What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-06 compared with 2021-05-07 · 222 added, 76 removed, 445 unchanged (40% of the section changed)

2 unchanged sentences

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

The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2021, or for any other future period.

The results of operations for the three and six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2021, or for any other future period.

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report, and in conjunction with our audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K as filed with the SEC on March 9, 2021.

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We have organically increased gross written premiums from $16.6 million for the year ended December 31, 2014, our first year of operations, to $354.4 million for the year ended December 31, 2020, a compound annual growth rate (“CAGR”) of approximately 66%.

For the three months ended March 31, 2021, we experienced average monthly premium retention rates above 90% for our Residential Earthquake, Commercial Earthquake, and Hawaii Hurricane lines and approximately 90% overall across all continuing lines of business, providing strong visibility into future revenue.

For the six months ended June 30, 2021, we experienced average monthly premium retention rates above 90% for our Hawaii Hurricane line and approximately 86% overall across all continuing lines of business, providing strong visibility into future revenue.

In February 2014, PSIC was awarded an “A−” rating from A.M.

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Best as an excellent rating and indicates a stable outlook.

In April 2020, A.M.

Best affirmed the “A−” rating for PSIC and affirmed our “A−” group rating for Palomar Holdings, Inc.

In July 2020, PESIC was also awarded an “A−” rating by A.M.

In May 2021, A.M.

Best affirmed the “A−”rating of PSIC and PESIC.

These ratings reflect A.M.

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

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

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

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In response to the Pandemic, we have been taking several actions to protect the health of the public and our employees while serving our policyholders and ensuring business continuity.

Since March 2020, the majority of our employees have been working from home and we have implemented safeguards to ensure operational reliability and established safety protocols for employees who interact directly with the public.

We have implemented safeguards to ensure operational reliability and established safety protocols for employees who interact directly with the public.

We also provide employees a reimbursement to help manage incremental costs associated with remote work.

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We have not seen a significant impact on the growth rate of our gross written premiums since the beginning of the Pandemic.

However, the macroeconomic effects of the Pandemic may persist for an indefinite period, even after the Pandemic has subsided and we cannot anticipate all the ways in which the Pandemic could adversely impact our business in the future.

Components of Our Results of Operations

86 unchanged sentences

Results of Operations

Three months ended March 31, 2021 compared to three months ended March 31, 2020

The following table summarizes our results for the three months ended March 31, 2021 and 2020:

Three months ended June 30, 2021 compared to three months ended June 30, 2020

The following table summarizes our results for the three months ended June 30, 2021 and 2020:

Three months ended

11 unchanged sentences

Net investment income

Net realized and unrealized gains (losses) on investments

Net realized and unrealized gains on investments

Income before income taxes

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Gross Written Premiums

Gross written premiums increased $32.1 million, or 44.9% to $103.6 million for the three months ended March 31, 2021 compared to $71.5 million for the three months ended March 31, 2020.

Gross written premiums increased $45.6 million, or 54.4% to $129.4 million for the three months ended June 30, 2021 compared to $83.8 million for the three months ended June 30, 2020.

Premium growth was primarily due to an increased volume of policies written across our lines of business which was driven by new business generated with existing partners, strong premium retention rates for existing business, expansion of our distribution footprint, and new partnerships.

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

Three Months Ended March 31,

Three Months Ended June 30,

($ in thousands)

Residential Earthquake

Commercial Earthquake

Specialty Homeowners

Commercial Earthquake

Commercial All Risk

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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 third quarter of 2020, we made significant underwriting changes to our Commercial All Risk program including ceasing to write policies on an admitted basis.

All prior year period Commercial All Risk polices were written on an admitted basis and these changes significantly impacted the growth rate shown above.

The following table summarizes our gross written premiums by insurance subsidiary:

Three Months Ended June 30,

($ in thousands)

Total Gross Written Premiums

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Ceded Written Premiums

Ceded written premiums increased $13.9 million, or 47.0%, to $43.4 million for the three months ended March 31, 2021 from $29.5 million for the three months ended March 31, 2020.

