What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-25 compared with 2021-03-09 · 131 added, 300 removed, 566 unchanged (43% of the section changed)

4 unchanged sentences

We are a rapidly growing and innovative insurer focused on providing specialty insurance to residential and commercial customers.

Our underwriting and analytical expertise allow us to concentrate on certain markets that we believe are underserved by other insurance companies, such as the markets for earthquake, hurricane and flood insurance.

Our underwriting and analytical expertise allow us to concentrate on certain markets that we

believe are underserved by other insurance companies, such as the markets for earthquake, hurricane, inland marine, and flood insurance.

We use proprietary data analytics and a modern technology platform to offer our customers flexible products with customized and granular pricing for both the admitted and excess and surplus lines (“E&S”) markets.

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We have organically increased gross written premiums from $16.6 million in our first year of operations to $535.2 million for the year ended December 31, 2021, which reflects a compound annual growth rate of approximately 64%.

For the year ended December 31, 2020, we experienced average monthly premium retention rates above 93% for our Residential Earthquake and Hawaii Hurricane lines and approximately 87% overall across all lines of business, providing strong visibility into future revenue.

For the year ended December 31, 2021, 55% of our gross written premiums were generated by our Residential Earthquake, Commercial Earthquake and Hawaii Hurricane lines of business, all of which are not subject to attritional losses.

We experienced average monthly premium retention rates above 89% overall for these 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 received regulatory approval for PESIC during the second quarter of 2020 and capitalized PESIC with approximately $100 million in initial surplus.

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COVID-19 Update

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.

Since March 2020, the majority of our employees have been working from home and we have put all business travel on hold indefinitely.

We have implemented safeguards for employees in critical roles 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.

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.

We will continue to operate in this manner for the foreseeable future.

The mandated closures of certain business due to the Pandemic have caused a slowdown in certain sectors of the economy and a corresponding increase in unemployment.

We have experienced an increase in the number of business interruption claims related to the Pandemic.

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

Since the beginning of the Pandemic, our focus has been to protect the health of the public and our employees while serving our policyholders and ensuring business continuity.

We recently began allowing all employees to return to our offices on a voluntary basis, with established protocols to ensure operational reliability and employee safety.

In addition, we have been 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.

Our All Risk and Commercial Earthquake (Difference in Conditions or “DIC”) policies offer business interruption coverage for insureds for a loss in business income caused by physical damage to the structure.

Each of our All Risk policies has a virus and/or communicable disease exclusion.

Our DIC policies require physical damage to the structure caused by the covered perils, whether it be an earthquake or flood.

We are acknowledging, investigating, assessing and adjudicating each claim received and providing the policyholder requisite consideration.

Our results of operations depend, in part, on the performance of our investment portfolio.

During 2020 we 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 change in the growth rate of our gross written premiums since the beginning of the Pandemic.

However, adverse events such as health-related concerns about working in our offices, the inability to travel, potential impact on our business partners and customers, and other matters affecting the general work and business environment could harm our business and impact the implementation of our business strategy.

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.

Our DIC policies require physical damage to the structure caused by the covered

perils, whether it be an earthquake or flood.

We do not expect additional business interruption claims from the Pandemic and have acknowledged and adjudicated each claim received.

The Pandemic’s ultimate impact on our results of operations remains uncertain.

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.

Additional financial volatility caused by the Pandemic may have a negative impact on our investment portfolio and results of operations.

Inflationary pressures caused by the Pandemic may increase our operating expenses and the average size of our loss claims.

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

However, the Pandemic continues to impact many aspects of the economy and society and the macroeconomic effects of the Pandemic may persist for an indefinite period, even after the Pandemic has subsided.

We cannot anticipate all the ways in which the Pandemic or other similar global health crises could adversely impact our business in the future.

Components of our results of operations

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Our gross written premiums are also impacted when we assume unearned in-force premiums due to new partnerships or other business reasons.

In periods where we assume a large volume of unearned premiums, our gross

written premiums may increase significantly compared to prior periods and the increase may not be indicative of future trends.

In periods where we assume a large volume of unearned premiums, our gross written premiums may increase significantly compared to prior periods and the increase may not be indicative of future trends.

Ceded Written Premiums

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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 vary over the life of XOL contracts due to changes of premium in force during the contract period.

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

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Commission and Other Income

Commission and other income consist of commissions earned on policies written on behalf of third-party insurance companies and where we have no exposure to the insured risk and certain fees earned in conjunction with underwriting policies.

Commission and other income consist of commissions earned on policies written on behalf of third party insurance companies where we have no exposure to the insured risk and certain fees earned in conjunction with underwriting policies.

Commission and other income are earned on the effective date of the underlying policy.

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Our losses and loss adjustment expenses are generally affected by:

• The occurrence, frequency and severity of catastrophe events in the areas where we underwrite polices relating to these perils;

● The occurrence, frequency and severity of catastrophe events in the areas where we underwrite policies relating to these perils;

● The occurrence, frequency and severity of non-catastrophe attritional losses;

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Acquisition Expenses

Acquisition expenses are principally comprised of the commissions we pay retail agents, program administrators and wholesale brokers, net of ceding commissions we receive on business ceded under certain reinsurance contracts.

In addition, acquisition expenses include premium-related taxes and other fees.

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Interest Expense

Interest expense consists primarily of interest expense on our surplus notes through September 2018 and our Floating Rate Notes after September 2018.

In addition, we incurred interest expense related to prepayment penalties on the payoff of our surplus notes in September 2018 and related to the redemption premium paid on our Floating Rate Notes in May 2019.

For the year ended December 31 2021, interest expense consists of the unused line fee and amortization of the commitment fee on our credit agreement.

We did not incur any interest expense during the year ended December 31, 2020.

Net Investment Income

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The principal factors that influence net investment income are the size of our investment portfolio, the yield on that portfolio, and investment management expenses.

