What changed in this filing

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Item 1. Financial Statements

2022-08-04 compared with 2022-05-05 · 98 added, 69 removed, 402 unchanged (29% of the section changed)

20 unchanged sentences

Prepaid expenses and other assets

Deferred tax assets, net

Property and equipment, net

10 unchanged sentences

Stockholders' equity:

Preferred stock, $ 0.0001 par value, 5,000,000 shares authorized, 0 shares issued and outstanding as of March 31, 2022 and December 31, 2021

Common stock, $ 0.0001 par value, 500,000,000 shares authorized, 25,231,571 and 25,428,929 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively

Preferred stock, $ 0.0001 par value, 5,000,000 shares authorized, 0 shares issued and outstanding as of June 30, 2022 and December 31, 2021

Common stock, $ 0.0001 par value, 500,000,000 shares authorized, 25,220,131 and 25,428,929 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively

Additional paid-in capital

9 unchanged sentences

Three Months Ended

Six Months Ended

Gross written premiums

4 unchanged sentences

Net investment income

Net realized and unrealized losses on investments

Net realized and unrealized gains (losses) on investments

Commission and other income

7 unchanged sentences

Income tax expense

Other comprehensive income, net:

Net unrealized losses on securities available for sale for the three months ended March 31, 2022 and 2021, respectively

Other comprehensive income (loss), net:

Net unrealized gains (losses) on securities available for sale for the three and six months ended June 30, 2022 and 2021, respectively

Net comprehensive income (loss)

16 unchanged sentences

Issuance of common stock via equity incentive plan

Balance at March 31, 2021

Repurchases of common stock

Balance at June 30, 2021

Balance at December 31, 2021

4 unchanged sentences

Repurchases of common stock

Balance at March 31, 2022

Balance at June 30, 2022

See accompanying notes.

3 unchanged sentences

(in thousands)

Three Months Ended

Six Months Ended

Operating activities

2 unchanged sentences

Purchases of property and equipment

Capitalized software costs

Purchases of fixed maturity securities

11 unchanged sentences

Net cash provided by (used in) financing activities

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

Net decrease in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash at beginning of period

33 unchanged sentences

Recently adopted accounting pronouncements

The Company has not adopted any new accounting guidance during the three months ended March 31, 2022.

The Company has not adopted any new accounting guidance during the three months ended June 30, 2022.

Recently issued accounting pronouncements not yet adopted

1 unchanged sentence

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

March 31, 2022

June 30, 2022

(in thousands)

3 unchanged sentences

Special revenue excluding mortgage/asset-backed securities

Industrial and miscellaneous

Corporate and other

Mortgage/asset-backed securities

6 unchanged sentences

Special revenue excluding mortgage/asset-backed securities

Industrial and miscellaneous

Corporate and other

Mortgage/asset-backed securities

1 unchanged sentence

Security holdings in an unrealized loss position

As of March 31, 2022, the Company held 534 fixed maturity securities in an unrealized loss position with a total estimated fair value of $ 346.7 million and total gross unrealized losses of $ 18.3 million.

As of June 30, 2022, the Company held 762 fixed maturity securities in an unrealized loss position with a total estimated fair value of $ 437.7 million and total gross unrealized losses of $ 35.0 million.

As of December 31, 2021, the Company held 231 fixed maturity securities in an unrealized loss position with a total estimated fair value of $ 170.1 million and total gross unrealized losses of $ 2.7 million.

The aggregate fair value and gross unrealized losses of the Company’s investments aggregated by investment category and the length of time these individual securities have been in a continuous unrealized loss position as of March 31, 2022 and December 31, 2021, are as follows:

The aggregate fair value and gross unrealized losses of the Company’s investments aggregated by investment category and the length of time these individual securities have been in a continuous unrealized loss position as of June 30, 2022 and December 31, 2021, are as follows:

Less Than 12 Months

More Than 12 Months

March 31, 2022

June 30, 2022

(in thousands)

3 unchanged sentences

Special revenue excluding mortgage/asset-backed securities

Industrial and miscellaneous

Corporate and other

Mortgage/asset-backed securities

7 unchanged sentences

Special revenue excluding mortgage/asset-backed securities

Industrial and miscellaneous

Corporate and other

Mortgage/asset-backed securities

2 unchanged sentences

The Company has recorded an immaterial allowance for credit losses pertaining to one investment security.