The increase was primarily due to an increase in excess of loss (“XOL”) reinsurance expense due to growth in exposure and additional charges resulting from Winter Storm Uri (“Uri”), which impacted our Specialty Homeowners and Commercial All Risk products.

Catastrophe losses from Uri caused us to utilize certain layers of our XOL program which increased our expense during the current quarter and will result in increased expense in the second quarter of 2021.

During the three months ended March 31, 2021, the Company incurred an additional $4.0 million of expense associated with the reinstatement of its reinsurance program.

The Company also expects to incur similar costs in the second quarter of 2021.

Ceded written premiums increased $21.4 million, or 70.8%, to $51.6 million for the three months ended June 30, 2021 from $30.2 million for the three months ended June 30, 2020.

The increase was primarily due to excess of loss (“XOL”) reinsurance expense due to growth in exposure and additional charges resulting from Winter Storm Uri (“Uri”), which impacted our Specialty Homeowners and Commercial All Risk products during the first quarter of 2021.

Catastrophe losses from Uri caused us to utilize certain layers of our XOL program in the prior quarter which resulted in us incurring an additional $3.9 million of expense associated with the reinstatement of our reinsurance program during the quarter ended June 30, 2021.

In addition to XOL increases, we had increased quota share cessions due to growth in the volume of written premiums subject to quota shares.

Ceded written premiums as a percentage of gross written premiums increased to 41.9% for the three months ended March 31, 2021 from 41.3% for the three months ended March 31, 2020.

Ceded written premiums as a percentage of gross written premiums increased to 39.9% for the three months ended June 30, 2021 from 36.0% for the three months ended June 30, 2020.

This increase was primarily due to XOL charges and a higher proportion of our written premiums being subject to quota shares.

Net Written Premiums

Net written premiums increased $18.2 million, or 43.4%, to $60.2 million for the three months ended March 31, 2021 from $42.0 million for the three months ended March 31, 2020.

The increase was primarily due to an increase in gross written premiums, primarily in our Commercial Earthquake and Residential Earthquake lines offset by increased ceded written premiums.

Net written premiums increased $24.2 million, or 45.1%, to $77.8 million for the three months ended June 30, 2021 from $53.6 million for the three months ended June 30, 2020.

The increase was primarily due to an increase in gross written premiums, primarily in our Residential Earthquake and Inland Marine lines offset by increased ceded written premiums.

Net Earned Premiums

Net earned premiums increased $12.2 million, or 35.2%, to $47.1 million for the three months ended March 31, 2021 from $34.8 million for the three months ended March 31, 2020 due primarily to the earning of increased gross written premiums offset by the earning of ceded written premiums under reinsurance agreements.

Net earned premiums increased $14.9 million, or 37.9%, to $54.2 million for the three months ended June 30, 2021 from $39.3 million for the three months ended June 30, 2020 due primarily to the earning of increased gross written premiums offset by the earning of ceded written premiums under reinsurance agreements.

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

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Commission and Other Income

Commission and other income decreased by an immaterial amount and was approximately $0.7 million for each of the three months ended March 31, 2021 and March 31, 2020.

The decrease was due to decreased commission income on policies we write through our affiliated managing general agent.

This was offset by an increase in policy related fees associated with an increased volume of premiums written.

Commission and other income increased by $0.1 million to $1.0 million for the three months ended June 30, 2021, from $0.9 million for the three months ended June 30, 2020.

This was due to an increase in policy related fees associated with an increased volume of premiums written.

Losses and Loss Adjustment Expenses

Losses and loss adjustment expenses decreased $6.3 million to negative $4.4 million for the three months ended March 31, 2021 from $1.9 million for the three months ended March 31, 2020.

Losses and loss adjustment expenses increased $3.3 million to $7.2 million for the three months ended June 30, 2021 from $4.0 million for the three months ended June 30, 2020.