As measured by amortized cost, which excludes changes in fair value caused by changes in interest rates, the size of our investment portfolio is mainly a function of our invested equity capital along with premium we receive from our insureds, less payments on policyholder claims and other operating expenses.

As measured by amortized cost, which excludes changes in fair value, caused by changes in interest rates, the size of our investment portfolio is mainly a function of our invested capital along with premium we receive from our insureds, less payments on policyholder claims and other operating expenses.

Our balance of invested capital may be impacted in the future by repurchases of shares of our common stock.

Net Realized and Unrealized Gains and Losses on Investments

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Income tax expense (benefit)

Expenses associated with IPO, tax restructuring, secondary offerings, and one time incentive cash bonuses

Expenses associated with transactions and stock offerings

Stock-based compensation expense

Expenses associated with retirement of debt

Amortization of intangibles

Expenses associated with catastrophe bond

23 unchanged sentences

Commercial Earthquake

Commercial All Risk

Specialty Homeowners

Inland Marine

Commercial All Risk

Hawaii Hurricane

1 unchanged sentence

Total Gross Written Premiums

During the twelve months ended December 31, 2019, we entered two new Residential Earthquake partnerships in which we assumed a total of $7.8 million of unearned premiums.

Excluding the impact of these unearned premium assumptions, our Residential Earthquake gross written premiums increased by $18.3 million, or 14.9%.

During the fourth quarter of 2020, we ceased offering Commercial All Risk products on an admitted basis and will only offer them on an E&S basis going forward.

This transition will impact the growth rate of our Commercial All Risk line in future periods.

In addition, during the fourth quarter of 2020, we purchased the renewal rights of certain Hawaii Hurricane policies from another insurance company.

We expect our Hawaii Hurricane written premiums to increase related to this purchase.

However, there is no guarantee that policyholders will renew their policies with us and the ultimate impact to our future written premiums is uncertain.

During the fourth quarter of 2020, we ceased offering Commercial All Risk products on an admitted basis and only offered them on an E&S basis during 2021.

This transition caused a decline in premium in our Commercial All Risk line.

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

Year Ended December 31,

($ in thousands)

Total Gross Written Premiums

Ceded Written Premiums

Ceded written premiums increased $68.3 million, or 44.1 %, to $223.4 million for the year ended December 31, 2021 from $155.1 million for the year ended December 31, 2020.

The increase was primarily due to increased excess of loss reinsurance (“XOL”) expense commensurate with growth in exposure.

In addition, catastrophe losses occurring in the third and fourth quarters of 2020 caused us to fully utilize portions of our XOL coverage.

As a result, we incurred charges of $7.0 million during the fourth quarter of 2020 related to the acceleration of XOL expenses and the purchase and utilization of a backup XOL layer.

Premiums ceded under quota share arrangements also increased due to the growth in written premium lines subject to quota share arrangements.

Ceded written premiums as a percentage of gross written premiums slightly increased to 43.8% for the year ended December 31, 2020 from 43.0% for the year ended December 31, 2019.

This increase was primarily due to increased XOL expense offset by changes in our quota share agreements in our Specialty

Homeowners and Commercial All Risk lines as we entered into new ceding arrangements on these lines which increased the percentage of premiums we retained.

The increase was primarily due to increased quota share ceding due to growth in written premium lines subject to quota shares.

In addition, XOL reinsurance expense increased due to growth in exposure and additional charges from Winter Storm Uri (“Uri”), which impacted our Specialty Homeowners and Commercial All Risk lines during the first quarter of 2021.

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

During the year ended December 31, 2021, we incurred an additional $7.9 million of expense associated with the reinstatement of our reinsurance program as a result of Winter Storm Uri.

During 2020, we also incurred specific XOL expenses resulting from castastrophe events.

As a result of hurricanes occurring in the third and fourth quarters of 2020, we fully utilized portions of our XOL coverage and incurred charges of $7.0 million related to the acceleration of XOL expenses and the purchase and utilization of a backup XOL layer.

Ceded written premiums as a percentage of gross written premiums slightly decreased to 41.8% for the year ended December 31, 2021 from 43.8% for the year ended December 31, 2020.

This decrease was primarily due to gross written premiums growing at a faster rate than ceded written premiums.

Net Written Premiums

Net written premiums increased $112.4 million, or 56.4%, to $311.7 million for the year ended December 31, 2021 from $199.3 million for the year ended December 31, 2020.

The increase was primarily due to higher gross written premiums, primarily in our Commercial Earthquake, Commercial All Risk, and Specialty Homeowners lines, offset by increased ceded written premiums.

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

Net Earned Premiums

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Commission and Other Income

Commission and other income increased $0.6 million, or 23.4%, to $3.3 million for the year ended December 31, 2020 from $2.7 million for the year ended December 31, 2019 due primarily to an increase in policy related fees associated with an increased volume of premiums written.

Commission and other income increased $0.3 million, or 9.5%, to $3.6 million for the year ended December 31, 2021 from $3.3 million for the year ended December 31, 2020 due primarily to an increase in policies written through our internal managing general agency, Palomar Insurance Agency.

Losses and Loss Adjustment Expenses

Losses and loss adjustment expenses increased $58.5 million, or 1,046.3%, to $64.1 million for the year ended December 31, 2020 from $5.6 million for the year ended December 31, 2019.

Losses and loss adjustment expenses decreased $22.6 million, or 35.3%, to $41.5 million for the year ended December 31, 2021 from $64.1 million for the year ended December 31, 2020.

During the year ended December 31, 2021, losses were primarily attributable to attritional losses and catastrophe losses from Hurricanes Ida and Nicholas and Winter Storm Uri which impacted our Specialty Homeowners and Commercial All Risk lines of business.

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

During the year ended December 31, 2020, losses were primarily attributable to catastrophe events occurring during the third and fourth quarters in our Specialty Homeowners and Commercial All Risk lines of business.