Based on the Company’s review as of March 31, 2022, for the remainder of 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.

Based on the Company’s review as of June 30, 2022, for the remainder of 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.

Contractual maturities of available-for-sale fixed maturity securities

The amortized cost and fair value of fixed maturity securities at March 31, 2022, by contractual maturity, are shown below.

The amortized cost and fair value of fixed maturity securities at June 30, 2022, by contractual maturity, are shown below.

(in thousands)

8 unchanged sentences

Three Months Ended

Six Months Ended

(in thousands)

Interest income

5 unchanged sentences

Three Months Ended

Six Months Ended

(in thousands)

Realized gains:

6 unchanged sentences

Total realized losses

Net realized investment gains

Net realized investment gains (losses)

Net unrealized gains (losses) on equity securities

1 unchanged sentence

Realized gains and losses on disposition of investments are based on specific identification of the investments sold on the settlement date.

Proceeds from the sale of fixed maturity securities were $ 4.8 million and $ 6.2 million for the three months ended March 31, 2022 and 2021, respectively.

Proceeds from the sale of fixed maturity securities were $ 1.0 million and $ 4.8 million for the three months ended June 30, 2022 and 2021, respectively.

Proceeds from the sale of fixed maturity securities were $ 5.8 million and $ 11.1 million for the six months ended June 30, 2022 and 2021, respectively.

The Company places securities on statutory deposit with certain state agencies to retain the right to do business in those states.

These securities are included in available-for-sale investments on the balance sheet.

As of March 31, 2022, the carrying value of securities on deposit with state regulatory authorities was $ 8.2 million.

As of June 30, 2022, the carrying value of securities on deposit with state regulatory authorities was $ 8.4 million.

As of December 31, 2021, the carrying value of securities on deposit with state regulatory authorities was $ 7.5 million.

16 unchanged sentences

Therefore, these investments are classified and disclosed in Level 2 of the hierarchy.

The following tables present the hierarchy for financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021.

March 31, 2022

The following tables present the hierarchy for financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021.

June 30, 2022

(in thousands)

13 unchanged sentences

Special revenue excluding mortgage/asset-backed securities

Industrial and miscellaneous

Corporate and other

Mortgage/asset-backed securities

4 unchanged sentences

Transfers between Level 3 and Level 2 securities result from changes in the availability of observable market inputs and are recorded at the beginning of the reporting period.

As of March 31, 2022, the Company had no fixed income securities classified as Level 3.

As of June 30, 2022, the Company had no fixed income securities classified as Level 3.

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

1 unchanged sentence

The following table represents a reconciliation of changes in the ending reserve balances for losses and loss adjustment expenses (“LAE”):

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

Reserve for losses and LAE net of reinsurance recoverables at beginning of period

8 unchanged sentences

Although management believes the liability recorded for losses and LAE is adequate, the variability inherent in this estimate could result in changes to the ultimate liability, which may be material to stockholders’ equity.

The Company experienced adverse prior year development of $ 1.5 million during the three months ended March 31, 2022 and favorable prior year development of $ 2.7 million in the three months ended March 31, 2021.

Adverse prior year development during the three months ended March 31, 2022 was primarily due to higher than anticipated severity of attritional losses from prior years.

Favorable prior year development during the three months ended March 31, 2021 was primarily due to lower than anticipated severity of catastrophe losses associated with certain hurricanes which occurred during the second half of 2020 primarily in the Company’s Specialty Homeowners line of business.

The Company experienced adverse prior year development of $ 0.05 million during the three months ended June 30, 2022 and favorable prior year development of $ 0.4 million in the three months ended June 30, 2021.

Adverse prior year development during the three months ended June 30, 2022 was primarily due to higher than anticipated severity catastrophe losses from prior years offset by favorable development on attritional losses.

Favorable prior year development during the three months ended June 30, 2021 was primarily due to lower than anticipated severity of catastrophe losses associated with certain hurricanes which occurred during the second half of 2020 primarily in the Company’s Specialty Homeowners line of business.

The Company experienced adverse prior year development of $ 1.6 million during the six months ended June 30, 2022 and favorable prior year development of $ 3.1 million in the six months ended June 30, 2021.

