What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-05 compared with 2021-08-06 · 157 added, 132 removed, 535 unchanged (35% 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 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 results of operations for the three and nine months ended September 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.

15 unchanged sentences

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 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.

For the nine months ended September 30, 2021, we experienced average monthly premium retention rates above 90% for our Residential Earthquake and Hawaii Hurricane lines and approximately 87% 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.

10 unchanged sentences

COVID-19 Update

The COVID-19 Pandemic ("the Pandemic") continues to impact businesses, households, communities, and financial markets.

The COVID-19 Pandemic (the “Pandemic") continues to impact businesses, households, communities, and financial markets.

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.

1 unchanged sentence

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

In addition, we are taking extra physical security and cybersecurity measures to safeguard our systems to serve the operational needs of our remote workforce and ensure uninterrupted service to our brokers and policyholders.

In addition, we are taking extra physical security and cybersecurity measures to safeguard our systems to serve the operational needs of our workforce and ensure uninterrupted service to our brokers and policyholders.

We have experienced business interruption claims related to the Pandemic.

5 unchanged sentences

Since the onset of the Pandemic, we have experienced volatility in the fair value of our investment portfolio due to unrealized losses and gains on our fixed income securities.

The economic impacts of the Pandemic could reduce our net investment income and result in realized investment losses in future periods.

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

19 unchanged sentences

In periods where we modify a quota share agreement, ceded written premiums may increase or decrease significantly compared to prior periods and these fluctuations may not be indicative of future trends.

In addition, our XOL costs as a percentage of gross earned premiums may vary each period due to changes of premium in-force during the XOL contract period or due to acceleration of XOL charges or the need to purchase additional reinsurance due to losses.

In addition, our XOL costs as a percentage of gross earned premiums may vary each period due to changes of premium in-force during

the XOL contract period or due to acceleration of XOL charges or the need to purchase additional reinsurance due to losses.

Net Earned Premiums

66 unchanged sentences

Results of Operations

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 September 30, 2021 compared to three months ended September 30, 2020

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

Three months ended

September 30,

($ in thousands, except per share data)

8 unchanged sentences

Other underwriting expenses

Underwriting income (1)

Underwriting loss (1)

Net investment income

Net realized and unrealized gains on investments

Income before income taxes

Net realized and unrealized gains (losses) on investments

Income (loss) before income taxes

Income tax expense

Expenses associated with transactions and stock offerings

Net income (loss)

Stock-based compensation expense

Amortization of intangibles

Expenses associated with catastrophe bond, net of rebate

Adjusted net income (1)

Adjusted net income (loss) (1)

Key Financial and Operating Metrics

13 unchanged sentences

Gross Written Premiums

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.

Gross written premiums increased $49.3 million, or 47.9% to $152.3 million for the three months ended September 30, 2021 compared to $103.0 million for the three months ended September 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 June 30,

Three Months Ended September 30,

($ in thousands)

Residential Earthquake

Specialty Homeowners

Commercial Earthquake

Commercial All Risk

Specialty Homeowners

Inland Marine

Hawaii Hurricane

Commercial All Risk

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 polices were written on an admitted basis and these changes significantly impacted the growth rate shown above.

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

The majority of prior year 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:

Three Months Ended June 30,

Three Months Ended September 30,

($ in thousands)

2 unchanged sentences

Ceded Written Premiums

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 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.

Ceded written premiums increased $16.5 million, or 39.7%, to $58.1 million for the three months ended September 30, 2021 from $41.6 million for the three months ended September 30, 2020.

The increase was primarily due to excess of loss (“XOL”) reinsurance expense due to growth in exposure and 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 decreased to 38.1% for the three months ended September 30, 2021 from 40.4% for the three months ended September 30, 2020.

This decrease was primarily due to lower XOL expense as a percentage of gross written premiums.

Net 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 written premiums increased $32.9 million, or 53.5%, to $94.3 million for the three months ended September 30, 2021 from $61.4 million for the three months ended September 30, 2020.