During the year ended December 31, 2019, losses were primarily attributable to attritional losses in our Commercial All Risk and Specialty Homeowners lines of business and windstorm exposure in Japan through our assumed reinsurance portfolio.

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

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Our catastrophe loss ratio was 2.1% during the year ended December 31, 2021.

Catastrophe losses primarily included losses from losses from Hurricanes Ida and Nicholas, Winter Storm Uri, and a single loss from an excess liability indemnity policy covered by PESIC .

Our catastrophe loss ratio was 32.9% during the year ended December 31, 2020.

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

We did not experience any catastrophe losses during the year ended December 31, 2019.

Our non-catastrophe loss ratio was 15.6% for the year ended December 31, 2021 compared to 8.5% during the year ended December 31, 2020.

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

Non-catastrophe losses increased due mainly to a higher percentage of business in lines subject to attritional losses such as Specialty Homeowners, Inland Marine, Flood, and assumed reinsurance.

Acquisition Expenses

Acquisition expenses increased $31.4 million, or 49.0%, to $95.4 million for the year ended December 31, 2021 from $64.0 million for the year ended December 31, 2020.

The primary reason for the increase was increased commissions and premium-related taxes due to higher earned premiums.

The primary reason for the increase was increased commissions due to higher earned premiums, offset by increased ceding commissions from quota share arrangements.

Acquisition expenses as a percentage of gross earned premiums were 22.0% for the year ended December 31, 2021 compared to 21.2% for the year ended December 31, 2020.

Acquisition expenses as a percentage of gross earned premiums increased due primarily to lower earned ceding commissions.

Earned ceding commissions decreased due to changes in our Specialty Homeowners and All Risk ceding arrangements where we retained a higher percentage of premiums and received less ceding commission as a result.

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 fluctuates based on mix of business produced and quota share arrangements in place.

Other Underwriting Expenses

Other underwriting expenses decreased $17.2 million, or 33.6%, to $34.1 million for the year ended December 31, 2020 from $51.3 million for the year ended December 31, 2019.

This decrease was primarily due to a decrease in expenses relating to unique items.

During the prior year, the company incurred significant charges associated with an IPO, tax restructuring, secondary offerings, retirement of debt, and one-time incentive cash bonuses.

The company also incurred a stock compensation charge of $23.0 million upon modification of its management incentive plan in the prior year.

Other underwriting expenses increased $19.7 million, or 57.6%, to $53.7 million for the year ended December 31, 2021 from $34.1 million for the year ended December 31, 2020.

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

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 12.4% for the year ended December 31, 2021 compared to 11.3% for the year ended December 31, 2020.

Excluding the impact of expenses relating to our IPO, tax restructuring, secondary offerings, one-time incentive cash bonuses, stock-based compensation, retirement of debt, and catastrophe bonds, other underwriting expenses as a percentage of gross earned premiums were 10.2% for the year ended December 31, 2020 compared to 11.6% for the year ended December 31, 2019.

This percentage decreased due to higher gross earned premiums without a proportional increase to expenses.

Interest Expense

Interest expense decreased to zero for the year ended December 31, 2020 from $1.1 million for the year ended December 31, 2019.

We redeemed our Floating Rate Notes in May 2019 and did not have any long-term debt during the year ended December 31, 2020 whereas we had outstanding Floating Rate Notes during a portion of the year ended December 31, 2019.

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 10.3% for the year ended December 31, 2021 compared to 10.2% for the year ended December 31, 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 $0.5 million, or 5.4%, to $9.1 million for the year ended December 31, 2021 from $8.6 million for the year ended December 31, 2020.

The increase was primarily due to a higher average balance of investments during the year ended December 31, 2020 due primarily to proceeds from our January and June 2020 stock offerings.

The increase from a higher average investment balance was partially offset by lower yields on investments due to a lower interest rate environment in 2020 versus 2019.

The increase was primarily due to a higher average balance of

investments during the year ended December 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 recently invested funds.

Net realized and unrealized gains on investments decreased $0.2 million, to a $1.3 million gain for the year ended December 31, 2021 from a $1.5 million gain for the year ended December 31, 2020.

We had a higher balance of

equity securities during the prior year period and experienced appreciation on those equity securities during that period.

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 with the remainder of investments in equity securities.

Our equity securities are comprised of mutual funds that provide exposure to the U.S.

investment-grade bond market.

This change was due to fluctuations in performance of equity securities held.

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

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Income Tax Expense (Benefit)

The company had an immaterial income tax benefit for the year ended December 31, 2020 compared to a $7.5 million expense for the year ended December 31, 2019 primarily because of lower pre-tax income during the year ended December 31, 2020.

During the year ended December 31, 2020, 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 year ended December 31, 2019, our income tax expense was significantly impacted by the reversal of our U.S.

federal deferred tax valuation allowance in March 2019, offset by an addback related to a nondeductible stock compensation charge incurred upon the modification of our management incentive plan in March 2019.

Year ended December 31, 2019 compared to year ended December 31, 2018

The following table summarizes our results for the years ended December 31, 2019 and 2018:

Year Ended December 31,

($ 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)

Interest expense

Net investment income

Net realized and unrealized (losses) gains on investments

Income before income taxes

Income tax expense (benefit)

Expenses associated with IPO, tax restructuring, secondary offerings, and one time incentive cash bonuses

Stock-based compensation expense

Expenses associated with retirement of debt

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)

NM- Not Meaningful

(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 were $252.0 million for the year ended December 31, 2019 compared to $154.9 million for the year ended December 31, 2018, an increase of $97.1 million, or 62.7%.

