What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-04 compared with 2022-05-05 · 271 added, 114 removed, 450 unchanged (46% 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 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.

The results of operations for the three and six months ended June 30, 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.

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 February 24, 2022.

8 unchanged sentences

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

We continue to develop product offerings for lines of business that harness our core competencies and where we believe we can generate attractive risk adjusted returns;

recent examples include our casualty and fronting offerings.

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.

5 unchanged sentences

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.

For the six months ended June 30, 2022, 45% 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 93% overall for these lines of business, providing strong visibility into future revenue.

5 unchanged sentences

In July 2020, PESIC was also awarded an “A−” rating by A.M.

In May 2021, A.M.

In June 2022, A.M.

Best affirmed the “A−” rating of PSIC and PESIC.

5 unchanged sentences

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 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, 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.

4 unchanged sentences

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.

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 and equity securities.

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

26 unchanged sentences

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 terms of the policies.

The majority of our insurance policies have a term of one year and premiums are earned pro rata over the terms of the policies.

Commission and Other Income

28 unchanged sentences

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.

Bank National Association and interest incurred on borrowings from our FHLB line of credit.

Net Investment Income

We earn investment income on our portfolio of invested assets.

Our invested assets are primarily comprised of fixed maturity securities, and may also include cash and cash equivalents, and equity securities.

We invest primarily 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 and cash and cash equivalents.

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

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

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

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

Our balance of invested capital may be impacted in the future by repurchases of shares of our common stock or borrowings under our credit agreements.

Net Realized and Unrealized Gains and Losses on Investments

Net realized and unrealized gains and losses on investments are a function of the difference between the amount received by us on the sale of a security and the security’s cost-basis, mark-to-market adjustments, and credit losses recognized in earnings.

Unrealized gains and losses on fixed maturity securities are recognized as a component of other comprehensive income and do not impact our net income.

Income Tax Expense

5 unchanged sentences

See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of total revenue calculated in accordance with GAAP to underwriting revenue.

Underwriting income is a non-GAAP financial measure defined as income before income taxes excluding net investment income and net realized and unrealized gains and losses on investments.

Underwriting income is a non-GAAP financial measure defined as income before income taxes excluding net investment income, net realized and unrealized gains and losses on investments, and interest expense.

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

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.

Return on equity is net income expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period.

Adjusted return on equity is a non-GAAP financial measure defined as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period.

Annualized return on equity is net income expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period.

Annualized adjusted return on equity is a non-GAAP financial measure defined as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period.

See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of return on equity calculated using unadjusted GAAP numbers to adjusted return on equity.

12 unchanged sentences

See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of combined ratio calculated using unadjusted GAAP numbers to adjusted combined ratio excluding catastrophe losses.

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

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

Tangible stockholders’ equity is a non-GAAP financial measure defined as stockholders’ equity less intangible assets.

1 unchanged sentence

Results of Operations

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 June 30, 2022 compared to three months ended June 30, 2021

The following table summarizes our results for the three months ended June 30, 2022 and 2021:

Three months ended

12 unchanged sentences

Net investment income

Net realized and unrealized losses on investments

Net realized and unrealized gains (losses) on investments

Income before income taxes

Income tax expense

Expenses associated with transactions and stock offerings

Stock-based compensation expense

13 unchanged sentences

Adjusted combined ratio excluding catastrophe losses (1)

Adjusted underwriting income (1)

NM - not meaningful

2 unchanged sentences

Gross Written Premiums

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.

Gross written premiums increased $89.3 million, or 69.1% to $218.7 million for the three months ended June 30, 2022 compared to $129.4 million for the three months ended June 30, 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:

Three Months Ended March 31,

Three Months Ended June 30,

($ in thousands)

3 unchanged sentences

Inland Marine

Specialty Homeowners

Commercial All Risk

Specialty Homeowners

Hawaii Hurricane

6 unchanged sentences

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

During the second quarter of 2022, we ceased writing Specialty Homeowners business outside of Texas and converted our Texas Specialty Homeowners business to a fronting arrangement beginning June 1, 2022.

These underwriting changes caused the decline in Specialty Homeowners premiums shown above.

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

Three Months Ended March 31,

Three Months Ended June 30,

($ in thousands)

1 unchanged sentence

Ceded Written Premiums

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.

Ceded written premiums increased $71.1 million, or 137.8%, to $122.6 million for the three months ended June 30, 2022 from $51.6 million for the three months ended June 30, 2021.

The increase was primarily due to increased

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

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.

During the three months ended June 30, 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 and incur approximately $3.9 million of expense associated with the reinstatement of our reinsurance program.

Ceded written premiums as a percentage of gross written premiums increased to 56.1% for the three months ended June 30, 2022 from 39.9% for the three months ended June 30, 2021.

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

Net 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 written premiums increased $18.3 million, or 23.5%, to $96.1 million for the three months ended June 30, 2022 from $77.8 million for the three months ended June 30, 2021.

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

Net Earned Premiums

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.

Net earned premiums increased $26.1 million, or 48.0%, to $80.3 million for the three months ended June 30, 2022 from $54.2 million for the three months ended June 30, 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:

6 unchanged sentences

Commission and Other Income

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.

Commission and other income was approximately $1.0 million for both the three months ended June 30, 2022 and June 30, 2021.

The balance remained materially consistent due to an increase in policy related fees associated with an increased volume of premiums written offset by a decrease in commissions from a lower volume of policies written through our internal managing general agency, Palomar Insurance Agency.

Losses and Loss Adjustment Expenses

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 increased $7.2 million, or 99.0% to $14.4 million for the three months ended June 30, 2022 from $7.2 million for the three months ended June 30, 2021.

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

4 unchanged sentences

Total losses and loss adjustment expenses

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

Our catastrophe loss ratio was 0.7% during the three months ended June 30, 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.

Our catastrophe loss ratio was negative 2.1% during the three months ended June 30, 2021.

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

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.

Our non-catastrophe loss ratio was 17.2% for the three months ended June 30, 2022 compared to 15.4% during the three months ended June 30, 2021.

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 $8.7 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.

Acquisition expenses increased $6.2 million, or 27.8%, to $28.7 million for the three months ended June 30, 2022 from $22.4 million for the three months ended June 30, 2021.

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

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 were 18.1% for the three months ended June 30, 2022 compared to 21.9% for the three months ended June 30, 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 $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.

Other underwriting expenses increased $5.7 million, or 45.1%, to $18.2 million for the three months ended June 30, 2022 from $12.5 million for the three months ended June 30, 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.

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 were 11.5% for the three months ended June 30, 2022 compared to 12.2% for the three months ended June 30, 2021.

Excluding the impact of expenses relating to stock-based compensation, amortization of intangibles, and catastrophe bonds, other underwriting expenses as a percentage of gross earned premiums were 8.5% for the three months ended June 30, 2022 compared to 11.1% for the three months ended June 30, 2021.

This percentage decreased due to an increase in net 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 $0.4 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.

Net investment income increased $0.9 million, or 43.1%, to $3.1 million for the three months ended June 30, 2022 from $2.2 million for the three months ended June 30, 2021.

The increase was primarily due to a higher average balance of investments during the three months ended June 30, 2022 and higher yields on invested assets.

The Company incurred $4.7 million of net realized and unrealized losses on investments for the three months ended June 30, 2022 compared to $0.3 million of net realized and unrealized gains for the three months ended June 30, 2021 due to higher unrealized losses on our equity securities during the period ended June 30, 2022.

Unrealized gains and losses on fixed maturity securities are recognized as a component of other comprehensive income and do not impact our net income.

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

7 unchanged sentences

Income Tax Expense

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.

Income tax expense increased $0.5 million or 16.6% to $3.7 million for the three months ended June 30, 2022 from $3.2 million for the three months ended June 30, 2021 due to higher pre-tax income for the period ended June 30, 2022.

During the three months ended June 30, 2022, our income tax rate of 20.2% 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 three months ended June 30, 2021 our income tax rate of 20.5% was lower than the statutory rate also due primarily to the tax impact of the permanent component of employee stock option exercises.

Results of Operations

Six months ended June 30, 2022 compared to six months ended June 30, 2021

The following table summarizes our results for the six months ended June 30, 2022 and 2021:

Six months ended

($ in thousands, except per share data)

Gross written premiums

Ceded written premiums

Net written premiums

Net earned premiums

Commission and other income

Total underwriting revenue (1)

Losses and loss adjustment expenses

Acquisition expenses

Other underwriting expenses

Underwriting income (1)

Interest expense

Net investment income

Net realized and unrealized losses on investments

Income before income taxes

Income tax expense

Expenses associated with transactions

Stock-based compensation expense

Amortization of intangibles

Expenses associated with catastrophe bond, net of rebate

Adjusted net income (1)

Key Financial and Operating Metrics

Annualized return on equity

Annualized adjusted return on equity (1)

Expense ratio

Combined ratio

Adjusted combined ratio (1)

Diluted earnings per share

Diluted adjusted earnings per share (1)

Catastrophe losses

Catastrophe loss ratio (1)

Adjusted combined ratio excluding catastrophe losses (1)

Adjusted underwriting income (1)

NM- not meaningful

(1) Indicates non-GAAP financial measure;

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

Gross Written Premiums

Gross written premiums increased $156.7 million, or 67.3% to $389.6 million for the six months ended June 30, 2022 compared to $232.9 million for the six months ended June 30, 2021.

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

Six Months Ended June 30,

($ in thousands)

Residential Earthquake

Fronting Premiums

Commercial Earthquake

Inland Marine

Commercial All Risk

Specialty Homeowners

Hawaii Hurricane

Residential Flood

Total Gross Written Premiums

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.

These underwriting changes caused the decline in Specialty Homeowners premiums shown above.

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

Six Months Ended June 30,

($ in thousands)

Total Gross Written Premiums

Ceded Written Premiums

Ceded written premiums increased $117.2 million, or 123.5%, to $212.2 million for the six months ended June 30, 2022 from $94.9 million for the six months ended June 30, 2021.

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

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

During the six months ended June 30, 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 $7.9 million of expense associated with the reinstatement of our reinsurance program.

Ceded written premiums as a percentage of gross written premiums increased to 54.5% for the six months ended June 30, 2022 from 40.8% for the six months ended June 30, 2021.

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

Net Written Premiums

Net written premiums increased $39.4 million, or 28.6%, to $177.4 million for the six months ended June 30, 2022 from $138.0 million for the six months ended June 30, 2021.

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 $55.0 million, or 54.3%, to $156.3 million for the six months ended June 30, 2022 from $101.3 million for the six months ended June 30, 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.

Six Months Ended

($ 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 $0.1 million, or 2.9%, to $1.8 million for the six months ended June 30, 2022, from $1.7 million for the six months ended June 30, 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 increased $26.5 million to $29.4 million for the six months ended June 30, 2022 from $2.8 million for the six months ended June 30, 2021.

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

Six Months Ended

($ in thousands)

Catastrophe losses

Non-catastrophe losses

Total losses and loss adjustment expenses

NM- not meaningful

Our catastrophe loss ratio was 0.7% during the six months ended June 30, 2022.

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

Our catastrophe loss ratio was negative 10.6% during the six months ended June 30, 2021.

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

Our non-catastrophe loss ratio was 18.1% for the six months ended June 30, 2022 compared to 13.4% during the six months ended June 30, 2021.

Acquisition Expenses

Acquisition expenses increased $15.0 million, or 35.9%, to $56.7 million for the six months ended June 30, 2022 from $41.7 million for the six months ended June 30, 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 19.1% for the six months ended June 30, 2022 compared to 21.5% for the six months ended June 30, 2021.

Other Underwriting Expenses

Other underwriting expenses increased $7.3 million, or 27.4%, to $34.1 million for the six months ended June 30, 2022 from $26.8 million for the six months ended June 30, 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.

Other underwriting expenses as a percentage of gross earned premiums were 11.5% for the six months ended June 30, 2022 compared to 13.8% for the six months ended June 30, 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 8.7% for the six months ended June 30, 2022 compared to 11.5% for the six months ended June 30, 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 $1.3 million, or 29.6%, to $5.7 million for the six months ended June 30, 2022 from $4.4 million for the six months ended June 30, 2021.

The increase was primarily due to a higher average balance of investments during the six months ended June 30, 2022 and higher yields on invested assets.

The Company incurred $6.0 million of net realized and unrealized losses on investments for the six months ended June 30, 2022 compared to $0.4 million of net realized and unrealized losses for the six months ended June 30, 2021 due to higher unrealized losses on our equity securities during the period ended June 30, 2022.

Unrealized gains and losses on fixed maturity securities are recognized as a component of other comprehensive income and do not impact our net income.

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

Six Months Ended

($ 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 tax expense increased $1.6 million or 24.0% to $8.3 million for the six months ended June 30, 2022 from $6.7 million for the six months ended June 30, 2021 due to higher pre-tax income and a higher effective tax rate during the six months ended June 30, 2022.

During the six months ended June 30, 2022, our income tax rate of 22.1% was higher than the statutory rate of 21% due primarily to non-deductible executive compensation expense.

For the six months ended June 30, 2021 our income 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.

Reconciliation of Non-GAAP Financial Measures

6 unchanged sentences

Three Months Ended

Six Months Ended

(in thousands)

Total revenue

2 unchanged sentences

Underwriting revenue

Underwriting Income

We define underwriting income as income before income taxes excluding net investment income and net realized and unrealized gains and losses on investments.

Underwriting Income and adjusted underwriting income

We define underwriting income as income before income taxes excluding net investment income, net realized and unrealized gains and losses on investments, and interest expense.

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.

Income before income taxes calculated in accordance with GAAP reconciles to underwriting income as follows:

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

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.

Adjusted underwriting income should not be viewed as a substitute for pre-tax income calculated in accordance with GAAP.

Other companies may define adjusted underwriting income differently.

Income before income taxes calculated in accordance with GAAP reconciles to underwriting income and adjusted underwriting income as follows:

Three Months Ended

Six Months Ended

(in thousands)

Income before income taxes

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Net realized and unrealized (gains) losses on investments

Interest expense

Underwriting income

Expenses associated with transactions

Stock-based compensation expense

Amortization of intangibles

Expenses associated with catastrophe bond, net of rebate

Adjusted underwriting income

Adjusted Net Income

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Three Months Ended

Six Months Ended

(in thousands)

Expenses associated with transactions and stock offerings

(in thousands)

Expenses associated with transactions

Stock-based compensation expense

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Annualized Adjusted Return on Equity

We define adjusted return on equity as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period.

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

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

We define annualized adjusted return on equity as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period.

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

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

Annualized adjusted return on equity is calculated as follows:

Three Months Ended

Six Months Ended

($ in thousands)

Annualized adjusted net income

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Three Months Ended

Six Months Ended

($ 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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Adjustments to numerator:

Expenses associated with transactions and stock offerings

Expenses associated with transactions

Stock-based compensation expense

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Three Months Ended

Six Months Ended

(in thousands, except per share data)

Adjusted net income

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Three Months Ended

Six Months Ended

($ in thousands)

Losses and loss adjustment expenses

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Three Months Ended

Six Months Ended

($ 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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Adjustments to numerator:

Expenses associated with transactions and stock offerings

Expenses associated with transactions

Stock-based compensation expense

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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.

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.

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If a Class 3A insurer has failed to meet its minimum solvency margin on the last day of any financial year, it will also be prohibited, without the approval of the BMA, from declaring or paying any dividends during the next financial year.

Furthermore, the Insurance Act limits the ability of PSRE to pay dividends or make capital distributions by stipulating certain margin and solvency requirements and by requiring approval from the BMA prior to a reduction of 15% or more of a Class 3A insurer’s total statutory capital as reported on its prior year statutory balance sheet.

Furthermore, the Insurance Act limits the ability of PSRE to pay dividends or make capital distributions

by stipulating certain margin and solvency requirements and by requiring approval from the BMA prior to a reduction of 15% or more of a Class 3A insurer’s total statutory capital as reported on its prior year statutory balance sheet.

Moreover, an insurer must submit an affidavit to the BMA, sworn by at least two directors and the principal representative in Bermuda of the Class 3A insurer, at least seven days prior to payment of any dividend which would exceed 25% of that insurer’s total statutory capital and surplus as reported on its prior year statutory balance sheet.

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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.

Our primary sources of cash flow are written premiums, investment income, reinsurance recoveries, sales and redemptions of investments, and proceeds from borrowings on our lines of credit.

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

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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 three months ended March 31, 2022 and 2021:

Three months ended

The following table summarizes our cash flows for the six months ended June 30, 2022 and 2021:

Six 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 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.

Our cash flow from operating activities was positive during the six months ended June 30, 2022 due to net income and a decrease in net operating assets.

Our cash flow from operating activities was negative during the six months ended June 30, 2021 due to an increase in net operating assets primarily related to timing of payments on claims.

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 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.

Cash used in investing activities for the six months ended June 30, 2022 related primarily to purchases of fixed maturity and equity securities in excess of sales and maturities.

Cash provided by investing activities for the six months ended June 30, 2021 related primarily to sales and maturities of fixed maturity and equity securities in excess of purchases.

Cash provided by financing activities for six months ended June 30, 2022 was related to $23.0 million in borrowings from our FHLB line of credit, the receipt of $1.8 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 $20.3 million of our common stock.

Cash used in financing activities for six months ended June 30, 2021 was related to the repurchase of $15.8 million of our common stock offset by the receipt of $1.2 million from the issuance of common stock via stock option exercises and the receipt of $0.3 million in proceeds related to the issuance of common stock via our employee stock purchase plan.

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 $533.2 million in cash and investment securities available at March 31, 2022.

To the extent our future operating cash flows are insufficient to cover our net losses from catastrophic events, we had $552.5 million in cash and investment securities available at June 30, 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.

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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.

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.

We purchased 347,013 shares for $20.3 million under this program during the six months ended June 30, 2022 and $79.7 million remains available for future repurchases.

Credit Agreements

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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.

As of June 30, 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”).

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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.

As of June 30, 2022, the Company had $23 million of borrowings outstanding through the FHLB line of credit.

Stockholders’ Equity

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.

At June 30, 2022 total stockholders’ equity was $378.1 million and tangible stockholders’ equity was $369.2 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 partially 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 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.

As of June 30, 2022, the majority of our investment portfolio, or $478.5 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 $37.5 million of equity securities.

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 addition, we maintained a non-restricted cash and cash equivalent balance of $36.5 million at June 30, 2022.

Our fixed maturity securities, including cash equivalents, had a weighted average effective duration of 4.18 and 3.99 years and an average rating of “A1/A+” and “A1/A” at June 30, 2022 and December 31, 2021, respectively.

Our fixed income investment portfolio had a book yield of 2.61% as of June 30, 2022, compared to 2.23% as of December 31, 2021.

At June 30, 2022 and December 31, 2021 the amortized cost and fair value on available-for-sale securities were as follows:

June 30, 2022

($ in thousands)

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Special revenue excluding mortgage/asset-backed securities

Industrial and miscellaneous

Corporate and other

Mortgage/asset-backed securities

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Special revenue excluding mortgage/asset-backed securities

Industrial and miscellaneous

Corporate and other

Mortgage/asset-backed securities

Total available-for-sale investments

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

March 31, 2022

The following tables provide the credit quality of investment securities as of June 30, 2022 and December 31, 2021:

June 30, 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 March 31, 2022 were as follows:

March 31, 2022

The amortized cost and fair value of our available-for-sale investments in fixed maturity securities summarized by contractual maturity as of June 30, 2022 were as follows:

June 30, 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.”

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.”

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

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

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

catastrophe bonds).

In addition to reinsurance purchased from traditional reinsurers, we have historically incorporated collateralized protection from the insurance linked securities market via catastrophe bonds.

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.

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.

(“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.

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

Our reinsurance coverage exhausts at $1.71 billion for earthquake events and $700 million for hurricane events, providing coverage in excess of our 1:250 year peak zone PML and in excess of our A.M.

Our reinsurance coverage exhausts at $2.08 billion for earthquake events and $900 million for hurricane events, providing coverage in excess of our 1 in 250 year peak zone PML and in excess of our A.M.

Best requirement.

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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.

Critical Accounting Estimates

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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