What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-05 compared with 2021-11-05 · 149 added, 277 removed, 415 unchanged (51% of the section changed)

2 unchanged sentences

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

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

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

The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2022, or for any other future period.

References to the "Company,"

6 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.

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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Founded in 2014, we have significantly grown our business and have generated attractive returns.

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

For the nine months ended September 30, 2021, we experienced average monthly premium retention rates above 90% for our Residential Earthquake and Hawaii Hurricane lines and approximately 87% overall across all continuing lines of business, providing strong visibility into future revenue.

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 three months ended March 31, 2022, 46% 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 91% 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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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.

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

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

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

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 designed to ensure operational reliability and employee safety.

In addition, we have taken 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.

1 unchanged sentence

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.

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

We do not expect additional business interruption claims from the Pandemic and have acknowledged and adjusted 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 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 or other similar global health crises could adversely impact our business in the future.

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

12 unchanged sentences

We enter into reinsurance contracts to limit our exposure to potential losses and to provide additional capacity for growth.

We cede premiums primarily through excess of loss (“XOL”) agreements and quota share agreements.

We cede premiums through excess of loss (“XOL”) agreements, quota share agreements, and fronting agreements.

Ceded written premiums are earned pro-rata over the period of risk covered.

The volume of our ceded written premiums is impacted by the amount of our gross written premiums and our decisions to increase or decrease limits or retention levels in our XOL agreements and co-participation levels in our quota share agreements.

The volume of our ceded written premiums is impacted by the amount of our gross written premiums and our decisions to increase or decrease limits or retention levels in our XOL

agreements and co-participation levels in our quota share agreements.

The volume of ceded written premiums is also impacted by the amount of premium we write under fronting agreements.

Our ceded written premiums can be impacted significantly in certain periods due to changes in quota share agreements.

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

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

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

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

In addition, the volume of premiums ceded in fronting agreements each period may vary due to the timing of entering new fronting partnerships and terminations of fronting partnerships.

Net Earned Premiums

Net earned premiums represent the earned portion of our gross written premiums, less the earned portion that is ceded to third-party reinsurers under our reinsurance agreements.

Our insurance policies generally have a term of one year and premiums are earned pro rata over the term of the policy.

Our insurance policies generally have a term of one year and premiums are earned pro rata over the terms of the policies.

Commission and Other Income

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Certain policies we write subject us to attritional losses such as building fires.

In addition, most of the policies we write subject us to catastrophe losses.

In addition, many of the policies we write subject us to catastrophe losses.

Catastrophe losses are certain losses resulting from events involving multiple claims and policyholders, including earthquakes, hurricanes, floods, convective storms, terrorist acts or other aggregating events.

11 unchanged sentences

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 quota share reinsurance contracts.

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

quota share and fronting reinsurance agreements.

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

Acquisition expenses related to each policy we write are deferred and expensed pro rata over the term of the policy.

We earn fronting fees in a manner consistent with the recognition of the earned premiums on the underlying insurance policies, on a pro rata basis over the terms of the policies.

Other Underwriting Expenses

Other underwriting expenses represent the general and administrative expenses of our insurance operations including employee salaries and benefits, software and technology costs, office rent, stock-based compensation, licenses and fees, and professional services fees such as legal, accounting, and actuarial services.

Interest Expense

Interest expense consists of the unused line fee and amortization of the commitment fee on our credit agreement with U.S.

Bank National Association and interest accrued on borrowings from our FHLB loan.

Net Investment Income

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Adjusted net income is a non-GAAP financial measure defined as net income excluding the impact of certain items that may not be indicative of underlying business trends, operating results, or future outlook, net of tax impact.

We calculate the tax impact only on adjustments which would be included in calculating our income tax expense using the estimated tax rate at which the company received a deduction for these adjustments.

We calculate the tax impact only on adjustments which would be included in calculating our income tax expense using the

estimated tax rate at which the company received a deduction for these adjustments.

See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of net income calculated in accordance with GAAP to adjusted net income.

