What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-02-25 compared with 2021-03-09 · 175 added, 165 removed, 1004 unchanged (25% of the section changed)

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and Subsidiaries as of December 31, 2021 and 2020 and for each of the Three Years Ended December 31, 2021, 2020 and 2019

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (PCAOB ID 42 )

Consolidated Financial Statements

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and Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of income and comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedules listed in the Index at Item 15(a) and our report dated March 9, 2021 expressed an unqualified opinion thereon.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of income and comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedules listed in the Index at Item 15(a) and our report dated February 24, 2022 expressed an unqualified opinion thereon.

Basis for Opinion

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San Francisco, California

March 9, 2021

February 24, 2022

Report of Independent Registered Public Accounting Firm

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generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 9, 2021 expressed an unqualified opinion thereon.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 24, 2022 expressed an unqualified opinion thereon.

Basis for Opinion

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Valuation of Reserve for Losses and Loss Adjustment Expenses

Description of the Matter

Description of

At December 31, 2021, the reserve for losses and loss adjustment expenses (LAE) is $173,366 thousand.

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The liability is based on individual claims, case reserves and other estimates reported by policyholders, as well as management estimates of ultimate losses and loss adjustment expenses.

Inherent in the

estimates of ultimate losses and loss adjustment expenses are expected trends in claims severity and frequency and other factors that could vary significantly as claims are settled.

Inherent in the estimates of ultimate losses and loss adjustment expenses are expected trends in claims severity and frequency and other factors that could vary significantly as claims are settled.

IBNR reserves include an estimate for future loss payments on incurred claims not yet reported and for expected development on reported claims.

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These assumptions have a significant effect on the valuation of reserves for IBNR claims.

How We Addressed the Matter in Our Audit

How We Addressed the Matter

We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls over the process for estimating IBNR reserves.

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San Francisco, California

March 9, 2021

February 24, 2022

Palomar Holdings, Inc.

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Deferred policy acquisition costs

Reinsurance recoverable on unpaid losses and loss adjustment expenses

Reinsurance recoverable on paid losses and loss adjustment expenses

Reinsurance recoverable on unpaid losses and loss adjustment expenses

Ceded unearned premiums

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Property and equipment, net

Intangible assets

Intangible assets, net

Liabilities and stockholders' equity

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Funds held under reinsurance treaty

Income and excise taxes payable

Deferred tax liabilities, net

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Net investment income

Net realized and unrealized gains (losses) on investments

Net realized and unrealized gains on investments

Commission and other income

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Balance at December 31, 2018

Other comprehensive income, net of tax

Cumulative effect of adopting ASU 2016-01

Balance at December 31, 2018

Other comprehensive income, net of tax

Other comprehensive income (loss), net of tax

Distribution to stockholder

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Cumulative effect of adopting ASU 2016-13 (Note 2)

Other comprehensive income, net of tax

Other comprehensive income (loss), net of tax

Stock-based compensation

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Balance at December 31, 2020

Other comprehensive income (loss), net of tax

Stock-based compensation

Issuance of common stock via employee stock purchase plan

Issuance of common stock via equity incentive plan

Repurchases of common stock

Balance at December 31, 2021

See accompanying notes.

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Amortization and write-off of debt issuance costs

Allowance for credit loss on fixed maturity securities

Loss on asset disposal

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Purchases of property and equipment

Capitalized software costs

Purchases of fixed maturity securities

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Proceeds from initial public offering, net of offering costs

Repayment of surplus notes

Distribution to stockholder

Proceeds from issuance of Floating Rate Notes, net of issuance costs

Redemption of Floating Rate Notes

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Proceeds from common stock issued via stock option exercises

Net cash provided by financing activities

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

Repurchase of common stock

Net cash provided by (used in) financing activities

Net increase in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash at beginning of period

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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.

Prior to the adoption of ASU 2016-13, the Company evaluated fixed maturity securities for credit losses and any losses were bifurcated into the credit-related loss and the loss related to all other factors.

The credit-related impairment loss would have been recognized as a realized loss in the statement of income and comprehensive income and the cost basis of the security would have been reduced.

The impairment related to other factors would have remained in accumulated other comprehensive income.

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

The Company recorded an immaterial allowance for credit losses related to its available-for-sale securities as of December 31, 2021.

As of December 31, 2020, the Company had no allowance for credit losses related to its available-for-sale securities.

Fair value is defined as the price that the Company would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment.

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The company considers the current economic environment, specific regulatory developments, and historic payment and cancelation trends by line of business and location when determining whether to record an allowance for uncollectable premiums.

