What changed in this filing

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Item 1A. Risk Factors

2021-08-06 compared with 2021-05-07 · 40 added, 36 removed, 555 unchanged (12% of the section changed)

17 unchanged sentences

● We rely on a select group of brokers and program administrators to manage the distribution of a significant portion of our Residential Earthquake, Commercial Earthquake, Specialty Homeowners and Hawaii Hurricane products.

Two program administrators with which we have long-standing relationships represented approximate ly 54% of our gross written premiums for the year ended December 31, 2020 and 49% for the three months ended March 31, 2021, and such relationships may not continue;

Two program administrators with which we have long-standing relationships represented approximate ly 54% of our gross written premiums for the year ended December 31, 2020 and 48% for the six months ended June 30, 2021, and such relationships may not continue;

● There is intense competition for business in our industry;

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In addition, a natural disaster could materially impact the financial condition of our policyholders, resulting in loss of premiums.

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.

Effective December 31, 2020, our reinsurance coverage exhausts at $1.4 billion for earthquake events and $600 million for hurricane events, with coverage in excess of our estimated peak zone 1 in 250 year PML event and in excess of our A.M.

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, with coverage in excess of our estimated peak zone 1 in 250 year PML event and in excess of our A.M.

Best requirement.

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We and our customers could be negatively and adversely impacted by the Pandemic, which may result in a decline in demand for our products, a decrease in underwriting income and a decrease in the value of our investment portfolio.

The ongoing Pandemic and response thereto have significantly impacted financial markets, businesses, households, and communities and have caused a contraction in business activity and volatility in financial markets.

The ongoing Pandemic and response thereto have significantly impacted financial markets, businesses, households, and communities and have caused a contraction and instability in business activity and volatility in financial markets.

Continuation of the Pandemic could cause additional reduction in business activity and financial market instability.

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Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred or ceded to the reinsurer, it does not relieve us (the ceding insurer) of our primary liability to our policyholders.

Our current reinsurance program is designed to limit our risk retention to $10 million of risk per earthquake or wind event, along with a $1 million vertical co-participation in selected layers, and provide coverage up to $1.4 billion for earthquake events and $600 million for hurricane events, subject to customary exclusions.

However, particularly in the event of a major catastrophe, our reinsurers may not pay claims made by us on a timely basis, or they

may not pay some or all these claims.

For example, the Pandemic has put financial pressure on the insurance market due to several factors, including the inability of customers to pay premiums and increased claims for business interruption.

Our current reinsurance program is designed to limit our risk retention to $12.5 million of risk per earthquake or wind event, and provide coverage up to $1.65 billion for earthquake events and $700 million for hurricane events, subject to customary exclusions.

However, particularly in the event of a major catastrophe, our reinsurers may not pay claims made by us on a timely basis, or they may not pay some or all these claims.

For example, the Pandemic has put financial pressure on the insurance market due to several factors, including the inability of customers to pay

premiums and increased claims for business interruption.

Increased claim demands for business interruption has put substantial financial pressure on the insurance and reinsurance market which may lead to court action and impact the ability of insurers and reinsurers to satisfy the liability under their policies.

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We evaluate each reinsurance claim based on the facts of the case, historical experience with the reinsurer on similar claims and existing case law and consider including any amounts deemed uncollectible from the reinsurer in a reserve for uncollectible reinsurance.

As of March 31, 2021, we had $217.6 million of aggregate reinsurance recoverables.

As of June 30, 2021, we had $194.9 million of aggregate reinsurance recoverables.

These risks could cause us to incur increased net losses, and, therefore, adversely affect our financial condition.

10 unchanged sentences

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, we closed a $400 million 144A catastrophe bond which became effective June 1, 2021.

The catastrophe bond was completed through Torrey Pines Re Pte.

3 unchanged sentences

We may seek to expand our catastrophe XOL coverage through similar bond offerings in the future.

There can be no assurances that we will be able to complete such offerings on acceptable terms, if at all.

If we are unable to renew our expiring contracts, enter into new reinsurance arrangements on acceptable terms or expand our catastrophe coverage through future bond offerings or otherwise, our loss exposure could increase, which would increase our potential losses related to catastrophe events.

There can be no assurance that we will be able to complete such offerings on acceptable terms, if at all.