18 unchanged sentences

Results of Operations

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

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

Three months ended

September 30,

($ in thousands, except per share data)

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 loss (1)

Net investment income

Net realized and unrealized gains (losses) on investments

Income (loss) before income taxes

Income tax expense

Net income (loss)

Stock-based compensation expense

Amortization of intangibles

Adjusted net income (loss) (1)

Key Financial and Operating Metrics

Annualized return on equity

Annualized adjusted return on equity (1)

Expense ratio

Combined ratio

Adjusted combined ratio (1)

Diluted earnings per share

Diluted adjusted earnings per share (1)

Catastrophe losses

Catastrophe loss ratio (1)

Adjusted combined ratio excluding catastrophe losses (1)

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(1) Indicates non-GAAP financial measure;

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

Gross Written Premiums

Gross written premiums increased $49.3 million, or 47.9% to $152.3 million for the three months ended September 30, 2021 compared to $103.0 million for the three months ended September 30, 2020.

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

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

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

Three Months Ended September 30,

($ in thousands)

Residential Earthquake

Commercial Earthquake

Specialty Homeowners

Inland Marine

Hawaii Hurricane

Commercial All Risk

Residential Flood

Total Gross Written Premiums

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

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

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

Three Months Ended September 30,

($ in thousands)

Total Gross Written Premiums

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Ceded Written Premiums

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

The increase was primarily due to excess of loss (“XOL”) reinsurance expense due to growth in exposure and increased quota share cessions due to growth in the volume of written premiums subject to quota shares.

Ceded written premiums as a percentage of gross written premiums decreased to 38.1% for the three months ended September 30, 2021 from 40.4% for the three months ended September 30, 2020.

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

Net Written Premiums

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

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

Net Earned Premiums

Net earned premiums increased $22.7 million, or 54.0%, to $64.7 million for the three months ended September 30, 2021 from $42.0 million for the three months ended September 30, 2020 due primarily to the earning of increased gross written premiums offset by the earning of ceded written premiums under reinsurance agreements.

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

Three Months Ended

September 30,

($ in thousands)

Gross earned premiums

Ceded earned premiums

Net earned premiums

Net earned premium ratio

Commission and Other Income

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

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

Losses and Loss Adjustment Expenses

Losses and loss adjustment expenses decreased $12.6 million, or 30.7% to $28.5 million for the three months ended September 30, 2021 from $41.1 million for the three months ended September 30, 2020.

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

Three Months Ended

September 30,

($ in thousands)

Catastrophe losses

Non-catastrophe losses

Total losses and loss adjustment expenses

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

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

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

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

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

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

Acquisition Expenses

Acquisition expenses increased $8.4 million, or 46.9%, to $26.4 million for the three months ended September 30, 2021 from $18.0 million for the three months ended September 30, 2020.

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

Acquisition expenses as a percentage of gross earned premiums were 22.5% for the three months ended September 30, 2021 compared to 22.6% for the three months ended September 30, 2020.

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

Other Underwriting Expenses

Other underwriting expenses increased $4.8 million, or 62.1%, to $12.6 million for the three months ended September 30, 2021 from $7.8 million for the three months ended September 30, 2020.

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

Other underwriting expenses as a percentage of gross earned premiums were 10.8% for the three months ended September 30, 2021 compared to 9.8% for the three months ended September 30, 2020.

Excluding the impact of expenses relating to stock-based compensation and amortization of intangibles, other underwriting expenses as a percentage of gross earned premiums were 9.4% for the three months ended September 30, 2021 compared to 9.1% for the three months ended September 30, 2020.

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

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

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

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

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

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

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

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

Three months ended March 31, 2022 compared to three months ended March 31, 2021

The following table summarizes our results for the three months ended March 31, 2022 and 2021:

Three months ended

September 30,

($ in thousands)

Interest income

Dividend income

Investment management fees and expenses

Net investment income

Net realized and unrealized gains (losses) on investments

Income Tax Expense

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

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

employee stock option exercises.

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

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

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

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

Nine months ended

September 30,

($ in thousands, except per share data)

9 unchanged sentences

Underwriting income (1)

Interest expense

Net investment income

Net realized and unrealized gains (losses) on investments

Net realized and unrealized losses on investments

Income before income taxes

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Gross Written Premiums

Gross written premiums increased $127.0 million, or 49.2%, to $385.3 million for the nine months ended September 30, 2021 compared to $258.3 million for the nine months ended September 30, 2020.

