What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-01 compared with 2022-02-25 · 122 added, 147 removed, 1032 unchanged (21% of the section changed)

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and Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of income and comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedules listed in the Index at Item 15(a) and our report dated February 24, 2022 expressed an unqualified opinion thereon.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of income and comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedules listed in the Index at Item 15(a) and our report dated March 1, 2023 expressed an unqualified opinion thereon.

Basis for Opinion

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San Francisco, California

February 24, 2022

March 1, 2023

Report of Independent Registered Public Accounting Firm

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generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 24, 2022 expressed an unqualified opinion thereon.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 1, 2023 expressed an unqualified opinion thereon.

Basis for Opinion

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Description of

At December 31, 2021, the reserve for losses and loss adjustment expenses (LAE) is $173,366 thousand.

At December 31, 2022, the reserve for losses and loss adjustment expenses (LAE) is $231,415 (in thousands).

As explained in Notes 2 and 9 to the consolidated financial statements, the reserve for losses and LAE represents management's best estimate for unpaid claims and claim adjustment expenses on reported losses and estimates of losses incurred but not reported (IBNR), net of salvage and subrogation recoveries.

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To test IBNR reserves, our audit procedures included, among others, testing the completeness and accuracy of the data used in the calculation by testing reconciliations of the underlying claims and policyholder data recorded in the source systems to the actuarial reserving calculations and comparing a sample of incurred and paid claims to source documentation.

We evaluated with the assistance of our actuarial specialists, the Company’s selection and weighting of actuarial methods compared to methods used in prior periods and in the industry for the specific types of insurance.

With the assistance of our actuarial specialists, we evaluated the Company’s selection and weighting of actuarial methods compared to methods used in prior periods and in the industry for the specific types of insurance.

To evaluate the significant assumptions used by management, we compared the assumptions to current and historical claims trends and to current industry benchmarks.

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San Francisco, California

February 24, 2022

March 1, 2023

Palomar Holdings, Inc.

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Prepaid expenses and other assets

Deferred tax assets, net

Property and equipment, net

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Deferred tax liabilities, net

Borrowings from credit agreements

Total liabilities

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Additional paid-in capital

Accumulated other comprehensive income

Accumulated other comprehensive income (loss)

Retained earnings

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Net investment income

Net realized and unrealized gains on investments

Net realized and unrealized (losses) gains on investments

Commission and other income

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Acquisition expenses

Other underwriting expenses (includes stock-based compensation of $ 5,584 , $ 2,167 and $ 24,103 for the years ended December 31, 2021, 2020 and 2019, respectively)

Other underwriting expenses

Interest expense

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Other comprehensive income, net:

Net unrealized gains (losses) on securities available for sale, net of taxes

Net unrealized (losses) gains on securities available for sale

Total comprehensive income

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and Subsidiaries

Consolidated Statements of Stockholder’s Equity

Consolidated Statements of Stockholders’ Equity

(in thousands, except share data)

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Balance at December 31, 2019

Other comprehensive income (loss), net of tax

Distribution to stockholder

Stock-based compensation

Issuance of common stock in initial public offering, net of offering costs

Balance at December 31, 2019

Cumulative effect of adopting ASU 2016-13 (Note 2)

Other comprehensive income (loss), net of tax

Cumulative effect of adopting ASU 2016-13

Other comprehensive income, net of tax

Stock-based compensation

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Balance at December 31, 2020

Other comprehensive loss, net of tax

Stock-based compensation

Issuance of common stock via employee stock purchase plan

Issuance of common stock via equity incentive plan

Repurchases of common stock

Balance at December 31, 2021

Other comprehensive income (loss), net of tax

Other comprehensive loss, net of tax

Stock-based compensation

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Depreciation and amortization expense

Amortization and write-off of debt issuance costs

Allowance for credit loss on fixed maturity securities

Loss on asset disposal

Net realized and unrealized losses (gains) on investments

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Financing activities

Proceeds from initial public offering, net of offering costs

Distribution to stockholder

Redemption of Floating Rate Notes

Proceeds from Line of Credit

Proceeds from January 2020 stock offering, net of offering costs

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The Company’s core focus is on the residential and commercial earthquake markets in earthquake-exposed states such as California, Oregon, Washington, and states with exposure to the New Madrid Seismic Zone.

The Company also offers products tailored to broader geographic regions and perils, including Hawaii residential hurricane, Specialty Homeowners, Inland Marine, and Flood products.

The Company also offers products tailored to broader geographic regions and perils, including Fronting Products, Inland Marine, Hawaii residential hurricane, Specialty Homeowners, Casualty, and Flood products.

PSIC is licensed to underwrite insurance on an admitted basis in 37 states in the United States, as of December 31, 2022, mainly through managing general insurance agencies, wholesale brokers, and independent agents.

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All intercompany balances and transactions have been eliminated in consolidation.

On March 15, 2019, the Company effected a 17,000,000 for one forward stock split in conjunction with domestication in the United States.

All share and per share information included in the accompanying consolidated financial statements and notes to the consolidated financial statements have been retroactively adjusted to reflect the stock split for the Company’s common stock for all periods presented.

Initial Public Offering (“IPO”)

On April 22, 2019, the Company completed its IPO with the sale of 6,468,750 shares of common stock at a price to the public of $ 15.00 per share, including 843,750 shares sold upon the exercise in full of the underwriter’s option to purchase additional shares.

After underwriter discounts and commissions and offering expenses, net proceeds from the IPO were approximately $ 87.4 million.

Use of Estimates

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Unrealized gains and losses related to fixed maturity securities are included in accumulated other comprehensive income as a separate component of stockholders’ equity.

Equity securities are carried at fair value with unrealized gains and losses included as a component of net income on the Company’s consolidated statement of income

and comprehensive income.

Equity securities are carried at fair value with unrealized gains and losses included as a component of net income on the Company’s consolidated statement of income and comprehensive income.

The Company uses the specific-identification method to determine the cost of fixed maturity securities sold and the first-in, first-out method for lots of equity securities sold.

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The Company also considers whether it intends to sell the security or if it is more likely than not that it will be required to sell the security before recovery of its amortized cost.

When assessing whether it intends to sell a fixed-maturity security or if it is likely to be required to sell a fixed-maturity security before recovery of its amortized cost, the Company evaluates facts and circumstances including, but not limited to, decisions to reposition the investment portfolio, potential sales of investments to meet cash flow needs, and potential sales of investments to capitalize on favorable pricing.

portfolio, potential sales of investments to meet cash flow needs, and potential sales of investments to capitalize on favorable pricing.

For fixed-maturity securities where a decline in fair value is below the amortized cost basis and the Company intends to sell the security, or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost, a credit-loss charge is recognized in net income based on the fair value of the security at the time of assessment.

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The Company does not measure an allowance for credit losses on accrued interest receivable and instead would write off accrued interest receivable at the time an issuer defaults or is expected to default on payments.

The Company recorded an immaterial allowance for credit losses related to its available-for-sale securities as of December 31, 2021.

As of December 31, 2020, the Company had no allowance for credit losses related to its available-for-sale securities.

The Company’s allowance for credit losses related to its available-for-sale securities was immaterial as of December 31, 2022 and December 31, 2021.

Fair value is defined as the price that the Company would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment.

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The Company recorded an allowance for uncollectable premiums of $ 0.1 million and $ 0.3 million as of December 31, 2022 and December 31, 2021, respectively, and believes that all other amounts are collectable.

Deferred Policy Acquisition Costs

The costs of successfully acquiring new business, principally commission expense and premium taxes, are deferred and amortized over the terms of the policies in force, net of any ceding commissions.

Premiums Earned

Earned Premiums

Gross premiums written are recorded at policy inception and are earned as revenue ratably over the term of the respective policies.

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A premium deficiency would first be recognized by charging any unamortized acquisition costs to expense to the extent required to eliminate the deficiency.

If the premium deficiency were greater than unamortized acquisition costs, a liability would be accrued for

the excess deficiency.

If the premium deficiency were greater than unamortized acquisition costs, a liability would be accrued for the excess deficiency.

The Company does not consider anticipated investment income when determining if a premium deficiency exists.

There was no premium deficiency at December 31, 2022 or 2021.

Deferred Policy Acquisition Costs

The costs of successfully acquiring new business, principally commission expense and premium taxes, are deferred and amortized over the terms of the policies in force, net of any ceding commissions or fronting fees and are shown as acquisition expenses in the accompanying consolidated statements of income and comprehensive income.

Commission and Other Income

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Leasehold improvements and other fixed assets are capitalized and depreciated over the useful lives of the properties and equipment.

Expenditures for maintenance and repairs are charged to operations as incurred.

for maintenance and repairs are charged to operations as incurred.

Upon disposition, the asset cost and related depreciation are removed from the accounts and the resulting gain or loss is included in the Company’s results of operations.

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Intangible assets consist of both finite and indefinite lived assets.

Finite lived intangible assets consist of customer relationships acquired from another insurer during 2020.

Finite lived intangible assets consist of customer relationships acquired from another insurer during 2020 which the Company is amortizing over a period of 8 years .

Indefinite lived intangible assets consist of state licenses acquired upon formation of the Company.

Intangible assets are initially recognized and measured at fair value and are subsequently evaluated for impairment annually or more frequently if circumstances warrant it.

Intangible assets are initially recognized and measured at fair value and are subsequently evaluated for impairment annually or more frequently if circumstances warrant.

No impairments of intangible assets were recognized for the years ended December 31, 2022, 2021 or 2020.

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The liability is based on individual claims, case reserves and other estimates reported by policyholders, as well as management estimates of ultimate losses and loss adjustment expenses.

Inherent in the

estimates of ultimate losses and loss adjustment expenses are expected trends in claims severity and frequency and other factors that could vary significantly as claims are settled.

Inherent in the estimates of ultimate losses and loss adjustment expenses are expected trends in claims severity and frequency and other factors that could vary significantly as claims are settled.

The Company’s estimates of ultimate losses and loss adjustment expenses are based in part upon the estimation of claims resulting from natural disasters such as hurricanes and earthquakes.

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Reserves for IBNR are established in accordance with industry practice to provide for (i) the estimated amount of future loss payments on incurred claims not yet reported, and (ii) potential development on reported claims.

IBNR reserves are estimated based on generally accepted actuarial reserving techniques that consider quantitative loss experience data and, where appropriate, qualitative factors.

reserves are estimated based on generally accepted actuarial reserving techniques that consider quantitative loss experience data and, where appropriate, qualitative factors.

Ultimate losses and loss adjustment expenses may vary materially from the amounts provided in the consolidated financial statements.

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The Company purchases excess of loss and quota share reinsurance to protect it against the impact of losses.

Reinsurance premiums, commissions, ceded unearned premiums are accounted for on bases consistent with the underlying terms of the reinsurance contracts and in proportion to the amount of insurance protection provided.

The Company receives ceding commissions in connection with quota share reinsurance.

The ceding commissions are capitalized and amortized as a reduction of acquisition expenses.

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

Reinsurance premiums, commissions, and ceded unearned premiums are accounted for on bases consistent with the underlying terms of the reinsurance contracts and in proportion to the amount of insurance protection provided.

The Company receives ceding commissions and fronting fees in connection with quota share and fronting reinsurance contracts.

The ceding commissions and fronting fees are capitalized and amortized as a reduction of acquisition expenses.

Amounts applicable to ceded unearned premiums are reported as assets in the accompanying consolidated balance sheets.

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The fair value of performance stock units containing employee service or company financial performance based conditions is determined using the closing price of the Company's common stock on the grant date.

The fair value of performance stock units containing

conditions based on performance of the Company’s stock is determined using a Monte Carlo simulation.

The fair value of performance stock units containing conditions based on performance of the Company’s stock is determined using a Monte Carlo simulation.

All stock-based compensation is included in other underwriting expenses in the Company’s consolidated statements of income and comprehensive income.

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Deferred income tax assets and liabilities are determined based on the difference between the financial statement and the tax bases of assets and liabilities, using enacted tax rates expected to be in effect during the year in which the basis differences reverse.

The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

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Recently adopted accounting pronouncements

In December 2019, the FASB issued ASU No.

2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes.

Among other things, ASU 2019-12 eliminates certain exceptions for recognizing deferred taxes for investments, performing intra-period tax allocation and calculating income taxes in interim periods.

ASU 2019-12 also clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill.

ASU 2019-12 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

The Company adopted this guidance on January 1, 2021 and adoption did not have a material impact on its consolidated financial statements.

The Company has not adopted any new accounting guidance during the year ended December 31, 2022.

Recently issued accounting pronouncements not yet adopted

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The Company reviewed the above securities at each balance sheet date to consider whether it was necessary to recognize a credit loss related to any of these securities.

An immaterial allowance for credit losses was recorded pertaining to one investment security as of December 31, 2021.

An immaterial allowance for credit losses was recorded pertaining to one investment security as of December 31, 2022 and 2021.

For the remaining securities, the Company determined that the fixed maturity securities’ unrealized losses were primarily the result of the interest rate environment and not the credit quality of the issuers.

The Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before the recovery of their amortized cost basis.

The Company did not recognize an allowance for credit losses related to any securities for the year ended December 31, 2020.

Contractual maturities of available-for-sale fixed maturity securities

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Total realized losses

Net realized investment gains

Net realized investment gains (losses)

Net unrealized gains (losses) on equity securities

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Cash, cash equivalents, and restricted cash

The carrying amounts of financial assets and liabilities reported in the accompanying consolidated balance sheets including cash and cash equivalents, restricted cash, receivables, reinsurance recoverable, and accounts payable and other accrued liabilities approximate fair value due to their short term-maturity.

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

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

The carrying amounts of financial assets and liabilities reported in the accompanying condensed consolidated balance sheet including cash and cash equivalents, restricted cash, receivables, reinsurance recoverable, and accounts payable and other accrued liabilities approximate fair value due to their short term-maturity.

The carrying amount of the Company’s borrowings under the Federal Home Loan Bank (“FHLB”) line of credit approximates fair value as the Company is currently borrowing at the overnight rate, which is adjusted daily.

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

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

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

Policy Acquisition Costs

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Direct commissions

Ceding commissions

Ceding commissions and fronting fees

Premium taxes

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The Company began amortizing this intangible asset on a straight line basis in 2021 and is amortizing it over a period of 8 years .

Amortization expense for the year ended December 31, 2021 was $ 1.3 million.

Amortization expense for the years ended December 31, 2022 and 2021 was $ 1.3 million during each year.

Capitalized Assets

Capitalized software balances are as follows:

Capitalized software is included as a component of prepaid expenses and other assets in the Company’s consolidated balance sheet.

The balances are as follows:

December 31, 2022

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Loss and loss adjustment expenses reserves represent management’s best estimate of the ultimate cost of all reported and unreported losses incurred for the years ended December 31, 2022, 2021, and 2020.

The Company does not

discount loss and loss adjustment expense reserves.

The Company does not discount loss and loss adjustment expense reserves.

The reserves for unpaid losses and loss adjustment expenses are estimated using individual case-basis valuations and statistical analyses.

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Reserve for losses and loss adjustment expenses gross of reinsurance recoverables on unpaid losses and loss adjustment expenses at end of period

The foregoing reconciliation shows loss and loss adjustment expense reserve redundancies of $ 3.6 million, $ 0.1 million and $ 0.2 million developed in 2021, 2020 and 2019, respectively.

During 2021, this net favorable reserve

development was primarily due to the effect of ceding gross unfavorable development under our reinsurance program and lower than anticipated severity of catastrophe losses associated with certain hurricanes that occurred during the second half of 2020.

The foregoing reconciliation shows a loss and loss adjustment expense deficiency of $ 2.4 million developed in 2022 and loss and loss adjustment expense reserve redundancies of $ 3.6 million and $ 0.1 million developed in 2021 and 2020, respectively.

During 2022, the net unfavorable reserve development was primarily attributable to prior year catastrophe events including certain 2020 Hurricanes, offset by favorable development related to 2021 attritional and catastrophe losses.

During 2021, this net favorable reserve development was primarily due to the effect of ceding gross unfavorable development under our reinsurance program and lower than anticipated severity of catastrophe losses associated with certain hurricanes that occurred during the second half of 2020.

During 2020, this favorable reserve development related to lower than anticipated frequency and severity of claims in our homeowners and special property lines of business offset by higher than anticipated frequency and severity of claims in our assumed reinsurance line.

During 2019, this favorable reserve development was primarily related to lower than originally anticipated frequency and severity of claims in our homeowners lines of business, offset by higher than originally anticipated frequency and severity of claims in our special property lines of business.

The Company compiles and aggregates its claims data by grouping the claims according to the year in which the claim occurred (“Accident Year”) when analyzing claim payment and emergence patterns and trends over time.

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The Company utilizes reinsurance in order to limit its exposure to losses and enable it to underwrite policies with sufficient limits to meet policyholder needs.

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

The Company primarily utilizes excess of loss (XOL) and quota share reinsurance to protect against catastrophe and attritional losses.

The Company also writes premiums under fronting agreements, whereby the majority of premium and risk is ceded to reinsurers and the Company receives a fronting fee.

In an XOL treaty, the Company retains losses for any occurrence up to a specified amount (its “retention”) and reinsurers assume any losses above that amount.

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

As of December 31, 2021, the Company’s XOL reinsurance structure provides protection up to $ 1.68 billion for earthquake events and $ 700 million for hurricane events.

In a quota share agreement, the Company transfers, or cedes, part or all of its exposure to a reinsurer who receives a portion of the associated premium in exchange.

The reinsurer also must share an agreed upon portion of losses and agreed upon portion of the associated commission expense.

The Company has quota share reinsurance agreements on several of its lines with the Commercial Earthquake, Inland Marine, Specialty Homeowners, and Commercial All

Risk lines are currently accounting for the largest amount of ceded written premiums.

The following table shows ceded written premiums under quota share arrangements by line of business for certain quota shares:

As of December 31, 2022, the Company’s XOL reinsurance structure provides protection up to $ 2.11 billion for earthquake events, $ 1.01 billion for Hawaii hurricane events, and $ 250 million for continental U.S.

hurricane events.

In a quota share agreement, the Company transfers, or cedes, a portion of its premiums to reinsurers and, in return, the reinsurer must share an agreed upon portion of losses and pay a ceding commission to the Company.

In a fronting agreement, the Company writes premium and then cedes the majority of the premium and risk in exchange for a fronting fee, which is the primary source of profit in the arrangement.

The following table shows ceded written premiums under fronting and quota share arrangements by line of business for the years ended December 31, 2022, 2021 and 2020:

Year Ended December 31,

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Commercial All Risk

No other quota share program accounted for more than 10% of total ceded written premiums for the above periods.

The Company recognizes ceded unearned premiums related to quota share agreements as an asset on its consolidated balance sheets.

As of December 31, 2022 and 2021, ceded unearned premiums totaled $ 204.1 million and $ 58.3 million, respectively.

The increase was driven primarily by premium growth in lines subject to quota shares and the timing at which the Company entered quota share arrangements.

The increase was driven primarily by premium growth in lines subject to fronting agreements or quota shares.

As part of its reinsurance program, in May 2017, the Company obtained catastrophe protection through a reinsurance agreement with Torrey Pines Re Ltd.

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(“Torrey Pines Re”).

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.

Written premiums ceded under these catastrophe bond agreements were $ 28.3 million, $ 11.7 million and $ 5.0 million for the years ended December 31, 2022, 2021 and 2020, respectively.

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best rating of A− (excellent) or better or post collateral.

Floating Rate notes

Prior to May 2019, the Company had $ 20.0 million floating rate senior secured notes (the “Floating Rate Notes”), bearing interest at the three-month treasury rate plus 6.50 % per annum.

The Company redeemed its Floating Rate Notes pursuant to their terms on May 23, 2019, at a redemption price equal to 102 % of the principal amount of the Floating Rate Notes, or $ 20.4 million (plus $ 0.3 million of accrued and unpaid interest thereon).

The Company recognized a charge of $ 1.3 million upon redemption with $ 0.4 million due to the redemption premium and $ 0.9 million

due to the write-off of unamortized debt issuance costs.

The $ 0.4 million redemption premium was recognized as a component of interest expense and the $ 0.9 million issuance cost write-off was recognized as a component of other underwriting expenses in the Company’s consolidated statements of income and comprehensive income.

The Company incurred $ 1.1 million and paid $ 1.2 million in interest expense related to the Floating Rate Notes for the year ended December 31, 2019 (inclusive of the $ 0.4 million redemption premium).

Credit Agreement

Credit Agreements

Bank Credit Agreement

In December 2021, the Company entered into a Credit Agreement (the “Credit Agreement”) with certain lenders which provides a revolving credit facility of up to $ 100.0 million (the “Revolving Loan”).

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The Company’s obligations under the Credit Agreement are unsecured with a negative pledge against all assets of Palomar and its subsidiaries as described in the Credit Agreement.

The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among other things, financial covenants, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness and dividends and other distributions.

The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among other things,

financial covenants, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness and dividends and other distributions.

The financial covenants in the Credit agreement require the Company not to exceed a maximum leverage ratio and maintain a minimum net worth at the end of each quarter.

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During the existence of an event of default, all outstanding amounts of the Revolving Loan shall bear interest at a rate per annum equal to the rate otherwise applicable thereto plus 2.00 %.

As of December 31, 2021, there were no outstanding borrowings under this Credit Agreement.

For the year ended December 31, 2021, the Company incurred an immaterial amount of interest related to amortization of the commitment fee and unused line fee paid on the Credit Agreement.

As of December 31, 2022 and 2021, there were no outstanding borrowings under this Credit Agreement.

For the year ended December 31, 2022, the Company incurred $ 0.4 million of interest related to amortization of the commitment fee and unused line fee paid on the Credit Agreement.

FHLB Line of Credit

The Company’s 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 currently equal to 10 % of PSIC’s statutory admitted assets.

All advances have a predetermined term and the interest rate varies based on the term of the advance.

As of December 31, 2022, the Company had $ 36.4 million of borrowings outstanding through the FHLB at the overnight rate of 4.65 %.

Interest expense on the FHLB Line of Credit was $ 0.5 million for the year ended December 31, 2022.

There were no borrowings outstanding at December 31, 2021.

Stockholders’ Equity

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All stock-based compensation is included in other underwriting expenses in the Company’s consolidated statements of income and comprehensive income.

The Company recognized approximately $ 23.0 million of stock-based compensation expense in March 2019 relating to the modification of its 2014 Management Incentive Plan.

The Company began recognizing stock-based compensation expense relating to its 2019 Equity Incentive Plan and the 2019 Employee Stock Purchase Plan upon their inception and initial equity grants in April 2019.

Aside from the aforementioned $ 23.0 million charge, all stock-based compensation expense recognized during the years ended December 31, 2021, December 31, 2020 and December 31, 2019 relates to the 2019 Equity Incentive Plan and 2019 Employee Stock Purchase Plan.

Management Incentive Plan prior to IPO

The Company’s former parent, GC Palomar Investor LP, adopted a 2014 Management Incentive Plan (in the form of profits interests) on February 12, 2014 under which certain officers and employees of PSIC and its affiliates were entitled to Class P Units in GC Palomar Investor LP.

Class P unit holders were expected to realize value only upon the occurrence of liquidity events meeting requisite financial thresholds after the Class A unit holders recovered their investment.

The Class P unit holders had no voting rights.

The Company did not record stock-based compensation expense related to this plan prior to 2019 because no liquidity events were probable of occurring.

On March 15, 2019, the Company modified its 2014 Management Incentive Plan by eliminating the requirement of a liquidity event to occur for the holders of its Class P units to realize value.

The 12,552,825 Class P units outstanding were modified such that the vesting of each Class P unit holder’s awards was accelerated and their Class P distribution percentages were determined and distributed based on these percentages.

This modification resulted in a stock compensation charge and corresponding increase to additional paid in capital of $ 23.0 million during the quarter ending March 31, 2019.

The stock compensation charge is included in other underwriting expenses in the Company’s consolidated statements of income and comprehensive income.

2019 Equity Incentive Plan

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As of December 31, 2022, the Company had approximately $ 15.4 million of total unrecognized stock-based compensation expense related to RSUs expected to be recognized over a weighted-average period of 2.87 years.

Performance Stock Units

During the year ended December 31, 2021, the Company began issuing PSUs to certain employees.

The Company issues PSUs with a combination of service, performance, and market conditions.

Performance Stock Units (“PSUs”)

The Company issues PSUs to employees with a combination of service, performance, and market conditions.

The majority of PSUs were issued pursuant to the 2021 Executive Stock Grants, as described below.

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The PSU grants above represent the number of shares that would vest based on achievement of all stock price milestones in the executive stock grants and the 100 % achievement of the predetermined company performance conditions for the other PSU grants.

The actual number of PSUs which will vest is subject to adjustment based on the Company’s actual stock price performance and financial performance relative to the predetermined targets.

The actual number of PSUs which will vest is subject to adjustment based on the Company’s actual stock price performance and financial performance relative to the predetermined targets and subject to recipient service requirements.

As of December 31, 2022, the Company had approximately $ 10.5 million of total unrecognized stock-based compensation expense related to PSUs expected to be recognized over a weighted-average period of 3.54 years.

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If the Company’s stock price reaches and remains at certain milestones for 30 days, the PSUs shall become earned units and will vest upon completion of a requisite service period.

The Company’s CEO must remain as an employee through December 31, 2025, or as an employee and/or director through the fifth anniversary of the grant date the PSUs to vest.

The Company’s CEO must remain as an employee through December 31, 2025, or as an

employee and/or director through the fifth anniversary of the grant date the PSUs to vest.

Other executives must remain as employees through December 31, 2026 for the PSUs to vest.

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Share repurchases

On March 29, 2021, the Company’s Board of Directors approved the adoption of a share repurchase program which became effective March 31, 2021.

The program authorized the repurchase by the Company of up to $ 40 million of its outstanding shares of common stock.

During the year ended December 31, 2021, the Company’s Board of Directors authorized a $ 40 million share repurchase program and the Company repurchased $ 15.9 million of shares under this program in 2021.

On January 24, 2022, the Board of Directors approved a new share repurchase program, replacing the existing program and authorizing the repurchase by the Company of up to $ 100 million of its outstanding shares of common stock over the period ending on March 31, 2024.

The Company purchased 621,415 shares for $ 34.4 million under this program during the year ended December 31, 2022.

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Underwriting Information

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

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

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

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Commercial Earthquake

Specialty Homeowners

Inland Marine

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Hawaii Hurricane

Specialty Homeowners

Residential Flood

Total Gross Written Premiums

NM-Not Meaningful

Gross written premiums by state are as follows:

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Total Gross Written Premiums

The Company distributes a significant portion of its Residential Earthquake, Commercial Earthquake, Specialty Homeowners and Hawaii Hurricane products through longstanding relationships with two program administrators.

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

The Company distributes a significant portion of its Fronting, Residential Earthquake, Commercial Earthquake, and Hawaii Hurricane products through two program administrators.

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

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

In total, these four products accounted for $ 255.8 million or 48.2 % of the Company’s gross written premiums for the year ended December 31, 2021, $ 191.3 million or 54.0 % of the Company’s gross written premiums for the year ended December 31, 2020, and $ 148.6 million or 59.0 % of the Company’s gross written premiums for the year ended December 31, 2019.

In total, these products accounted for $ 417.5 million or 47.3 % of the Company’s gross written premiums for the year ended December 31, 2022, $ 255.8 million or 48.2 % of the Company’s gross written premiums for the year ended December 31, 2021, and $ 191.3 million or 54.0 % of the Company’s gross written premiums for the year ended December 31, 2020.

Retirement and Post-Employment Retirement Plans

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For the years ended December 31, 2022, 2021 and 2020 the Company’s contributions to the plan were $ 0.7 million, $ 0.7 million and $ 0.3 million, respectively.

The components of the Company’s federal income tax expense (benefit) are as follows:

The components of the Company’s income tax expense (benefit) are as follows:

(in thousands)

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State tax net operating losses

Deferred Intercompany

Unearned premiums

Capitalized organizational costs

Unrealized losses on investments

Deferred compensation

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Total deferred tax liabilities

Net deferred tax liability before valuation allowance

Net deferred tax asset (liability) before valuation allowance

Valuation allowance

Total net deferred tax liabilities

Total net deferred tax assets (liabilities)

The valuation allowance shown above relates to deferred tax assets associated with state net operating loss carryforwards.

These carryforwards do not meet the “more likely than not” criteria under ASC 740, Income Taxes due to the limited carryforward period.

The amount of the deferred tax assets considered realizable could be adjusted if estimates of future taxable income during the carryforward period change or if objective negative evidence in the form of cumulative losses is no longer present.

These carryforwards do not meet the “more likely than not” criteria under ASC 740, Income Taxes due to the limited carryforward period and the Company will continue to maintain a valuation allowance on the associated deferred tax assets as of December 31, 2022.

The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period change or if objective negative evidence in the form of cumulative losses is no longer present.

As of December 31, 2022, there are no federal net operating losses or tax credit carryforwards.

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Income tax expense (benefit)

For the year ended December 31, 2021, the difference relates primarily to a benefit from the permanent component of employee stock option exercises and charges related to state tax accruals.

For the year ended December 31, 2022, the difference relates primarily to non-deductible executive compensation expense and state taxes.

For the year ended December 31, 2021, the difference relates primarily to a benefit from the permanent component of employee stock option exercises and state taxes.

For the year ended December 31, 2020, the difference relates primarily the permanent component of employee stock option exercises.

For the year ended December 31, 2019, this difference relates primarily to a non-deductible stock compensation charge of $ 23.1 million incurred by the Company in March 2019.

For the years ended December 31, 2021 and Decembers 31, 2020, the Company increased its valuation allowance relating to deferred tax assets associated with state net operating losses.

The Company reversed the valuation allowance on its U.S.

tax attributes during the year ended December 31, 2019 because of Domestication in the United States and projected future operating income in the U.S.

As of December 31, 2022 and 2021, the Company had no uncertain tax positions that required either recognition or disclosure in the consolidated financial statements.

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Earnings per share:

Common share equivalents relate to outstanding stock options and PSUs under the 2019 Plan and unpurchased shares under the 2019 ESPP and are calculated using the treasury stock method.

Common share equivalents relate to outstanding stock options, RSUs, and PSUs under the 2019 Plan and unpurchased shares under the 2019 ESPP and are calculated using the treasury stock method.

Statutory financial information

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Statutory capital and surplus

Risk-Based Capital (“RBC”) requirements promulgated by the NAIC require property/casualty insurers to maintain minimum capitalization levels determined based on formulas incorporating various business risks of the insurance subsidiaries.

insurance subsidiaries.

As of December 31, 2022 and 2021, the company’s capital and surplus exceeds its authorized control level.

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PSRE had statutory net income of $ .2 million, $ 1.4 million and $ 0.9 million for 2022, 2021 and 2020, respectively.

PSRE had stockholder’s equity of $ 17.0 million and $ 41.9 million on a GAAP basis at December 31, 2021 and 2020, respectively.

The principal difference between statutory capital and surplus and stockholder’s equity presented in accordance with GAAP are prepaid expenses, which are non-admitted assets for Bermuda statutory purposes.

PSRE had stockholders’ equity of $ 15.5 million and $ 17.0 million on a GAAP basis at December 31, 2022 and 2021, respectively.

The principal difference between statutory capital and surplus and stockholders’ equity presented in accordance with GAAP are prepaid expenses, which are non-admitted assets for Bermuda statutory purposes.

In the third and fourth quarter of 2021, PSRE distributed $ 15.0 million and $ 10.0 million in dividends to the Company.

No dividends were paid in 2022.

PSRE maintains a Class 3A license and thus must maintain a minimum liquidity ratio in which the value of its relevant assets is not less than 75.0 % of the amount of its relevant liabilities for general business.

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Based on the above restrictions, PSIC may pay a dividend or distribution of no greater than $ 78.2 million in 2023 without approval by the California and Oregon Insurance Commissioners.

Under Arizona statute with 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 $ 1.2 million in 2022 without approval of the Arizona Insurance Commissioner.

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 not pay a dividend or distribution in 2023 without approval of the Arizona Insurance Commissioner due to incurring a statutory net loss in 2022.

In addition to the above limitations, any dividend or distribution declared is also subject to state regulatory approval prior to payment.

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Letters of Credit

As of December 31, 2021, the Company has three irrevocable standby letters of credit for the benefit of ceding insurance companies to secure the unearned premium assumed by PSIC.

The bank letters of credit amount to $ 1.5 million, $ 0.3 million and $ 0.4 million.

The $ 1.5 million and $ 0.4 million letters of credit expire December 31, 2022 with no renewal terms.

The $ 0.4 million letter of credit auto renews each year.

The letters of credit are collateralized by $ 3.2 million of U.S.

Treasury bonds which are included in available-for-sale investments on the consolidated balance sheets.

As of December 31, 2022, the Company has six irrevocable standby letters of credit for the benefit of ceding insurance companies to secure the unearned premium assumed by PSIC.

The bank letters of credit amount to a total of $ 5.7 million and may renew if the Company continues to assume premium from these insurance companies.

The letters of credit are collateralized by either the Company’s available-for-sale investments or the Credit Agreement.

In addition, the Company established a Regulation 114 Trust account for the benefit of ceding insurance companies to secure the unearned premium assumed by PSIC.

As of December 31, 2021 the trust had a par value of $ 2.2 million.

As of December 31, 2022 the trust had a market value of $ 37.2 million.

Palomar Holdings, Inc.

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Stockholders' equity:

Preferred stock, $ 0.0001 par value, 5,000,000 shares authorized as of December 31, 2021 and December 31, 2020, respectively, 0 shares issued and outstanding as of December 31, 2021 and December 31, 2020

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

Common stock, $ 0.0001 par value, 500,000,000 shares authorized, 25,027,467 and 25,428,929 shares issued and outstanding as of December 31, 2022 and December 31, 2021, respectively

Additional paid‑in capital

Accumulated other comprehensive income

Accumulated other comprehensive income (loss)

Retained earnings

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Net investment income

Net realized and unrealized gains on investments

Net realized and unrealized gains (losses) on investments

Total revenues

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Other comprehensive income:

Net unrealized gains on securities available for sale

Net unrealized gains (losses) on securities available for sale

Equity in other comprehensive income (loss) of subsidiaries, net of taxes

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Financing activities

Proceeds from initial public offering, net of offering costs

Distribution to stockholder

Redemption of Floating Rate Notes

Proceeds from January 2020 stock offering, net of offering costs

8 unchanged sentences

Cash paid for income taxes

Cash paid for interest

See accompanying notes.

22 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data