If we are unable to renew our expiring reinsurance contracts on acceptable terms or expand our reinsurance coverage through traditional reinsurers, catastrophe bonds, or otherwise, our loss exposure could increase, which would increase our potential losses related to catastrophe events.

If we are unwilling to bear an increase in loss exposure, we could have to reduce the level of our underwriting commitments, both of which could materially adversely affect our business, financial condition and results of operations.

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Our approach to risk management relies on subjective variables that entail significant uncertainties.

We manage our exposure to catastrophe losses by analyzing the probability and severity of the occurrence of catastrophe events and the impact of such events on our overall underwriting and investment portfolio.

We manage our exposure to catastrophe losses by analyzing the probability of the occurrence of catastrophe events and their severity and overall impact on our underwriting and investment portfolio.

We monitor and mitigate our exposure through a number of methods designed to minimize risk, including underwriting specialization, modeling and data systems, data quality control, strategic use of policy deductibles and regular review of aggregate exposure and probable maximum loss reports, which report the maximum amount of losses that one would expect based on computer or actuarial modeling techniques.

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The models may not accurately reflect a risk’s vulnerability or susceptibility to damage for a given event characteristic;

The models may not account for unusual or unprecedented catastrophe events;

The models may not accurately represent loss potential to insurance or reinsurance contract coverage limits, terms and conditions;

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Best financial strength ratings range from “A++” (Superior) to “F” for insurance companies that have been publicly placed in liquidation.

As of December 31, 2020, A.M.

Best has assigned a financial strength rating of “A−” (Excellent) (Outlook Stable) to our Company as a whole group and individually to our insurance company subsidiaries, Palomar Specialty Insurance Company (“PSIC”) and Palomar Excess and Surplus Insurance Company (“PESIC”).

As of June 30, 2021, A.M.

Best has assigned a financial strength rating of “A−” (Excellent) (Outlook Stable) to our insurance company subsidiaries, Palomar Specialty Insurance Company (“PSIC”) and Palomar Excess and Surplus Insurance Company (“PESIC”).

Best assigns ratings that are intended to provide an independent opinion of an insurance company’s ability to meet its obligations to policyholders and such ratings are not evaluations directed to investors and are not a recommendation to buy, sell or hold our common stock or any other securities we may issue.

17 unchanged sentences

In addition, in view of the earnings and capital pressures experienced by many financial institutions, including insurance companies, it is possible that rating organizations will heighten the level of scrutiny that they apply to such institutions, will increase the frequency and scope of their credit reviews, will request additional information from the companies that they rate or will increase the capital and other requirements employed in the rating organizations’ models for maintenance of certain ratings levels.

If our credit rating were to be downgraded, or general market conditions were to ascribe higher risk to our rating levels, due to the Pandemic, our access to capital markets and the cost of any equity or debt financing will be negatively impacted.

If our credit rating were to be downgraded, or general market conditions were to ascribe higher risk to our rating levels, due to the Pandemic or otherwise, our access to capital markets and the cost of any equity or debt financing will be negatively impacted.

We can offer no assurance that our rating will remain at its current level.

1 unchanged sentence

Our business is concentrated in California and Texas and, as a result, we are exposed more significantly to California and Texas loss activity and regulatory environments.

Our policyholders and insurance risks are currently concentrated in California and Texas, which generated 49% and 19% of our gross written premiums, respectively, for the year ended December 31, 2020 and 49% and 11% for the three months ended March 31, 2021.

We are exposed to business, economic, political, judicial and regulatory risks due to this concentration that are greater than the risks faced by insurance companies that conduct business over a more extensive geographic area.

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As such, higher demand for employees having the desired skills and expertise could lead to increased compensation expectations for existing and prospective personnel, making it difficult for us to retain and recruit key personnel and maintain labor costs at desired levels.

In particular, our future success is substantially dependent on the continued service of our Co-Founder and Chief Executive Officer and Chairman, Mac Armstrong, and our Chief Financial Officer, Christopher Uchida.

In particular, our future success is substantially dependent on the continued service of our Co-Founder, Chief Executive Officer and Chairman, Mac Armstrong, and our Chief Financial Officer, Christopher Uchida.

Should any of our key executives terminate their employment with us, or if we are unable to retain and attract talented personnel, we may be unable to maintain our current competitive position in the specialized markets in which we operate, which could adversely affect our results of operations.

6 unchanged sentences

These programs also feature separate managerial oversight and leadership, policy administration systems and retail agents originating policies.