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

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

Gross written premiums increased $67.3 million, or 65.0% to $170.9 million for the three months ended March 31, 2022 compared to $103.6 million for the three months ended March 31, 2021.

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

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

Nine Months Ended September 30,

Three Months Ended March 31,

($ in thousands)

Residential Earthquake

Fronting Premiums

Commercial Earthquake

Specialty Homeowners

Inland Marine

Specialty Homeowners

Commercial All Risk

2 unchanged sentences

Total Gross Written Premiums

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

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

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During the fourth quarter of 2021, we launched our fronting business, known as PLMR-FRONT.

In a fronting agreement, we write the premium and then cede the majority of the premium and risk in exchange for a fronting fee, which is our primary source of profit in the arrangement.

We expect to continue to write fronting premiums for the foreseeable future.

The volume of fronting premiums written each period may vary due to the timing of entering new fronting partnerships and terminations of fronting partnerships.

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

Nine Months Ended September 30,

Three Months Ended March 31,

($ in thousands)

Total Gross Written Premiums

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Ceded Written Premiums

Ceded written premiums increased $51.7 million, or 51.1%, to $153.0 million for the nine months ended September 30, 2021 from $101.3 million for the nine months ended September 30, 2020.

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

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

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

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

Ceded written premiums as a percentage of gross written premiums increased to 39.7% for the nine months ended September 30, 2021 from 39.2% for the nine months ended September 30, 2020.

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

Ceded written premiums increased $46.2 million, or 106.5%, to $89.6 million for the three months ended March 31, 2022 from $43.4 million for the three months ended March 31, 2021.

The increase was primarily due to increased premium ceded under quota share arrangements due to growth in the volume of written premiums subject to quota shares and due to increased ceding under fronting agreements.

In addition, we incurred increased excess of loss (“XOL”) reinsurance expense due to growth in exposure.

During the three months ended March 31, 2021, our XOL

reinsurance expense was impacted by Winter Storm Uri (“Uri”).

Catastrophe losses from Uri caused us to utilize certain layers of our XOL program causing us to incur approximately $4.0 million of expense associated with the reinstatement of our reinsurance program in the prior year.

Ceded written premiums as a percentage of gross written premiums increased to 52.4% for the three months ended March 31, 2022 from 41.9% for the three months ended March 31, 2021.

This increase was primarily due increased quota share and fronting cessions as previously described.

Net Written Premiums

Net written premiums increased $75.3 million, or 47.9%, to $232.3 million for the nine months ended September 30, 2021 from $157.0 million for the nine months ended September 30, 2020.

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

Net written premiums increased $21.2 million, or 35.2%, to $81.4 million for the three months ended March 31, 2022 from $60.2 million for the three months ended March 31, 2021.

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

Net Earned Premiums

Net earned premiums increased $49.9 million, or 42.9%, to $166.0 million for the nine months ended September 30, 2021 from $116.1 million for the nine months ended September 30, 2020 due primarily to the earning of increased gross written premiums offset by the earning of ceded written premiums under reinsurance agreements.

Net earned premiums increased $28.9 million, or 61.6%, to $76.0 million for the three months ended March 31, 2022 from $47.1 million for the three months ended March 31, 2021 due primarily to the earning of increased gross written premiums offset by the earning of ceded written premiums under reinsurance agreements.

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

Nine Months Ended

September 30,

Three Months Ended

($ in thousands)

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Commission and Other Income

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

Commission and other income increased by $0.1 million, or 9.3%, to $0.8 million for the three months ended March 31, 2022, from $0.7 million for the three months ended March 31, 2021.

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

Losses and Loss Adjustment Expenses

Losses and loss adjustment expenses decreased $15.6 million or 33.3% to $31.3 million for the nine months ended September 30, 2021 from $46.9 million for the nine months ended September 30, 2020.

Losses and loss adjustment expenses increased $19.4 million, or 438.1% to $15.0 million for the three months ended March 31, 2022 from negative $4.4 million for the three months ended March 31, 2021.

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

Nine Months Ended

September 30,

Three Months Ended

($ in thousands)

2 unchanged sentences

Total losses and loss adjustment expenses

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

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

These events impacted our Commercial All

Risk and Specialty Homeowners lines of business.