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 products’ 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:

Year Ended December 31,

($ in thousands)

Residential Earthquake

Commercial Earthquake

Commercial All Risk

Specialty Homeowners

Inland Marine

Hawaii Hurricane

Residential Flood

Total Gross Written Premiums

NM- not meaningful

Approximately $19.4 million of the increase to Residential Earthquake premiums was due to a new partnership with a homeowners carrier in which we assumed $6.6 million of unearned premiums and wrote an additional $12.8 million in premiums.

Ceded Written Premiums

Ceded written premiums increased $25.4 million, or 30.6%, to $108.3 million for the year ended December 31, 2019 from $82.9 million for the year ended December 31, 2018.

The increase was primarily due to increased cessions to new quota share reinsurance partners in our Commercial All Risk line.

We also incurred increased excess of loss reinsurance expense commensurate with growth in exposure.

Ceded written premiums as a percentage of gross written premiums decreased to 43.0% for the year ended December 31, 2019 from 53.6% for the year ended December 31, 2018.

The cession percentage was higher in the prior year due to an $11.8 million transfer of unearned premiums in June 2018 related to our entering into a fronting arrangement in our Specialty Homeowners line in the state of Texas.

This fronting arrangement terminated in June 2019 in conjunction with the inception of our Specialty Homeowners Facility (“SHF”).

Net Written Premiums

Net written premiums increased $71.7 million, or 99.6%, to $143.6 million for the year ended December 31, 2019 from $71.9 million for the year ended December 31, 2018.

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

Net Earned Premiums

Net earned premiums increased $30.3 million, or 43.4%, to $100.2 million for the year ended December 31, 2019 from $69.9 million for the year ended December 31, 2018 due primarily to the earned portion of the higher gross written premiums offset by the earned portion of the higher ceded written premiums under reinsurance agreements.

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

($ in thousands)

Gross earned premiums

Ceded earned premiums

Net earned premiums

Net earned premium ratio

Commission and Other Income

Commission and other income increased $0.3 million, or 11.1%, to $2.7 million for the year ended December 31, 2019 from $2.4 million for the year ended December 31, 2018 due primarily 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 $0.7 million, or 10.9%, to $5.6 million for the year ended December 31, 2019 from $6.3 million for the year ended December 31, 2018.

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

($ in thousands)

Catastrophe losses

Non-catastrophe losses

Total losses and loss adjustment expenses

NM- not meaningful

During the year ended December 31, 2018, losses were primarily attributable a $5 million catastrophe loss from Hurricane Florence and attritional losses in our Commercial All Risk and Specialty Homeowners lines of business.

Losses decreased during the year ended December 31, 2019 due to a reduction in the severity of weather-related losses.

Our non-catastrophe loss ratio was 5.6% for the year ended December 31, 2019 compared to 1.8% during the year ended December 31, 2018.

Non-catastrophe losses increased due mainly to a higher percentage of business in lines subject to attritional losses such as Commercial All Risk, Specialty Homeowners, and Inland Marine and due to losses on our assumed reinsurance portfolio.

Acquisition Expenses

Acquisition expenses increased $9.1 million, or 32.0%, to $37.3 million for the year ended December 31, 2019 from $28.2 million for the year ended December 31, 2018.

The primary reason for the increase was higher earned premiums which resulted in higher commissions and premium-related taxes.

Acquisition expenses as a percentage of gross earned premiums were 18.6% for the year ended December 31, 2019 compared to 20.5% for the year ended December 31, 2018.

Acquisition expenses as a percentage of gross earned premiums decreased due to higher earned ceding commissions related to our Specialty Homeowners and Commercial All Risk lines.

Other Underwriting Expenses

Other underwriting expenses increased $33.3 million, or 185.7%, to $51.3 million for the year ended December 31, 2019 from $18.0 million for the year ended December 31, 2018.

During the year ended December 31, 2019, we incurred increased payroll, professional fees, technology expenses, stock-based compensation and other expenses necessary to support our growth.

During the year ended December 31, 2019, other underwriting expenses included a stock compensation charge of $23.0 million related to the modification of our former parent company’s management incentive plan, $0.4 million of expenses associated with our IPO and tax restructuring, a $0.9 million charge related to the write-off of debt amortization costs upon redemption of our Floating Rate Notes, and $2.6 million of expenses from one-time incentive cash bonuses triggered by the September 2019 Secondary Offering and expenses associated with both Secondary Offerings.

During the year ended December 31, 2018, other underwriting expenses included $1.1 million of expenses associated with our IPO and tax restructuring and $0.5 million of expenses related to the repayment of our surplus notes in September 2018.

Other underwriting expenses as a percentage of gross earned premiums were 25.6% for the year ended December 31, 2019 compared to 13.0% for the year ended December 31, 2018.

Excluding the impact of expenses relating to our IPO, tax restructuring, Secondary Offerings, one-time incentive cash bonuses, stock-based compensation and retirement of debt, other underwriting expenses as a percentage of gross earned premiums were 11.6% for the year ended December 31, 2019 compared to 12.0% for the year ended December 31, 2018.

This percentage decreased due to higher gross earned premiums without a proportional increase to expenses.

Interest Expense

Interest expense decreased $1.2 million, or 53.6%, to $1.1 million for the year ended December 31, 2019 from $2.3 million for the year ended December 31, 2018.

Interest expense decreased as we redeemed our Floating Rate Notes in May 2019 and did not have any long-term debt after May 2019 whereas we had outstanding surplus notes and Floating Rate Notes during the entire year ended December 31, 2018.

In addition, interest expense for the year ended December 31, 2019 includes a $0.4 million charge incurred upon redemption of our Floating Rate Notes in May 2019.

Interest expense for the year ended December 31, 2018 includes a $0.1 million charge incurred upon repayment of our surplus notes in September 2018.

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

Net investment income increased $2.8 million, or 84.5%, to $6.0 million for the year ended December 31, 2019 from $3.2 million for the year ended December 31, 2018.

