What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-03 compared with 2022-08-04 · 167 added, 140 removed, 581 unchanged (35% of the section changed)

2 unchanged sentences

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

The results of operations for the three and 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 results of operations for the three and nine months ended September 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.

6 unchanged sentences

and its subsidiaries, unless the context otherwise requires.

We are a rapidly growing and innovative insurer focused on providing specialty insurance to residential and commercial customers.

Our underwriting and analytical expertise allow us to concentrate on certain markets that we believe are underserved by other insurance companies, such as the markets for earthquake, hurricane, 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 are a specialty insurance company that provides property and casualty insurance products to individuals and businesses.

We use our underwriting and analytical expertise to provide products for select markets that we believe are underserved by other insurance companies, including the market for earthquake insurance.

We use proprietary data analytics and a modern technology platform to offer our customers flexible products with customized and granular pricing for both the admitted and excess and surplus lines (“E&S”) markets.

We provide admitted insurance products through our Oregon domiciled insurance company, Palomar Specialty Insurance Company (“PSIC”), and non-admitted insurance products through our Arizona domiciled surplus lines insurance company, Palomar Excess and Surplus Insurance Company (“PESIC”).

Each of our insurance company subsidiaries as well as our holding company, Palomar Holdings Inc., carry an “A-“ rating from A.M.

Best Company (“A.M.

Best”), a leading rating agency for the insurance industry.

We distribute our products through multiple channels, including retail agents, program administrators, wholesale brokers, and partnerships with other insurance companies.

Due to our participation in lines of business such as earthquake insurance and the fronting market, a significant portion of our gross written premium does not expose us to the risk of attritional losses.

Our business strategy is supported by a comprehensive risk transfer program with reinsurance coverage that we believe reduces earnings volatility and provides appropriate levels of protection from catastrophic events.

2 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 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.

In February 2014, PSIC was awarded an “A−” rating from A.M.

Best Company (“A.M.

Best”), a leading rating agency for the insurance industry.

An “A−” rating is categorized by A.M.

Best as an excellent rating and indicates a stable outlook.

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

In June 2022, A.M.

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

These ratings reflect A.M.

Best’s opinion of our subsidiaries’ financial strength, operating performance, and ability to meet obligations to policyholders and are not an evaluation directed towards the protection of investors.

We have also been profitable since 2016 and our net income growth since 2016 reflects a compound annual growth rate of 47%.

We seek to continuously grow our underwriting income by developing product offerings for lines of business that harness our core competencies and where we believe we can generate attractive risk adjusted returns.

We believe that our market opportunity, distinctive products, and differentiated business model position us to grow our business profitably.

21 unchanged sentences

● Entrance into new partnerships or the offering of new types of insurance products;

● Exits from existing partnerships or reducing or ceasing to offer existing insurance products;

● Renewal rates of existing policies;

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

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

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

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

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

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

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

In periods where we modify a quota share agreement, ceded written premiums may increase or decrease

significantly compared to prior periods and these fluctuations may not be indicative of future trends.

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

21 unchanged sentences

● Inflation in housing and construction costs;

● Increases in amounts awarded by courts and juries.

Losses and loss adjustment expenses are based on an actuarial analysis of the estimated losses, including losses incurred during the period and changes in estimates from prior periods.

1 unchanged sentence

Acquisition Expenses

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

quota share and fronting reinsurance agreements.

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

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

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

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

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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 and include unrealized gains and losses on equity securities.

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, credit losses recognized in earnings, and unrealized gains and losses on equity securities.

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

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

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

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.

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Results of Operations

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

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

Three months ended

September 30,

($ in thousands, except per share data)

8 unchanged sentences

Other underwriting expenses

Underwriting income (1)

Underwriting income (loss) (1)

Interest expense

Net investment income

Net realized and unrealized gains (losses) on investments

Net realized and unrealized losses on investments

Income before income taxes

Income tax expense

Income tax expense (benefit)

Expenses associated with transactions

Stock-based compensation expense

Amortization of intangibles

Expenses associated with catastrophe bond, net of rebate

Adjusted net income (1)

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Adjusted combined ratio excluding catastrophe losses (1)

Adjusted underwriting income (1)

Adjusted underwriting income (loss) (1)

NM - not meaningful

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Gross Written Premiums

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.

Gross written premiums increased $100.8 million, or 66.2% to $253.1 million for the three months ended September 30, 2022 compared to $152.3 million for the three months ended September 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 June 30,

Three Months Ended September 30,

($ in thousands)

Residential Earthquake

Fronting Premiums

Residential Earthquake

Commercial Earthquake

Inland Marine

Commercial All Risk

Specialty Homeowners

Hawaii Hurricane

Commercial All Risk

Residential Flood

Specialty Homeowners

Total Gross Written Premiums

7 unchanged sentences

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

Three Months Ended June 30,

Three Months Ended September 30,

($ in thousands)

1 unchanged sentence

Ceded Written Premiums

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.

Ceded written premiums increased $103.9 million, or 178.8%, to $161.9 million for the three months ended September 30, 2022 from $58.1 million for the three months ended September 30, 2021.

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

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

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.

During the three months ended September 30, 2022, our XOL reinsurance expense was impacted by Hurricane Ian.

Catastrophe losses from Ian caused us to utilize certain layers of our XOL program and incur approximately $1.3 million of expense associated with the acceleration of XOL expense and reinstatement of our reinsurance program.

We expect to incur an additional $1.8 million of ceded premium to be recognized ratably from October 1, 2022 to May 31, 2023.

Ceded written premiums as a percentage of gross written premiums increased to 64.0% for the three months ended September 30, 2022 from 38.1% for the three months ended September 30, 2021.

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

Net 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 written premiums decreased $3.1 million, or 3.2%, to $91.2 million for the three months ended September 30, 2022 from $94.3 million for the three months ended September 30, 2021.

The decrease was due to higher XOL expense due to growth in exposure and growth in lines of business subject to a quota share, such as Inland Marine, Casualty and Commercial Earthquake.

In addition, ceding increased due to the conversion of our Texas Specialty Homeowners business to a fronting arrangement beginning June 1, 2022.

Net Earned Premiums

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.

Net earned premiums increased $13.2 million, or 20.4%, to $77.9 million for the three months ended September 30, 2022 from $64.7 million for the three months ended September 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:

Three Months Ended

September 30,

($ in thousands)

4 unchanged sentences

Commission and Other Income

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.

Commission and other income increased $0.3 million to $1.3 million for the three months ended September 30, 2022 from $1.0 million for the three months ended September 30, 2021.

The balance increased 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 $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 increased $2.4 million, or 8.5% to $30.9 million for the three months ended September 30, 2022 from $28.5 million for the three months ended September 30, 2021.

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

Three Months Ended

September 30,

($ in thousands)

2 unchanged sentences

Total losses and loss adjustment expenses

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 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 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.

Our catastrophe loss ratio was 16.0% during the three months ended September 30, 2022.

Catastrophe losses were related to losses from Hurricane Ian which primarily impacted our Commercial All Risk line of business.

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

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

Our non-catastrophe loss ratio was 23.6% for the three months ended September 30, 2022 compared to 17.0% during the three months ended September 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 and Inland Marine.

Acquisition Expenses

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.

Acquisition expenses increased $0.8 million, or 3.0%, to $27.2 million for the three months ended September 30, 2022 from $26.4 million for the three months ended September 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 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 were 14.6% for the three months ended September 30, 2022 compared to 22.5% for the three months ended September 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 $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 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 increased $4.5 million, or 35.3%, to $17.1 million for the three months ended September 30, 2022 from $12.6 million for the three months ended September 30, 2021.

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

Other underwriting expenses as a percentage of gross earned premiums were 9.2% for the three months ended September 30, 2022 compared to 10.8% for the three months ended September 30, 2021.

Excluding the impact of expenses relating to transactions, stock-based compensation, and amortization of intangibles, other underwriting expenses as a percentage of gross earned premiums were 7.3% for the three months ended September 30, 2022 compared to 9.4% for the three months ended September 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 $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.

Net investment income increased $1.5 million, or 67.4%, to $3.7 million for the three months ended September 30, 2022 from $2.2 million for the three months ended September 30, 2021.

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

The Company incurred $2.4 million of net realized and unrealized losses on investments for the three months ended September 30, 2022 compared to $0.3 million of net realized and unrealized losses for the three months ended September 30, 2021 due to higher unrealized losses on our equity securities during the period ended September 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.

1 unchanged sentence

Three Months Ended

September 30,

($ in thousands)

4 unchanged sentences

Net realized and unrealized gains (losses) on investments

NM- not meaningful

Income Tax Expense

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.

Income tax expense increased $1.0 million to $0.9 million of expense for the three months ended September 30, 2022 from a benefit of $0.1 million for the three months ended September 30, 2021 due to higher pre-tax income for the period ended September 30, 2022.

During the three months ended September 30, 2022, our income tax rate of 17.5% was lower than the statutory rate of 21% due primarily to the tax impact of the permanent component of employee stock option exercises.

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

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

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

Nine months ended September 30, 2022 compared to nine months ended September 30, 2021

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

Nine months ended

September 30,

($ in thousands, except per share data)

35 unchanged sentences

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.

Gross written premiums increased $257.5 million, or 66.8% to $642.8 million for the nine months ended September 30, 2022 compared to $385.3 million for the nine months ended September 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,

Nine Months Ended September 30,

($ in thousands)

8 unchanged sentences

Total Gross Written Premiums

NM- not meaningful

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

5 unchanged sentences

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

Six Months Ended June 30,

Nine Months Ended September 30,

($ in thousands)

1 unchanged sentence

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.

Ceded written premiums increased $221.1 million, or 144.5%, to $374.1 million for the nine months ended September 30, 2022 from $153.0 million for the nine months ended September 30, 2021.

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

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”).

During the nine months ended September 30, 2022, our XOL reinsurance expense was impacted by Hurricane Ian.

Catastrophe losses from Ian caused us to utilize certain layers of our XOL program and incur approximately $1.3 million of expense associated with the reinstatement of our reinsurance program.

We expect to incur an additional $1.8 million of ceded premium to be recognized ratably from October 1, 2022 to May 31, 2023.

During the nine months ended September 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.

Ceded written premiums as a percentage of gross written premiums increased to 58.2% for the nine months ended September 30, 2022 from 39.7% for the nine months ended September 30, 2021.

This increase was primarily due to 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.

Net written premiums increased $36.4 million, or 15.7%, to $268.6 million for the nine months ended September 30, 2022 from $232.3 million for the nine months ended September 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.

Net earned premiums increased $68.3 million, or 41.1%, to $234.2 million for the nine months ended September 30, 2022 from $166.0 million for the nine months ended September 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

Nine Months Ended

September 30,

($ in thousands)

4 unchanged sentences

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.

Commission and other income increased by $0.4 million, or 14.4%, to $3.1 million for the nine months ended September 30, 2022, from $2.7 million for the nine months ended September 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 increased $29.0 million, or 92.6%, to $60.3 million for the nine months ended September 30, 2022 from $31.3 million for the nine months ended September 30, 2021.

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

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

2 unchanged sentences

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.

Our catastrophe loss ratio was 5.8% during the nine months ended September 30, 2022.

Catastrophe losses were primarily related to losses from Hurricane Ian which primarily impacted our Commercial All Risk line of business.

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

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

These events impacted our Commercial All Risk and Specialty Homeowners lines of business.

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

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

Our non-catastrophe loss ratio was 19.9% for the nine months ended September 30, 2022 compared to 14.8% during the nine months ended September 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 and Inland Marine.

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.

Acquisition expenses increased $15.8 million, or 23.2%, to $83.9 million for the nine months ended September 30, 2022 from $68.1 million for the nine months ended September 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.

Acquisition expenses as a percentage of gross earned premiums were 17.3% for the nine months ended September 30, 2022 compared to 21.9% for the nine months ended September 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.

Other underwriting expenses increased $11.8 million, or 29.9%, to $51.2 million for the nine months ended September 30, 2022 from $39.4 million for the nine months ended September 30, 2021.

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

Other underwriting expenses as a percentage of gross earned premiums were 10.6% for the nine months ended September 30, 2022 compared to 12.7% for the nine months ended September 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 8.2% for the nine months ended September 30, 2022 compared to 10.7% for the nine months ended September 30, 2021.

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

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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.

Net investment income increased $2.8 million, or 42.3%, to $9.5 million for the nine months ended September 30, 2022 from $6.6 million for the nine months ended September 30, 2021.

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

The Company incurred $8.4 million of net realized and unrealized losses on investments for the nine months ended September 30, 2022 compared to $0.8 million of net realized and unrealized losses for the nine months ended September 30, 2021 due to higher unrealized losses on our equity securities during the period ended September 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

Nine Months Ended

September 30,

($ in thousands)

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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.

Income tax expense increased $2.6 million or 40.3% to $9.2 million for the nine months ended September 30, 2022 from $6.5 million for the nine months ended September 30, 2021 due to higher pre-tax income and a higher effective tax rate during the nine months ended September 30, 2022.

During the nine months ended September 30, 2022, our income tax rate of 21.5% was higher than the statutory rate of 21% due primarily to non-deductible executive compensation expense.

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

Reconciliation of Non-GAAP Financial Measures

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(in thousands, except per share data)

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

September 30,

(in thousands)

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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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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 six months ended June 30, 2022 and 2021:

Six months ended

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

Nine months ended

September 30,

($ in thousands)

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Change in cash, cash equivalents, and restricted cash

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.

Our cash flow from operating activities was positive during the nine months ended September 30, 2022 and 2021 due to net income and a decrease in net operating assets in each period.

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 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.

Cash used in investing activities for the nine months ended September 30, 2022 and 2021 related primarily to purchases of fixed maturity securities in excess of sales and maturities in each period.

Cash provided by financing activities for nine months ended September 30, 2022 was related to $26.4 million in borrowings from our FHLB line of credit, the receipt of $2.2 million in proceeds from stock option exercises and the

receipt of $0.8 million in proceeds from our employee stock purchase plan, offset by the repurchase of $23.3 million of our common stock.

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

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 $552.5 million in cash and investment securities available at June 30, 2022.

To the extent our future operating cash flows are insufficient to cover our net losses from catastrophic events, we had $541.8 million in cash and investment securities available at September 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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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.

We purchased 399,198 shares for $23.3 million under this program during the nine months ended September 30, 2022 and $76.7 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 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.

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

As of September 30, 2022, the Company had $26.4 million of borrowings outstanding through the FHLB line of credit.

Stockholders’ Equity

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.

At September 30, 2022 total stockholders’ equity was $367.8 million and tangible stockholders’ equity was $359.3 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.

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

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.

As of September 30, 2022, the majority of our investment portfolio, or $476.8 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 $35.5 million of equity securities.

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 addition, we maintained a non-restricted cash and cash equivalent balance of $29.5 million at September 30, 2022.

Our fixed maturity securities, including cash equivalents, had a weighted average effective duration of 4.03 and 3.99 years and an average rating of “A1/A+” and “A1/A” at September 30, 2022 and December 31, 2021, respectively.

Our fixed income investment portfolio had a book yield of 2.83% as of September 30, 2022, compared to 2.23% as of December 31, 2021.

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

September 30, 2022

($ in thousands)

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Total available-for-sale investments

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

June 30, 2022

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

September 30, 2022

($ in thousands)

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($ in thousands)

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

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

September 30, 2022

($ in thousands)

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

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.

Our reinsurance coverage exhausts at $2.08 billion for earthquake events, $900 million for Hawaii hurricane events, and $250 million for continental U.S.

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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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