In total, these four products accounted for $191.3 million or 54% of our gross written premiums for the year ended December 31, 2020 and $51.0 million or 49% for the three months ended March 31, 2021.

This amount includes our Value Select Residential Earthquake program, which represents the majority of our Residential Earthquake premium and is administered through a mutually exclusive program administrator agreement with Arrowhead for the states of California, Oregon and Washington.

In total, these four products accounted for $191.3 million or 54% of our gross written premiums for the year ended December 31, 2020 and $111.1 million or 48% for the six months ended June 30, 2021.

This amount includes our Value Select Residential Earthquake program, which represents the majority of our Residential Earthquake premium and is administered through a mutually exclusive program administrator agreement with Arrowhead General Insurance Agency for the states of California, Oregon and Washington.

The termination of a relationship with one or more significant brokers or program administrators could result in lower gross written premiums and could have a material adverse effect on our results of operations or business prospects.

77 unchanged sentences

We expect our quarterly results to continue to fluctuate in the future due to a number of factors, including the general economic conditions in the markets where we operate, the frequency of occurrence or severity of catastrophe or other insured events, fluctuating interest rates, claims exceeding our loss reserves, competition in our industry, deviations from expected premium retention rates of our existing policies and contracts, adverse investment performance, and the cost of reinsurance coverage.

Additionally, the full extent of the impact of COVID-19 on our business, operations, liquidity, financial condition and results of operations remain uncertain at this time.

Additionally, the full extent of the impact of the Pandemic on our business, operations, liquidity, financial condition and results of operations remain uncertain at this time.

We seek to underwrite products and make investments to achieve favorable returns on tangible stockholders’ equity over the long term.

49 unchanged sentences

These securities are carried on the balance sheet at fair market value and are subject to potential losses and declines in market value.

Our equity invested assets totaled $10.5 million as of March 31, 2021.

Our equity invested assets totaled $5.6 million as of June 30, 2021.

Risks for all types of securities are managed through the application of our investment policy, which establishes investment parameters that include but are not limited to, maximum percentages of investment in certain types of securities and minimum levels of credit quality, which we believe are within applicable guidelines established by the National Association of Insurance Commissioners (“NAIC”), the Oregon Division of Financial Regulation and the California and Arizona Departments of Insurance.

29 unchanged sentences

Some of these systems may include or rely on third-party systems not located on our premises or under our control.

Events such as natural catastrophes, pandemics (including the COVID-19 Pandemic), terrorist attacks, industrial accidents or computer viruses may cause our systems to fail or be inaccessible for extended periods of time.

Events such as natural catastrophes, pandemics (including the COVID-19 Pandemic), cyber-attacks, terrorist attacks, industrial accidents or computer viruses may cause our systems to fail or be inaccessible for extended periods of time.

While we have implemented business contingency plans and other reasonable plans to protect our systems, sustained or repeated system failures or service denials could severely limit our ability to write and process new and renewal business, provide customer service, pay claims in a timely manner or otherwise operate in the ordinary course of business.

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Premium grace periods could significantly increase our expenses while decreasing our short-term revenues which would adversely impact our liquidity.

Additionally, in response to the growing threat of cyber-attacks in the insurance industry, certain jurisdictions have begun to consider new cybersecurity measures, including the adoption of cybersecurity regulations which, among other things, would require insurance companies to establish and maintain a cybersecurity program and implement and maintain cybersecurity policies and procedures.

On October 24, 2017, the NAIC adopted its Insurance Data Security Model Law, intended to serve as model legislation for states to enact in order to govern cybersecurity and data protection practices of insurers, insurance agents, and other licensed entities registered under state insurance laws.

As we expand our insurance operations, we expect to be impacted by this legislation and be required to file compliance certifications pertaining to this legislation.

While we have implemented cybersecurity policies and procedures, there is no guarantee our policies and procedures will protect our systems against all attacks or comply with all provisions of these evolving regulations.

Changes in tax laws as a result of the enactment of tax legislation could impact our operations and profitability.

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This limitation particularly affects taxpayers in states with relatively high home prices and state and local taxes, such as California, where a significant portion of our business is concentrated.

Any future tax legislation which alters provisions of the Tax Act such as changing the corporate tax rate could have a negative impact on our results of operations and profitability.