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

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Our catastrophe loss ratio was negative 20.5% during the three months ended March 31, 2021.

Our catastrophe loss ratio was negative 2.1% during the three months ended June 30, 2021.

The negative catastrophe loss ratio was due to favorable development on catastrophe losses from 2020 hurricanes and due to reinsurance recoveries.

We did not incur any catastrophe losses during the three months ended March 31, 2020.

Our non-catastrophe loss ratio was 11.1% for the three months ended March 31, 2021 compared to 5.4% during the three months ended March 31, 2020.

We did not incur any catastrophe losses during the three months ended June 30, 2020.

Our non-catastrophe loss ratio was 15.4% for the three months ended June 30, 2021 compared to 10.1% during the three months ended June 30, 2020.

Non-catastrophe losses increased due mainly to higher attritional loss activity on lines of business subject to attritional losses such as Commercial All Risk, Specialty Homeowners, Flood, and Inland Marine.

Acquisition Expenses

Acquisition expenses increased $6.3 million, or 48.0%, to $19.3 million for the three months ended March 31, 2021 from $13.0 million for the three months ended March 31, 2020.

Acquisition expenses increased $7.5 million, or 50.6%, to $22.4 million for the three months ended June 30, 2021 from $14.9 million for the three months ended June 30, 2020.

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

Acquisition expenses as a percentage of

gross earned premiums were 21.2% for the three months ended March 31, 2021 compared to 20.1% for the three months ended March 31, 2020.

Acquisition expenses as a percentage of gross earned premiums were 21.9% for the three months ended June 30, 2021 compared to 21.0% for the three months ended June 30, 2020.

Acquisition expenses as a percentage of gross earned premiums increased due to changes in business mix and changes in our Specialty Homeowners ceding arrangements which increased the percentage of premiums we retained and decreased our ceding commissions.

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Other Underwriting Expenses

Other underwriting expenses increased $6.3 million, or 79.2%, to $14.2 million for the three months ended March 31, 2021 from $7.9 million for the three months ended March 31, 2020.

Other underwriting expenses increased $3.5 million, or 39.7%, to $12.5 million for the three months ended June 30, 2021 from $9.0 million for the three months ended June 30, 2020.

The increase was primarily due to the company incurring higher payroll, technology, stock-based compensation, and professional fees expenses associated with growth of the Company.

In addition, during the first quarter of 2021, other underwriting expenses were significantly impacted by expenses associated with the issuance of a catastrophe bond.

Other underwriting expenses as a percentage of gross earned premiums were 15.6% for the three months ended March 31, 2021 compared to 12.2% for the three months ended March 31, 2020.

Excluding the impact of expenses relating to transactions and stock offerings, stock-based compensation, amortization of intangibles and catastrophe bonds, other underwriting expenses as a percentage of gross earned premiums were 11.9% for the three months ended March 31, 2021 compared to 11.2% for the three months ended March 31, 2020.

Other underwriting expenses as a percentage of gross earned premiums were 12.2% for the three months ended June 30, 2021 compared to 12.7% for the three months ended June 30, 2020.

Excluding the impact of expenses relating to transactions and stock offerings, stock-based compensation, amortization of intangibles and catastrophe bonds, other underwriting expenses as a percentage of gross earned premiums were 11.1% for the three months ended June 30, 2021 compared to 10.8% for the three months ended June 30, 2020.

Other underwriting expenses as a percentage of gross earned premiums may fluctuate period over period based on timing of certain expenses relative to premium growth.

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

Net investment income increased $0.2 million, or 9.0%, to $2.2 million for the three months ended March 31, 2021 from $2.0 million for the three months ended March 31, 2020.

The increase was primarily due to a higher average balance of investments during the three months ended March 31, 2021 due primarily to proceeds from our June 2020 stock offering and the investing of our cash generated from operations, partially offset by lower yields on investments due to a lower interest rate environment.

Net realized and unrealized gains on investments decreased $1.2 million, or 268.0%, to a $0.7 million loss for the three months ended March 31, 2021 from a $0.4 million gain for the three months ended March 31, 2020 due to unrealized losses on our fixed income based equity securities during the period ended March 31, 2021.

Net investment income increased $0.1 million, or 3.8%, to $2.2 million for the three months ended June 30, 2021 from $2.1 million for the three months ended June 30, 2020.

The increase was primarily due to a higher average balance of investments during the three months ended June 30, 2021 due primarily to proceeds from our June 2020 stock offering, which were invested after the second quarter of 2020, and the investing of our cash generated from operations, partially offset by lower yields on investments due to a lower interest rate environment.

Net realized and unrealized gains on investments decreased $0.5 million, or 61.4%, to $0.3 million for the three months ended June 30, 2021 from $0.8 million for the three months ended June 30, 2020 due to lower appreciation on our fixed income based equity securities during the period ended June 30, 2021.

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

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Income Tax Expense

Income taxes increased $0.1 million or 2.7% to $3.5 million for the three months ended March 31, 2021 from $3.4 million for the three months ended March 31, 2020 as we had higher pre-tax income during the three months ended March 31, 2021.

During the three months ended March 31, 2021, our income tax rate differed from the statutory rate of 21% due primarily to the tax impact of the permanent component of employee stock option exercises.

For the 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.

Income taxes decreased $0.1 million or 3.6% to $3.2 million for the three months ended June 30, 2021 from $3.3 million for the three months ended June 30, 2020 due to a fluctuation in our tax rate.

During the three months ended June 30, 2021, our income tax rate of 20.5% differed 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 June 30, 2020 our income tax rate of 21.5% differed from the statutory rate of 21% due to miscellaneous differences between taxable income calculated under GAAP and IRS regulations.

Six months ended June 30, 2021 compared to six months ended June 30, 2020

The following table summarizes our results for the six months ended June 30, 2021 and 2020:

Six months ended

($ in thousands, except per share data)

Gross written premiums

Ceded written premiums

Net written premiums

Net earned premiums

Commission and other income

Total underwriting revenue (1)

Losses and loss adjustment expenses

Acquisition expenses

Other underwriting expenses

Underwriting income (1)

Net investment income

Net realized and unrealized gains (losses) on investments

Income before income taxes

Income tax expense

Expenses associated with transactions and stock offerings

Stock-based compensation expense

Amortization of intangibles

Expenses associated with catastrophe bond, net of rebate

Adjusted net income (1)

Key Financial and Operating Metrics

Annualized return on equity

Annualized adjusted return on equity (1)

Expense ratio

Combined ratio

Adjusted combined ratio (1)

Diluted earnings per share

Diluted adjusted earnings per share (1)

Catastrophe losses

Catastrophe loss ratio (1)

Adjusted combined ratio excluding catastrophe losses (1)

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(1) Indicates non-GAAP financial measure;

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

Gross Written Premiums

Gross written premiums increased $77.6 million, or 50.0%, to $232.9 million for the six months ended June 30, 2021 compared to $155.3 million for the six months ended June 30, 2020.

Premium growth was primarily due to an increased volume of policies written across our lines of business which was driven by new business generated with

existing partners, strong premium retention rates for existing business, expansion of our distribution footprint, and new partnerships.

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

Six Months Ended June 30,

($ in thousands)

Residential Earthquake

Commercial Earthquake

Specialty Homeowners

Commercial All Risk

Inland Marine

Hawaii Hurricane

Residential Flood

Total Gross Written Premiums

During the third quarter of 2020, we made significant underwriting changes to our Commercial All Risk program including ceasing to write policies on an admitted basis.

All prior year period Commercial All Risk policies were written on an admitted basis and these changes significantly impacted the growth rate shown above.

The following table summarizes our gross written premiums by insurance subsidiary:

Six Months Ended June 30,

($ in thousands)

Total Gross Written Premiums

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Ceded Written Premiums

Ceded written premiums increased $35.2 million, or 59.0%, to $94.9 million for the six months ended June 30, 2021 from $59.7 million for the six months ended June 30, 2020.