Adverse prior year development during the six months ended June 30, 2022 was primarily due to higher than anticipated severity of attritional and catastrophe losses from prior years.

Favorable prior year development during the six months ended June 30, 2021 was primarily due to lower than anticipated severity of catastrophe losses associated with certain hurricanes which occurred during the second half of 2020 primarily in the Company’s Specialty Homeowners line of business

Stockholders’ Equity

Common stock reserved for future issuance

Common stock reserved for future issuance consists of the following as of March 31, 2022:

Common stock reserved for future issuance consists of the following as of June 30, 2022:

Stock options outstanding under 2019 Equity Incentive Plan

5 unchanged sentences

The below table summarizes the Company’s stock-based compensation expense for each period presented:

Three months ended March 31,

Three months ended June 30,

Six months ended June 30,

(in thousands)

Stock-Based Compensation

14 unchanged sentences

Stock options expire ten years after the grant date.

The following table summarizes stock option transactions for the three months ended March 31, 2022:

The following table summarizes stock option transactions for the six months ended June 30, 2022:

Number of shares

6 unchanged sentences

Options canceled

Outstanding at March 31, 2022

Vested and Exercisable at March 31, 2022

As of March 31, 2022, the Company had approximately $ 5.1 million of total unrecognized stock-based compensation expense related to stock options expected to be recognized over a weighted-average period of 1.98 years.

The fair value of each option granted during the three months ended March 31, 2022 was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions:

Outstanding at June 30, 2022

Vested and Exercisable at June 30, 2022

As of June 30, 2022, the Company had approximately $ 4.6 million of total unrecognized stock-based compensation expense related to stock options expected to be recognized over a weighted-average period of 1.83 years.

The fair value of each option granted during the six months ended June 30, 2022 was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions:

Risk free rate of return (1)

14 unchanged sentences

All vesting is subject to continued service.

The following table summarizes RSU transactions for the three months ended March 31, 2022:

The following table summarizes RSU transactions for the six months ended June 30, 2022:

Number of shares

1 unchanged sentence

Outstanding at January 1, 2022

Non vested outstanding at March 31, 2022

As of March 31, 2022, the Company had approximately $ 19.4 million of total unrecognized stock-based compensation expense related to RSUs expected to be recognized over a weighted-average period of 3.58 years.

Non vested outstanding at June 30, 2022

As of June 30, 2022, the Company had approximately $ 18.2 million of total unrecognized stock-based compensation expense related to RSUs expected to be recognized over a weighted-average period of 3.43 years.

Performance Stock Units

3 unchanged sentences

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 of approximately five years from the date of grant.

As of March 31, 2022, none of the stock price milestones have been achieved.

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.

As of June 30, 2022, none of the stock price milestones have been achieved.

For other PSUs outstanding, 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.

1 unchanged sentence

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 three months ended March 31, 2022:

The following table summarizes PSU transactions for the six months ended June 30, 2022:

Number of shares

1 unchanged sentence

Outstanding at January 1, 2022

Non vested outstanding at March 31, 2022

Non vested outstanding at June 30, 2022

The PSU grants above represent the number of shares that would vest based on achievement of all stock price milestones in the 2021 executive stock grants and the 100 % achievement of the predetermined performance and market 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 March 31, 2022, the Company had approximately $ 13.0 million of total unrecognized stock-based compensation expense related to PSUs expected to be recognized over a weighted-average period of 4.28 years.

As of June 30, 2022, the Company had approximately $ 12.1 million of total unrecognized stock-based compensation expense related to PSUs expected to be recognized over a weighted-average period of 4.04 years.

2019 Employee Stock Purchase Plan

5 unchanged sentences

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

The Company issued 6,078 shares pursuant to the ESPP during the three months ended March 31, 2022.

The Company issued 6,078 shares pursuant to the ESPP during the six months ended June 30, 2022.

Share repurchases

1 unchanged sentence

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

The Company purchased 219,061 shares for $ 13.0 million during the three months ended March 31, 2022.

The Company purchased 347,013 shares for $ 20.3 million during the six months ended June 30, 2022.