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

Net Earned Premiums

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.

Net earned premiums increased $22.7 million, or 54.0%, to $64.7 million for the three months ended September 30, 2021 from $42.0 million for the three months ended September 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:

Three Months Ended

September 30,

($ in thousands)

4 unchanged sentences

Commission and Other Income

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.

Commission and other income increased by $0.2 million, or 24.8%, to $1.0 million for the three months ended September 30, 2021, from $0.8 million for the three months ended September 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 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 decreased $12.6 million, or 30.7% to $28.5 million for the three months ended September 30, 2021 from $41.1 million for the three months ended September 30, 2020.

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

Three Months Ended

September 30,

($ in thousands)

2 unchanged sentences

Total losses and loss adjustment expenses

NM- not meaningful

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 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.

Our catastrophe loss ratio was 27.0% during the three months ended September 30, 2021.

Catastrophe losses included losses from Hurricanes Ida and Nicholas which impacted our Commercial All Risk and Specialty Homeowners lines of business and a single loss from an excess liability indemnity policy covered by PESIC.

Our catastrophe loss ratio was 86.9% during the three months ended September 30, 2020.

Catastrophe losses primarily included losses from Hurricanes Hanna, Isaias, Laura, Sally and Beta and impacted primarily our Commercial All Risk and Specialty Homeowners lines of business.

Our non-catastrophe loss ratio was 17.0% for the three months ended September 30, 2021 compared to 10.8% during the three months ended September 30, 2020.

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

Acquisition Expenses

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.

Acquisition expenses increased $8.4 million, or 46.9%, to $26.4 million for the three months ended September 30, 2021 from $18.0 million for the three months ended September 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 21.9% 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.

Acquisition expenses as a percentage of gross earned premiums were 22.5% for the three months ended September 30, 2021 compared to 22.6% for the three months ended September 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 $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.

Other underwriting expenses increased $4.8 million, or 62.1%, to $12.6 million for the three months ended September 30, 2021 from $7.8 million for the three months ended September 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.

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 were 10.8% for the three months ended September 30, 2021 compared to 9.8% for the three months ended September 30, 2020.

Excluding the impact of expenses relating to stock-based compensation and amortization of intangibles, other underwriting expenses as a percentage of gross earned premiums were 9.4% for the three months ended September 30, 2021 compared to 9.1% for the three months ended September 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 $0.1 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.

Net investment income increased $0.1 million, or 4.6%, to $2.2 million for the three months ended September 30, 2021 from $2.1 million for the three months ended September 30, 2020.

The increase was primarily due to a higher average balance of investments during the three months ended September 30, 2021, partially offset by lower yields on recently invested funds.

Net realized and unrealized gains on investments decreased $0.3 million to a $0.3 million loss for the three months ended September 30, 2021 from an immaterial gain for the three months ended September 30, 2020 due to unrealized losses on our equity securities during the period ended September 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.

government issues, state government issues, mortgage and asset-backed obligations, and corporate bonds with a small portion of our portfolio in equity securities.

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

Three Months Ended

September 30,

($ in thousands)

5 unchanged sentences

Income Tax Expense

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

Income taxes increased $6.0 million or 98.0% to $0.1 million of benefit for the three months ended September 30, 2021 from $6.2 million of benefit for the three months ended September 30, 2020 due to higher pretax income during the three months ended September 30, 2021.

During the three months ended September 30, 2021, our income tax rate of negative 101.6% differed from the statutory rate of 21% due primarily to the tax impact of the permanent component of

employee stock option exercises.

The tax rate was also impacted by the Company’s pre-tax income being close to break-even.

For the three months ended September 30, 2020 our income tax rate of 28.2% differed from the statutory rate of 21% also due primarily to the tax impact of the permanent component of employee stock option exercises.

Nine months ended September 30, 2021 compared to nine months ended September 30, 2020

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

Nine months ended

September 30,

($ in thousands, except per share data)

33 unchanged sentences

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.