Catastrophe losses from Uri caused us to utilize certain layers of our XOL program which increased our XOL reinsurance expense.

During the six months ended June 30, 2021, we incurred an additional $7.9 million of expense associated with the reinstatement of our reinsurance program.

In addition to XOL increases, we had increased quota share cessions due to growth in the volume of written premiums subject to quota shares.

Ceded written premiums as a percentage of gross written premiums increased to 40.8% for the six months ended June 30, 2021 from 38.4% for the six months ended June 30, 2020.

This increase was primarily due to XOL charges and a higher proportion of our written premiums being subject to quota shares.

Net Written Premiums

Net written premiums increased $42.4 million, or 44.3%, to $138.0 million for the six months ended June 30, 2021 from $95.6 million for the six months ended June 30, 2020.

The increase was primarily due to an increase in gross written premiums, primarily in our Commercial Earthquake and Residential Earthquake lines offset by increased ceded written premiums.

Net Earned Premiums

Net earned premiums increased $27.1 million, or 36.6%, to $101.3 million for the six months ended June 30, 2021 from $74.1 million for the six months ended June 30, 2020 due primarily to the earning of increased gross written premiums offset by the earning of ceded written premiums under reinsurance agreements.

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

Six Months Ended

($ in thousands)

Gross earned premiums

Ceded earned premiums

Net earned premiums

Net earned premium ratio

Commission and Other Income

Commission and other income increased by an immaterial amount and was approximately $1.7 million for each of the six months ended June 30, 2021 and June 30, 2020.

This was due to an increase in policy related fees associated with an increased volume of premiums written.

Losses and Loss Adjustment Expenses

Losses and loss adjustment expenses decreased $3.0 million to $2.8 million for the six months ended June 30, 2021 from $5.8 million for the six months ended June 30, 2020.

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

Six Months Ended

($ in thousands)

Catastrophe losses

Non-catastrophe losses

Total losses and loss adjustment expenses

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Our catastrophe loss ratio was negative 10.6% during the six months ended June 30, 2021.

The negative catastrophe loss ratio was due to favorable development on catastrophe losses from 2020 Hurricanes and due to reinsurance recoveries.

We did not incur any catastrophe losses during the six months ended June 30, 2020.

Our non-catastrophe loss ratio was 13.4% for the six months ended June 30, 2021 compared to 7.9% during the six months ended June 30, 2020.

Acquisition Expenses

Acquisition expenses increased $13.8 million, or 49.4%, to $41.7 million for the six months ended June 30, 2021 from $27.9 million for the six months ended June 30, 2020.

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

Acquisition expenses as a percentage of gross earned premiums were 21.5% for the six months ended June 30, 2021 compared to 20.6% for the six months ended June 30, 2020.

Acquisition expenses as a percentage of gross earned premiums fluctuates based on mix of business produced and quota share arrangements in place.

Other Underwriting Expenses

Other underwriting expenses increased $9.9 million, or 58.2%, to $26.8 million for the six months ended June 30, 2021 from $16.9 million for the six months ended June 30, 2020.

The increase was primarily due to the Company incurring higher payroll, technology, stock-based compensation, and professional fees expenses associated with growth of the Company.

In addition, during the first quarter of 2021, other underwriting expenses were significantly impacted by expenses associated with the issuance of a catastrophe bond.

Other underwriting expenses as a percentage of gross earned premiums were 13.8% for the six months ended June 30, 2021 compared to 12.5% for the six months ended June 30, 2020.

Excluding the impact of expenses relating to transactions and stock offerings, stock-based compensation, amortization of intangibles and catastrophe bonds, other underwriting expenses as a percentage of gross earned premiums were 11.5% for the six months ended June 30, 2021 compared to 11.0% for the six months ended June 30, 2020.

Other underwriting expenses as a percentage of gross earned premiums may fluctuate period over period based on timing of certain expenses relative to premium growth.

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

Net investment income increased $0.3 million, or 6.4%, to $4.4 million for the six months ended June 30, 2021 from $4.1 million for the six months ended June 30, 2020.

The increase was primarily due to a higher average balance of investments during the six months ended June 30, 2021 due primarily to proceeds from our June 2020 stock offering and the investing of our cash generated from operations, partially offset by lower yields on investments due to a lower interest rate environment.

Net realized and unrealized gains on investments decreased $1.7 million, or 136.0%, to a $0.4 million loss for the six months ended June 30, 2021 from a $1.2 million gain for the six months ended June 30, 2020 due to unrealized losses on our fixed income based equity securities during the period ended June 30, 2021.

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

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

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

Six Months Ended

($ in thousands)

Interest income

Dividend income

Investment management fees and expenses

Net investment income

Net realized and unrealized gains (losses) on investments

Income Tax Expense

Income taxes decreased by an immaterial amount and was approximately $6.7 million for each of the six months ended June 30, 2021 and June 30, 2020.

During the six months ended June 30, 2021, our income tax rate of 18.7% differed from the statutory rate of 21% due primarily to the tax impact of the permanent component of employee stock option exercises.

For the six months ended June 30, 2020 our income tax rate of 21.9% differed from the statutory rate of 21% due to miscellaneous differences between taxable income calculated under GAAP and IRS regulations.

Reconciliation of Non-GAAP Financial Measures

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Three Months Ended

Six Months Ended

(in thousands)

Total revenue

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Underwriting income represents the pre-tax profitability of our underwriting operations and allows us to evaluate our underwriting performance without regard to investment results.

We use this metric as we believe it gives our management and other users of our financial information useful insight into our underlying business performance.

We use this metric as we believe it gives our management and other users of our financial information useful insight into

our underlying business performance.

Underwriting income should not be viewed as a substitute for pre-tax income calculated in accordance with GAAP, and other companies may define underwriting income differently.

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Three Months Ended

Six Months Ended

(in thousands)

Income before income taxes

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Three Months Ended

Six Months Ended

(in thousands)

Expenses associated with transactions and stock offerings

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Three Months Ended

Six Months Ended

($ in thousands)

Annualized adjusted net income

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Three Months Ended

Six Months Ended

($ in thousands)

Sum of losses and loss adjustment expenses, acquisition expenses, and other underwriting expenses, net of commission and other income

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Three Months Ended

Six Months Ended

(in thousands, except per share data)

Adjusted net income

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Three Months Ended

Six Months Ended

($ in thousands)

Losses and loss adjustment expenses

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Three Months Ended

Six Months Ended

($ in thousands)

Sum of losses and loss adjustment expenses, acquisition expenses, and other underwriting expenses, net of commission and other income

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In addition, under Oregon statute PSIC may only declare a dividend from earned surplus, which does not include contributed capital.

Surplus arising from unrealized capital gains or revaluation of assets is not considered part of earned surplus.

Surplus arising from unrealized

capital gains or revaluation of assets is not considered part of earned surplus.

Based on the above restrictions, PSIC may pay a dividend or distribution of no greater than $11.3 million in 2021 without approval by the California and Oregon Insurance Commissioners.

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If a Class 3A insurer has failed to meet its minimum solvency margin on the last day of any financial year, it will also be prohibited, without the approval of the BMA, from declaring or paying any dividends during the next financial year.

Furthermore, the Insurance Act limits the ability of PSRE to pay dividends or make capital distributions

by stipulating certain margin and solvency requirements and by requiring approval from the BMA prior to a reduction of 15% or more of a Class 3A insurer’s total statutory capital as reported on its prior year statutory balance sheet.

Furthermore, the Insurance Act limits the ability of PSRE to pay dividends or make capital distributions by stipulating certain margin and solvency requirements and by requiring approval from the BMA prior to a reduction of 15% or more of a Class 3A insurer’s total statutory capital as reported on its prior year statutory balance sheet.