Prior to December 31, 2019, the Company did not have an allowance for uncollectable premiums.

An initial allowance for uncollectable premiums of $0.2 million was established upon adoption of ASC 2016-13 on January 1, 2020 and the company recognized an immaterial amount of credit losses relating to uncollectable premiums during the year ended December 31, 2020.

The Company recorded an allowance for uncollectable premiums of $ 0.3 million and $ 0.2 million as of December 31, 2021 and December 31, 2020, respectively, and believes that all other amounts are collectable.

Deferred Policy Acquisition Costs

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A premium deficiency would first be recognized by charging any unamortized acquisition costs to expense to the extent required to eliminate the deficiency.

If the premium deficiency were greater than unamortized acquisition costs, a liability would be accrued for the excess deficiency.

If the premium deficiency were greater than unamortized acquisition costs, a liability would be accrued for

the excess deficiency.

The Company does not consider anticipated investment income when determining if a premium deficiency exists.

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An impairment loss is recognized only if the carrying amount of a long-lived asset or asset group is not recoverable and exceeds its fair value.

The carrying amount of a long-lived asset or asset group is not recoverable if it exceeds the sum of

the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group.

The carrying amount of a long-lived asset or asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group.

This assessment is based on the carrying amount of the asset or asset group at the date it is tested for recoverability.

An impairment loss is measured as the amount by which the carrying amount of a long-lived asset or asset group exceeds its fair value.

No impairments of long-lived assets were recognized for the years ended December 31, 2020, 2019 and 2018.

No impairments of long-lived assets were recognized for the years ended December 31, 2021, 2020 or 2019.

Reserve for Losses and Loss Adjustment Expenses

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The liability is based on individual claims, case reserves and other estimates reported by policyholders, as well as management estimates of ultimate losses and loss adjustment expenses.

Inherent in the estimates of ultimate losses and loss adjustment expenses are expected trends in claims severity and frequency and other factors that could vary significantly as claims are settled.

Inherent in the

estimates of ultimate losses and loss adjustment expenses are expected trends in claims severity and frequency and other factors that could vary significantly as claims are settled.

The Company’s estimates of ultimate losses and loss adjustment expenses are based in part upon the estimation of claims resulting from natural disasters such as hurricanes and earthquakes.

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

Historically, the Company has not experienced any credit

losses from reinsurance recoverables and did not have an allowance for uncollectable reinsurance recoverables as of December 31, 2020 or December 31, 2019.

Historically, the Company has not experienced any credit losses from reinsurance recoverables and did not have an allowance for uncollectable reinsurance recoverables as of December 31, 2021 or December 31, 2020.

Stock Based Compensation Expense

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The fair value of restricted stock units is determined using the closing price of the Company's common stock on the grant date.

The fair value of performance stock units containing employee service or company financial performance based conditions is determined using the closing price of the Company's common stock on the grant date.

The fair value of performance stock units containing

conditions based on performance of the Company’s stock is determined using a Monte Carlo simulation.

All stock-based compensation is included in other underwriting expenses in the Company’s consolidated statements of income and comprehensive income.

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The Company recognizes interest and penalties related to uncertain tax positions, if any, as a component of income tax expense.

The Company has not been assessed interest or penalties by any major tax jurisdictions for the respective tax years ended December 31, 2020, 2019, and 2018.

The Company has not been assessed interest or penalties by any major tax jurisdictions for the respective tax years ended December 31, 2021, 2020, or 2019.

Earnings Per Share

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Recently adopted accounting pronouncements

Clarification on change in filing status and prior quarterly information

Prior to December 31, 2020, the Company qualified as an emerging growth company (“EGC”) under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act.

The Company was previously electing to adopt new or revised accounting guidance within the same time periods as private companies as permitted by its status as an EGC.

The Company became a large accelerated filed on December 31, 2020 and must now adopt new accounting guidance within the same time periods as public companies, beginning with this 2020 Annual Report on Form 10-K.

Prior to this annual report, the Company’s 2020 quarterly filings did not reflect adoption of the below guidance as the Company was not required to have adopted it.

Upon adoption of the below guidance, the Company updated its financials as if the below guidance was adopted on January 1, 2020, however, this adoption had a negligible impact on previously filed quarterly information.

In February 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance for accounting for leases, ASU 2016-02, Leases (Topic 842) and subsequently issued multiple clarifying updates to the guidance.

This updated guidance requires the recognition of a right-of-use (“ROU”) asset and a corresponding lease liability, discounted to the present value, for all leases that extend beyond 12 months.