Gross written premiums increased $127.0 million, or 49.2%, to $385.3 million for the nine months ended September 30, 2021 compared to $258.3 million for the nine months ended September 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,

Nine Months Ended September 30,

($ in thousands)

2 unchanged sentences

Specialty Homeowners

Commercial All Risk

Inland Marine

Commercial All Risk

Hawaii Hurricane

1 unchanged sentence

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.

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

The majority of prior year 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,

Nine Months Ended September 30,

($ in thousands)

2 unchanged sentences

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.

Ceded written premiums increased $51.7 million, or 51.1%, to $153.0 million for the nine months ended September 30, 2021 from $101.3 million for the nine months ended September 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.

During the nine months ended September 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.

Ceded written premiums as a percentage of gross written premiums increased to 39.7% for the nine months ended September 30, 2021 from 39.2% for the nine months ended September 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 written premiums increased $75.3 million, or 47.9%, to $232.3 million for the nine months ended September 30, 2021 from $157.0 million for the nine months ended September 30, 2020.

The increase was primarily due to an increase in gross written premiums, primarily in our Commercial Earthquake, Inland Marine, 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.

Net earned premiums increased $49.9 million, or 42.9%, to $166.0 million for the nine months ended September 30, 2021 from $116.1 million for the nine months ended September 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

Nine Months Ended

September 30,

($ in thousands)

4 unchanged sentences

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.

Commission and other income increased by $0.2 million, or 9.8% to $2.7 million for the nine months ended September 30, 2021 from $2.5 million for the nine months ended September 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 decreased $15.6 million or 33.3% to $31.3 million for the nine months ended September 30, 2021 from $46.9 million for the nine months ended September 30, 2020.

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

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

2 unchanged sentences

Total losses and loss adjustment expenses

NM- not meaningful

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.

Our catastrophe loss ratio was 4.0% during the nine months ended September 30, 2021.

Catastrophe losses included losses from Hurricanes Ida and Nicholas and Winter Storm Uri.

These events impacted our Commercial All

Risk and Specialty Homeowners lines of business.

We also incurred a single loss from an excess liability indemnity policy covered by PESIC.

These losses were partially offset by favorable development on catastrophe losses from 2020 Hurricanes and reinsurance recoveries.

Our catastrophe loss ratio was 31.4% during the nine months ended September 30, 2020.

Catastrophe losses primarily included losses from Hurricanes Hanna, Isaias, Laura, Sally and Beta.

Our non-catastrophe loss ratio was 14.8% for the nine months ended September 30, 2021 compared to 8.9% during the nine months ended September 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.

Acquisition expenses increased $22.2 million, or 48.4%, to $68.1 million for the nine months ended September 30, 2021 from $45.9 million for the nine months ended September 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 were 21.9% for the nine months ended September 30, 2021 compared to 21.3% for the nine months ended September 30, 2020.

1 unchanged sentence

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.

Other underwriting expenses increased $14.7 million, or 59.5%, to $39.4 million for the nine months ended September 30, 2021 from $24.7 million for the nine months ended September 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 were 12.7% for the nine months ended September 30, 2021 compared to 11.5% for the nine months ended September 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 10.7% for the nine months ended September 30, 2021 compared to 10.3% for the nine months ended September 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.

Net investment income increased $0.3 million, or 5.8%, to $6.6 million for the nine months ended September 30, 2021 from $6.3 million for the nine months ended September 30, 2020.

The increase was primarily due to a higher average balance of investments during the nine months ended September 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 recently invested funds.

Net realized and unrealized gains on investments decreased $2.0 million, or 160.5%, to a $0.8 million loss for the nine months ended September 30, 2021 from a $1.2 million gain for the nine months ended September 30, 2020 due to unrealized losses on our equity securities during the period ended September 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.

government issues, state government issues, mortgage and asset-backed obligations, and corporate bonds with a small portion of our portfolio invested in equity securities.

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

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

5 unchanged sentences

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.

Income taxes increased by $6.0 million to $6.5 million for the nine months ended September 30, 2021 from $0.5 million for the nine months ended September 30, 2020.

During the nine months ended September 30, 2021, our income tax rate of 18.3% differed from the statutory rate of 21% due primarily to the tax impact of the permanent component of employee stock option exercises.

For the nine months ended September 30, 2020 our income tax rate of 6.1% differed from the statutory rate of 21% also due primarily to the tax impact of the permanent component of employee stock option exercises.

Reconciliation of Non-GAAP Financial Measures

6 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

7 unchanged sentences

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.

1 unchanged sentence

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

Income before income taxes

Income (loss) before income taxes

Net investment income

Net realized and unrealized (gains) losses on investments

Underwriting income

Adjusted Net Income

Underwriting income (loss)

Adjusted Net Income (loss)

We define adjusted net income as net income excluding the impact of certain items that may not be indicative of underlying business trends, operating results, or future outlook, net of tax impact.

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

Net income (loss)

Expenses associated with transactions and stock offerings

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Expenses associated with catastrophe bond, net of rebate

Adjusted net income

Adjusted net income (loss)

Annualized Adjusted Return on Equity

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in thousands, except per share data)

Adjusted net income

Adjusted net income (loss)

Weighted-average common shares outstanding, diluted

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

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Stockholders’ equity calculated in accordance with GAAP reconciles to tangible stockholders’ equity as follows:

September 30,

(in thousands)

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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.

We purchased 239,096 shares for $15.8 million under this program during the nine months ended September 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 six months ended June 30, 2021 and 2020:

Six months ended

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

Nine months ended

September 30,

($ in thousands)

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Change in cash, cash equivalents, and restricted cash

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.

Our cash flow from operating activities was positive during the nine months ended September 30, 2021 and 2020 due to net income or 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.

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

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.

Cash used in investing activities for the nine months ended September 30, 2021 and 2020 related primarily to purchases of fixed maturity and equity securities in excess of sales and maturities.

Cash used in financing activities for nine months ended September 30, 2021 was related to the repurchase of $15.8 million of our common stock offset by the receipt of $1.8 million from the issuance of common stock via stock option exercises and the receipt of $0.7 million in proceeds related to the issuance of common stock via our employee stock purchase plan.

Cash provided by financing activities for nine months ended September 30, 2020 was related to the receipt of $35.5 million in net proceeds from the January 2020 stock offering, the receipt of $90.1 million in net proceeds from the June 2020 stock offering, the receipt of $0.7 million in proceeds related to the issuance of common stock via our employee stock purchase plan, and the receipt of $1.7 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.

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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 $427.8 million in cash and investment securities available at June 30, 2021.

To the extent our future operating cash flows are insufficient to cover our net losses from catastrophic events, we had $467.0 million in cash and investment securities available at September 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 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.

At September 30, 2021 total stockholders’ equity was $377.8 million and tangible stockholders’ equity was $367.3 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 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 $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

As of September 30, 2021, the majority of our investment portfolio, or $408.0 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 $17.4 million of equity securities.

In addition, we maintained a non-restricted cash and cash equivalent balance of $41.4 million at September 30, 2021.

Our fixed maturity securities, including cash equivalents, had a weighted average effective duration of 4.04 and 3.96 years and an average rating of “A2/A” and “A2/A” at September 30, 2021 and December 31, 2020, respectively.

Our fixed income investment portfolio had a book yield of 2.19% as of September 30, 2021, compared to 2.27% as of December 31, 2020.

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

September 30, 2021

($ in thousands)

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Total available-for-sale investments

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

June 30, 2021

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

September 30, 2021

($ in thousands)

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($ in thousands)

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

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

September 30, 2021

($ in thousands)

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Best, or whose surplus drops by more than 20%.

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

In addition to reinsurance purchased from traditional reinsurers, we have historically incorporated collateralized protection from the insurance linked securities market (e.g.

catastrophe bonds).

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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