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

1 unchanged sentence

Accumulated Other Comprehensive Income

Changes in accumulated other comprehensive income (“AOCI”) are as follows:

Three Months Ended March 31,

Changes in accumulated other comprehensive income (loss) (“AOCI”) are as follows:

Six Months Ended June 30,

(in thousands)

Beginning Balance

Other comprehensive income before reclassification

Other comprehensive income (loss) before reclassification

Federal income tax expense

Other comprehensive income before reclassification, net of tax

Other comprehensive income (loss) before reclassification, net of tax

Amounts reclassified from AOCI

1 unchanged sentence

Amounts reclassified from AOCI, net of tax

Other comprehensive income

Other comprehensive income (loss)

Balance at end of period

1 unchanged sentence

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

The Company also writes premiums under fronting agreements where it cedes the majority of the premium and risk in exchange for a fronting fee.

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

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

($ in thousands)

Residential Earthquake

2 unchanged sentences

Inland Marine

Specialty Homeowners

Commercial All Risk

Specialty Homeowners

Hawaii Hurricane

2 unchanged sentences

Gross written premiums by state are as follows:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

($ in thousands)

North Carolina

1 unchanged sentence

Gross written premiums by insurance subsidiary are as follows:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

($ in thousands)

Total Gross Written Premiums

The Company calculates its tax provision in interim periods using its best estimate of the effective tax rate expected for the full year.

During the three months ended March 31, 2022, the Company’s 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 the 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.

For the three months ended June 30, 2022 and 2021, the Company’s tax rate of 20.2 % and 20.5 % , respectively, was lower than the statutory rate of 21 % due primarily to the tax impact of the permanent component of employee stock option exercises.

For the six months ended June 30, 2022, the Company’s tax rate of 22.1 % was higher than the statutory rate due primarily to non-deductible executive compensation expense.

For the six months ended June 30, 2021, the Company’s tax rate of 18.7 % was lower than the statutory rate due primarily to the tax impact of the permanent component of employee stock option exercises.

Earnings Per Share

The following table sets out earnings per share of common stock:

Three months ended March 31,

Three months ended June 30,

Six months ended June 30,

(in thousands, except shares and per share data)

Weighted average common shares outstanding:

4 unchanged sentences

The Company utilizes both excess of loss (XOL) and quota share reinsurance.

As of March 31, 2022, the Company’s catastrophe event retention is $ 12.5 million for all perils.

As of March 31, 2022, the Company’s XOL reinsurance structure provides protection up to $ 1.71 billion for earthquake events and $ 700 million for hurricane events.

In addition to reinsurance purchased from traditional reinsurers, the Company has historically incorporated collateralized protection from the insurance linked securities (“ILS”) market via catastrophe bonds.

As of June 30, 2022, the Company’s catastrophe event retention is $ 12.5 million for all perils.

As of June 30, 2022, the Company’s XOL reinsurance structure provides protection up to $ 2.08 billion for earthquake events and $ 900 million for hurricane events.

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”).

Torrey Pines Re.

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

(“Torrey Pines Re Pte.”).

Torrey Pines Re Pte.

is a special purpose reinsurance vehicle incorporated in Singapore that provides Palomar with indemnity-based reinsurance covering earthquake events through June 1, 2024.

During the second quarter of 2022, the Company also closed a $ 275 million 144A catastrophe bond which became effective June 1, 2022.

This catastrophe bond was completed through Torrey Pines Re Ltd., a Bermuda-domiciled special purpose insurer that provides indemnity-based reinsurance covering earthquake events through June 1, 2025.

Credit Agreements

10 unchanged sentences

If an event of default occurs, any debt may be declared immediately due and payable.

As of March 31, 2022, the Company was in compliance with all debt covenants.

As of March 31, 2022 and December 31, 2021, the Company did not have any outstanding borrowings under the Credit Agreement.

As of June 30, 2022, the Company was in compliance with all debt covenants.

As of June 30, 2022 and December 31, 2021, the Company did not have any outstanding borrowings under the Credit Agreement.

FHLB Line of Credit

3 unchanged sentences

All advances have a 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 at the current overnight rate of 0.35 %.

As of June 30, 2022, the Company had $ 23 million of borrowings outstanding through the FHLB at the overnight rate of 1.67 %.

Interest expense on the FHLB Line of Credit was immaterial for the three and six months ended June 30, 2022.

There were no borrowings outstanding at December 31, 2021.

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 1. Financial Statements