Under the previous guidance, leases were only included on the balance sheet if the criteria to classify the agreement as a capital lease were met.

The Company adopted this new guidance as of January 1, 2020.

The Company adopted this guidance using the modified retrospective transition method, applying the transition provisions on the date of adoption and not restating prior periods.

The Company elected to use a number of practical expedients permitted under the transition guidance, but did not elect to use hindsight in determining the lease term.

Upon adoption, the Company recognized a ROU asset of $2.9 million and lease liabilities of $3.8 million, with the difference representing the reclassification of deferred rent and lease incentive liabilities (the difference between the straight-line rent expenses and cash paid for rent under the leases) to operating lease ROU assets from other liabilities.

The ROU asset and corresponding liability recognized pertained to various operating leases for office space.

The Company did not have any cumulative-effect adjustment because of the adoption.

Measurement of credit losses

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326) and subsequently issued multiple clarifying updates to the guidance.

This updated guidance requires financial assets measured at amortized cost 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 adopted this guidance on January 1, 2020 using the modified retrospective approach and recorded a $0.2 million cumulative effect adjustment to beginning retained earnings upon adoption relating to an allowance for credit losses on the Company’s premium receivables.

The adoption of this accounting guidance did not have an impact on value of the Company’s fixed maturity securities or its reinsurance recoverables.

Recently issued accounting pronouncements not yet adopted

In December 2019, the FASB issued ASU No.

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ASU 2019-12 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

The Company will adopt this guidance in the first fiscal quarter of 2021 and does not expect adoption to have a material impact on its consolidated financial statements.

The Company adopted this guidance on January 1, 2021 and adoption did not have a material impact on its consolidated financial statements.

Recently issued accounting pronouncements not yet adopted

To date, there have been no recent accounting pronouncements not yet effective that have significance, or potential significance, to the Company’s consolidated financial statements.

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

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Mortgage/asset-backed securities

The Company reviewed the above securities at each balance sheet date to consider whether it was necessary to recognize a credit loss or other-than-temporary impairment (OTTI) related to any of these securities.

Based on the reviews, the company determined that the fixed maturity securities’ unrealized losses were primarily the result of the interest rate environment and not the credit quality of the issuers for both periods.

The Company does not intend to sell the investments and it is not more likely than not that that the Company will be required to sell the investments before the recovery of their amortized cost basis.

Therefore, the Company did not recognize an allowance for credit losses related to any of these securities for the year ended December 31, 2020 and did not recognize any OTTI charges for the year ended December 31, 2019.

The Company reviewed the above securities at each balance sheet date to consider whether it was necessary to recognize a credit loss related to any of these securities.

An immaterial allowance for credit losses was recorded pertaining to one investment security as of December 31, 2021.

For the remaining securities, the Company determined that the fixed maturity securities’ unrealized losses were primarily the result of the interest rate environment and not the credit quality of the issuers.

The Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before the recovery of their amortized cost basis.

The Company did not recognize an allowance for credit losses related to any securities for the year ended December 31, 2020.

Contractual maturities of available-for-sale fixed maturity securities

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Net investment income is summarized as follows:

Year Ended December 31,

(in thousands)

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As of December 31, 2021, the Company had $ 1.5 million of fixed income securities classified as Level 3 due to the availability of market observable inputs.

These securities were transferred to Level 2 during the year ended December 31, 2020.

Policy Acquisition Costs

The following tables present the policy acquisition costs deferred and amortized over the terms of the policies in force:

Year ended December 31,

(in thousands)

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State insurance licenses consist of licenses acquired at the inception of PSIC.

Customer relationships represents the fair value of policy renewal rights acquired by PSIC from another insurance company in November 2020.

The policy renewals pertaining to this intangible asset will begin in early 2021 and the Company intends to amortize this customer relationship intangible over a period of 8 years.

Customer relationships represents the fair value of acquired policy renewal rights.

The Company began amortizing this intangible asset on a straight line basis in 2021 and is amortizing it over a period of 8 years .

Amortization expense for the year ended December 31, 2021 was $ 1.3 million.

Capitalized Assets

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The Company has operating leases for office space used to conduct its insurance operations and administration activities.

Operating lease ROU assets are a component of prepaid expenses and other assets and operating lease liabilities are included in accounts payable and other accrued liabilities in the Company's consolidated balance sheets.

Operating lease right-of-use (“ROU”) assets are a component of prepaid expenses and other assets and operating lease liabilities are included in accounts payable and other accrued liabilities in the Company's consolidated balance sheets.

The Company determines whether an arrangement is a lease at its inception.