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

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

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

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

Our non-catastrophe loss ratio was 14.8% for the nine months ended September 30, 2021 compared to 8.9% during the nine months ended September 30, 2020.

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

Our catastrophe loss ratio was 0.6% during the three months ended March 31, 2022.

Catastrophe losses were related to unfavorable development on prior year catastrophe events.

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

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

Our non-catastrophe loss ratio was 19.1% for the three months ended March 31, 2022 compared to 11.1% during the three months ended March 31, 2021.

Acquisition Expenses

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

Acquisition expenses increased $8.7 million, or 45.3%, to $28.0 million for the three months ended March 31, 2022 from $19.3 million for the three months ended March 31, 2021.

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

Acquisition expenses as a percentage of gross earned premiums were 21.9% for the nine months ended September 30, 2021 compared to 21.3% for the nine months ended September 30, 2020.

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

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

The higher commissions and premium-related taxes were partially offset by higher earned ceding commissions and fronting fees due to an increase in premiums subject to a quota share or fronting agreement.

Acquisition expenses as a percentage of gross earned premiums were 20.2% for the three months ended March 31, 2022 compared to 21.2% for the three months ended March 31, 2021.

Acquisition expenses as a percentage of gross earned premiums decreased due to the recognition of higher ceding commission and fronting fee income as a percentage of gross earned premiums resulting from changes in mix of business produced.

Other Underwriting Expenses

Other underwriting expenses increased $14.7 million, or 59.5%, to $39.4 million for the nine months ended September 30, 2021 from $24.7 million for the nine months ended September 30, 2020.

Other underwriting expenses increased $1.7 million, or 11.8%, to $15.9 million for the three months ended March 31, 2022 from $14.2 million for the three months ended March 31, 2021.

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

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

Other underwriting expenses as a percentage of gross earned premiums were 12.7% for the nine months ended September 30, 2021 compared to 11.5% for the nine months ended September 30, 2020.

Excluding the impact of expenses relating to transactions and stock offerings, stock-based compensation, amortization of intangibles and catastrophe bonds, other underwriting expenses as a percentage of gross earned premiums were 10.7% for the nine months ended September 30, 2021 compared to 10.3% for the nine months ended September 30, 2020.

Other underwriting expenses as a percentage of gross earned premiums were 11.5% for the three months ended March 31, 2022 compared to 15.6% for the three months ended March 31, 2021.

Excluding the impact of expenses relating to transactions, stock-based compensation, amortization of intangibles, and catastrophe bonds other underwriting expenses as a percentage of gross earned premiums were 9.0% for the three months ended March 31, 2022 compared to 11.9% for the three months ended March 31, 2021.

This percentage decreased due to an increase in earned premiums without a corresponding increase in operating expenses.

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

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

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

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

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

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

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

Net investment income increased $0.4 million, or 16.2%, to $2.6 million for the three months ended March 31, 2022 from $2.2 million for the three months ended March 31, 2021.

The increase was primarily due to a higher average balance of investments during the three months ended March 31, 2022.

The Company incurred $1.3 million of net realized and unrealized losses on investments for the three months ended March 31, 2022 compared to $0.7 million of net realized and unrealized losses for the three months ended March 31, 2021 due to higher unrealized losses on our equity securities during the period ended March 31, 2022.

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

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

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

Nine Months Ended

September 30,

Three Months Ended

($ in thousands)

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Income Tax Expense

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

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

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

Income tax expense increased $1.0 million or 30.8% to $4.5 million for the three months ended March 31, 2022 from $3.5 million for the three months ended March 31, 2021 due to a higher effective tax rate during the three months ended March 31, 2022.

During the three months ended March 31, 2022, our income tax rate of 23.8% was higher than the statutory rate of 21% due primarily to non-deductible executive compensation expense.

For the three months ended March 31, 2021 our income tax rate of 17.3% was lower than the statutory rate due primarily to the tax impact of the permanent component of employee stock option exercises.

Reconciliation of Non-GAAP Financial Measures

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Three Months Ended

Nine Months Ended

September 30,

(in thousands)

Total revenue

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

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

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

our underlying business performance.

