16.32 ​ ​ ​ ​ ​ Options cancelled ( 2,125 ) ​ ​ 45.44 ​ ​ ​ ​ ​ Outstanding at March 31, 2021 1,004,643 ​ $ 28.63 ​ 8.31 ​ $ 42,324 Vested and Exercisable at March 31, 2021 557,384 ​ $ 15.90 ​ 8.06 ​ $ 28,505 ​ 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) 0.57 % - 0.59 % Expected share price volatility (2) 26.06 % - 26.08 % Expected life in years (3) 5.89 years Dividend yield (4) 0 % (1) Determined based on the U.S. Treasury yield in effect at the time of the grant for zero-coupon U.S. Treasury notes with remaining terms similar to the expected term of the options. (2) Determined based on analysis of the volatility of a peer group of publicly traded companies. (3) Determined using the “simplified method” for estimating the expected option life, which is the average of the weighted-average vesting period and contractual term of the option as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its common stock has been publicly traded. (4) Determined to be zero as the Company has not historically issued dividends. ​ ​ 14 Table of Contents Restricted Stock Units 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 January 1, 2021 14,734 ​ $ 95.86 Granted 26,858 ​ ​ 97.87 Released ( 125 ) ​ ​ 58.06 Forfeited — ​ ​ — Non vested outstanding at March 31, 2021 41,467 ​ $ 97.28 ​ 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 — ​ $ — Granted 8,040 ​ ​ 97.87 Vested — ​ ​ — Forfeited — ​ ​ — Non vested outstanding at March 31, 2021 8,040 ​ $ 97.87 ​ 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 On April 16, 2019, the Company's 2019 Employee Stock Purchase Plan (“the 2019 ESPP”) became effective. A total of 240,000 shares of common stock are initially authorized and reserved for issuance under the 2019 ESPP. In addition, the 2019 ESPP provides for annual increases in the number of shares available for issuance on January 1 of 15 Table of Contents each year through 2029, equal to the smaller of 240,000 shares of the Company’s common stock or such other amount as may be determined by the board of directors. Under the 2019 ESPP, employees can purchase Company stock at a discount via payroll withholdings. The 2019 ESPP is administered through employee participation in discrete offering periods. During each discrete offering period employee funds are withheld, and the stock purchase occurs upon the conclusion of the offering period. The Company issued 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. 6. Accumulated Other Comprehensive Income Changes in accumulated other comprehensive income (“AOCI”) are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, ​ 2021 2020 ​ ​ ​ (in thousands) Beginning Balance ​ $ 13,246 ​ $ 4,686 Other comprehensive income before reclassification ​ ( 7,796 ) ​ ​ ( 7,368 ) Federal income tax expense ​ 1,637 ​ ​ 1,547 Other comprehensive income before reclassification, net of tax ​ ( 6,159 ) ​ ( 5,821 ) Amounts reclassified from AOCI ​ ( 51 ) ​ ​ ( 15 ) Federal income tax expense ​ 11 ​ ​ 3 Amounts reclassified from AOCI, net of tax ​ ( 40 ) ​ ( 12 ) Other comprehensive income ​ ( 6,199 ) ​ ( 5,833 ) Balance at end of period ​ $ 7,047 ​ $ ( 1,147 ) ​ ​ ​ ​ 16 Table of Contents 7. Underwriting Information 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 March 31, ​ ​ 2021 ​ 2020 ​ ​ ($ in thousands) ​ ​ ​ ​ ​ % of ​ ​ ​ ​ % of ​ ​ Amount ​ GWP ​ Amount ​ GWP Product ​ ​ ​ Residential Earthquake ​ $ 35,898 ​ 34.7 % $ 28,756 ​ 40.2 % Commercial Earthquake ​ 21,277 ​ 20.5 % 10,848 ​ 15.2 % Specialty Homeowners ​ 14,002 ​ 13.5 % 9,845 ​ 13.8 % Commercial All Risk ​ ​ 8,190 ​ 7.9 % ​ 12,456 ​ 17.4 % Inland Marine ​ ​ 7,834 ​ 7.6 % ​ 1,890 ​ 2.6 % Hawaii Hurricane ​ 6,137 ​ 5.9 % 2,695 ​ 3.8 % Residential Flood ​ 2,283 ​ 2.2 % 1,526 ​ 2.1 % Other ​ ​ 7,956 ​ 7.7 % ​ 3,478 ​ 4.9 % Total Gross Written Premiums ​ $ 103,577 100.0 % $ 71,494 100.0 % ​ Gross written premiums by state are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, ​ ​ 2021 ​ 2020 ​ ​ ($ in thousands) ​ ​ ​ ​ ​ % of ​ ​ ​ ​ % of ​ ​ Amount ​ GWP ​ Amount ​ GWP State ​ ​ ​ California ​ $ 50,502 ​ 48.8 % $ 32,751 ​ 45.8 % Texas ​ ​ 11,054 ​ 10.7 % ​ 15,791 ​ 22.1 % Hawaii ​ ​ 6,920 ​ 6.7 % ​ 3,052 ​ 4.3 % Florida ​ ​ 6,058 ​ 5.8 % ​ — ​ 0.0 % Washington ​ 4,088 ​ 3.9 % 2,606 3.6 % North Carolina ​ ​ 3,888 ​ 3.8 % ​ 1,684 2.4 % Oregon ​ ​ 2,904 ​ 2.8 % ​ 2,097 ​ 2.9 % Illinois ​ 2,522 ​ 2.4 % 1,147 1.6 % Other ​ 15,641 ​ 15.1 % 12,366 17.3 % Total Gross Written Premiums ​ $ 103,577 100.0 % $ 71,494 100.0 % ​ 17 Table of Contents 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. 8. Income Taxes The Company calculates its tax provision in interim periods using its best estimate of the effective tax rate expected for the full year. 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. 9. Earnings Per Share The following table sets out earnings per share of common stock: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended March 31, ​ 2021 2020 ​ (in thousands, except shares and per share data) Net income ​ $ 16,630 ​ $ 11,775 Weighted average common shares outstanding: ​ ​ ​ ​ ​ ​ Basic ​ 25,552,629 ​ 24,119,263 Common Share equivalents ​ ​ 703,652 ​ ​ 659,345 Diluted ​ ​ 26,256,281 ​ ​ 24,778,608 ​ ​ ​ ​ ​ ​ ​ Earnings per share: ​ ​ ​ ​ ​ ​ Basic ​ $ 0.65 ​ $ 0.49 Diluted ​ $ 0.63 ​ $ 0.48 ​ 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. 10. Reinsurance The Company utilizes reinsurance in order to limit its exposure to losses and enable it to underwrite policies with sufficient limits to meet policyholder needs. The Company utilizes both excess of loss (XOL) and quota share reinsurance. As of 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. Ltd. (“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. 18 Table of Contents