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Operating cash outflows from operating leases

Right of use assets obtained in exchange for new operating lease liabilities

December 31, 2021

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Operating lease liabilities

Weighted-average remaining lease term-operating leases

Weighted-average discount rate-operating leases

Weighted-average remaining lease term on operating leases

Weighted-average discount rate on operating leases

Future minimum lease payments as of December 31, 2021 are as follows:

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Loss and loss adjustment expenses reserves represent management’s best estimate of the ultimate cost of all reported and unreported losses incurred for the years ended December 31, 2021, 2020, and 2019.

The Company does not discount loss and loss adjustment expense reserves.

The reserves for unpaid losses and loss adjustment expenses are

estimated using individual case-basis valuations and statistical analyses.

The Company does not

discount loss and loss adjustment expense reserves.

The reserves for unpaid losses and loss adjustment expenses are estimated using individual case-basis valuations and statistical analyses.

Those estimates are subject to the effects of trends in loss severity and frequency.

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The foregoing reconciliation shows loss and loss adjustment expense reserve redundancies of $ 3.6 million, $ 0.1 million and $ 0.2 million developed in 2021, 2020 and 2019, respectively.

During 2020, this favorable reserve development related to lower than anticipated frequency and severity of claims in our homeowners and special property

lines of business offset by higher than anticipated frequency and severity of claims in our assumed reinsurance line.

During 2021, this net favorable reserve

development was primarily due to the effect of ceding gross unfavorable development under our reinsurance program and lower than anticipated severity of catastrophe losses associated with certain hurricanes that occurred during the second half of 2020.

During 2020, this favorable reserve development related to lower than anticipated frequency and severity of claims in our homeowners and special property lines of business offset by higher than anticipated frequency and severity of claims in our assumed reinsurance line.

During 2019, this favorable reserve development was primarily related to lower than originally anticipated frequency and severity of claims in our homeowners lines of business, offset by higher than originally anticipated frequency and severity of claims in our special property lines of business.

During 2018, this favorable reserve development was primarily due to favorable development in our homeowners lines of business due to lower than originally anticipated frequency and severity of claims.

The Company compiles and aggregates its claims data by grouping the claims according to the year in which the claim occurred (“Accident Year”) when analyzing claim payment and emergence patterns and trends over time.

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The Special Property classification includes fire, allied lines, inland marine, and earthquake claims.

As such, the following tables show the Company’s historical homeowner and special property incurred and cumulative paid losses and LAE development, net of reinsurance, as well as IBNR loss reserves and the number of reported claims on an aggregate basis as of December 31, 2020 for each of the previous two accident years.

The information provided herein about incurred and paid accident year claims development for the years ended December 31, 2020 and prior is presented as unaudited supplementary information.

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Payout percentage

(2) Negative payout percentages are due to timing of reinsurance payments, allocations of reinsurance between different lines of business based on actual results, and allocation of reinsurance to different periods for reinsurance treaties in effect for multiple periods.

These are primarily associated with larger recoveries from catastrophe events in earlier years of operation.

Incurred Losses and Allocated Loss Adjustment Expenses,

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Net of Reinsurance Special Property Insurance (in thousands)

Year Ended December 31,

Accident Year

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Historically, the Company has had a retention of between $ 5 million and $ 15 million for hurricane and earthquake events.

As of December 31, 2020, the Company’s catastrophe event retention is $10 million for all perils and $1 million as a vertical co-participation in selected layers.

As of December 31, 2021, the Company’s catastrophe event retention is $ 12.5 million for all perils.

As of December 31, 2021, the Company’s XOL reinsurance structure provides protection up to $ 1.68 billion for earthquake events and $ 700 million for hurricane events.

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The reinsurer also must share an agreed upon portion of losses and agreed upon portion of the associated commission expense.

The Company has quota share reinsurance agreements on several of its lines with the Commercial All Risk and Specialty Homeowners lines currently accounting for the largest amount of ceded written premiums.

For Texas Homeowners, a component of Specialty Homeowners, the Company ceded substantially all exposure between June 2018 and June 2019 and ceded a significant portion of exposure thereafter.

Ceded written premium related to the Texas Homeowners line was $14.6 million, $20.4 million and $24.9 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Ceded written premium related to the Commercial All Risk line was $19.2 million, $19.0 million and $7.2 million for the years ended December 31, 2020, 2019 and 2018, respectively.

The Company also began ceding a small portion of its Commercial Earthquake premiums

in November 2020, which accounted for approximately $7.1 million in ceded written premiums for the year ended December 31, 2020.

No other quota share program accounted for more than 10% of total ceded written premiums for those years.