The primary reason for the increase was a higher average balance of investments during the year ended December 31, 2019 due primarily to proceeds from our IPO which were received in April 2019.

Net realized and unrealized gains on investments increased $7.0 million, or 272.9%, to a $4.4 million gain for the year ended December 31, 2019 from a loss of $2.6 million for the year ended December 31, 2018.

The primary reason for the increase was an improvement in the performance of our equity securities during the year ended December 31, 2019 compared to the year ended December 31, 2018.

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 with the remainder of investments in equity securities.

The following table summarizes the components of our investment income for the years ended December 31, 2019 and 2018:

($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 (Benefit)

Income tax expense increased to $7.5 million for the year ended December 31, 2019 from an immaterial amount for the year ended December 31, 2018 as a result of positive taxable income during the year ended December 31, 2019 occurring after our U.S.

domestication in March 2019 partially offset by the benefit from the reduction of the valuation allowance on our federal deferred tax assets.

For the year ended December 31, 2019, our income tax expense was significantly impacted by the reversal of our U.S.

We are subject to income taxes in certain jurisdictions in which we operate.

subsidiaries are subject to federal and state income taxes.

We earn income in Bermuda, a non-taxable jurisdiction, primarily as a result of quota share reinsurance agreements between our U.S.

insurance subsidiary and PSRE, and the investment income earned in PSRE.

Prior to July 1, 2019, our U.S.

insurance subsidiary and PSRE were subject to a quota share reinsurance agreement under which the U.S.

insurance subsidiary ceded 50% of the earthquake and Hawaii hurricane gross premiums earned as well as losses and loss adjustment expenses to PSRE in exchange for a 25% ceding commission.

As a result of our multinational operations our effective tax rate has historically been below that of a fully U.S.

based operation.

All of our operations became subject to U.S.

income tax in 2019 as a result of our domestication to the United States.

Income tax expense increased to $11.3 million for the year ended December 31, 2021 versus an immaterial benefit during the year ended December 31, 2020.

For the year ended December 31, 2021, the difference between our tax rate and the 21% statutory rate relates primarily to a benefit from the permanent component of employee stock option exercises and charges related to state tax accruals.

For the year ended December 31, 2020, the difference relates primarily the permanent component of employee stock option exercises.

Reconciliation of Non-GAAP Financial Measures

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Underwriting revenue represents revenue generated by our underwriting operations and allows us to evaluate our underwriting performance without regard to investment income.

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 revenue should not be viewed as a substitute for total revenue calculated in accordance with GAAP, and other companies may define underwriting revenue differently.

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Net investment income

Net realized and unrealized (gains) losses on investments

Net realized and unrealized gains on investments

Underwriting revenue

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Net investment income

Net realized and unrealized (gains) losses on investments

Net realized and unrealized gains on investments

Interest expense

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(in thousands)

Expenses associated with IPO, tax restructuring, secondary offerings, and one time incentive cash bonuses

Expenses associated with transactions and stock offerings

Stock-based compensation expense

Expenses associated with retirement of debt

Amortization of intangibles

Expenses associated with catastrophe bond

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We use adjusted return on equity as an internal performance measure in the management of our operations because we believe it gives our management and financial statement users useful insight into our results of operations and our underlying business performance.

Adjusted return on equity should not be viewed as a substitute for return on equity calculated using unadjusted GAAP numbers, and other companies may define adjusted return on equity differently.

Adjusted return on

equity should not be viewed as a substitute for return on equity calculated using unadjusted GAAP numbers, and other companies may define adjusted return on equity differently.

Adjusted return on equity is calculated as follows:

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Adjustments to numerator:

Expenses associated with IPO, tax restructuring, secondary offerings, and one time incentive cash bonuses

Expenses associated with transactions and stock offerings

Stock-based compensation expense

Portion of expenses associated with retirement of debt classified as other underwriting expenses

Amortization of intangibles

Expenses associated with catastrophe bond

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Adjustments to numerator:

Expenses associated with IPO, tax restructuring, secondary offerings, and one-time incentive cash bonuses

Expenses associated with transactions and stock offerings

Stock-based compensation expense

Portion of expenses associated with retirement of debt classified as other underwriting expenses

Amortization of intangibles

Expenses associated with catastrophe bond

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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 $45.7 million in 2022 without approval by the California and Oregon Insurance Commissioners.

Under Arizona statute with governs PESIC, dividends paid in a consecutive twelve month period cannot exceed the lesser of (i) 10% of an insurance company’s statutory policyholders’ surplus as of December 31 of the preceding year or (ii) 100% of its statutory net income for the preceding calendar year.

As such, PESIC is unable to pay a dividend or distribution in 2021 without the approval of the Arizona Insurance Commissioner as it had a statutory net loss in 2020.

Based on the above restrictions, PESIC may pay a dividend or distribution of no greater than $4.1 million in 2022 without approval of the Arizona Insurance Commissioner.

In addition to the above limitations, any dividend or distribution declared is also subject to state regulatory approval prior to payment.

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As of December 31, 2021 and December 31, 2020, the total adjusted capital of PSIC and PESIC were in excess of their respective prescribed risk-based capital requirements.

Under the Insurance Act and related regulations, our Bermuda reinsurance subsidiary is required to maintain certain solvency and liquidity levels, which it maintained as of December 31, 2020 and December 31, 2019.

Our Bermuda reinsurance subsidiary maintains a Class 3A license and thus must maintain a minimum liquidity ratio in which the value of its relevant assets is not less than 75% of the amount of its relevant liabilities for general business.

Under the Insurance Act and related regulations, our Bermuda reinsurance subsidiary, PSRE, is required to maintain certain solvency and liquidity levels, which it maintained as of December 31, 2021 and December 31, 2020.

PSRE maintains a Class 3A license and thus must maintain a minimum liquidity ratio in which the value of its relevant assets is not less than 75% of the amount of its relevant liabilities for general business.