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

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Three Months Ended

Nine Months Ended

September 30,

(in thousands)

Income (loss) before income taxes

Income before income taxes

Net investment income

Net realized and unrealized (gains) losses on investments

Underwriting income (loss)

Adjusted Net Income (loss)

Underwriting income

Adjusted Net Income

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

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Three Months Ended

Nine Months Ended

September 30,

(in thousands)

Net income (loss)

Expenses associated with transactions and stock offerings

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Expenses associated with catastrophe bond, net of rebate

Adjusted net income (loss)

Adjusted net income

Annualized Adjusted Return on Equity

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Three Months Ended

Nine Months Ended

September 30,

($ in thousands)

Annualized adjusted net income

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Three Months Ended

Nine Months Ended

September 30,

($ in thousands)

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

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Three Months Ended

Nine Months Ended

September 30,

(in thousands, except per share data)

Adjusted net income (loss)

Adjusted net income

Weighted-average common shares outstanding, diluted

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Three Months Ended

Nine Months Ended

September 30,

($ in thousands)

Losses and loss adjustment expenses

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Three Months Ended

Nine Months Ended

September 30,

($ in thousands)

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

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

September 30,

(in thousands)

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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.

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

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 which 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.

State insurance regulators have broad powers to prevent the reduction of statutory surplus to inadequate levels, and there is no assurance that dividends up to the maximum amounts calculated under any applicable formula would be permitted.

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(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 PSRE during 2022 is calculated to be approximately $4.2 million.

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

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

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

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

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

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

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

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

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

Nine months ended

September 30,

The following table summarizes our cash flows for the three months ended March 31, 2022 and 2021:

Three months ended

($ in thousands)

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Change in cash, cash equivalents, and restricted cash

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

Our cash flow from operating activities was positive during the three months ended March 31, 2022 due to net income and a decrease in net operating assets.

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

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

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

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

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

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

Cash used in investing activities for the three months ended March 31, 2022 related primarily to purchases of fixed maturity and equity securities in excess of sales and maturities.

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

Cash provided by financing activities for three months ended March 31, 2022 was related to $15.0 million in borrowings from our FHLB line of credit, the receipt of $0.1 million in proceeds from stock option exercises and the receipt of $0.3 million in proceeds from our employee stock purchase plan, offset by the repurchase of $13.0 million of our common stock.

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

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

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

To the extent our future operating cash flows are insufficient to cover our net losses from catastrophic events, we had $467.0 million in cash and investment securities available at September 30, 2021.

To the extent our future operating cash flows are insufficient to cover our net losses from catastrophic events, we had $533.2 million in cash and investment securities available at March 31, 2022.

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.

Share Repurchases

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

Under our current share repurchase program, shares may be repurchased from time to time in the open market or negotiated transactions at prevailing market rates, or by other means

in accordance with federal securities laws.

The Company purchased 219,061 shares for $13.0 million under this program during the three months ended March 31, 2022 and $87.0 million remains available for future repurchases.

Credit Agreements

We have the ability to access additional capital through multiple credit agreements.

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%.

A loan 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 March 31, 2022 we do not have any outstanding borrowings under the Credit Agreement, but we may seek to borrow under the Credit Agreement in the future.

Our PSIC subsidiary is a member of the Federal Home Loan Bank of San Francisco (“FHLB”).

Membership in the FHLB provides PSIC access to collateralized advances, which can be drawn for general corporate purposes and used to enhance liquidity management.

All borrowings are fully secured by a pledge of specific investment securities of PSIC and the borrowing capacity is equal to 5% of PSIC’s statutory admitted assets.

All advances have predetermined term and the interest rate varies based on the term of the advance.

As of March 31, 2022, the Company had $15 million of borrowings outstanding through the FHLB line of credit.

Stockholders’ Equity

At September 30, 2021 total stockholders’ equity was $377.8 million and tangible stockholders’ equity was $367.3 million, compared to total stockholders’ equity of $363.7 million and tangible stockholders’ equity of $352.2 million as of December 31, 2020.

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

At March 31, 2022 total stockholders’ equity was $380.4 million and tangible stockholders’ equity was $371.2 million, compared to total stockholders’ equity of $394.2 million and tangible stockholders’ equity of $384.7 million as of December 31, 2021.