The Company has quota share reinsurance agreements on several of its lines with the Commercial Earthquake, Inland Marine, Specialty Homeowners, and Commercial All

Risk lines are currently accounting for the largest amount of ceded written premiums.

The following table shows ceded written premiums under quota share arrangements by line of business for certain quota shares:

Year Ended December 31,

(in thousands)

Inland Marine

Specialty Homeowners

Commercial Earthquake

Commercial All Risk

No other quota share program accounted for more than 10% of total ceded written premiums for the above periods.

The Company recognizes ceded unearned premiums related to quota share agreements as an asset on its consolidated balance sheets.

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In connection with the reinsurance agreement, TPRe issued notes to unrelated investors in an amount equal to the full $ 166 million of coverage provided under the reinsurance agreement covering a three-year period, ending May 31, 2020.

At the time of the agreement, the Company performed an evaluation of TPRe to determine if it meets the definition of a variable interest entity (“VIE”).

The Company concluded that TPRe is a VIE but it does not have a variable interest in the entity, as the variability in results is expected to be absorbed entirely by the investors in TPRe.

Accordingly, TPRe is not consolidated in the Company’s financial statements.

The premium ceded to TPRe for the year ended December 31, 2020 was approximately $5.0 million.

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

The catastrophe bond was completed through Torrey Pines Re Pte.

(“Torrey Pines Re”).

Written premiums ceded under these catastrophe bond agreements were $ 11.7 million, $ 5.0 million and $ 10.6 million for the years ended December 31, 2021, 2020 and 2019, respectively.

The effect of reinsurance on premiums written and earned and on losses and LAE incurred for the years ended December 31, 2021, 2020 and 2019, is as follows:

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At December 31, 2021 reinsurance recoverable on unpaid losses by the Company’s three largest reinsurers were $ 21.9 million, $ 10.5 million and $ 9.2 million representing 19.3 % of the total balance.

At December 31, 2019 reinsurance recoverables on paid and unpaid losses by the Company’s three largest reinsurers were $2.7 million, $1.9 million, and $1.9 million representing 38.2% of the total balance.

All of the Company’s reinsurers post collateral or have an A.M.

best rating of A− (excellent) or better.

Long-term Debt

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 and any such payment required the prior approval of the Oregon Insurance Commissioners before such payment could be made.

Such payments could only be made from surplus.

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.

At December 31, 2020 reinsurance recoverable on unpaid losses by the Company’s three largest reinsurers were $ 36.0 million, $ 5.8 million, and $ 3.1 million representing 42.8 % of the total balance.

All of the Company’s reinsurers are required to have an A.M.

best rating of A− (excellent) or better or post collateral.

Floating Rate notes

Prior to May 2019, the Company had $ 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.

The Company redeemed its Floating Rate Notes 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 and paid $ 1.2 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).

Credit Agreement

In December 2021, the Company entered into a Credit Agreement (the “Credit Agreement”) with certain lenders which provides a revolving credit facility of up to $ 100.0 million (the “Revolving Loan”).

The maturity of the facility is December 8, 2026.

The Revolving Loan may be either a SOFR rate loan or a base rate loan, at the Company’s discretion.

The Revolving Loan 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.

Interest on the Revolving Loan 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 (ii) 0.75 % .

In addition, the Company paid a commitment fee of $ 0.3 million upon closing of the Credit Agreement and must pay an unused line fee of 0.25 % per annum on any unborrowed amount under the Credit Agreement.

The Company’s obligations under the Credit Agreement are unsecured with a negative pledge against all assets of Palomar and its subsidiaries as described in the Credit Agreement.

The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among other things, financial covenants, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness and dividends and other distributions.

The financial covenants in the Credit agreement require the Company not to exceed a maximum leverage ratio and maintain a minimum net worth at the end of each quarter.

The Company’s insurance subsidiaries are also required to maintain a minimum Risk Based Capital Ratio at the end of each year and must always maintain a minimum AM Best Financial Strength rating.

As of December 31, 2021, the Company was in compliance with all covenants.

The Credit Agreement provides for events of default customary for revolving loans of this type, including but not limited to non-payment, breaches, or defaults in the performance of covenants, insolvency, bankruptcy and the occurrence of a material adverse effect on Palomar.

During the existence of an event of default, all outstanding amounts of the Revolving Loan shall bear interest at a rate per annum equal to the rate otherwise applicable thereto plus 2.00 %.

As of December 31, 2021, there were no outstanding borrowings under this Credit Agreement.

For the year ended December 31, 2021, the Company incurred an immaterial amount of interest related to amortization of the commitment fee and unused line fee paid on the Credit Agreement.

Stockholders’ Equity

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Additional paid in capital is $ 318.9 million as of December 31, 2021 and $ 310.5 million as of December 31, 2020.

In March 2019, the Company made a one-time cash distribution totaling approximately $5.1 million to its then-sole stockholder, GC Palomar Investor LP, enabling it to distribute funds to its partners in order to allow such partners to satisfy tax obligations incurred as a result of the Domestication transactions.

On April 22, 2019, the Company completed its IPO with the sale of 6,468,750 shares of common stock at a price to the public of $15.00 per share.

The Company received net proceeds of approximately $87.4 million, after deducting underwriting discounts and commissions and offering costs.

On January 9, 2020, the Company sold 750,000 shares of common stock to the public at a price of $49.00 per share (along with 5,000,000 shares sold by existing stockholders) in an underwritten public offering.

The Company received net proceeds of approximately $35.5 million, after deducting underwriting discounts and commissions and offering costs.

On June 26, 2020, the Company sold 1,150,000 shares of common stock to the public at a price of $82.00 per share in an underwritten public offering.

The Company received net proceeds of approximately $90.1 million, after deducting underwriting discounts and commissions and offering costs.

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

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Restricted stock units outstanding under 2019 Equity Incentive Plan

Performance stock units outstanding under 2019 Equity Incentive Plan

Shares authorized for future issuance under 2019 Equity Incentive Plan

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The Company does not apply a forfeiture rate to unvested awards and accounts for forfeitures as they occur.

All stock-based

compensation is included in other underwriting expenses in the Company’s consolidated statements of income and comprehensive income.

All stock-based compensation is included in other underwriting expenses in the Company’s consolidated statements of income and comprehensive income.

The Company recognized approximately $ 23.0 million of stock-based compensation expense in March 2019 relating to the modification of its 2014 Management Incentive Plan.

The Company began recognizing stock-based compensation expense relating to its 2019 Equity Incentive Plan and the 2019 Employee Stock Purchase Plan upon their inception and initial equity grants in April 2019.

Aside from the aforementioned $23.0 million charge, all stock-based compensation expense recognized during the years ended December 31, 2020 and December 31, 2019 relates to the 2019 Equity Incentive Plan and 2019 Employee Stock Purchase Plan.

Aside from the aforementioned $ 23.0 million charge, all stock-based compensation expense recognized during the years ended December 31, 2021, December 31, 2020 and December 31, 2019 relates to the 2019 Equity Incentive Plan and 2019 Employee Stock Purchase Plan.

Management Incentive Plan prior to IPO

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In addition, the 2019 Plan contains a mechanism through which the Company may adopt a deferred compensation arrangement in the future.

A total of 2,400,000 shares of common stock are initially authorized and reserved for issuance under the 2019 Plan.

A total of 2,400,000 shares of common stock were initially authorized and reserved for issuance under the 2019 Plan.

This reserve increases on January 1 of each year through 2029, by an amount equal to the smaller of:

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

Stock options vest over a two or four year period with 25% or 50% vesting on the first anniversary of the grant date and the remainder vesting monthly over the remaining period, subject to continued service to the Company.

Stock options vest over a period between two and four years with between 25 % and 50 % vesting on the first anniversary of the grant date and the remainder vesting monthly over the remaining period , subject to continued service to the Company.

Stock options expire ten years after the grant date.

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Vested and Exercisable at December 31, 2021

The total intrinsic value of stock options exercised during the year ended December 31, 2020 was $7.7 million.

The total intrinsic value of stock options exercised during the years ended December 31, 2021 and December 31, 2020 was $ 8.5 million and $ 7.7 million, respectively.

No options were exercised prior to 2020.

6 unchanged sentences

0.32 % - 1.52 %

1.59 % - 2.45 %

Expected share price volatility (2)

1 unchanged sentence

18.13 % - 25.67 %

18.12 % - 18.45 %

Expected life in years (3)

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Treasury notes with remaining terms similar to the expected term of the options.

(2) Determined based on analysis of the historical volatility of a peer group of publicly traded companies.

(2) Determined based on a blend of the Company’s historic stock price volatility and the historic volatility of a peer group of publicly traded companies.

(3) Determined using the “simplified method” for estimating the expected option life, which is the average of the weighted-average vesting period and contractual term of the option as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its common stock has been publicly traded.

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As of December 31, 2021, the Company had approximately $ 16.5 million of total unrecognized stock-based compensation expense related to RSUs expected to be recognized over a weighted-average period of 4.04 years.

Performance Stock Units

During the year ended December 31, 2021, the Company began issuing PSUs to certain employees.

The Company issues PSUs with a combination of service, performance, and market conditions.

The majority of PSUs were issued pursuant to the executive stock grants, as described below.

For other PSU grants, vesting of PSUs requires a period of future service and the number of shares that vest depends on performance relative to predetermined targets of the Company’s Gross Written Premiums and Adjusted Return on Equity as set by the Compensation Committee.

The PSU’s performance period is the fiscal year of the grant.

At the end of the performance period, the actual results will be measured against the predetermined targets to determine the number of PSUs to be earned as compensation.

The earned PSUs are then subject to a required service period of approximately three years from the grant date before vesting and being issued as common stock.

The following table summarizes PSU transactions for the year ended December 31, 2021:

Weighted-average

Non vested outstanding at January 1, 2021

Non vested outstanding at December 31, 2021

The PSU grants above represent the number of shares that would vest based on achievement of all stock price milestones in the executive stock grants and the 100 % achievement of the predetermined company performance conditions for the other PSU grants.

The actual number of PSUs which will vest is subject to adjustment based on the Company’s actual stock price performance and financial performance relative to the predetermined targets.

As of December 31, 2021, the Company had approximately $ 12.2 million of total unrecognized stock-based compensation expense related to PSUs expected to be recognized over a weighted-average period of 4.64 years.

2021 Executive Stock Grants

During the year ended December 31, 2021, the Company granted 192,307 RSUs and 350,000 PSUs to various executives, including the Company’s CEO.

The RSUs vest over a period of five years with one fifth vesting upon the first, second and third anniversary of the grants and the remainder vesting monthly thereafter.

The PSUs are earned based on the achievement of stock price milestones.

If the Company’s stock price reaches and remains at certain milestones for 30 days, the PSUs shall become earned units and will vest upon completion of a requisite service period.

The Company’s CEO must remain as an employee through December 31, 2025, or as an employee and/or director through the fifth anniversary of the grant date the PSUs to vest.

Other executives must remain as employees through December 31, 2026 for the PSUs to vest.

As of December 31, 2021, none of the stock price milestones have been achieved.

The RSUs were valued based on the closing price of the Company’s stock on the grant date.

The PSUs were valued using a Monte Carlo simulation to account for the market condition within the award.

The Company expects to recognize $ 14.6 million of expense relating to the RSUs and $ 12.4 million relating to the PSUs.

The expense shall be recognized straight-line over the requisite service period of approximately five years .

Should these executives leave prior to the requisite service period, any recognized compensation expense related to unvested RSUs and PSUs will be reversed.

2019 Employee Stock Purchase Plan

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During each discrete offering period employee funds are withheld, and the stock purchase occurs upon the conclusion of the offering period.

The Company issued 28,367 shares pursuant to the ESPP during the year ended December 31, 2020.

The Company issued 9,793 and 28,367 shares pursuant to the ESPP during the years ended December 31, 2021 and December 31,2020, respectively.

Share repurchases

On March 29, 2021, the Company’s Board of Directors approved the adoption of a share repurchase program which became effective March 31, 2021.

The program authorized the repurchase by the Company of up to $ 40 million of its outstanding shares of common stock.

The Company purchased 239,096 shares for $ 15.9 million under this program during the year ended December 31, 2021.

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

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

Accumulated Other Comprehensive Income

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Balance as of January 1

Effect of equity accounting guidance adoption

Beginning Balance

Other comprehensive income (loss) before reclassification

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Underwriting Information

The Company has a single reportable segment and offers primarily earthquake, wind, and flood insurance products.

The Company has a single reportable segment and offers primarily earthquake, wind, inland marine, and flood insurance products.

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

3 unchanged sentences

Commercial Earthquake

Commercial All Risk

Specialty Homeowners

Inland Marine

Commercial All Risk

Hawaii Hurricane

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North Carolina

South Carolina

Total Gross Written Premiums

Gross written premiums by insurance subsidiary are as follows:

Year Ended December 31,

($ in thousands)

Total Gross Written Premiums

The Company distributes a significant portion of its Residential Earthquake, Commercial Earthquake, Specialty Homeowners and Hawaii Hurricane products through longstanding relationships with two program administrators.

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For the years ended December 31, 2021, 2020 and 2019 the Company’s contributions to the plan were $ 0.7 million, $ 0.3 million and $ 0.3 million, respectively.

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

tax residency.

On March 14, 2019, the Company implemented a domestication (“the Domestication”) pursuant to Section 388 of the Delaware General Corporation Law and Section 206 of the Companies Law (2018 Revision), as amended, of the Cayman Islands pursuant to which it became a Delaware corporation and no longer subject to the laws of the Cayman Islands.

Historically, 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.

The Company has elected for PSRE to be taxed as a U.S.

domestic corporation under Section 953(d) of the Code effective January 1, 2019.

The components of the Company’s federal income tax expense (benefit) are as follows:

5 unchanged sentences

Losses and LAE reserve discount

Net operating losses

Investment amortization

State tax net operating losses

Unearned premiums

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The amount of the deferred tax assets considered realizable 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.

As of December 31, 2021, there are no federal net operating losses or tax credit carryforwards .

The following is a reconciliation of the statutory federal income tax rate to the Company’s effective tax rate for the tax years ended December 31, 2021, 2020 and 2019:

2 unchanged sentences

Expense computed at federal tax rate

group member income

Stock-based compensation

2 unchanged sentences

Income tax expense (benefit)

The stock-based compensation difference shown above relates primarily to the permanent component of employee stock option exercises for the year ended December 31, 2020.

For the year ended December 31, 2021, the difference 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.

For the year ended December 31, 2019, this difference relates primarily to a non-deductible stock compensation charge of $ 23.1 million incurred by the Company in March 2019.

For the year ended December 31, 2020, the Company increased its valuation allowance relating to deferred tax assets associated with state net operating losses.

For the years ended December 31, 2021 and Decembers 31, 2020, the Company increased its valuation allowance relating to deferred tax assets associated with state net operating losses.

The Company reversed the valuation allowance on its U.S.

11 unchanged sentences

Earnings per share:

Common share equivalents relate to outstanding stock options and RSUs under the 2019 Plan and unpurchased shares under the 2019 ESPP and are calculated using the treasury stock method.

Common share equivalents relate to outstanding stock options and PSUs under the 2019 Plan and unpurchased shares under the 2019 ESPP and are calculated using the treasury stock method.

Statutory financial information

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The principal difference between statutory capital and surplus and stockholder’s equity presented in accordance with GAAP are prepaid expenses, which are non-admitted assets for Bermuda statutory purposes.

In the third and fourth quarter of 2021 PSRE distributed $ 15.0 million and $ 10.0 million in dividends to the Company.

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 75.0 % of the amount of its relevant liabilities for general business.

11 unchanged sentences

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 $ 1.2 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.

15 unchanged sentences

Treasury bonds which are included in available-for-sale investments on the consolidated balance sheets.

Selected Quarterly Financial Data (unaudited)

The following is a summary of the Company’s unaudited quarterly results of operations:

($ in thousands, except per share data)

Gross written premiums

Total revenues (1)

Net income (loss)

Comprehensive income (loss)

Earnings per share (2):

($ in thousands, except per share data)

Gross written premiums

Total revenues

Net income (loss)

Comprehensive income (loss)

Earnings per share (2):

(1) Due to rounding differences, quarterly total revenues does not add up to the yearly total.

(2) Due to differences in weighted-average common shares outstanding between periods, quarterly earnings per share may not add up to the totals reported for the full year.

In addition, the Company established a Regulation 114 Trust account for the benefit of ceding insurance companies to secure the unearned premium assumed by PSIC.

As of December 31, 2021 the trust had a par value of $ 2.2 million.

Palomar Holdings, Inc.

33 unchanged sentences

Net investment income

Net realized and unrealized losses on investments

Net realized and unrealized gains on investments

Total revenues

2 unchanged sentences

Income tax expense (benefit)

Income (loss) before equity in net income of subsidiaries

Loss before equity in net income of subsidiaries

Equity in net income of subsidiaries

Other comprehensive income:

Net unrealized losses on securities available for sale

Equity in other comprehensive income of subsidiaries, net of taxes

Net unrealized gains on securities available for sale

Equity in other comprehensive income (loss) of subsidiaries, net of taxes

Total comprehensive income

8 unchanged sentences

Equity in undistributed earnings of subsidiaries

Stock-based compensation expense

Net realized and unrealized losses on investments

8 unchanged sentences

Cash received from subsidiaries

Net cash used in investing activities

Net cash provided by (used in) investing activities

Financing activities

5 unchanged sentences

Proceeds from common stock issued via equity incentive plans

Net cash provided by financing activities

Net increase in cash and cash equivalents

Repurchase of common stock

Net cash provided by (used in) financing activities

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

23 unchanged sentences

Valuation Allowance for deferred tax assets

Valuation Allowance for premium receivable

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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 8. Financial Statements and Supplementary Data