What changed in this filing

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Item 1A. Risk Factors

2022-08-04 compared with 2022-05-05 · 41 added, 36 removed, 580 unchanged (12% of the section changed)

16 unchanged sentences

● The potential loss of one or more key executives or an inability to attract and retain qualified personnel could adversely affect our results of operations;

● We rely on a select group of brokers and program administrators to manage the distribution of a significant portion of our Residential Earthquake, Commercial Earthquake, Specialty Homeowners and Hawaii Hurricane products.

Three program administrators with which we have long-standing relationships represented approximate ly 50% of our gross written premiums for the year ended December 31, 2021 and 54% for the three months ended March 31, 2022, and such relationships may not continue;

Three program administrators account for a significant portion of our premiums and such relationships may not continue;

● There is intense competition for business in our industry;

17 unchanged sentences

The frequency and severity of catastrophes are inherently unpredictable and the occurrence of one catastrophe does not make the occurrence of another catastrophe more or less likely.

Increases in the replacement cost of insured property due higher material and labor costs, increases in concentrations of insured property, the effects of inflation, and changes in cyclical weather patterns may increase the severity of claims from catastrophe events in the future.

Increases in the replacement cost of insured property due to higher material and labor costs, increases in concentrations of insured property, the effects of inflation, and changes in cyclical weather patterns may increase the severity of claims from catastrophe events in the future.

Claims from catastrophe events could reduce our earnings and cause substantial volatility in our results of operations for any fiscal quarter or year, which could materially adversely affect our financial condition, possibly to the extent of eliminating our total stockholders’ equity.

We have recently

experienced significant catastrophe losses including hurricane related losses during the third and fourth quarters of 2020 and third quarter of 2021.

We experienced significant catastrophe losses including hurricane related losses during the third and fourth quarters of 2020 and third

quarter of 2021.

Our ability to underwrite new insurance policies could also be materially adversely impacted as a result of corresponding reductions in our capital.

24 unchanged sentences

Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred or ceded to the reinsurer, it does not relieve us (the ceding insurer) of our primary liability to our policyholders.

Our current reinsurance program is designed to limit our risk retention to $12.5 million of risk per

earthquake or wind event and provide coverage up to $1.71 billion for earthquake events and $700 million for hurricane events, subject to customary exclusions.

Our current reinsurance program is designed to limit our risk retention to $12.5 million of risk per earthquake or wind event and provide coverage up to $2.08 billion for earthquake events and $900 million for hurricane

events, subject to customary exclusions.

However, particularly in the event of a major catastrophe, our reinsurers may not pay claims made by us on a timely basis, or they may not pay some or all these claims.

5 unchanged sentences

We evaluate each reinsurance claim based on the facts of the case, historical experience with the reinsurer on similar claims and existing case law and consider including any amounts deemed uncollectible from the reinsurer in a reserve for uncollectible reinsurance.

As of March 31, 2022, we had $145.8 million of aggregate reinsurance recoverables.

As of June 30, 2022, we had $132.6 million of aggregate reinsurance recoverables.

These risks could cause us to incur increased net losses, and, therefore, adversely affect our financial condition.

9 unchanged sentences

As a result, we may not be able to purchase reinsurance in the areas and for the amounts we desire or on terms we deem acceptable or at all.

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

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

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.

We are currently seeking to expand our catastrophe XOL coverage through a catastrophe bond offering and may seek similar catastrophe bond offerings in the future.

(“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.

We may seek similar catastrophe bond offerings in the future.

However, there can be no assurance that we will be able to complete such offerings on acceptable terms, if at all.

1 unchanged sentence

If we are unwilling to bear an increase in loss exposure, we could have to reduce the level of our underwriting commitments, both of which could materially adversely affect our business, financial condition, and results of operations.

In addition, as we grow our written premiums and enter new lines of business we will seek out new types of reinsurance and will need to purchase reinsurance on commercially acceptable terms in order to reduce the risk

associated with entering new lines of business.

The inability to find and purchase appropriate reinsurance for new lines of business would have a negative impact on our ability to grow our written premiums.

58 unchanged sentences

Our business is concentrated in California and Texas and, as a result, we are exposed more significantly to California and Texas loss activity and regulatory environments.

Our policyholders and insurance risks are currently concentrated in California and Texas, which generated 46% and 12% of our gross written premiums, respectively, for the year ended December 31, 2021 and 40% and 11% for the three months ended March 31, 2022.

We are exposed to business, economic, political, judicial and regulatory risks due to this concentration that are greater than the risks faced by insurance companies that conduct business over a more extensive geographic area.

6 unchanged sentences

As such, higher demand for employees having the desired skills and expertise could lead to increased compensation expectations for existing and prospective personnel, making it difficult for us to retain and recruit key personnel and maintain labor costs at desired levels.

Since the onset of the Pandemic, companies have had issues with employee turnover and finding and hiring qualified employees.

Since the onset of the Pandemic, companies have had issues with employee turnover and finding, hiring, and retaining qualified employees.

These challenges may continue for the foreseeable future.

6 unchanged sentences

We distribute a significant portion of our Residential Earthquake, Commercial Earthquake, Specialty Homeowners, Hawaii Hurricane, and Fronting products through longstanding relationships with three program administrators.

Each of the products managed by the program administrators operates as a separate program that is governed by an independent, separately negotiated agreement with unique terms and conditions, including geographic scope, key person provisions, economics and exclusivity.

Each of the products managed by the program administrators operates as a separate program that is governed by an independent, separately negotiated agreement with

unique terms and conditions, including geographic scope, key person provisions, economics and exclusivity.

These programs also feature separate managerial oversight and leadership, policy administration systems and retail agents originating policies.

In total, these products accounted for $266.1 million or 50% of our gross written premiums for the

year ended December 31, 2021 and $92.5 million or 54% for the three months ended March 31, 2022.

These products accounted for $266.2 million or 50% of our gross written premiums for the year ended December 31, 2021, with $10.3 million or 2% of the total attributable to fronting premiums.

These products accounted for $212.4 million or 55% of our gross written premiums for the six months ended June 30, 2022, with $62.4 million or 16% of the total attributable to fronting premiums.

This amount includes our Value Select Residential Earthquake program, which represents the majority of our Residential Earthquake premium and is administered through a mutually exclusive program administrator agreement with Arrowhead General Insurance Agency for the states of California, Oregon and Washington.

12 unchanged sentences

Although the failure by any of our brokers to remit premiums to us has not been material to date, there may be instances where our brokers collect premiums but do not remit them to us and we may be required under applicable law to provide the coverage set forth in the policy despite the related premiums not being paid to us.

Additionally, the loss or disruption of business from our agents and brokers or the failure or inability of these agents and brokers to successfully market our insurance products, including impacts related to the Pandemic, could have a material adverse effect on our business, financial condition, and results of operations.

Additionally, the loss or disruption of business from our agents and brokers or the failure or inability of these agents and brokers to successfully market our insurance products could have a material adverse effect on our business, financial condition, and results of operations.

Because the possibility of these events occurring depends in large part upon the financial condition and internal operations of our brokers, we regularly meet and communicate with our brokers, monitor broker behavior and review broker financial information on an as-needed basis.

5 unchanged sentences

If the CEA decided to provide coverage to non-CEA member carriers or lessened the capital requirements for membership, we would face additional competition in our markets, and our operating results could be adversely affected.

Furthermore, it may be difficult or prohibitively expensive for us to implement technology systems and processes that are competitive with the systems and processes of these larger companies.

Competition in the insurance industry is based on many factors, including price of coverage, the general reputation and perceived financial strength of the company, relationships with brokers, terms and conditions of products offered, ratings assigned by independent rating agencies, speed of claims payment, and the experience and reputation of

the members of our underwriting team in the particular lines of insurance and reinsurance we seek to underwrite.

Furthermore, it

may be difficult or prohibitively expensive for us to implement technology systems and processes that are competitive with the systems and processes of these larger companies.

In recent years, the insurance industry has undergone increasing consolidation, which may further increase competition.

11 unchanged sentences

If actual renewals do not meet expectations or if we choose not to write a renewal because of pricing conditions, our written premium in future years and our future operations would be materially adversely affected.

In addition, the volume of fronting premiums written may vary significantly in future periods due to the timing of entering large fronting partnerships and terminations of large fronting partnerships.

Our failure to accurately and timely evaluate and pay claims could materially and adversely affect our business, financial condition, results of operations, and prospects.

6 unchanged sentences

We rely on information provided by insureds or their representatives when underwriting insurance policies.

While we may make inquiries and take other steps to validate or supplement the information provided, we may make underwriting decisions based on incorrect or incomplete information.

While we may make inquiries and take other steps to validate or supplement the information provided, we may make

underwriting decisions based on incorrect or incomplete information.

It is possible that we will misunderstand the nature or extent of the activities or facilities and the corresponding extent of the risks that we insure because of our reliance on inadequate or inaccurate information.

19 unchanged sentences

We intend to grow our business in the future, which could require additional capital, systems development, and skilled personnel.

However, we must be able to meet our capital needs, expand our systems and our internal controls effectively, allocate our human resources optimally, identify and hire qualified employees, and effectively incorporate the components of any businesses we may acquire in our effort to achieve growth.

However, we must be able to meet our capital needs, expand our systems and our internal controls effectively, allocate our human resources optimally, identify, hire and retain qualified employees, and effectively incorporate the components of any businesses we may acquire in our effort to achieve growth.

The failure to manage our growth effectively could have a material adverse effect on our business, financial condition and results of operations.

2 unchanged sentences

The E&S market is highly competitive and many of our competitors are better capitalized and have a longer history in the market.

While we believe that the underwriting acumen and market expertise we have established through our admitted insurance company, PSIC, can be applied to the surplus lines market as well, there can be no assurances that we will be successful in accurately analyzing risks and scaling a profitable operation in the E&S market.

in accurately analyzing risks and scaling a profitable operation in the E&S market.

If we are unable to underwrite profitably in the E&S market, our business and future prospects may be adversely impacted.

1 unchanged sentence

Our operating results are subject to fluctuation and have historically varied from quarter to quarter.

We expect our quarterly results to continue to fluctuate in the future due to a number of factors, including the general economic conditions in the markets where we operate, the frequency of occurrence and severity of catastrophe or other insured events, fluctuating interest rates, claims exceeding our loss reserves, competition in our industry, deviations from expected premium retention rates of our existing policies and contracts, volatility in investment performance, and the cost of reinsurance coverage.

Additionally, the future impact of the Pandemic on our business, operations, liquidity, financial condition, and results of operations remains uncertain.

43 unchanged sentences

We underwrite a significant portion of our insurance in California and Texas.

Any economic downturn in either state could have an adverse effect on our financial condition and results of operations.

An economic downturn which particularly impacts either state could have an adverse effect on our financial condition and results of operations.

Performance of our investment portfolio is subject to a variety of investment risks that may adversely affect our financial results.

13 unchanged sentences

These securities are carried on the balance sheet at fair market value and are subject to potential losses and declines in market value based on the performance of equity markets.

Our equity invested assets totaled $42.0 million as of March 31, 2022.

Our equity invested assets totaled $37.5 million as of June 30, 2022.

Risks for all types of securities are managed through the application of our investment policy, which establishes investment parameters that include but are not limited to, maximum percentages of investment in certain types of securities and minimum levels of credit quality, which we believe are within applicable guidelines established by the National Association of Insurance Commissioners (“NAIC”), the Oregon Division of Financial Regulation and the California and Arizona Departments of Insurance.

1 unchanged sentence

In addition, although we seek to employ investment strategies that are not correlated with our insurance and reinsurance exposures, losses in our investment portfolio may occur at the same time as underwriting losses and, therefore, exacerbate the adverse effect of the losses on us.

Our investment portfolio could also be adversely impacted by ratings downgrades, increased bankruptcies and credit spread widenings caused by economic downturns from pandemics or other events.

Our investment portfolio could also be adversely impacted by ratings downgrades, increased bankruptcies and credit spread widenings caused by economic downturns or other events.

Severe economic downturns could cause impairments in our fixed income portfolio.

26 unchanged sentences

Some of these systems may include or rely on third-party systems not located on our premises or under our control.

Events such as natural catastrophes, pandemics (including the COVID-19 Pandemic), cyber-attacks, terrorist attacks, industrial accidents or computer viruses may cause our systems to fail or be inaccessible for extended periods of time.

Events such as natural catastrophes, pandemics, cyber-attacks, terrorist attacks, industrial accidents or computer viruses may cause our systems to fail or be inaccessible for extended periods of time.

While we have implemented business contingency plans and other reasonable plans to protect our systems, sustained or repeated system failures or service denials could severely limit our ability to write and process new and renewal business, provide customer service, pay claims in a timely manner or otherwise operate in the ordinary course of business.

89 unchanged sentences

As PSIC grows, its share of any assessments in each state in which it underwrites business on an admitted basis may increase.

PSIC paid assessments of $0.1 million in 2021 and for the three months ended March 31, 2022.

PSIC paid assessments of $0.1 million in 2021 and $0.1 million for the six months ended June 30, 2022.

We cannot predict with certainty the amount of future assessments, because they depend on factors outside our control, such as insolvencies of other insurance companies as well as the occurrence of significant catastrophes.

128 unchanged sentences

exchange rate fluctuations;

other events or factors, including those from natural disasters, war, pandemics, acts of terrorism, or responses to these events.

other events or factors, including those from natural disasters, war, pandemics, acts of terrorism, cyber-attacks or responses to these events.

The securities markets have from time to time experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of particular companies.

8 unchanged sentences

permit the Board of Directors to establish the number of directors and fill any vacancies and newly created directorships;

provide that our Board of Directors are classified into three classes with staggered, three year terms and that directors may only be removed for cause;

provide, through 2027, that our Board of Directors are classified into three classes with staggered, three year terms and that directors may only be removed for cause;

require super-majority voting to amend provisions in our certificate of incorporation and bylaws;

25 unchanged sentences

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 1A. Risk Factors