Stockholder’s equity decreased primarily due to unrealized losses on fixed maturity securities and repurchases of shares of our common stock and was offset by the net income we earned for the period and activity related to stock-based compensation.

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

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

As of September 30, 2021, the majority of our investment portfolio, or $408.0 million, was comprised of fixed maturity securities that are classified as available-for-sale and carried at fair value with unrealized gains and losses on these securities, net of applicable taxes, reported as a separate component of accumulated other comprehensive income.

As of March 31, 2022, the majority of our investment portfolio, or $444.4 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 $42.0 million of equity securities.

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

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

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

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

September 30, 2021

In addition, we maintained a non-restricted cash and cash equivalent balance of $46.9 million at March 31, 2022.

Our fixed maturity securities, including cash equivalents, had a weighted average effective duration of 4.17 and 3.99 years and an

average rating of “A1/A+” and “A1/A” at March 31, 2022 and December 31, 2021, respectively.

Our fixed income investment portfolio had a book yield of 2.34% as of March 31, 2022, compared to 2.23% as of December 31, 2021.

At March 31, 2022 and December 31, 2021 the amortized cost and fair value on available-for-sale securities were as follows:

March 31, 2022

($ in thousands)

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Special revenue excluding mortgage/asset-backed securities

Corporate and other

Industrial and miscellaneous

Mortgage/asset-backed securities

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Special revenue excluding mortgage/asset-backed securities

Corporate and other

Industrial and miscellaneous

Mortgage/asset-backed securities

Total available-for-sale investments

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

September 30, 2021

The following tables provide the credit quality of investment securities as of March 31, 2022 and December 31, 2021:

March 31, 2022

($ in thousands)

1 unchanged sentence

($ in thousands)

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

September 30, 2021

The amortized cost and fair value of our available-for-sale investments in fixed maturity securities summarized by contractual maturity as of March 31, 2022 were as follows:

March 31, 2022

($ in thousands)

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To the extent that our reinsurers are unable to meet the obligations they assume under our reinsurance agreements, we remain liable for the entire insured loss;

see “Risk Factors—Risks Related to Our Business and Industry—We may be unable to purchase third-party reinsurance or otherwise expand our catastrophe coverage in amounts we desire on commercially acceptable terms or on terms that adequately protect us, and this inability may materially adversely affect our business, financial condition and results of operations.”

terms or on terms that adequately protect us, and this inability may materially adversely affect our business, financial condition and results of operations.”

We use treaty reinsurance and, on a limited basis, facultative reinsurance coverage.

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

The Company is currently seeking to expand its catastrophe XOL coverage through a catastrophe bond offering, which is expected to close in the second quarter of 2022, and may seek similar catastrophe bond offerings in the future.

There can be no assurances that the catastrophe bond offering will close in the expected timeline, on acceptable terms or at all.

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

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In the event that multiple catastrophe events occur in a period, many of our contracts include the right to reinstate reinsurance limits for potential future recoveries during the same contract year and preserve our limit for subsequent events.

This feature for subsequent event coverage is known as a “reinstatement.” In addition, to provide further coverage against the potential for frequent catastrophe events we have secured $25 million of aggregate XOL reinsurance limit effective April 1, 2021.

This feature for subsequent event coverage is known as a “reinstatement.” In addition, to provide further coverage against the potential for frequent catastrophe events, the Company has historically obtained aggregate reinsurance coverage.

Beginning April 1, 2021 and renewing on April 1, 2022, we have secured $25 million of aggregate XOL reinsurance limit.

This coverage, applying within our per occurrence retention, has an attachment point of $30 million and applies across all perils including but not limited to earthquakes, hurricanes, convective storms, and floods above a qualifying level of $2.0 million in ultimate gross loss.

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Critical accounting estimates are defined as those estimates that are both important to the portrayal of our financial condition and results of operations and require us to exercise significant judgment.

We use significant judgment concerning future results and developments in applying these critical accounting estimates and in preparing our condensed consolidated financial statements.

We use significant

judgment concerning future results and developments in applying these critical accounting estimates and in preparing our condensed consolidated financial statements.

These judgments and estimates affect our reported amounts of assets, liabilities, revenues and expenses and the disclosure of our material contingent assets and liabilities.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis