Palomar Holdings, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The discussion and analysis below includes certain forward-looking statements that are subject to risks, uncertainties and other factors described in part II, item 1A of this Quarterly Report. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors. The results of operations for the three and nine months ended September 30, 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. References to the "Company," "Palomar," "we," "us," and "our" are to Palomar Holdings, Inc. and its subsidiaries, unless the context otherwise requires. Overview 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. Our management team combines decades of insurance industry experience across specialty underwriting, reinsurance, program administration, distribution, and analytics. Founded in 2014, we have significantly grown our business and have generated attractive returns. We have organically increased gross written premiums from $16.6 million 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%. 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. COVID-19 Update ​ The COVID-19 Pandemic (the “Pandemic") continues to impact businesses, households, communities, and financial markets. ​ 21 ​ 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 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. Our All Risk and Commercial Earthquake (Difference in Conditions or “DIC”) policies offer business interruption coverage for insureds for a loss in business income caused by physical damage to the structure. Each of our All Risk policies has a virus and/or communicable disease exclusion. Our DIC policies require physical damage to the structure caused by the covered peril, whether it be an earthquake or flood. We do not expect additional business interruption claims from the Pandemic and have acknowledged and adjusted each claim received. ​ The Pandemic’s ultimate impact on our results of operations remains uncertain. Since the onset of the Pandemic, we have experienced volatility in the fair value of our investment portfolio due to unrealized losses and gains on our fixed income 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. However, the Pandemic continues to impact many aspects of the economy and society and the macroeconomic effects of the Pandemic may persist for an indefinite period, even after the Pandemic has subsided. We cannot anticipate all the ways in which the Pandemic or other similar global health crises could adversely impact our business in the future. Components of Our Results of Operations Gross Written Premiums Gross written premiums are the amounts received or to be received for insurance policies written or assumed by us during a specific period of time without reduction for policy acquisition costs, reinsurance costs or other deductions. The volume of our gross written premiums in any given period is generally influenced by: ● Volume of new business submissions in existing products or partnerships; ● Binding of new business submissions in existing products or partnerships into policies; ● 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; and ● Average size and premium rate of bound policies. Our gross written premiums are also impacted when we assume unearned in-force premiums due to new partnerships or other business reasons. In periods where we assume a large volume of unearned premiums, our gross written premiums may increase significantly compared to prior periods and the increase may not be indicative of future trends. Ceded Written Premiums Ceded written premiums are the amount of gross written premiums ceded to reinsurers. We enter into reinsurance contracts to limit our exposure to potential losses and to provide additional capacity for growth. We cede premiums through excess of loss (“XOL”) agreements, quota share agreements, and fronting agreements. Ceded written premiums are earned pro-rata over the period of risk covered. The volume of our ceded written premiums is impacted by the amount of our gross written premiums and our decisions to increase or decrease limits or retention levels in our XOL agreements and co-participation levels in our quota share agreements. The volume of 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 22 ​ 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. In addition, the volume of premiums ceded in fronting agreements each period may vary due to the timing of entering new fronting partnerships and terminations of fronting partnerships. Net Earned Premiums Net earned premiums represent the earned portion of our gross written premiums, less the earned portion that is ceded to third-party reinsurers under our reinsurance agreements. 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 Commission and other income consist of commissions earned on policies written on behalf of third party insurance companies where we have no exposure to the insured risk and certain fees earned in conjunction with underwriting policies. Commission and other income are earned on the effective date of the underlying policy. Losses and Loss Adjustment Expenses Losses and loss adjustment expenses represent the costs incurred for losses, net of any losses ceded to reinsurers. These expenses are a function of the size and term of the insurance policies we write and the loss experience associated with the underlying coverage. Certain policies we write subject us to attritional losses such as building fires. In addition, many of the policies we write subject us to catastrophe losses. Catastrophe losses are certain losses resulting from events involving multiple claims and policyholders, including earthquakes, hurricanes, floods, convective storms, terrorist acts or other aggregating events. Our losses and loss adjustment expenses are generally affected by: ● The occurrence, frequency, and severity of catastrophe events in the areas where we underwrite policies relating to these perils; ● The occurrence, frequency, and severity of non-catastrophe attritional losses; ● The mix of business written by us; ● The reinsurance agreements we have in place at the time of a loss; ● The geographic location and characteristics of the policies we underwrite; ● Changes in the legal or regulatory environment related to the business we write; ● Trends in legal defense costs; ● Inflation in housing and construction costs; and ● 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. Losses and loss adjustment expenses may be paid out over multiple years. 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 23 ​ policy. We earn fronting fees in a manner consistent with the recognition of the earned premiums on the underlying insurance policies, on a pro rata basis over the terms of the policies. Other Underwriting Expenses Other underwriting expenses represent the general and administrative expenses of our insurance operations including employee salaries and benefits, software and technology costs, office rent, stock-based compensation, licenses and fees, and professional services fees such as legal, accounting, and actuarial services. Interest Expense Interest expense consists of the unused line fee and amortization of the commitment fee on our credit agreement with U.S. Bank National Association and interest incurred on borrowings from our FHLB line of credit. ​ Net Investment Income We earn investment income on our portfolio of invested assets. 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 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, 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. Income Tax Expense Currently our income tax expense consists mainly of federal income taxes imposed on our operations. Our effective tax rates are dependent upon the components of pretax earnings and the related tax effects. Key Financial and Operating Metrics We discuss certain key financial and operating metrics, described below, which provide useful information about our business and the operational factors underlying our financial performance. Underwriting revenue is a non-GAAP financial measure defined as total revenue, excluding net investment income and net realized and unrealized gains and losses on investments. 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, 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 24 ​ 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. 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. Loss ratio , expressed as a percentage, is the ratio of losses and loss adjustment expenses, to net earned premiums. Expense ratio, expressed as a percentage, is the ratio of acquisition and other underwriting expenses, net of commission and other income to net earned premiums. Combined ratio is defined as the sum of the loss ratio and the expense ratio. A combined ratio under 100% generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss. Adjusted combined ratio is a non-GAAP financial measure defined as the sum of the loss ratio and the expense ratio calculated 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 combined ratio calculated using unadjusted GAAP numbers to adjusted combined ratio. Diluted adjusted earnings per share is a non-GAAP financial measure defined as adjusted net income divided by the weighted-average common shares outstanding for the period, reflecting the dilution which could occur if equity-based awards are converted into common share equivalents as calculated using the treasury stock method. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of diluted earnings per share calculated in accordance with GAAP to diluted adjusted earnings per share. Catastrophe loss ratio is a non-GAAP financial measure defined as the ratio of catastrophe losses to net earned premiums. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of loss ratio calculated using unadjusted GAAP numbers to catastrophe loss ratio. Adjusted combined ratio excluding catastrophe losses is a non-GAAP financial measure defined as adjusted combined ratio excluding the impact of catastrophe losses. 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. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of stockholders’ equity calculated in accordance with GAAP to tangible stockholders’ equity. 25 ​ Results of Operations 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, ​ ​ ​ ​ ​ ​ 2022 2021 Change % Change ​ ​ ($ in thousands, except per share data) Gross written premiums ​ $ 253,128 ​ $ 152,332 $ 100,796 66.2 % Ceded written premiums ​ (161,930) ​ ​ (58,073) ​ (103,857) 178.8 % Net written premiums ​ 91,198 ​ 94,259 ​ (3,061) (3.2) % Net earned premiums ​ 77,942 ​ ​ 64,720 ​ 13,222 20.4 % Commission and other income ​ 1,362 ​ ​ 1,018 ​ 344 33.8 % Total underwriting revenue (1) ​ 79,304 ​ 65,738 ​ 13,566 20.6 % Losses and loss adjustment expenses ​ 30,900 ​ ​ 28,475 ​ 2,425 8.5 % Acquisition expenses ​ 27,210 ​ ​ 26,412 ​ 798 3.0 % Other underwriting expenses ​ 17,114 ​ ​ 12,652 ​ 4,462 35.3 % Underwriting income (loss) (1) ​ 4,080 ​ (1,801) ​ 5,881 NM ​ Interest expense ​ (270) ​ ​ — ​ (270) NM ​ Net investment income ​ 3,744 ​ ​ 2,236 ​ 1,508 67.4 % Net realized and unrealized losses on investments ​ (2,356) ​ ​ (313) ​ (2,043) NM ​ Income before income taxes ​ 5,198 ​ 122 ​ 5,076 NM ​ Income tax expense (benefit) ​ 912 ​ ​ (124) ​ 1,036 NM ​ Net income ​ $ 4,286 ​ $ 246 $ 4,040 NM ​ Adjustments: ​ ​ ​ ​ ​ ​ Expenses associated with transactions ​ 45 ​ — ​ 45 NM ​ Stock-based compensation expense ​ ​ 3,092 ​ ​ 1,525 ​ 1,567 ​ 102.8 % Amortization of intangibles ​ ​ 313 ​ ​ 115 ​ 198 ​ 172.4 % Tax impact ​ ​ (376) ​ ​ (166) ​ ​ (210) ​ 126.5 % Adjusted net income (1) ​ $ 7,360 ​ $ 1,720 $ 5,640 NM ​ Key Financial and Operating Metrics ​ ​ ​ ​ Annualized return on equity ​ 4.6 % 0.3 % ​ ​ Annualized adjusted return on equity (1) ​ 7.9 % 1.8 % ​ ​ Loss ratio ​ 39.6 % 44.0 % ​ ​ Expense ratio ​ 55.1 % 58.8 % ​ ​ Combined ratio ​ 94.8 % 102.8 % ​ ​ Adjusted combined ratio (1) ​ ​ 90.3 % ​ 100.2 % ​ ​ ​ ​ ​ Diluted earnings per share ​ $ 0.17 ​ $ 0.01 ​ ​ ​ ​ ​ ​ Diluted adjusted earnings per share (1) ​ $ 0.29 ​ $ 0.07 ​ ​ ​ ​ ​ ​ Catastrophe losses ​ $ 12,500 ​ $ 17,487 ​ ​ ​ ​ ​ ​ Catastrophe loss ratio (1) ​ ​ 16.0 % ​ 27.0 % ​ ​ ​ ​ ​ Adjusted combined ratio excluding catastrophe losses (1) ​ ​ 74.3 % ​ 73.2 % ​ ​ ​ ​ ​ Adjusted underwriting income (loss) (1) ​ $ 7,530 ​ $ (161) ​ $ 7,691 ​ NM ​ 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. 26 ​ Gross Written Premiums Gross written premiums increased $100.8 million, or 66.2% to $253.1 million for the three months ended September 30, 2022 compared to $152.3 million for the three months ended September 30, 2021. Premium growth was primarily due to an increased volume of policies written across our lines of business which was driven by new business generated with existing partners, strong premium retention rates for existing business, expansion of our distribution footprint, and new partnerships. The following table summarizes our gross written premiums by line of business and shows each line’s percentage of total gross written premiums for each period: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ ​ ​ ​ ​ ​ ​ 2022 2021 ​ ​ ​ ​ ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ % of ​ ​ ​ ​ ​ % of ​ ​ ​ % ​ ​ Amount ​ GWP ​ ​ Amount ​ GWP ​ Change ​ Change Product ​ ​ ​ ​ ​ ​ ​ ​ Fronting Premiums ​ $ 82,232 ​ 32.5 % ​ $ — ​ — % $ 82,232 ​ NM ​ Residential Earthquake ​ ​ 59,569 ​ 23.5 % ​ ​ 50,075 ​ 32.9 % ​ 9,494 ​ 19.0 % Commercial Earthquake ​ 32,647 ​ 12.9 % ​ 27,433 ​ 18.0 % 5,214 ​ 19.0 % Inland Marine ​ ​ 30,842 ​ 12.2 % ​ ​ 19,532 ​ 12.8 % ​ 11,310 ​ 57.9 % Casualty ​ ​ 12,888 ​ 5.1 % ​ ​ 2,868 ​ 1.9 % ​ 10,020 ​ NM ​ Hawaii Hurricane ​ 9,425 ​ 3.7 % ​ 8,996 ​ 5.9 % 429 ​ 4.8 % Commercial All Risk ​ 9,224 ​ 3.6 % ​ 6,867 ​ 4.5 % 2,357 ​ 34.3 % Residential Flood ​ 3,871 ​ 1.5 % ​ 3,228 ​ 2.1 % 643 ​ 19.9 % Specialty Homeowners ​ ​ (94) ​ (0.0) % ​ ​ 19,881 ​ 13.1 % ​ (19,975) ​ (100.5) % Other ​ 12,524 ​ 5.0 % ​ ​ 13,451 ​ 8.8 % ​ (927) ​ (6.9) % Total Gross Written Premiums ​ $ 253,128 ​ 100.0 % $ 152,331 ​ 100.0 % $ 100,797 ​ 66.2 % NM- not meaningful ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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. 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 September 30, ​ ​ ​ ​ ​ ​ ​ 2022 2021 ​ ​ ​ ​ ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ ​ % of ​ ​ ​ ​ ​ % of ​ ​ ​ % ​ ​ ​ Amount ​ GWP ​ ​ Amount ​ GWP ​ Change ​ Change ​ Subsidiary ​ ​ ​ ​ ​ ​ ​ ​ PSIC ​ $ 136,814 ​ 54.0 % ​ $ 110,875 ​ 72.8 % $ 25,939 ​ 23.4 % PESIC ​ 116,314 ​ 46.0 % ​ 41,457 ​ 27.2 % 74,857 ​ 180.6 % Total Gross Written Premiums ​ $ 253,128 ​ 100.0 % $ 152,332 ​ 100.0 % $ 100,796 ​ 66.2 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 27 ​ Ceded Written Premiums 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 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 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 $13.2 million, or 20.4%, to $77.9 million for the three months ended September 30, 2022 from $64.7 million for the three months ended September 30, 2021 due primarily to the earning of increased gross written premiums offset by the earning of ceded written premiums under reinsurance agreements. The table below shows the amount of premiums we earned on a gross and net basis and net earned premiums as a percentage of gross earned premiums in each period presented: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ ​ ​ ​ ​ ​ September 30, ​ ​ ​ ​ ​ ​ 2022 2021 Change % Change ​ ($ in thousands) ​ Gross earned premiums ​ $ 186,938 ​ $ 117,276 ​ $ 69,662 59.4 % Ceded earned premiums ​ (108,996) ​ (52,556) ​ (56,440) 107.4 % Net earned premiums ​ $ 77,942 ​ $ 64,720 ​ $ 13,222 20.4 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net earned premium ratio ​ ​ 41.7% ​ ​ 55.2% ​ ​ ​ ​ ​ ​ ​ Commission and Other Income 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. 28 ​ Losses and Loss Adjustment Expenses 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 $28.5 million for the three months ended September 30, 2021. Losses and loss adjustment expenses consisted of the following elements during the respective periods: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ ​ ​ ​ ​ ​ September 30, ​ ​ ​ ​ ​ ​ 2022 2021 Change % Change ​ ($ in thousands) ​ Catastrophe losses ​ $ 12,500 ​ $ 17,487 ​ $ (4,987) (28.5) % Non-catastrophe losses ​ 18,400 ​ 10,988 ​ 7,412 67.5 % Total losses and loss adjustment expenses ​ $ 30,900 ​ $ 28,475 ​ $ 2,425 8.5 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 $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 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 $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. 29 ​ Net Investment Income and Net Realized and Unrealized Gains (Losses) on Investments 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 $0.3 million of net realized and unrealized losses for the three months ended September 30, 2021 due to higher unrealized losses on our equity securities during the period ended September 30, 2022. Unrealized gains and losses on fixed maturity securities are recognized as a component of other comprehensive income and do not impact our net income. The following table summarizes the components of our investment income for each period presented: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ ​ ​ ​ ​ ​ September 30, ​ ​ ​ ​ ​ ​ 2022 2021 Change % Change ​ ($ in thousands) ​ Interest income ​ $ 3,688 ​ $ 2,254 ​ $ 1,434 63.6 % Dividend income ​ 178 ​ 104 ​ 74 71.2 % Investment management fees and expenses ​ (122) ​ (122) ​ — — % Net investment income ​ 3,744 ​ 2,236 ​ 1,508 67.4 % Net realized and unrealized gains (losses) on investments ​ (2,356) ​ (313) ​ (2,043) NM ​ Total ​ $ 1,388 ​ $ 1,923 ​ $ (535) (27.8) % NM- not meaningful ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Income Tax Expense 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 $0.1 million for the three months ended September 30, 2021 due to higher pre-tax income for the period ended September 30, 2022. During the three months ended September 30, 2022, our income tax rate of 17.5% was lower than the statutory rate of 21% due primarily to the tax impact of the permanent component of employee stock option exercises. During the three months ended September 30, 2021, our income tax rate of negative 101.6% differed from the statutory rate of 21% due primarily to the tax impact of the permanent component of employee stock option exercises. The tax rate was also impacted by the Company’s pre-tax income being close to break-even. 30 ​ Results of Operations Nine months ended September 30, 2022 compared to nine months ended September 30, 2021 The following table summarizes our results for the nine months ended September 30, 2022 and 2021: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended ​ ​ ​ ​ ​ ​ ​ September 30, ​ ​ ​ ​ ​ ​ 2022 2021 Change % Change ​ ​ ($ in thousands, except per share data) Gross written premiums ​ $ 642,751 ​ $ 385,267 $ 257,484 66.8 % Ceded written premiums ​ (374,109) ​ ​ (153,005) ​ (221,104) 144.5 % Net written premiums ​ 268,642 ​ 232,262 ​ 36,380 15.7 % Net earned premiums ​ 234,239 ​ ​ 165,988 ​ 68,251 41.1 % Commission and other income ​ 3,129 ​ ​ 2,735 ​ 394 14.4 % Total underwriting revenue (1) ​ 237,368 ​ 168,723 ​ 68,645 40.7 % Losses and loss adjustment expenses ​ 60,251 ​ ​ 31,288 ​ 28,963 92.6 % Acquisition expenses ​ 83,928 ​ ​ 68,150 ​ 15,778 23.2 % Other underwriting expenses ​ 51,233 ​ ​ 39,438 ​ 11,795 29.9 % Underwriting income (1) ​ 41,956 ​ 29,847 ​ 12,109 40.6 % Interest expense ​ ​ (475) ​ ​ — ​ ​ (475) NM ​ Net investment income ​ 9,462 ​ ​ 6,649 ​ 2,813 42.3 % Net realized and unrealized losses on investments ​ (8,369) ​ ​ (752) ​ (7,617) NM ​ Income before income taxes ​ 42,574 ​ 35,744 ​ 6,830 19.1 % Income tax expense ​ 9,163 ​ ​ 6,529 ​ 2,634 40.3 % Net income ​ $ 33,411 ​ $ 29,215 $ 4,196 14.4 % Adjustments: ​ ​ ​ ​ ​ Expenses associated with transactions ​ 130 ​ 411 ​ (281) (68.4) % Stock-based compensation expense ​ ​ 8,556 ​ ​ 3,370 ​ 5,186 153.9 % Amortization of intangibles ​ ​ 942 ​ ​ 704 ​ 238 ​ 33.8 % Expenses associated with catastrophe bond, net of rebate ​ ​ 1,992 ​ ​ 1,698 ​ ​ 294 ​ 17.3 % Tax impact ​ ​ (1,395) ​ ​ (1,156) ​ ​ (239) ​ 20.7 % Adjusted net income (1) ​ $ 43,636 ​ $ 34,242 $ 9,394 27.4 % Key Financial and Operating Metrics ​ ​ ​ ​ Annualized return on equity ​ 11.7 % 10.5 % ​ ​ Annualized adjusted return on equity (1) ​ 15.3 % 12.3 % ​ ​ Loss ratio ​ 25.7 % 18.8 % ​ ​ Expense ratio ​ 56.4 % 63.2 % ​ ​ Combined ratio ​ 82.1 % 82.0 % ​ ​ Adjusted combined ratio (1) ​ ​ 77.1 % ​ 78.3 % ​ ​ ​ ​ ​ Diluted earnings per share ​ $ 1.29 ​ $ 1.12 ​ ​ ​ ​ ​ ​ Diluted adjusted earnings per share (1) ​ $ 1.69 ​ $ 1.31 ​ ​ ​ ​ ​ ​ Catastrophe losses ​ $ 13,529 ​ $ 6,719 ​ ​ ​ ​ ​ ​ Catastrophe loss ratio (1) ​ ​ 5.8 % ​ 4.0 % ​ ​ ​ ​ ​ Adjusted combined ratio excluding catastrophe losses (1) ​ ​ 71.4 % ​ 74.2 % ​ ​ ​ ​ ​ Adjusted underwriting income (1) ​ $ 53,576 ​ $ 36,030 ​ $ 17,546 ​ 48.7 % 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. ​ 31 ​ Gross Written Premiums Gross written premiums increased $257.5 million, or 66.8% to $642.8 million for the nine months ended September 30, 2022 compared to $385.3 million for the nine months ended September 30, 2021. Premium growth was primarily due to an increased volume of policies written across our lines of business which was driven by new business generated with existing partners, strong premium retention rates for existing business, expansion of our distribution footprint, and new partnerships. The following table summarizes our gross written premiums by line of business and shows each line’s percentage of total gross written premiums for each period: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, ​ ​ ​ ​ ​ ​ ​ 2022 2021 ​ ​ ​ ​ ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ % of ​ ​ ​ ​ ​ % of ​ ​ ​ ​ ​ ​ Amount ​ GWP ​ ​ Amount ​ GWP ​ Change ​ Change Product ​ ​ ​ ​ ​ ​ ​ ​ Residential Earthquake ​ $ 159,995 ​ 24.9 % ​ $ 128,165 ​ 33.3 % $ 31,830 ​ 24.8 % Fronting Premiums ​ ​ 154,232 ​ 24.0 % ​ ​ — ​ 0.0 % ​ 154,232 ​ NM ​ Commercial Earthquake ​ 90,894 ​ 14.1 % ​ 66,052 ​ 17.1 % 24,842 ​ 37.6 % Inland Marine ​ ​ 72,214 ​ 11.2 % ​ ​ 39,047 ​ 10.1 % ​ 33,167 ​ 84.9 % Commercial All Risk ​ ​ 41,647 ​ 6.5 % ​ ​ 30,032 ​ 7.8 % ​ 11,615 ​ 38.7 % Specialty Homeowners ​ 30,082 ​ 4.7 % ​ 53,018 ​ 13.8 % (22,936) ​ (43.3) % Casualty ​ ​ 25,697 ​ 4.0 % ​ 5,504 ​ 1.4 % 20,193 ​ 366.9 % Hawaii Hurricane ​ 24,579 ​ 3.8 % ​ 22,921 ​ 6.0 % 1,658 ​ 7.2 % Residential Flood ​ 10,448 ​ 1.6 % ​ 8,377 ​ 2.2 % 2,071 ​ 24.7 % Other ​ 32,963 ​ 5.1 % ​ 32,151 ​ 8.4 % 812 ​ 2.5 % Total Gross Written Premiums ​ $ 642,751 ​ 100.0 % $ 385,267 ​ 100.0 % $ 257,484 ​ 66.8 % NM- not meaningful ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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. 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, ​ ​ ​ ​ ​ ​ ​ 2022 2021 ​ ​ ​ ​ ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ % of ​ ​ ​ ​ ​ % of ​ ​ ​ % ​ ​ Amount ​ GWP ​ ​ Amount ​ GWP ​ Change ​ Change Subsidiary ​ ​ ​ ​ ​ ​ ​ ​ PSIC ​ $ 357,156 ​ 55.6 % ​ $ 285,991 ​ 74.2 % $ 71,165 ​ 24.9 % PESIC ​ 285,595 ​ 44.4 % ​ 99,276 ​ 25.8 % 186,319 ​ 187.7 % Total Gross Written Premiums ​ $ 642,751 ​ 100.0 % $ 385,267 ​ 100.0 % $ 257,484 ​ 66.8 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 32 ​ Ceded Written Premiums 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 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 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 $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 $68.3 million, or 41.1%, to $234.2 million for the nine months ended September 30, 2022 from $166.0 million for the nine months ended September 30, 2021 due primarily to the earning of increased gross written premiums offset by the earning of ceded written premiums under reinsurance agreements. The table below shows the amount of premiums we earned on a gross and net basis and net earned premiums as a percentage of gross earned premiums in each period presented. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ ​ ​ ​ ​ ​ ​ 2022 2021 Change % Change ​ ($ in thousands) ​ Gross earned premiums ​ $ 484,005 ​ $ 311,088 ​ $ 172,917 55.6 % Ceded earned premiums ​ (249,766) ​ (145,100) ​ (104,666) 72.1 % Net earned premiums ​ $ 234,239 ​ $ 165,988 ​ $ 68,251 41.1 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net earned premium ratio ​ ​ 48.4% ​ ​ 53.4% ​ ​ ​ ​ ​ ​ Commission and Other Income 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. 33 ​ Losses and Loss Adjustment Expenses 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 $31.3 million for the nine months ended September 30, 2021. Losses and loss adjustment expenses consisted of the following elements during the respective periods: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ ​ ​ ​ ​ ​ ​ 2022 2021 Change % Change ​ ($ in thousands) ​ Catastrophe losses ​ $ 13,529 ​ $ 6,719 ​ $ 6,810 101.4 % Non-catastrophe losses ​ 46,722 ​ 24,569 ​ 22,153 90.2 % Total losses and loss adjustment expenses ​ $ 60,251 ​ $ 31,288 ​ $ 28,963 92.6 % 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 $15.8 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. 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 17.3% for the nine months ended September 30, 2022 compared to 21.9% for the nine 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 due to changes in mix of business produced. Other Underwriting Expenses 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. 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. 34 ​ Net Investment Income and Net Realized and Unrealized Gains (Losses) on Investments 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 $0.8 million of net realized and unrealized losses for the nine months ended September 30, 2021 due to higher unrealized losses on our equity securities during the period ended September 30, 2022. Unrealized gains and losses on fixed maturity securities are recognized as a component of other comprehensive income and do not impact our net income. The following table summarizes the components of our investment income for each period presented: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ ​ ​ ​ ​ ​ ​ September 30, ​ ​ ​ ​ ​ ​ 2022 2021 Change % Change ​ ($ in thousands) ​ Interest income ​ $ 9,328 ​ $ 6,755 ​ $ 2,573 38.1 % Dividend income ​ 518 ​ 261 ​ 257 98.5 % Investment management fees and expenses ​ (384) ​ (367) ​ (17) 4.6 % Net investment income ​ 9,462 ​ 6,649 ​ 2,813 42.3 % Net realized and unrealized gains (losses) on investments ​ (8,369) ​ (752) ​ (7,617) NM ​ Total ​ $ 1,093 ​ $ 5,897 ​ $ (4,804) (81.5) % ​ Income Tax Expense 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 Underwriting Revenue We define underwriting revenue as total revenue excluding net investment income and net realized and unrealized gains and losses on investments. Underwriting revenue represents revenue generated by 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. Underwriting revenue should not be viewed as a substitute for total revenue calculated in accordance with GAAP, and other companies may define underwriting revenue differently. 35 ​ Total revenue calculated in accordance with GAAP reconciles to underwriting revenue as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ September 30, ​ September 30, ​ 2022 2021 2022 2021 ​ (in thousands) ​ (in thousands) Total revenue ​ $ 80,692 ​ $ 67,661 ​ ​ $ 238,461 ​ $ 174,620 Net investment income ​ (3,744) ​ (2,236) ​ ​ (9,462) ​ (6,649) Net realized and unrealized (gains) losses on investments ​ 2,356 ​ 313 ​ ​ 8,369 ​ 752 Underwriting revenue ​ $ 79,304 ​ $ 65,738 ​ ​ $ 237,368 ​ $ 168,723 ​ 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. 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. 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 ​ Nine Months Ended ​ ​ September 30, ​ September 30, ​ 2022 2021 2022 2021 ​ (in thousands) ​ (in thousands) Income before income taxes ​ $ 5,198 $ 122 ​ ​ $ 42,574 $ 35,744 Net investment income ​ (3,744) ​ (2,236) ​ ​ (9,462) ​ (6,649) Net realized and unrealized (gains) losses on investments ​ 2,356 ​ 313 ​ ​ 8,369 ​ 752 Interest expense ​ 270 ​ ​ — ​ ​ ​ 475 ​ ​ — Underwriting income ​ $ 4,080 ​ $ (1,801) ​ ​ $ 41,956 ​ $ 29,847 Expenses associated with transactions ​ 45 ​ — ​ ​ 130 ​ 411 Stock-based compensation expense ​ ​ 3,092 ​ ​ 1,525 ​ ​ ​ 8,556 ​ ​ 3,370 Amortization of intangibles ​ ​ 313 ​ ​ 115 ​ ​ ​ 942 ​ ​ 704 Expenses associated with catastrophe bond, net of rebate ​ ​ — ​ ​ — ​ ​ ​ 1,992 ​ ​ 1,698 Adjusted underwriting income ​ $ 7,530 ​ $ (161) ​ ​ $ 53,576 ​ $ 36,030 ​ Adjusted Net Income We define adjusted net income as net income excluding the impact of certain items that may not be indicative of underlying business trends, operating results, or future outlook, net of tax impact. 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 use adjusted net income 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 net income does not reflect the overall profitably of our business and should not be viewed as a substitute for net income calculated in accordance with GAAP. Other companies may define adjusted net income differently. 36 ​ Net income calculated in accordance with GAAP reconciles to adjusted net income as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ September 30, ​ September 30, ​ 2022 2021 2022 2021 ​ ​ (in thousands) ​ (in thousands) Net income ​ $ 4,286 $ 246 ​ ​ $ 33,411 $ 29,215 Adjustments: ​ ​ ​ ​ ​ Expenses associated with transactions ​ 45 ​ — ​ ​ 130 ​ 411 Stock-based compensation expense ​ 3,092 ​ 1,525 ​ ​ 8,556 ​ 3,370 Amortization of intangibles ​ ​ 313 ​ ​ 115 ​ ​ ​ 942 ​ ​ 704 Expenses associated with catastrophe bond, net of rebate ​ ​ — ​ ​ — ​ ​ ​ 1,992 ​ ​ 1,698 Tax impact ​ ​ (376) ​ ​ (166) ​ ​ ​ (1,395) ​ ​ (1,156) Adjusted net income ​ $ 7,360 ​ $ 1,720 ​ ​ $ 43,636 ​ $ 34,242 ​ Annualized Adjusted Return on Equity 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 ​ Nine Months Ended ​ ​ September 30, ​ September 30, ​ 2022 2021 2022 2021 ​ ($ in thousands) ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ ​ Annualized adjusted net income $ 29,441 $ 6,880 $ 58,181 $ 45,656 Average stockholders' equity ​ $ 372,955 ​ $ 377,260 ​ ​ $ 381,007 ​ $ 370,745 ​ Annualized adjusted return on equity ​ 7.9 % 1.8 % ​ 15.3 % 12.3 % ​ Adjusted Combined Ratio We define adjusted combined ratio as the sum of the loss ratio and the expense ratio calculated excluding the impact of certain items that may not be indicative of underlying business trends, operating results, or future outlook. We use adjusted combined ratio 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 combined ratio should not be viewed as a substitute for combined ratio calculated using unadjusted GAAP numbers, and other companies may define adjusted combined ratio differently. 37 ​ Adjusted combined ratio is calculated as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ Nine Months Ended ​ ​ September 30, ​ ​ September 30, ​ ​ 2022 2021 ​ ​ 2022 2021 ​ ​ ​ ($ in thousands) ​ ​ ($ in thousands) ​ Numerator: Sum of losses and loss adjustment expenses, acquisition expenses, and other underwriting expenses, net of commission and other income ​ $ 73,862 ​ $ 66,521 ​ ​ $ 192,283 ​ $ 136,141 ​ Denominator: Net earned premiums ​ $ 77,942 ​ $ 64,720 ​ ​ $ 234,239 ​ $ 165,988 ​ Combined ratio ​ 94.8 % 102.8 % ​ 82.1 % 82.0 % Adjustments to numerator: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Expenses associated with transactions ​ $ (45) ​ $ — ​ ​ $ (130) ​ $ (411) ​ Stock-based compensation expense ​ ​ (3,092) ​ ​ (1,525) ​ ​ ​ (8,556) ​ ​ (3,370) ​ Amortization of intangibles ​ ​ (313) ​ ​ (115) ​ ​ ​ (942) ​ ​ (704) ​ Expenses associated with catastrophe bond, net of rebate ​ ​ — ​ ​ — ​ ​ ​ (1,992) ​ ​ (1,698) ​ Adjusted combined ratio ​ ​ 90.3 % ​ 100.2 % ​ ​ 77.1 % ​ 78.3 % ​ Diluted Adjusted Earnings Per share We define diluted adjusted earnings per share as adjusted net income divided by the weighted-average common shares outstanding for the period, reflecting the dilution which could occur if equity-based awards are converted into common share equivalents as calculated using the treasury stock method. We use diluted adjusted earnings per share 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. Diluted adjusted earnings per share should not be viewed as a substitute for diluted earnings per share calculated in accordance with GAAP, and other companies may define diluted adjusted earnings per share differently. Diluted adjusted earnings per share is calculated as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ September 30, ​ September 30, ​ 2022 2021 2022 2021 ​ (in thousands, except per share data) ​ (in thousands, except per share data) ​ ​ ​ ​ ​ ​ Adjusted net income $ 7,360 $ 1,720 $ 43,636 $ 34,242 Weighted-average common shares outstanding, diluted ​ ​ 25,787,625 ​ ​ 26,043,680 ​ ​ ​ 25,808,387 ​ ​ 26,133,664 Diluted adjusted earnings per share ​ $ 0.29 ​ $ 0.07 ​ ​ $ 1.69 ​ $ 1.31 ​ Catastrophe Loss Ratio ​ Catastrophe loss ratio is defined as the ratio of catastrophe losses to net earned premiums. Although we are inherently subject to catastrophe losses, the frequency and severity of catastrophe losses is unpredictable and their impact on our operating results may vary significantly between periods and obscure other trends in our business. Therefore, we are providing this metric because we believe it gives our management and other financial statement users useful insight into our results of operations and trends in our financial performance without the volatility caused by catastrophe losses. Catastrophe loss ratio should not be viewed as a substitute for loss ratio calculated using unadjusted GAAP numbers, and other companies may define catastrophe loss ratio differently 38 ​ Catastrophe loss ratio is calculated as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ Nine Months Ended ​ ​ ​ September 30, ​ ​ September 30, ​ ​ ​ 2022 2021 ​ ​ 2022 2021 ​ ​ ​ ($ in thousands) ​ ​ ($ in thousands) ​ Numerator: Losses and loss adjustment expenses ​ $ 30,900 ​ $ 28,475 ​ ​ $ 60,251 ​ $ 31,288 ​ Denominator: Net earned premiums ​ $ 77,942 ​ $ 64,720 ​ ​ $ 234,239 ​ $ 165,988 ​ Loss ratio ​ 39.6 % 44.0 % ​ 25.7 % 18.8 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Numerator: Catastrophe losses ​ $ 12,500 ​ $ 17,487 ​ ​ $ 13,529 ​ $ 6,719 ​ Denominator: Net earned premiums ​ $ 77,942 ​ $ 64,720 ​ ​ $ 234,239 ​ $ 165,988 ​ Catastrophe loss ratio ​ ​ 16.0 % ​ 27.0 % ​ ​ 5.8 % ​ 4.0 % ​ Adjusted Combined Ratio Excluding Catastrophe Losses Adjusted combined ratio excluding catastrophe losses is defined as adjusted combined ratio excluding the impact of catastrophe losses. Although we are inherently subject to catastrophe losses, the frequency and severity of catastrophe losses is unpredictable and their impact on our operating results may vary significantly between periods and obscure other trends in our business. Therefore, we are providing this metric because we believe it gives our management and other financial statement users useful insight into our results of operations and trends in our financial performance without the volatility caused by catastrophe losses. Adjusted combined ratio excluding catastrophe losses should not be viewed as a substitute for combined ratio calculated using unadjusted GAAP numbers, and other companies may define adjusted combined ratio excluding catastrophe losses differently. ​ Adjusted combined ratio excluding catastrophe losses is calculated as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ Nine Months Ended ​ ​ ​ September 30, ​ ​ September 30, ​ ​ ​ 2022 2021 ​ ​ 2022 2021 ​ ​ ​ ($ in thousands) ​ ​ ($ in thousands) ​ Numerator: Sum of losses and loss adjustment expenses, acquisition expenses, and other underwriting expenses, net of commission and other income ​ $ 73,862 ​ $ 66,521 ​ ​ $ 192,283 ​ $ 136,141 ​ Denominator: Net earned premiums ​ $ 77,942 ​ $ 64,720 ​ ​ $ 234,239 ​ $ 165,988 ​ Combined ratio ​ 94.8 % 102.8 % ​ 82.1 % 82.0 % Adjustments to numerator: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Expenses associated with transactions ​ $ (45) ​ $ — ​ ​ $ (130) ​ $ (411) ​ Stock-based compensation expense ​ ​ (3,092) ​ ​ (1,525) ​ ​ ​ (8,556) ​ ​ (3,370) ​ Amortization of intangibles ​ ​ (313) ​ ​ (115) ​ ​ ​ (942) ​ ​ (704) ​ Expenses associated with catastrophe bond, net of rebate ​ ​ — ​ ​ — ​ ​ ​ (1,992) ​ ​ (1,698) ​ Catastrophe losses ​ ​ (12,500) ​ ​ (17,487) ​ ​ ​ (13,529) ​ ​ (6,719) ​ Adjusted combined ratio excluding catastrophe losses ​ ​ 74.3 % ​ 73.2 % ​ ​ 71.4 % ​ 74.2 % ​ Tangible Stockholders’ Equity We define tangible stockholders’ equity as stockholders’ equity less intangible assets. Our definition of tangible stockholders’ equity may not be comparable to that of other companies, and it should not be viewed as a substitute for stockholders’ equity calculated in accordance with GAAP. We use tangible stockholders’ equity internally to evaluate the strength of our balance sheet and to compare returns relative to this measure. 39 ​ Stockholders’ equity calculated in accordance with GAAP reconciles to tangible stockholders’ equity as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, ​ 2022 2021 ​ ​ (in thousands) Stockholders' equity ​ $ 367,845 $ 394,169 Intangible assets ​ (8,575) ​ (9,501) Tangible stockholders' equity ​ $ 359,270 ​ $ 384,668 ​ Liquidity and Capital Resources Sources and Uses of Funds We operate as a holding company with no business operations of our own. Consequently, our ability to pay dividends to stockholders and pay taxes and administrative expenses is largely dependent on dividends or other distributions from our subsidiaries and affiliates, whose ability to pay us is highly regulated. The Company’s U.S. insurance company subsidiaries, PSIC and PESIC, are restricted by the statutes as to the amount of dividends that they may pay without prior approval by state insurance commissioners. Under California and Oregon statute which govern PSIC, dividends paid in a consecutive twelve month period cannot exceed the greater 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. Any dividends or distributions in excess of these amounts would require regulatory approval. In addition, under Oregon statute PSIC may only declare a dividend from earned surplus, which does not include contributed capital. Surplus arising from unrealized capital gains or revaluation of assets is not considered part of earned surplus. Based on the above restrictions, PSIC may pay a dividend or distribution of no greater than $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. Based on the above restrictions, PESIC may pay a dividend or distribution of no greater than $4.1 million in 2022 without approval of the Arizona Insurance Commissioner. State insurance regulators have broad powers to prevent the reduction of statutory surplus to inadequate levels, and there is no assurance that dividends up to the maximum amounts calculated under any applicable formula would be permitted. In addition, state insurance regulators may adopt statutory provisions and dividend limitations more restrictive than those currently in effect in the future. Bermuda regulations limit the amount of dividends and return of capital paid by a regulated entity. A Class 3A insurer is prohibited from declaring or paying a dividend if it is in breach of its minimum solvency margin, its enhanced capital requirement, or its minimum liquidity ratio, or if the declaration or payment of such dividend would cause such a breach. 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. 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. The affidavit must state that in the opinion of those swearing the declaration of such dividend has not caused the insurer to fail to meet its relevant margins. 40 ​ Further, under the Companies Act, PSRE may only declare or pay a dividend, or make a distribution out of contributed surplus, if it has no reasonable grounds for believing that: (1) it is, or would after the payment be, unable to pay its liabilities as they become due or (2) the realizable value of its assets would be less than its liabilities. Pursuant to Bermuda regulations, the maximum amount of dividends and return of capital available to be paid by a reinsurer is determined pursuant to a formula. Under this formula, the maximum amount of dividends and return of capital available from PSRE during 2022 is calculated to be approximately $4.2 million. However, this dividend amount is subject to annual enhanced solvency requirement calculations. Cash Flows Our primary sources of cash flow are written premiums, investment income, reinsurance recoveries, sales and redemptions of investments, and proceeds from borrowings on our lines of credit. We use our cash flows primarily to pay reinsurance premiums, operating expenses, losses and loss adjustment expenses, and income taxes. Our cash flows from operations may differ substantially from our net income due to non-cash charges or due to changes in balance sheet accounts. The timing of our cash flows from operating activities can also vary among periods due to the timing by which payments are made or received. Some of our payments and receipts, including loss settlements and subsequent reinsurance receipts, can be significant. Therefore, their timing can influence cash flows from operating activities in any given period. The potential for a large claim under an insurance or reinsurance contract means that our insurance subsidiaries may need to make substantial payments within relatively short periods of time, which would have a negative impact on our operating cash flows. Management believes that our current liquidity and cash receipts from written premiums, investment income, proceeds from investment sales and redemptions, and reinsurance recoveries, if necessary, are sufficient to cover cash outflows for each of the Company’s insurance subsidiaries in the foreseeable future. The following table summarizes our cash flows for the nine months ended September 30, 2022 and 2021: ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended ​ ​ September 30, ​ 2022 2021 ​ ​ ($ in thousands) Cash provided by (used in): ​ ​ Operating activities ​ $ 94,544 ​ $ 37,030 Investing activities ​ (121,422) ​ (15,805) Financing activities ​ 6,051 ​ (13,377) Change in cash, cash equivalents, and restricted cash ​ $ (20,827) ​ $ 7,848 ​ 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 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 41 ​ 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. We believe that we will generate sufficient cash flows from operations to satisfy our liquidity requirements for at least the next 12 months and beyond. 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 $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. Share Repurchases We also have implemented a share repurchase plan and have used and may use our cash in the future to purchase outstanding shares of our common stock. Under our current share repurchase program, shares may be repurchased from time to time in the open market or negotiated transactions at prevailing market rates, or by other means in accordance with federal securities laws. 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 ​ We have the ability to access additional capital through multiple credit agreements. ​ In December 2021, we entered into a Credit Agreement (the “Credit Agreement”) with U.S. Bank National Association which provides a revolving credit facility of up to $100 million through December 8, 2026. Interest on the credit facility accrues on each SOFR rate loan at the applicable SOFR (as defined in the Credit Agreement) plus 1.75% and on each base rate loan at the applicable Alternate Base Rate (as defined in the Credit Agreement) plus 0.75%. A loan may be either a SOFR rate loan or a base rate loan, at our discretion. Outstanding amounts under the Credit Agreement may be prepaid in full or in part at any time with no prepayment premium and may be reduced in full or in part at any time upon prior notice. ​ As of 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”). Membership in the FHLB provides PSIC access to collateralized advances, which can be drawn for general corporate purposes and used to enhance liquidity management. All borrowings are fully secured by a pledge of specific investment securities of PSIC and the borrowing capacity is equal to 5% of PSIC’s statutory admitted assets. All advances have predetermined term and the interest rate varies based on the term of the advance. ​ As of September 30, 2022, the Company had $26.4 million of borrowings outstanding through the FHLB line of credit. ​ Stockholders’ Equity 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. 42 ​ Tangible stockholders’ equity is a non-GAAP financial measure. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of stockholders’ equity in accordance with GAAP to tangible stockholders’ equity. Investment Portfolio Our primary investment objectives are to maintain liquidity, preserve capital and generate a stable level of investment income. We purchase securities that we believe are attractive on a relative value basis and seek to generate returns in excess of predetermined benchmarks. Our Board of Directors approves our investment guidelines in compliance with applicable regulatory restrictions on asset type, quality and concentration. Our current investment guidelines allow us to invest in taxable and tax-exempt fixed maturities, as well as publicly traded mutual funds and common stock of individual companies. Our cash and invested assets consist of cash and cash equivalents, fixed maturity securities, and equity securities. 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 $29.5 million at September 30, 2022. Our fixed maturity securities, including cash equivalents, had a weighted average effective duration of 4.03 and 3.99 years and an average rating of “A1/A+” and “A1/A” at September 30, 2022 and December 31, 2021, respectively. Our fixed income investment portfolio had a book yield of 2.83% as of September 30, 2022, compared to 2.23% as of December 31, 2021. At September 30, 2022 and December 31, 2021 the amortized cost and fair value on available-for-sale securities were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Amortized Fair % of Total September 30, 2022 ​ Cost or Cost ​ Value ​ Fair Value ​ ($ in thousands) ​ Fixed maturities: ​ ​ ​ U.S. Governments ​ $ 52,021 ​ $ 49,598 10.6 % States, territories, and possessions ​ 7,671 ​ 6,713 1.4 % Political subdivisions ​ 4,922 ​ 4,245 0.9 % Special revenue excluding mortgage/asset-backed securities ​ 42,409 ​ 36,075 7.6 % Corporate and other ​ 269,308 ​ 240,420 50.2 % Mortgage/asset-backed securities ​ 154,661 ​ 139,743 29.3 % Total available-for-sale investments ​ $ 530,992 ​ $ 476,794 100.0 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Amortized Fair % of Total December 31, 2021 ​ Cost or Cost ​ Value ​ Fair Value ​ ($ in thousands) ​ Fixed maturities: ​ ​ ​ U.S. Governments ​ $ 16,713 ​ $ 16,870 3.9 % States, territories, and possessions ​ 3,789 ​ 4,014 0.9 % Political subdivisions ​ 6,295 ​ 6,380 1.5 % Special revenue excluding mortgage/asset-backed securities ​ 43,301 ​ 44,498 10.3 % Corporate and other ​ 245,064 ​ 249,046 57.5 % Mortgage/asset-backed securities ​ 110,960 ​ 111,874 25.9 % Total available-for-sale investments ​ $ 426,122 ​ $ 432,682 100.0 % ​ 43 ​ The following tables provide the credit quality of investment securities as of September 30, 2022 and December 31, 2021: ​ ​ ​ ​ ​ ​ ​ ​ Estimated % of September 30, 2022 Fair Value Total ​ ($ in thousands) ​ Rating ​ ​ AAA ​ $ 163,919 ​ 34.4 % AA ​ 56,551 ​ 11.9 % A ​ 155,199 ​ 32.6 % BBB ​ 92,061 ​ 19.3 % BB ​ 8,738 ​ 1.8 % B ​ ​ 277 ​ 0.1 % CCC & Below ​ 49 ​ 0.0 % ​ ​ $ 476,794 100.0 % ​ ​ ​ ​ ​ ​ ​ ​ ​ Estimated % of December 31, 2021 Fair Value Total ​ ($ in thousands) ​ Rating ​ ​ AAA ​ $ 97,209 ​ 22.5 % AA ​ 65,308 ​ 15.1 % A ​ 165,770 ​ 38.3 % BBB ​ 93,051 ​ 21.5 % BB ​ 11,057 ​ 2.5 % B ​ ​ 268 ​ 0.1 % CCC & Below ​ ​ 125 ​ — % ​ ​ $ 432,788 100.0 % ​ 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Amortized ​ Fair ​ % of Total September 30, 2022 ​ Cost ​ Value ​ Fair Value ​ ($ in thousands) ​ Due within one year $ 37,321 $ 36,730 7.7 % Due after one year through five years ​ 177,989 ​ 165,172 34.7 % Due after five years through ten years ​ 128,378 ​ 109,641 23.0 % Due after ten years ​ 32,643 ​ 25,508 5.3 % Mortgage and asset-backed securities ​ 154,661 ​ 139,743 29.3 % ​ ​ $ 530,992 ​ $ 476,794 100.0 % ​ Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations. 44 ​ Reinsurance We purchase a significant amount of reinsurance from third parties that we believe enhances our business by reducing our exposure to potential catastrophe losses, limiting volatility in our underwriting performance, and providing us with greater visibility into our future earnings. Reinsurance involves transferring, or ceding, a portion of our risk exposure on policies that we write to another insurer, the reinsurer, in exchange for a premium. 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.” We use treaty reinsurance and, on a limited basis, facultative reinsurance coverage. Treaty coverage refers to a reinsurance contract that is applied to a group or class of business where all the risks written meet the criteria for that class. Our treaty reinsurance program primarily consists of catastrophe excess of loss (“XOL”) coverage, in which the reinsurer(s) agree to assume all or a portion of the ceding company’s losses relating to a group of policies occurring in relation to specified events, subject to customary exclusions, in excess of a specified amount. Additionally, we buy program specific reinsurance coverage for specific lines of business on a quota share, property per risk or a facultative basis. In quota share reinsurance, the reinsurer agrees to assume a specified percentage of the ceding company’s losses arising out of a defined class of business in exchange for a corresponding percentage of premiums, net of a ceding commission. Property per risk coverage is similar to catastrophe XOL coverage except that the treaty applies in individual property losses rather than in the aggregate for all claims associated with a single catastrophic loss occurrence. Facultative coverage refers to a reinsurance contract on individual risks as opposed to a group or class of business. We use facultative reinsurance selectively to supplement limits or to cover risks or perils excluded from other reinsurance contracts. We have a robust program utilizing a mix of traditional reinsurers and insurance linked securities. We currently purchase reinsurance from over 80 reinsurers, who either have an “A−” (Excellent) (Outlook Stable) or better financial strength rating by A.M. Best or post collateral. Our reinsurance contracts include special termination provisions that allow us to cancel and replace any participating reinsurer that is downgraded below a rating of “A−” (Excellent) (Outlook Stable) from A.M. 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 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. Ltd. (“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 $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. In addition, we maintain reinsurance coverage equivalent to or better than the 1 in 250 year PML for our other lines. 45 ​ In the event that multiple catastrophe events occur in a period, many of our contracts include the right to reinstate reinsurance limits for potential future recoveries during the same contract year and preserve our limit for subsequent events. This feature for subsequent event coverage is known as a “reinstatement.” In addition, to provide further coverage against the potential for frequent catastrophe events, the Company has historically obtained aggregate reinsurance coverage. Beginning April 1, 2021 and renewing on April 1, 2022, we have secured $25 million of aggregate XOL reinsurance limit. This coverage, applying within our per occurrence retention, has an attachment point of $30 million and applies across all perils including but not limited to earthquakes, hurricanes, convective storms, and floods above a qualifying level of $2.0 million in ultimate net loss. Critical Accounting Estimates We identified the accounting estimates which are critical to the understanding of our financial position and results of operations. 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. These judgments and estimates affect our reported amounts of assets, liabilities, revenues and expenses and the disclosure of our material contingent assets and liabilities. Actual results may differ materially from the estimates and assumptions used in preparing the condensed consolidated financial statements. We evaluate our estimates regularly using information that we believe to be relevant. Our critical accounting policies and estimates are described in our annual consolidated financial statements and the related notes in our 2021 Annual Report on Form 10-K. There have been no significant changes in our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Operations included in our 2021 Annual Report on Form 10-K