Moreover, an insurer must submit an affidavit to the BMA, sworn by at least two directors and the principal representative in Bermuda of the Class 3A insurer, at least seven days prior to payment of any dividend which would exceed 25% of that insurer’s total statutory capital and surplus as reported on its prior year statutory balance sheet.

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We use our cash flows primarily to pay reinsurance premiums, operating expenses, losses and loss adjustment expenses, and income taxes.

We also recently implemented a share repurchase plan and may use our cash to purchase outstanding shares of our common stock in the future.

We also have implemented a share repurchase plan and have used and may use our cash in the future to purchase outstanding shares of our common stock.

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

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

Our cash flows from operations may differ substantially from our net income due to non-cash charges or due to changes in balance sheet accounts.

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

The following table summarizes our cash flows for the three months ended March 31, 2021 and 2020:

Three months ended

The following table summarizes our cash flows for the six months ended June 30, 2021 and 2020:

Six months ended

($ in thousands)

4 unchanged sentences

Change in cash, cash equivalents, and restricted cash

Our cash flow from operating activities was negative during the three months ended March 31, 2021 due to an increase in net operating assets primarily related to payment on claims in excess of reinsurance recoveries.

Our cash flow from operating activities was positive during the three months ended March 31, 2020 due to net income and a decrease in net operating assets.

Variations in operating cash flow between periods are primarily driven by variations in our gross and ceded written premiums and the volume and timing of premium receipts, claim payments, reinsurance payments, and

reinsurance recoveries on paid losses.

Our cash flow from operating activities was negative during the six months ended June 30, 2021 due to an increase in net operating assets primarily related to timing of payments on claims.

Our cash flow from operating activities was positive during the six months ended June 30, 2020 due to net income and a decrease in net operating assets.

In addition, fluctuations in losses and loss adjustment expenses and other insurance operating expenses impact operating cash flows.

Cash provided by in investing activities for the three months ended March 31, 2021 related primarily to sales and maturities of fixed maturity and equity securities in excess of purchases.

Cash used in investing activities for the three months ended March 31, 2020 related primarily to purchases of fixed maturity and equity securities in excess of sales and maturities.

Cash provided by financing activities for three months ended March 31, 2021 was related to the receipt of $0.3 million in proceeds from the issuance of common stock via our employee stock purchase plan, and the receipt of $1.0 million from the issuance of common stock via stock option exercises.

Cash provided by financing activities for the three months ended March 31, 2020 was related to the receipt of $35.5 million in net proceeds from the January 2020 Secondary Offering and the receipt of $0.4 million in proceeds related to the issuance of common stock pursuant to our employee stock purchase plan.

Cash provided by investing activities for the six months ended June 30, 2021 related primarily to sales and maturities of fixed maturity and equity securities in excess of purchases.

Cash used in investing activities for the six months ended June 30, 2020 related primarily to purchases of fixed maturity and equity securities in excess of sales and maturities.

Cash used in financing activities for six months ended June 30, 2021 was related to the repurchase of $15.8 million of our common stock offset by the receipt of $1.2 million from the issuance of common stock via stock option exercises and the receipt of $0.3 million in proceeds related to the issuance of common stock via our employee stock purchase plan.

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

We do not have any current plans for material capital expenditures other than current operating requirements.

1 unchanged sentence

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

To the extent our future operating cash flows are insufficient to cover our net losses from catastrophic events, we had $436.7 million in cash and investment securities available at March 31, 2021.

To the extent our future operating cash flows are insufficient to cover our net losses from catastrophic events, we had $427.8 million in cash and investment securities available at June 30, 2021.

We also have the ability to access additional capital through pursuing third-party borrowings, sales of our equity or debt securities or entrance into a reinsurance arrangement.

Stockholders’ Equity

At March 31, 2021 total stockholders’ equity was $376.4 million and tangible stockholders’ equity was $365.2 million, compared to total stockholders’ equity of $363.7 million and tangible stockholders’ equity of $352.2 million as of December 31, 2020.

Stockholder’s equity increased primarily due to net income, issuance of common stock and stock-based compensation from our equity compensation plans off set by unrealized losses on fixed maturity securities.

At June 30, 2021 total stockholders’ equity was $376.7 million and tangible stockholders’ equity was $365.9 million, compared to total stockholders’ equity of $363.7 million and tangible stockholders’ equity of $352.2 million as of December 31, 2020.

Stockholder’s equity increased primarily due to net income, issuance of common stock and

stock-based compensation from our equity compensation plans offset by unrealized losses on fixed maturity securities and repurchases of shares of our common stock.

Tangible stockholders’ equity is a non-GAAP financial measure.

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

As of March 31, 2021, the majority of our investment portfolio, or $402.3 million, was comprised of fixed maturity securities that are classified as available-for-sale and carried at fair value with unrealized gains and losses on these securities, net of applicable taxes, reported as a separate component of accumulated other comprehensive income.

As of June 30, 2021, the majority of our investment portfolio, or $396.6 million, was comprised of fixed maturity securities that are classified as available-for-sale and carried at fair value with unrealized gains and losses on these securities, net of applicable taxes, reported as a separate component of accumulated other comprehensive income.

Also included in our investment portfolio were $5.6 million of equity securities, primarily comprised of mutual funds that provide exposure to the U.S.

investment-grade bond market.

In addition, we maintained a non-restricted cash and cash equivalent balance of $23.6 million at March 31, 2021.

Our fixed maturity securities, including cash equivalents, had a weighted average effective duration of 3.97 and 3.96 years and an average rating of “A1/A” and “A2/A” at March 31, 2021 and December 31, 2020, respectively.

Our fixed income investment portfolio had a book yield of 2.24% as of March 31, 2021, compared to 2.27% as of December 31, 2020.

At March 31, 2021 and December 31, 2020 the amortized cost and fair value on available-for-sale securities were as follows:

March 31, 2021

In addition, we maintained a non-restricted cash and cash equivalent balance of $24.9 million at June 30, 2021.

Our fixed maturity securities, including cash equivalents, had a weighted average effective duration of 3.84 and 3.96 years and an average rating of “A1/A” and “A2/A” at June 30, 2021 and December 31, 2020, respectively.

Our fixed income investment portfolio had a book yield of 2.25% as of June 30, 2021, compared to 2.27% as of December 31, 2020.

At June 30, 2021 and December 31, 2020 the amortized cost and fair value on available-for-sale securities were as follows:

June 30, 2021

($ in thousands)

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Special revenue excluding mortgage/asset-backed securities

Industrial and miscellaneous

Corporate and other

Mortgage/asset-backed securities

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Special revenue excluding mortgage/asset-backed securities

Industrial and miscellaneous

Corporate and other

Mortgage/asset-backed securities

Total available-for-sale investments

The following tables provide the credit quality of investment securities as of March 31, 2021 and December 31, 2020:

March 31, 2021

The following tables provide the credit quality of investment securities as of June 30, 2021 and December 31, 2020:

June 30, 2021

($ in thousands)

1 unchanged sentence

($ in thousands)

The amortized cost and fair value of our available-for-sale investments in fixed maturity securities summarized by contractual maturity as of March 31, 2021 were as follows:

March 31, 2021

The amortized cost and fair value of our available-for-sale investments in fixed maturity securities summarized by contractual maturity as of June 30, 2021 were as follows:

June 30, 2021

($ in thousands)

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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.

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

Our catastrophe event retention is currently $10 million for all perils and we retain $1 million as a vertical co-participation in selected layers of our reinsurance program that we believe present a compelling risk adjusted return.

Our catastrophe event retention is currently $12.5 million for all perils.

Our reinsurance coverage exhausts at $1.65 billion for earthquake events and $700 million for hurricane events, providing coverage in excess of our 1:250 year peak zone PML and in excess of our A.M.

14 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis