What changed in this filing

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Item 1. Financial Statements

2021-08-06 compared with 2021-05-07 · 92 added, 72 removed, 371 unchanged (31% of the section changed)

31 unchanged sentences

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

Preferred stock, $ 0.0001 par value, 5,000,000 shares authorized, 0 shares issued and outstanding as of June 30, 2021 and December 31, 2020

Common stock, $ 0.0001 par value, 500,000,000 shares authorized, 25,369,503 and 25,525,796 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively

Additional paid-in capital

9 unchanged sentences

Three Months Ended

Six Months Ended

Gross written premiums

9 unchanged sentences

Acquisition expenses

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

Other underwriting expenses

Total expenses

2 unchanged sentences

Other comprehensive income, net:

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

Net unrealized gains (losses) on securities available for sale for the three and six months ended June 30, 2021 and 2020, respectively

Net comprehensive income

12 unchanged sentences

Balance at December 31, 2019

Other comprehensive income, net of tax

Other comprehensive income (loss), net of tax

Stock-based compensation

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

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

Issuance of common stock via employee stock purchase plan

Balance at March 31, 2020

Issuance of common stock via equity incentive plan

Balance at June 30, 2020

Balance at December 31, 2020

Other comprehensive income, net of tax

Other comprehensive income (loss), net of tax

Stock-based compensation

1 unchanged sentence

Issuance of common stock via equity incentive plan

Balance at March 31, 2021

Repurchases of common stock

Balance at June 30, 2021

See accompanying notes.

3 unchanged sentences

(in thousands)

Three Months Ended

Six Months Ended

Operating activities

10 unchanged sentences

Financing activities

Proceeds from stock offering, net of offering costs

Proceeds from stock offerings, net of offering costs

Proceeds from common stock issued via employee stock purchase plan

Proceeds from common stock issued via stock option exercises

Net cash provided by financing activities

Net decrease in cash, cash equivalents and restricted cash

Repurchases of common stock

Net cash provided by (used in) financing activities

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

Cash, cash equivalents and restricted cash at beginning of period

41 unchanged sentences

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

March 31, 2021

June 30, 2021

(in thousands)

3 unchanged sentences

Special revenue excluding mortgage/asset-backed securities

Industrial and miscellaneous

Corporate and other

Mortgage/asset-backed securities

6 unchanged sentences

Special revenue excluding mortgage/asset-backed securities

Industrial and miscellaneous

Corporate and other

Mortgage/asset-backed securities

1 unchanged sentence

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 June 30, 2021, the Company held 111 fixed maturity securities in an unrealized loss position with a total estimated fair value of $ 76.0 million and total gross unrealized losses of $ 1.1 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 March 31, 2021 and December 31, 2020, are as follows:

The aggregate fair value and gross unrealized losses of the Company’s investments aggregated by investment category and the length of time these individual securities have been in a continuous unrealized loss position as of June 30, 2021 and December 31, 2020, are as follows:

Less Than 12 Months

More Than 12 Months

March 31, 2021

June 30, 2021

(in thousands)

3 unchanged sentences

Special revenue excluding mortgage/asset-backed securities

Industrial and miscellaneous

Corporate and other

Mortgage/asset-backed securities

7 unchanged sentences

Special revenue excluding mortgage/asset-backed securities

Industrial and miscellaneous

Corporate and other

Mortgage/asset-backed securities

1 unchanged sentence

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.

Based on the Company’s reviews as of June 30, 2021, the Company recorded an immaterial allowance for credit losses pertaining to one investment security.

For the remainder of securities, 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.

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.

The amortized cost and fair value of fixed maturity securities at June 30, 2021, by contractual maturity, are shown below.

(in thousands)

8 unchanged sentences

Three Months Ended

Six Months Ended

(in thousands)

Interest income

5 unchanged sentences

Three Months Ended

Six Months Ended

(in thousands)

Realized gains:

10 unchanged sentences

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 $ 6.2 million and $ 2.3 million for the three months ended March 31, 2021 and 2020, respectively.

Proceeds from the sale of fixed maturity securities were $ 11.1 million and $ 10.5 million for the six months ended June 30, 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.

At both June 30, 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 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

The following tables present the hierarchy for financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2021 and December 31, 2020.

June 30, 2021

(in thousands)

3 unchanged sentences

Special revenue excluding mortgage/asset-backed securities

Industrial and miscellaneous

Corporate and other

Mortgage/asset-backed securities

7 unchanged sentences

Special revenue excluding mortgage/asset-backed securities

Industrial and miscellaneous

Corporate and other

Mortgage/asset-backed securities

3 unchanged sentences

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

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

As of June 30, 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 March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

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

8 unchanged sentences

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.