Relevant assets include cash and cash equivalents, fixed maturity securities, accrued interest income, premiums receivable, losses recoverable from reinsurers, and funds withheld.

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A Class 3A insurer is prohibited from declaring or paying a dividend if it is in breach of its minimum solvency margin, its enhanced capital requirement, or its minimum liquidity ratio, or if the declaration or payment of such dividend would cause such a breach.

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 our Bermuda reinsurance subsidiary 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.

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 Bermuda Monetary Authority (“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.

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.

The affidavit must state that in the opinion of those swearing the declaration of such dividend has not caused the insurer to fail to meet its relevant margins.

Further, under the Companies Act, our Bermuda reinsurance subsidiary may only declare or pay a dividend, or make a distribution out of contributed surplus, if it has no reasonable grounds for believing that:

Further, under the Companies Act, PSRE may only declare or pay a dividend, or make a distribution out of contributed surplus, if it has no reasonable grounds for believing that:

(1) it is, or would after the payment be, unable to pay its liabilities as they become due or (2) the realizable value of its assets would be less than its liabilities.

Pursuant to Bermuda regulations, the maximum amount of dividends and return of capital available to be paid by a reinsurer is determined pursuant to a formula.

Under this formula, the maximum amount of dividends and return of capital available from our Bermuda subsidiary during 2021 is calculated to be approximately $10.5 million.

Under this formula, the maximum amount of dividends and return of capital available from PSRE during 2022 is calculated to be approximately $4.2 million.

However, this dividend amount is subject to annual enhanced solvency requirement calculations.

There were no dividends approved or paid in 2020 or 2019.

During the year ended December 31 2021, PSRE paid

dividends of $15.0 million and $10.0 million to the Company.

These dividend payments were approved by the BMA.

There were no dividends declared or paid during the year ended December 31, 2020.

One of our insurance company subsidiaries, PSIC, is a member of the Federal Home Loan Bank of San Francisco (FHLB).

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The amount of advances that may be taken is dependent on statutory admitted assets.

As of December 31, 2020, there are no advances outstanding under the FHLB facility.

As of December 31, 2021 and 2020, there are no advances outstanding under the FHLB facility.

Our primary sources of cash flow are written premiums, investment income, reinsurance recoveries, sales and redemptions of investments, and proceeds from offerings of debt and equity securities.

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Therefore, their timing can influence cash flows from operating activities in any given period.

The potential for a large claim under an insurance or reinsurance contract means that our insurance

subsidiaries may need to make substantial payments within relatively short periods of time, which would have a negative impact on our operating cash flows.

We generated positive cash flows from operations for each of the years ended December 31, 2020, 2019 and 2018.

The potential for a large claim under an insurance or reinsurance contract means that our insurance subsidiaries may need to make substantial payments within relatively short periods of time, which would have a negative impact on our operating cash flows.

We generated positive cash flows from operations for the years ended December 31, 2021 and 2020.

Management believes that cash receipts from premium, proceeds from investment sales and redemptions, and investment income and reinsurance recoveries, if necessary, are sufficient to cover cash outflows in the foreseeable future.

The following table summarizes our cash flows for the years ended December 31, 2021 and 2020:

Year Ended December 31,

($ in thousands)

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Change in cash, cash equivalents, and restricted cash

Our cash flow from operating activities has been positive in each of the last three years.

Our cash flow from operating activities has been positive in each of the last two years.

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, and reinsurance payments.

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

Cash used in investing activities for each of the last three years related primarily to purchases of fixed income and equity securities in excess of sales and maturities.

Cash provided by financing activities for year ended December 31, 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 $2.0 million related to the issuance of common stock via stock option exercises.

Cash provided by financing activities for the year ended December 31, 2019 was related to the receipt of $87.4 million in net proceeds from our IPO in April 2019, offset by $20.0 million of cash paid to redeem our Floating Rate Notes in May 2019 and a one-time cash distribution of $5.1 million to our then sole stockholder, GC Palomar Investor LP in March 2019.

Cash provided by financing activities in 2018 was related to the issuance of Floating Rate Notes and the payoff of surplus notes in September 2018.

Cash used in investing activities for each of the last two years related primarily to purchases of fixed income and equity securities in excess of sales and maturities.

Cash used in financing activities for the year ended December 31, 2021 related to the repurchase of $15.9 million of our common stock offset by $2.8 million in proceeds from common stock issued via stock option exercises and our employee stock purchase plan.

common stock via our employee stock purchase plan, and the receipt of $2.0 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.

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To the extent our future operating cash flows are insufficient to cover our net losses from catastrophic events, we had $516.3 million in cash and investment securities available at December 31, 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.

Notes Payable

Surplus Notes

Prior to September 2018, the Company had $17.5 million in outstanding surplus notes which had been issued by PSIC on February 3, 2015 for a term of seven years.

The surplus notes bore interest at the rate of LIBOR plus 8.00% and had restrictions as to payments of interest and principal.

Any such payments required the prior approval of the

Oregon Insurance Commissioners before such payments could be made.

Such payments could only be made from surplus.

Floating Rate Notes

In September 2018, the Company completed a private placement financing of $20.0 million floating rate senior secured notes (the “Floating Rate Notes”), bearing interest at the three-month treasury rate plus 6.50% per annum.

As part of the financing agreement, the Company immediately used surplus funds to pay down the existing $17.5 million in surplus notes.

As part of this pre-payment, the Company incurred a penalty of $0.1 million which, along with unamortized debt issuance costs of $0.4 million, was charged to income in 2018.

The Floating Rate Notes were redeemed pursuant to their terms on May 23, 2019, at a redemption price equal to 102% of the principal amount of the Floating Rate Notes, or $20.4 million (plus $0.3 million of accrued and unpaid interest thereon).

The Company recognized a charge of $1.3 million upon redemption with $0.4 million due to the redemption premium and $0.9 million due to the write-off of unamortized debt issuance costs.

The $0.4 million redemption premium was recognized as a component of interest expense and the $0.9 million issuance cost write-off was recognized as a component of other underwriting expenses in the Company’s consolidated statements of income and comprehensive income.

The Company incurred $1.1 million in interest expense related to the Floating Rate Notes for the year ended December 31, 2019 (inclusive of the $0.4 million redemption premium) and $0.6 million for the year ended December 31, 2018 and paid $1.2 million and $0.5 million for each period, respectively.

The Company incurred and paid $1.2 million in interest expense related to the surplus notes for the year ended December 31, 2018.

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

Contractual Obligations and Commitments

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Accordingly, it is highly likely that the total amounts of obligations paid by us in the time periods shown will be greater than those indicated in the table.

Share repurchases

During the year ended December 31, 2021, our Board of Directors authorized a $40 million share repurchase program and we repurchased $15.9 million of shares under this program in 2021.

Subsequent to December 31, 2021, our Board of Directors approved a new share repurchase program, replacing the existing program and authorizing the repurchase by the Company of up to $100 million of our outstanding shares of common stock over the period ending on March 31, 2024 .

Through this program, we may use our capital to repurchase our shares in the future.

The timing and amount of future share repurchases will depend on several factors, including our stock price performance, ongoing capital planning considerations, general market conditions, and applicable legal requirements.

Credit Agreement

In December 2021, we entered into a Credit Agreement (the “Credit Agreement”) with U.S.

Bank National Association which provides a revolving credit facility of up to $100 million through December 8, 2026.

Interest on the credit facility accrues on each SOFR rate loan at the applicable SOFR (as defined in the Credit Agreement) plus 1.75% and on each base rate loan at the applicable Alternate Base Rate (as defined in the Credit Agreement) plus 0.75%.

may be either a SOFR rate loan or a base rate loan, at our discretion.

Outstanding amounts under the Credit Agreement may be prepaid in full or in part at any time with no prepayment premium and may be reduced in full or in part at any time upon prior notice.

As of December 31, 2021 we do not have any outstanding borrowings under the Credit Agreement, but we may seek to borrow under the Credit Agreement in the future.

Financial Condition

Stockholders’ Equity

At December 31, 2020 total stockholders’ equity was $363.7 million and tangible stockholders’ equity was $352.2 million, compared to total stockholders’ equity of $218.6 million and tangible stockholders’ equity of $217.8 million as of December 31, 2019.

Stockholder’s equity increased primarily due to net income, receipt of proceeds from our January 2020 and June 2020 common stock offerings, and unrealized gains on fixed maturity securities.

It also increased due to issuance of common stock and stock-based compensation expense from our equity compensation plans.

At December 31, 2021 total stockholder’s equity was $394.2 million and tangible stockholders’ equity was $384.7 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 and due to issuance of common stock and stock-based compensation expense from our equity compensation plans, offset by unrealized losses on our fixed income securities and company repurchases of our common stock.

Stock-based compensation expense is treated as an additional paid-in-capital and increases stockholder’s equity.

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As of December 31, 2021, the majority of our investment portfolio, or $432.7 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 $24.3 million of equity securities, primarily comprised of mutual funds that provide exposure to the U.S.

investment-grade bond market.

Also included in our investment portfolio were $33.3 million of equity securities.

In addition, we maintained a non-restricted cash and cash equivalent balance of $50.3 million at December 31, 2021.

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These methods utilize, to varying degrees, the initial expected loss ratio, detailed statistical analysis of past claims reporting and payment patterns, claims frequency and severity, paid loss experience, industry loss experience, and changes in market conditions, policy forms, exclusions, and exposures.

The actuarial methods used to estimate loss and loss adjustment expenses reserves are:

● Reported and/or Paid Loss Development Methods —Ultimate losses are estimated based on historical reported and/or paid loss reporting patterns.

The actuarial methods used to estimate loss reserves are:

● Reported and/or Paid Loss Development Methods —Ultimate losses are estimated based on historical reported and/or paid loss patterns.

Reported losses are the sum of paid and case losses.

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IBNR losses are estimated based on expected average severity, estimated ultimate claim counts and the historical development patterns of reported losses.

● Paid Bornhuetter-Ferguson Pure Premium Method —Under this method, ultimate losses are estimated as the sum of cumulative reported losses and estimated IBNR losses.

● Reported Bornhuetter Ferguson Pure Premium Method —Under this method, ultimate losses are estimated as the sum of cumulative reported losses and estimated IBNR losses.

IBNR losses are estimated based on expected pure premium and on the historical development patterns of reported losses.

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Loss Adjustment Expense reserves are estimated based on the ratio of paid loss adjustment expense to paid loss, which is estimated separately by line of business as well as split by hurricane and excluding hurricane.

We then apply this ratio to our estimated unpaid loss, by multiplying the ratio times 50% of loss case reserves and 100% of loss IBNR reserves.

We then apply

this ratio to our estimated unpaid loss, by multiplying the ratio times 50% of loss case reserves and 100% of loss IBNR reserves.

This is applied by line of business and accident year to arrive at estimated unpaid loss adjustment expense on a gross basis.

We then add the estimated unpaid loss adjustment expense on a gross basis to the paid loss adjustment expense to calculate estimated ultimate loss adjustment expense.

On a quarterly basis, the Chief Executive Officer, President, Chief Risk Officer, Chief Financial Officer, Chief Accounting Officer, and Vice President Legal—Compliance & Claims, meet to review the recommendations made by the independent actuarial consultant and use their best judgment to determine the best estimate to be recorded for the reserve for losses and loss adjustment expenses on our balance sheet.

On a quarterly basis, the leaders of our executive management, accounting, actuarial, and claims teams meet to review the recommendations made by the independent actuarial consultant and use their best judgment to determine the best estimate to be recorded for the reserve for losses and loss adjustment expenses on our balance sheet.

Our reserves are driven by several important factors, including litigation and regulatory trends, legislative activity, climate change, social and economic patterns and claims inflation assumptions.

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The amount by which estimated losses differ from those originally reported for a period is known as “development.” Development is unfavorable when the losses ultimately settle for more than the amount reserved or subsequent estimates indicate a basis for reserve increases on unresolved claims.

Development is favorable when losses ultimately settle for less than the amount reserved, or subsequent estimates indicate a basis for reducing loss reserves on unresolved claims.

Development is favorable when losses ultimately settle for less than the amount reserved, or subsequent estimates indicate a basis for reducing loss reserves on

unresolved claims.

We reflect favorable or unfavorable development of loss reserves in the results of operations in the period the estimates are changed.

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(in thousands)

During the year ended December 31, 2021, our gross incurred losses for accident years 2020 and prior developed unfavorably by $28.7 million.

The gross unfavorable development was due primarily to losses on certain 2020 Hurricanes emerging at a higher severity than expected, primarily in our special property lines of business.

On a net basis, the development was favorable by $3.6 million due to the effect of ceding gross unfavorable development under our reinsurance program.

The catastrophe events which experienced unfavorable development were primarily subject to ceding under our XOL treaties while the catastrophe events which experienced favorable development were subject to a lower amount of ceding.

During the year ended December 31, 2020, our gross incurred losses for accident years 2018 and prior developed favorably by $3.3 million.

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The net favorable development of $0.2 million reflects the effect of ceding the gross favorability under our reinsurance program.

During the year ended December 31, 2018, our gross incurred losses for accident years 2017 and prior developed favorably by $3.2 million.

This favorable development was due to reported losses emerging at a lower level than expected, primarily in our Specialty Homeowners business.

The net favorable development of $1.9 million reflects the effect of ceding the gross favorability under our reinsurance program.

Although we believe that our reserve estimates are reasonable, it is possible that our actual loss experience may not conform to our assumptions.

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Prior to 2018, unrealized gains and losses on equity securities were included in accumulated other comprehensive income as a separate component of stockholders’ equity.

The Company adopted new accounting guidance beginning with this Annual Report on 10-K, and is now required to consider recognizing an allowance for credit losses on its financial assets, including its available-for-sale securities.

All financial assets measured at amortized cost are required to be presented at the net amount expected to be collected by means of an allowance for credit losses that is included in net income.

All financial assets measured at amortized cost, including available-for-sale securities are required to be presented at the net amount expected to be collected by means of an allowance for credit losses that is included in net income.

Credit losses relating to available-for-sale debt securities are also required to be recorded through a reversible allowance for credit losses, but the allowance is limited to the amount by which fair value is less than amortized cost.

The previous accounting guidance delayed the recognition of credit losses until it was probable a loss had been incurred.

The Company reviews all securities with unrealized losses on a regular basis to assess whether the decline in the securities fair value necessitates the recognition of an allowance for credit losses.

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The Company also considers whether it intends to sell the security or if it is more likely than not that it will be required to sell the security before recovery of its amortized cost.

portfolio, potential sales of investments to meet cash flow needs, and potential sales of investments to capitalize on favorable pricing.

When assessing whether it intends to sell a fixed-maturity security or if it is likely to be required to sell a fixed-maturity security before recovery of its amortized cost, the Company evaluates facts and circumstances including, but not limited to, decisions to reposition the investment portfolio, potential sales of investments to meet cash flow needs, and potential sales of investments to capitalize on favorable pricing.

For fixed-maturity securities where a decline in fair value is below the amortized cost basis and the Company intends to sell the security, or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost, a credit-loss charge is recognized in net income based on the fair value of the security at the time of assessment.

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The Company does not measure an allowance for credit losses on accrued interest receivable and instead would write off accrued interest receivable at the time an issuer defaults or is expected to default on payments.

The Company did not recognize any credit losses during the years ended December 31, 2020 and 2019 related to its available-for-sale securities.

Deferred Income Taxes

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We consider multiple factors, including the nature and amount of the deferred tax asset, the expected timing of when an asset will be used, and the historical profitability of our entities.

Prior to March 2019, the Company was a Cayman Islands incorporated holding company with U.K.

tax residency.

In addition, the Company’s Bermuda based subsidiary, PSRE, was not required to pay any taxes on its income or capital gains but was subject to a 1% U.S.

federal excise tax on reinsurance premiums assumed.

As a result of our multinational operations our effective tax rate has historically been below that of a fully U.S.

based operation.

In 2019, the Company became a Delaware corporation and all income and became subject to U.S.

federal income tax.

Prior to 2019, the Company maintained a valuation allowance on the U.S.

tax attributes due to significant negative evidence, including cumulative U.S.

losses in the most recent three-year period and our assessment that the realization of the net deferred tax assets did not meet the “more likely than not” criteria under ASC 740, Income Taxes .

Management assessed available positive and negative evidence to estimate whether sufficient future taxable income would be generated to permit use of the existing deferred tax assets.

The projected reversal of temporary differences, the Domestication, and projected future operating income in the U.S.

represents significant positive evidence, which outweighed the historical negative evidence.

Based on this evidence, management determined it was more likely than not that the federal deferred tax assets are recoverable and therefore the associated valuation allowance was released as of March 31, 2019.

We decreased the

valuation allowance on the federal deferred tax assets by $1.7 million because of this analysis.

State NOL carryforwards, due to the limited carryforward period, did not meet the “more likely than not” criteria and we continued to maintain a valuation allowance on the associated deferred tax assets.

The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period change or if objective negative evidence in the form of cumulative losses is no longer present.

Recent Accounting Pronouncements

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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-K

Item 7. Management’s Discussion and Analysis