Any future tax legislation or changes to tax laws such as changing the corporate tax rate could have a negative impact on our results of operations and profitability.

If states increase the assessments that we are required to pay, our business, financial condition and results of operations would suffer.

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PSIC paid assessments of $0.4 million in 2020.

There were no assessments for the three months ended March 21, 2021.

There were no assessments for the six months ended June 30, 2021.

We cannot predict with certainty the amount of future assessments, because they depend on factors outside our control, such as insolvencies of other insurance companies as well as the occurrence of significant catastrophes.

2 unchanged sentences

Significant assessments could result in higher than expected operating expenses and have a material adverse effect on our business, financial condition or results of operations.

In addition, while some states permit member insurers to recover assessments paid through full or partial

premium tax offset or, in limited circumstances, by surcharging policyholders, there is no certainty that offsets or surcharges will be permitted in connection with any future assessments.

In addition, while some states permit member insurers to recover assessments paid through full or partial premium tax offset or, in limited circumstances, by surcharging policyholders, there is no certainty that offsets or surcharges will be permitted in connection with any future assessments.

Because we are a holding company and substantially all of our operations are conducted by our insurance subsidiaries, our ability to pay dividends depends on our ability to obtain cash dividends or other permitted payments from our insurance subsidiaries.

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Although we are not currently involved in any material litigation with our customers, other members of the insurance industry are the target of class action lawsuits and other types of litigation, some of which involve claims for substantial or indeterminate amounts, and the outcomes of which are unpredictable.

This litigation is based on a variety of issues, including insurance and claim settlement practices.

This litigation is based on a variety of issues,

including insurance and claim settlement practices.

We cannot predict with any certainty whether we will be involved in such litigation in the future or what impact such litigation would have on our business.

2 unchanged sentences

Consumer groups and regulators have questioned whether the use of credit scoring unfairly discriminates against some groups of people and are calling for laws and regulations to prohibit or restrict the use of credit scoring in underwriting and pricing.

materially and adversely affect our business, financial condition, results of operations and prospects, and make it harder for us to be profitable over time.

Laws or regulations that significantly curtail or regulate the use of credit scoring, if enacted in a large number of states in which we operate, could impact the integrity of our pricing and underwriting processes, which could, in turn, materially and adversely affect our business, financial condition, results of operations and prospects, and make it harder for us to be profitable over time.

Any failure to protect our intellectual property rights could impair our ability to protect our intellectual property, proprietary technology platform and brand, or we may be sued by third parties for alleged infringement of their proprietary rights.

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In addition, we are subject to other reporting and corporate governance requirements, including certain requirements of and certain provisions of the Sarbanes-Oxley Act and the regulations promulgated thereunder, which impose significant compliance obligations upon us.

In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404

of the Sarbanes-Oxley Act.

Our compliance with Section 404 requires that we incur substantial accounting expense and expend significant management efforts.

25 unchanged sentences

We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404(b) of Sarbanes-Oxley.

If we conclude that our internal control over financial reporting is not effective, the cost and scope of remediation actions and

their effect on our operations may be significant.

If we conclude that our internal control over financial reporting is not effective, the cost and scope of remediation actions and their effect on our operations may be significant.

Moreover, any material weaknesses or other deficiencies in our internal control over financial reporting may impede our ability to file timely and accurate reports with the SEC.

16 unchanged sentences

This market volatility, as well as general economic, market or political conditions, could subject the market price of our shares to wide price fluctuations regardless of our operating performance.

Although we believe we have adequate sources of liquidity over the short- and long-term, the success of our operations, the global economic outlook, and the pace of sustainable growth in our markets, in each case, in light of the market volatility and uncertainty as a result of the Pandemic, among other factors, could impact our business and liquidity.

result of the Pandemic, among other factors, could impact our business and liquidity.

You should consider an investment in our common stock to be risky, and you should invest in our common stock only if you can withstand a significant loss and wide fluctuation in the market value of your investment.

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The securities markets have from time to time experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of particular companies.

As a result of these factors, investors in our common stock may not be able to resell their shares at or above the price at which they purchased their shares.

As a result of these

factors, investors in our common stock may not be able to resell their shares at or above the price at which they purchased their shares.

These broad market fluctuations, as well as general market, economic and political conditions, such as recessions, loss of investor confidence or interest rate changes, may negatively affect the market price of our common stock.

34 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 1A. Risk Factors