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.

The Company experienced favorable prior year development of $ 0.4 million during the three months ended June 30, 2021 and adverse development of $ 0.09 million in the three months ended June 30, 2020.

The Company experienced favorable prior year development of $ 3.1 million and $ 0.2 million during the six months ended June 30, 2021 and June 30, 2020, respectively.

Favorable prior year development during the three months ended June 30, 2021 was primarily due to lower than anticipated severity of catastrophe losses associated with certain hurricanes which occurred during the second half of 2020 in the Company’s Commercial All Risk and Specialty Homeowners line of business.

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

Favorable prior year development during the six months ended June 30, 2021 was primarily due to lower than anticipated severity of catastrophe losses associated with certain hurricanes which occurred during the second half of 2020 in the Company’s Commercial All Risk and Specialty Homeowners line of business.

Favorable development in the six months ended June 30, 2020 was primarily due to lower than anticipated frequency and severity of claims in the Specialty Homeowners and Residential Flood lines of business.

Stockholders’ Equity

Common stock reserved for future issuance

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

Common stock reserved for future issuance consists of the following as of June 30, 2021:

Stock options outstanding under 2019 Equity Incentive Plan

5 unchanged sentences

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

Three months ended March 31,

Three months ended June 30,

Six months ended June 30,

(in thousands)

Stock-Based Compensation

11 unchanged sentences

Stock Options

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

Stock options vest over a two 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 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 three months ended March 31, 2021:

The following table summarizes stock option transactions for the six months ended June 30, 2021:

Number of shares

5 unchanged sentences

Options exercised

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:

Options canceled

Outstanding at June 30, 2021

Vested and Exercisable at June 30, 2021

As of June 30, 2021, the Company had approximately $ 4.2 million of total unrecognized stock-based compensation expense related to stock options expected to be recognized over a weighted-average period of 2.29 years.

The fair value of each option granted during the six months ended June 30, 2021 was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions:

Risk free rate of return (1)

12 unchanged sentences

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:

The following table summarizes RSU transactions for the six months ended June 30, 2021:

Number of shares

Weighted-average grant date fair value

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.

Outstanding at January 1, 2021

Non vested outstanding at June 30, 2021

As of June 30, 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 2.32 years.

Performance Stock Units

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

During the six months ended June 30, 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.

Vesting of PSUs requires a period of future service and the number of shares that vest 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.

1 unchanged sentence

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:

The following table summarizes PSU transactions for the six months ended June 30, 2021:

Number of shares

Weighted-average grant date fair value

Non vested outstanding at January 1, 2021

Non vested outstanding at March 31, 2021

Outstanding at January 1, 2021

Non vested outstanding at June 30, 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.

As of June 30, 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 2.5 years.

2019 Employee Stock Purchase Plan

6 unchanged sentences

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.

The Company issued 4,596 shares pursuant to the ESPP during the six months ended June 30, 2021.

Share repurchases

2 unchanged sentences

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.

The Company purchased 239,096 shares for $ 15.8 million under this program during the six months ended June 30, 2021.

The Company accounts for share repurchases by charging the excess of repurchase price over the common stock’s par value entirely to retained earnings.

All repurchased shares are retired and become authorized but unissued shares.

Accumulated Other Comprehensive Income

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

Three Months Ended March 31,

Six Months Ended June 30,

(in thousands)

11 unchanged sentences

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

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

($ in thousands)

Residential Earthquake

Commercial Earthquake

Specialty Homeowners

Commercial Earthquake

Commercial All Risk

4 unchanged sentences

Gross written premiums by state are as follows:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

($ in thousands)

North Carolina

Total Gross Written Premiums

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.

During the three months ended June 30, 2021, PSIC accounted for $ 95.3 million or approximately 73.6 % of the Company’s gross written premiums and PESIC accounted for $ 34.1 million or approximately 26.4 % of our gross written premiums.

During the six months ended June 30, 2021, PSIC accounted for $ 175.1 million or approximately 75.2 % of the Company’s gross written premiums and PESIC accounted for $ 57.8 million or approximately 24.8 % 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.

The tax rate for the three and six months ended June 30, 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 and six months ended June 30, 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,

Three months ended June 30,

Six months ended June 30,

(in thousands, except shares and per share data)

Weighted average common shares outstanding:

4 unchanged sentences

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.

As of June 30, 2021, the Company’s catastrophe event retention is $ 12.5 million for all perils.

As of June 30, 2021, the Company’s XOL reinsurance structure provides protection up to $ 1.65 billion for earthquake events and $ 700 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.

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

The catastrophe bond was completed through Torrey Pines Re Pte.

2 unchanged sentences

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