Palomar Holdings, Inc. 10-Q

Item 1: Financial Statements ​ Palomar Holdings, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (in thousands, except shares and par value data) ​ ​ ​ ​ ​ ​ ​ ​ March 31, December 31 , ​ ​ 2023 ​ 2022 ​ ​ (Unaudited) ​ ​ ​ Assets ​ ​ Investments: ​ ​ Fixed maturity securities available for sale, at fair value (amortized cost: $ 594,736 in 2023; $ 561,580 in 2022) ​ $ 554,489 ​ $ 515,064 Equity securities, at fair value (cost: $ 42,352 in 2023; $ 42,352 in 2022) ​ 39,356 ​ 38,576 Total investments ​ 593,845 ​ 553,640 Cash and cash equivalents ​ 80,295 ​ 68,108 Restricted cash ​ 65 ​ 56 Accrued investment income ​ 4,077 ​ 3,777 Premiums receivable ​ 187,910 ​ 162,858 Deferred policy acquisition costs, net of ceding commissions and fronting fees ​ 54,187 ​ 56,740 Reinsurance recoverable on paid losses and loss adjustment expenses ​ 45,801 ​ 39,718 Reinsurance recoverable on unpaid losses and loss adjustment expenses ​ 183,601 ​ 153,895 Ceded unearned premiums ​ 232,425 ​ 204,084 Prepaid expenses and other assets ​ 41,291 ​ 44,088 Deferred tax assets, net ​ ​ 9,005 ​ ​ 10,622 Property and equipment, net ​ 540 ​ 603 Intangible assets, net ​ 7,948 ​ 8,261 Total assets ​ $ 1,440,990 ​ $ 1,306,450 Liabilities and stockholders' equity ​ ​ Liabilities: ​ ​ Accounts payable and other accrued liabilities ​ $ 19,401 ​ $ 25,760 Reserve for losses and loss adjustment expenses ​ 264,967 ​ 231,415 Unearned premiums ​ 496,182 ​ 471,314 Ceded premium payable ​ 173,035 ​ 146,127 Funds held under reinsurance treaty ​ 11,356 ​ 10,680 Borrowings from credit agreements ​ ​ 71,400 ​ ​ 36,400 Total liabilities ​ 1,036,341 ​ 921,696 Stockholders' equity: ​ ​ Preferred stock, $ 0.0001 par value, 5,000,000 shares authorized, 0 shares issued and outstanding as of March 31, 2023 and December 31, 2022 ​ ​ — ​ ​ — Common stock, $ 0.0001 par value, 500,000,000 shares authorized, 24,942,196 and 25,027,467 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively ​ 3 ​ 3 Additional paid-in capital ​ 337,492 ​ 333,558 Accumulated other comprehensive loss ​ ( 31,041 ) ​ ( 36,515 ) Retained earnings ​ 98,195 ​ 87,708 Total stockholders' equity ​ 404,649 ​ 384,754 Total liabilities and stockholders' equity ​ $ 1,440,990 ​ $ 1,306,450 ​ See accompanying notes. ​ 3 ​ Palomar Holdings, Inc. and Subsidiaries ​ Condensed Consolidated Statements of Income and Comprehensive Income (Loss) (Unaudited) (in thousands, except shares and per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ March 31, ​ 2023 2022 Revenues: ​ ​ Gross written premiums ​ $ 250,112 ​ $ 170,934 Ceded written premiums ​ ( 170,344 ) ​ ( 89,552 ) Net written premiums ​ 79,768 ​ 81,382 Change in unearned premiums ​ 3,473 ​ ​ ( 5,350 ) Net earned premiums ​ 83,241 ​ 76,032 Net investment income ​ 5,120 ​ ​ 2,579 Net realized and unrealized gains (losses) on investments ​ 146 ​ ​ ( 1,278 ) Commission and other income ​ 695 ​ ​ 777 Total revenues ​ 89,202 ​ 78,110 Expenses: ​ ​ Losses and loss adjustment expenses ​ ​ 20,652 ​ ​ 14,954 Acquisition expenses, net of ceding commissions and fronting fees ​ ​ 25,679 ​ ​ 28,054 Other underwriting expenses ​ ​ 19,222 ​ ​ 15,925 Interest expense ​ ​ 1,020 ​ ​ 93 Total expenses ​ 66,573 ​ 59,026 Income before income taxes ​ 22,629 ​ 19,084 Income tax expense ​ ​ 5,316 ​ ​ 4,547 Net income ​ 17,313 ​ 14,537 Other comprehensive income (loss), net: ​ ​ Net unrealized gains (losses) on securities available for sale ​ ​ 5,474 ​ ​ ( 18,463 ) Net comprehensive income (loss) ​ $ 22,787 ​ $ ( 3,926 ) Per Share Data: ​ ​ Basic earnings per share ​ $ 0.69 ​ $ 0.57 Diluted earnings per share ​ $ 0.68 ​ $ 0.56 ​ ​ ​ ​ ​ ​ ​ Weighted-average common shares outstanding: ​ ​ ​ ​ ​ ​ Basic ​ ​ 24,969,703 ​ ​ 25,362,179 Diluted ​ ​ 25,442,902 ​ ​ 25,899,290 ​ See accompanying notes. ​ 4 ​ Palomar Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) (in thousands, except share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Number of ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ Common ​ ​ ​ ​ Additional ​ Other ​ ​ ​ ​ Total ​ ​ Shares ​ Common ​ Paid-In ​ Comprehensive ​ Retained ​ Stockholders' ​ ​ Outstanding ​ Stock ​ Capital ​ Income (Loss) ​ Earnings ​ Equity Balance at December 31, 2021 25,428,929 ​ ​ 3 ​ $ 318,902 ​ $ 5,312 ​ $ 69,952 ​ $ 394,169 Other comprehensive loss, net of tax — ​ ​ — ​ ​ — ​ ​ ( 18,463 ) ​ ​ — ​ ( 18,463 ) Stock-based compensation — ​ ​ — ​ ​ 2,760 ​ ​ — ​ ​ — ​ 2,760 Issuance of common stock via employee stock purchase plan ​ 6,078 ​ ​ — ​ ​ 333 ​ ​ — ​ ​ — ​ ​ 333 Issuance of common stock via equity incentive plan ​ 15,625 ​ ​ — ​ ​ 53 ​ ​ — ​ ​ — ​ ​ 53 Repurchases of common stock ​ ( 219,061 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 12,989 ) ​ ​ ( 12,989 ) Net income — ​ ​ — ​ ​ — ​ ​ — ​ ​ 14,537 ​ 14,537 Balance at March 31, 2022 25,231,571 ​ $ 3 ​ $ 322,048 ​ $ ( 13,151 ) ​ $ 71,500 ​ $ 380,400 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balance at December 31, 2022 25,027,467 ​ ​ 3 ​ $ 333,558 ​ $ ( 36,515 ) ​ $ 87,708 ​ $ 384,754 Other comprehensive income, net of tax — ​ ​ — ​ ​ — ​ ​ 5,474 ​ ​ — ​ 5,474 Stock-based compensation — ​ ​ — ​ ​ 3,450 ​ ​ — ​ ​ — ​ 3,450 Issuance of common stock via employee stock purchase plan ​ 7,724 ​ ​ — ​ ​ 394 ​ ​ — ​ ​ — ​ ​ 394 Issuance of common stock via equity incentive plan ​ 41,685 ​ ​ — ​ ​ 90 ​ ​ — ​ ​ — ​ ​ 90 Repurchases of common stock ​ ( 134,680 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 6,826 ) ​ ​ ( 6,826 ) Net income — ​ ​ — ​ ​ — ​ ​ — ​ ​ 17,313 ​ 17,313 Balance at March 31, 2023 24,942,196 ​ $ 3 ​ $ 337,492 ​ $ ( 31,041 ) ​ $ 98,195 ​ $ 404,649 ​ See accompanying notes. ​ 5 ​ Palomar Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) (in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ March 31, ​ 2023 2022 Operating activities ​ ​ Net cash provided by operating activities ​ $ 17,437 ​ $ 49,190 Investing activities ​ ​ ​ ​ Purchases of property and equipment ​ — ​ ( 7 ) Capitalized software costs ​ ​ ( 1,658 ) ​ ​ ( 1,389 ) Purchases of fixed maturity securities ​ ( 54,871 ) ​ ( 73,921 ) Purchases of equity securities ​ — ​ ( 10,002 ) Sales and maturities of fixed maturity securities ​ 21,679 ​ 38,159 Change in securities receivable or payable, net ​ ​ 950 ​ ​ ( 7,843 ) Payment of additional costs associated with purchase of policy renewal rights ​ ​ — ​ ​ ( 15 ) Net cash used in investing activities ​ ( 33,900 ) ​ ( 55,018 ) Financing activities ​ ​ Proceeds from line of credit ​ ​ 35,000 ​ ​ 15,000 Proceeds from common stock issued via employee stock purchase plan ​ ​ 394 ​ ​ 333 Proceeds from common stock issued via stock option exercises ​ ​ 91 ​ ​ 53 Repurchases of common stock ​ ​ ( 6,826 ) ​ ​ ( 12,989 ) Net cash provided by financing activities ​ 28,659 ​ 2,397 Net increase (decrease) in cash, cash equivalents and restricted cash ​ 12,196 ​ ( 3,432 ) Cash, cash equivalents and restricted cash at beginning of period ​ 68,164 ​ 50,371 Cash, cash equivalents and restricted cash at end of period ​ $ 80,360 ​ $ 46,939 Supplementary cash flow information: ​ ​ Cash paid for income taxes ​ $ 1 ​ $ — Cash paid for interest ​ $ 1,017 ​ $ — ​ The following table summarizes our cash and cash equivalents and restricted cash and cash equivalents within the condensed consolidated balance sheets (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ December 31, ​ ​ 2023 ​ 2022 ​ ​ (unaudited) ​ ​ ​ Cash and cash equivalents ​ $ 80,295 ​ $ 68,108 Restricted cash ​ 65 ​ 56 Cash and cash equivalents and restricted cash ​ $ 80,360 ​ $ 68,164 ​ See accompanying notes. ​ 6 ​ Palomar Holdings, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) ​ ​ 1. Summary of Operations and Basis of Presentation Summary of Operations Palomar Holdings, Inc. (the “Company”) is a Delaware incorporated insurance holding company that was founded in 2014. The Company has several wholly owned subsidiaries including an Oregon domiciled insurance company, Palomar Specialty Insurance Company (“PSIC”), a Bermuda based reinsurance company, Palomar Specialty Reinsurance Company Bermuda Ltd. (“PSRE”), an Arizona domiciled surplus lines insurance company, Palomar Excess and Surplus Insurance Company (“PESIC”), and a California domiciled property and casualty insurance agency, Palomar Insurance Agency, DBA Palomar General Insurance Agency (“PGIA”). Basis of Presentation The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and include the accounts of the Company and its wholly-owned subsidiaries. These condensed consolidated financial statements do not contain all information and footnotes required by U.S. GAAP for complete consolidated financial statements. For a more complete description of the Company’s business and accounting policies, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 1, 2023 (the “2022 Annual Report on Form 10-K”). In the opinion of management, all adjustments necessary for a fair presentation of the condensed consolidated financial statements have been included. Such adjustments consist only of normal recurring items. All intercompany balances and transactions have been eliminated in consolidation. Interim results are not necessarily indicative of results of operations for the full year. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the condensed consolidated financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein. All revisions to accounting estimates are recognized in the period in which the estimates are revised. Significant estimates reflected in the Company’s condensed consolidated financial statements include, but are not limited to, reserves for losses and loss adjustment expenses, reinsurance recoverables on unpaid losses, and the fair values of investments. Recent Accounting Pronouncements Recently adopted accounting pronouncements The Company has not adopted any new accounting guidance during the three months ended March 31, 2023. Recently issued accounting pronouncements not yet adopted There are not currently any recent accounting pronouncements or pending accounting guidance that have significance, or potential significance, to the Company’s consolidated financial statements. ​ 7 ​ ​ 2. Investments The Company’s available-for-sale investments are summarized as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Gross Gross Allowance ​ ​ ​ Amortized ​ Unrealized ​ Unrealized ​ for ​ Fair March 31, 2023 ​ Cost or Cost ​ Gains ​ Losses ​ Credit Losses ​ Value ​ (in thousands) Fixed maturities: ​ ​ ​ ​ ​ ​ ​ U.S. Governments ​ $ 51,405 ​ $ 7 ​ $ ( 1,763 ) ​ $ — ​ $ 49,649 States, territories, and possessions ​ 5,852 ​ 128 ​ ( 466 ) ​ — ​ 5,514 Political subdivisions ​ 4,915 ​ — ​ ( 481 ) ​ ​ — ​ 4,434 Special revenue excluding mortgage/asset-backed securities ​ 37,698 ​ 112 ​ ( 3,569 ) ​ — ​ 34,241 Corporate and other ​ 302,810 ​ 363 ​ ( 21,233 ) ​ ( 896 ) ​ 281,044 Mortgage/asset-backed securities ​ 192,056 ​ 454 ​ ( 12,903 ) ​ — ​ 179,607 Total available-for-sale investments ​ $ 594,736 ​ $ 1,064 ​ $ ( 40,415 ) ​ $ ( 896 ) ​ $ 554,489 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Gross Gross Allowance ​ ​ ​ ​ Amortized ​ Unrealized ​ Unrealized ​ for ​ Fair December 31, 2022 ​ Cost or Cost ​ Gains ​ Losses ​ Credit Losses ​ Value ​ (in thousands) Fixed maturities: ​ ​ ​ ​ ​ U.S. Governments ​ $ 50,802 ​ $ 2 ​ $ ( 2,253 ) ​ $ — ​ $ 48,551 States, territories, and possessions ​ 5,857 ​ 49 ​ ​ ( 552 ) ​ — ​ 5,354 Political subdivisions ​ 4,919 ​ — ​ ( 621 ) ​ — ​ 4,298 Special revenue excluding mortgage/asset-backed securities ​ 37,260 ​ 26 ​ ( 4,487 ) ​ — ​ 32,799 Corporate and other ​ 278,164 ​ 79 ​ ​ ( 23,912 ) ​ ( 236 ) ​ 254,095 Mortgage/asset-backed securities ​ 184,578 ​ 251 ​ ( 14,862 ) ​ — ​ 169,967 Total available-for-sale investments ​ $ 561,580 ​ $ 407 ​ $ ( 46,687 ) ​ $ ( 236 ) ​ $ 515,064 ​ Security holdings in an unrealized loss position As of March 31, 2023, the Company held 538 fixed maturity securities in an unrealized loss position with a total estimated fair value of $ 497.9 million and total gross unrealized losses of $ 40.4 million. As of December 31, 2022, the Company held 543 fixed maturity securities in an unrealized loss position with a total estimated fair value of $ 484.7 million and total gross unrealized losses of $ 46.9 million. 8 ​ The aggregate fair value and gross unrealized losses of the Company’s investments aggregated by investment category and the length of time these individual securities have been in a continuous unrealized loss position as of March 31, 2023 and December 31, 2022, are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Less Than 12 Months ​ More Than 12 Months ​ Total ​ Fair Unrealized Fair Unrealized Fair Unrealized March 31, 2023 ​ Value ​ Losses ​ Value ​ Losses ​ Value ​ Losses ​ ​ (in thousands) Fixed maturity securities: ​ ​ ​ ​ ​ ​ U.S. Governments $ 25,586 ​ $ ( 391 ) ​ $ 23,438 ​ $ ( 1,372 ) ​ $ 49,024 ​ $ ( 1,763 ) States, territories, and possessions ​ 3,310 ​ ​ ( 466 ) ​ — ​ — ​ 3,310 ​ ( 466 ) Political subdivisions ​ 454 ​ ​ ( 21 ) ​ 3,980 ​ ( 460 ) ​ 4,434 ​ ( 481 ) Special revenue excluding mortgage/asset-backed securities ​ 8,050 ​ ​ ( 595 ) ​ 22,928 ​ ( 2,974 ) ​ 30,978 ​ ( 3,569 ) Corporate and other ​ 136,179 ​ ​ ( 6,630 ) ​ 120,285 ​ ( 14,603 ) ​ 256,464 ​ ( 21,233 ) Mortgage/asset-backed securities ​ 77,660 ​ ​ ( 3,414 ) ​ 76,058 ​ ( 9,489 ) ​ 153,718 ​ ( 12,903 ) Total ​ $ 251,239 ​ $ ( 11,517 ) ​ $ 246,689 ​ $ ( 28,898 ) ​ $ 497,928 ​ $ ( 40,415 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Less Than 12 Months ​ More Than 12 Months ​ Total ​ Fair Unrealized Fair Unrealized Fair Unrealized December 31, 2022 ​ Value ​ Losses ​ Value ​ Losses ​ Value ​ Losses ​ ​ (in thousands) Fixed maturity securities: ​ ​ ​ ​ ​ ​ U.S. Governments ​ $ 41,077 ​ $ ( 1,523 ) ​ $ 6,853 ​ $ ( 730 ) ​ $ 47,930 ​ $ ( 2,253 ) States, territories, and possessions ​ ​ 3,227 ​ ​ ( 552 ) ​ — ​ — ​ 3,227 ​ ( 552 ) Political subdivisions ​ ​ 4,298 ​ ​ ( 621 ) ​ — ​ — ​ 4,298 ​ ( 621 ) Special revenue excluding mortgage/asset-backed securities ​ ​ 25,091 ​ ​ ( 3,287 ) ​ 5,080 ​ ( 1,200 ) ​ 30,171 ​ ( 4,487 ) Corporate and other ​ ​ 192,185 ​ ​ ( 15,667 ) ​ 55,605 ​ ( 8,481 ) ​ 247,790 ​ ( 24,148 ) Mortgage/asset-backed securities ​ ​ 118,815 ​ ​ ( 9,908 ) ​ 32,448 ​ ( 4,954 ) ​ 151,263 ​ ( 14,862 ) Total ​ $ 384,693 ​ $ ( 31,558 ) ​ $ 99,986 ​ $ ( 15,365 ) ​ $ 484,679 ​ $ ( 46,923 ) ​ The Company reviews all securities with unrealized losses on a quarterly basis to assess whether the decline in the securities fair value necessitates the recognition of an allowance for credit losses. The Company considers numerous factors in its review as described in Footnote 1 of the Notes to the Consolidated Financial Statements in the 2022 Annual Report on Form 10-K. The Company has recorded an allowance for credit losses for two investment securities. Based on the Company’s review as of March 31, 2023, for the remainder of 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. ​ 9 ​ Contractual maturities of available-for-sale fixed maturity securities The amortized cost and fair value of fixed maturity securities at March 31, 2023, by contractual maturity, are shown below. ​ ​ ​ ​ ​ ​ ​ ​ ​ Amortized Fair ​ ​ Cost ​ Value ​ (in thousands) Due within one year ​ $ 47,423 ​ $ 45,867 Due after one year through five years ​ 184,515 ​ 173,737 Due after five years through ten years ​ 139,084 ​ 127,547 Due after ten years ​ 31,658 ​ 27,731 Mortgage and asset-backed securities ​ 192,056 ​ 179,607 ​ ​ $ 594,736 ​ $ 554,489 ​ Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations. ​ Net investment income summary Net investment income is summarized as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ March 31, ​ 2023 2022 ​ (in thousands) Interest income ​ $ 5,060 ​ $ 2,558 Dividend income ​ 181 ​ 155 Investment expense ​ ( 121 ) ​ ( 134 ) Net investment income ​ $ 5,120 ​ $ 2,579 ​ Net realized and unrealized investment gains and losses The following table presents net realized and unrealized investment gains and losses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ March 31, ​ 2023 2022 ​ ​ ​ (in thousands) Realized gains: ​ ​ ​ Gains on sales of fixed maturity securities ​ ​ $ 28 ​ $ 2 Gains on sales of equity securities ​ ​ — ​ — Total realized gains ​ ​ 28 ​ 2 Realized losses: ​ ​ ​ Losses on sales of fixed maturity securities ​ ​ ( 3 ) ​ ​ — Losses on sales of equity securities ​ ​ — ​ ​ — Total realized losses ​ ​ ( 3 ) ​ — Net realized investment gains ​ ​ 25 ​ 2 Change in allowance for credit losses ​ ​ ​ ( 659 ) ​ ​ — Net unrealized gains (losses) on equity securities ​ ​ 780 ​ ( 1,280 ) Net realized and unrealized gains (losses) on investments ​ ​ $ 146 ​ $ ( 1,278 ) ​ Realized gains and losses on disposition of investments are based on specific identification of the investments sold on the settlement date. 10 ​ ​ Proceeds from the sale of fixed maturity securities were $ 5.1 million and $ 4.8 million for the three months ended March 31, 2023 and 2022, respectively. The Company places securities on statutory deposit with certain state agencies to retain the right to do business in those states. These securities are included in available-for-sale investments on the balance sheet. As of March 31, 2023 and December 31, 2022, the carrying value of securities on deposit with state regulatory authorities was $ 9.6 million and $ 8.5 million, respectively. 3. Fair Value Measurements 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. The three-tier hierarchy of inputs is summarized in the three broad levels listed below: Level 1—Unadjusted quoted prices are available in active markets for identical investments as of the reporting date. Level 2—Pricing inputs are quoted prices for similar investments in active markets; quoted prices for identical or similar investments in inactive markets; or valuations based on models where the significant inputs are observable or can be corroborated by observable market data. Level 3—Pricing inputs into models are unobservable for the investment. The unobservable inputs require significant management judgment or estimation. To measure fair value, the Company obtains quoted market prices for its investment securities from its outside investment managers. If a quoted market price is not available, the Company uses prices of similar securities. The fair values obtained from the outside investment managers are reviewed for reasonableness and any discrepancies are investigated for final valuation. The fair value of the Company’s investments in fixed maturity securities is estimated using relevant inputs, including available market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. An Option Adjusted Spread model is also used to develop prepayment and interest rate scenarios. Industry standard models are used to analyze and value securities with embedded options or prepayment sensitivities. These fair value measurements are estimated based on observable, objectively verifiable market information rather than market quotes. Therefore, these investments are classified and disclosed in Level 2 of the hierarchy. 11 ​ The following tables present the hierarchy for financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, 2023 Level 1 Level 2 Level 3 Total ​ (in thousands) Assets: ​ ​ ​ ​ Fixed maturity securities ​ ​ ​ ​ U.S. Governments ​ $ — ​ $ 49,649 ​ $ — ​ $ 49,649 States, territories, and possessions ​ — ​ 5,514 ​ — ​ 5,514 Political subdivisions ​ — ​ 4,434 ​ — ​ 4,434 Special revenue excluding mortgage/asset-backed securities ​ — ​ 34,241 ​ — ​ 34,241 Corporate and other ​ — ​ 281,044 ​ — ​ 281,044 Mortgage/asset-backed securities ​ — ​ 179,607 ​ — ​ 179,607 Equity securities ​ 39,356 ​ — ​ — ​ 39,356 Cash, cash equivalents, and restricted cash ​ 80,360 ​ — ​ — ​ 80,360 Total assets ​ $ 119,716 ​ $ 554,489 ​ $ — ​ $ 674,205 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2022 Level 1 Level 2 Level 3 Total ​ (in thousands) Assets: ​ ​ ​ ​ Fixed maturity securities ​ ​ ​ ​ U.S. Governments ​ $ — ​ $ 48,551 ​ $ — ​ $ 48,551 States, territories, and possessions ​ — ​ 5,354 ​ — ​ 5,354 Political subdivisions ​ — ​ 4,298 ​ — ​ 4,298 Special revenue excluding mortgage/asset-backed securities ​ — ​ 32,799 ​ — ​ 32,799 Corporate and other ​ — ​ 254,095 ​ — ​ 254,095 Mortgage/asset-backed securities ​ — ​ 169,967 ​ — ​ 169,967 Equity securities ​ 38,576 ​ — ​ — ​ 38,576 Cash, cash equivalents, and restricted cash ​ 68,164 ​ — ​ — ​ 68,164 Total assets ​ $ 106,740 ​ $ 515,064 ​ $ — ​ $ 621,804 ​ ​ ​ ​ ​ ​ 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 and U.S. Bank credit agreement (the “Credit Agreement”) approximate fair value as the Company is currently borrowing at a variable rate which frequently reprices at market rates. 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 March 31, 2023 and December 31, 2022, the Company had no fixed income securities classified as Level 3. 12 ​ 4. Reserve for Losses and Loss Adjustment Expenses The following table represents a reconciliation of changes in the ending reserve balances for losses and loss adjustment expenses (“LAE”): ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, ​ 2023 2022 ​ ​ (in thousands) Reserve for losses and LAE net of reinsurance recoverables at beginning of period ​ $ 77,520 ​ $ 45,419 Add: Incurred losses and LAE, net of reinsurance, related to: ​ ​ ​ ​ ​ ​ Current year ​ 17,300 ​ ​ 13,449 Prior years ​ 3,352 ​ ​ 1,505 Total incurred ​ 20,652 ​ 14,954 Deduct: Loss and LAE payments, net of reinsurance, related to: ​ ​ Current year ​ ​ 1,393 ​ ​ 1,490 Prior years ​ ​ 15,413 ​ ​ 7,497 Total payments ​ 16,806 ​ 8,987 Reserve for losses and LAE net of reinsurance recoverables at end of period ​ 81,366 ​ 51,386 Add: Reinsurance recoverables on unpaid losses and LAE at end of period ​ ​ 183,601 ​ ​ 113,726 Reserve for losses and LAE gross of reinsurance recoverables on unpaid losses and LAE at end of period ​ $ 264,967 ​ $ 165,112 ​ Considerable variability is inherent in the estimate of the reserve for losses and LAE. Although management believes the liability recorded for losses and LAE is adequate, the variability inherent in this estimate could result in changes to the ultimate liability, which may be material to stockholders’ equity. ​ The Company experienced adverse prior year development of $ 3.4 and $ 1.5 million during the three months ended March 31, 2023 and 2022, respectively. ​ Adverse prior year development during the three months ended March 31, 2023 was primarily due to higher than anticipated severity of attritional losses, offset by lower than anticipated severity of catastrophe losses. Adverse prior year development during the three months ended March 31, 2022 was primarily due to higher than anticipated severity of attritional losses from prior years. ​ 5. Stockholders’ Equity Common stock reserved for future issuance Common stock reserved for future issuance consists of the following as of March 31, 2023: ​ ​ ​ Stock options outstanding under 2019 Equity Incentive Plan 873,346 Restricted stock units outstanding under 2019 Equity Incentive Plan 355,234 Performance stock units outstanding under 2019 Equity Incentive Plan, at target 426,359 Shares authorized for future issuance under 2019 Equity Incentive Plan 3,143,477 Shares authorized for future issuance under 2019 Employee Stock Purchase Plan 1,140,126 Total 5,938,542 ​ 13 ​ Stock based compensation The below table summarizes the Company’s stock-based compensation expense for each period presented: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended March 31, ​ 2023 2022 ​ (in thousands) Stock-Based Compensation ​ $ 3,450 ​ $ 2,760 ​ Stock-based compensation expense is recognized on a straight-line basis over the vesting period of equity-based awards. For performance stock units (“PSUs”), any changes to expense resulting from differences in actual performance versus target are recognized over the remaining vesting period of the awards. The Company does not apply a forfeiture rate to unvested awards and accounts for forfeitures as they occur. All stock-based compensation is included in other underwriting expenses in the Company’s unaudited condensed consolidated statement of income and comprehensive income. 2019 Equity Incentive Plan On April 16, 2019, the Company's 2019 Equity Incentive Plan (the “2019 Plan”) became effective. The 2019 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance shares and units, and other cash-based or share-based awards. In addition, the 2019 Plan contains a mechanism through which the Company may adopt a deferred compensation arrangement in the future. A total of 2,400,000 shares of common stock were initially authorized and reserved for issuance under the 2019 Plan. This reserve increases on January 1 of each year through 2029 by an amount equal to the smaller of: 3 % of the number of shares of common stock issued and outstanding on the immediately preceding December 31, or an amount determined by the board of directors. Stock Options Recipients of stock options can purchase shares of the Company’s common stock at a price equal to the stock's fair market value on the grant date, determined by the closing price of the Company's common stock on the grant date. Stock options vest over a two to four-year period with a portion vesting on the first anniversary of the grant date and the remainder vesting monthly over the remaining period , subject to continued service. Stock options expire ten years after the grant date. The following table summarizes stock option transactions for the three months ended March 31, 2023: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Number of shares ​ ​ Weighted-average exercise price ​ Weighted-average remaining contractual term (in years) ​ ​ Aggregate intrinsic value (in thousands) Outstanding at January 1, 2023 882,892 ​ $ 33.85 ​ - ​ $ - Options granted - ​ ​ - ​ ​ ​ ​ ​ Options exercised ( 5,957 ) ​ ​ 15.24 ​ ​ ​ ​ ​ Options canceled ( 3,589 ) ​ ​ 64.91 ​ ​ ​ ​ ​ Outstanding at March 31, 2023 873,346 ​ $ 33.85 ​ 6.63 ​ $ 23,374 Vested and Exercisable at March 31, 2023 724,939 ​ $ 28.15 ​ 6.33 ​ $ 22,598 ​ As of March 31, 2023, the Company had approximately $ 2.9 million of total unrecognized stock-based compensation expense related to stock options expected to be recognized over a weighted-average period of 1.47 years. 14 ​ ​ ​ ​ ​ Restricted Stock Units RSUs are valued using the closing price of the Company’s common stock on their grant date. The Company has issued RSUs with vesting periods of one to five years . All vesting is subject to continued service. The following table summarizes RSU transactions for the three months ended March 31, 2023: ​ ​ ​ ​ ​ ​ ​ Number of shares ​ ​ Weighted-average grant date fair value Outstanding at January 1, 2023 271,951 ​ $ 68.90 Granted 123,396 ​ ​ 51.32 Released ( 35,728 ) ​ ​ 59.92 Forfeited ( 4,385 ) ​ ​ 52.83 Non-vested outstanding at March 31, 2023 355,234 ​ $ 63.89 ​ As of March 31, 2023, the Company had approximately $ 19.7 million of total unrecognized stock-based compensation expense related to RSUs expected to be recognized over a weighted-average period of 2.8 years. Performance Stock Units The Company issues PSUs with a combination of service, performance, and market conditions. The majority of PSUs were issued via grants made to certain executives during 2021. These PSUs are earned based on the achievement of stock price milestones. 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 of approximately five years from the date of grant. As of March 31, 2023, none of the stock price milestones have been achieved. For other PSUs outstanding, vesting of PSUs requires a period of future service and the number of shares that vest depends on performance relative to predetermined targets of the Company’s Gross Written Premiums and Adjusted Return on Equity as set by the Compensation Committee. Prior to 2023, the PSU’s performance period was the fiscal year of the grant. Beginning in 2023, the PSU’s performance period is primarily a three-year period beginning with the grant date. At the end of the performance period, the actual results are measured against the predetermined targets to determine the number of PSUs to be earned as compensation. The earned PSUs are then subject to a required service period of approximately three years from the grant date before vesting and being issued as common stock. The following table summarizes PSU transactions for the three months ended March 31, 2023: ​ ​ ​ ​ ​ ​ ​ Number of shares ​ ​ Weighted-average grant date fair value Outstanding at January 1, 2023 383,103 ​ $ 37.62 Granted 44,354 ​ ​ 51.25 Vested — ​ ​ — Forfeited ( 1,098 ) ​ ​ 55.36 Non-vested outstanding at March 31, 2023 426,359 ​ $ 38.99 ​ The PSU grants above represent the number of shares that would vest based on achievement of all stock price milestones in the 2021 executive stock grants and the 100 % achievement of the predetermined 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. As of March 31, 2023, 15 ​ the Company had approximately $ 12.5 million of total unrecognized stock-based compensation expense related to PSUs expected to be recognized over a weighted-average period of 3.23 years. 2019 Employee Stock Purchase Plan On April 16, 2019, the Company's 2019 Employee Stock Purchase Plan “the “2019 ESPP”) became effective. A total of 240,000 shares of common stock are initially authorized and reserved for issuance under the 2019 ESPP. In addition, the 2019 ESPP provides for annual increases in the number of shares available for issuance on January 1 of each year through 2029, equal to the smaller of 240,000 shares of the Company’s common stock or such other amount as may be determined by the board of directors. Under the 2019 ESPP, employees can purchase Company stock at a discount via payroll withholdings. The 2019 ESPP is administered through employee participation in discrete offering periods. During each discrete offering period employee funds are withheld, and the stock purchase occurs upon the conclusion of the offering period. The Company issued 7,724 shares pursuant to the ESPP during the three months ended March 31, 2023. Share repurchases In January 2022, the Board of Directors approved a new share repurchase program which replaced the existing program and authorized the repurchase of up to $ 100 million of outstanding shares of common stock over the period ending on March 31, 2024. The Company purchased 134,680 shares for $ 6.8 million during the three months ended March 31, 2023. The Company accounts for share repurchases by charging the excess of repurchase price over the common stock’s par value entirely to retained earnings. All repurchased shares are retired and become authorized but unissued shares. 6. Accumulated Other Comprehensive Income Changes in accumulated other comprehensive income (loss) (“AOCI”) are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, ​ 2023 2022 ​ ​ ​ (in thousands) Beginning Balance ​ $ ( 36,515 ) ​ $ 5,312 ​ ​ ​ ​ ​ ​ ​ Other comprehensive income (loss) before reclassification ​ 6,956 ​ ​ ( 23,368 ) Federal income tax expense ​ ( 1,460 ) ​ ​ 4,907 Other comprehensive income (loss) before reclassification, net of tax ​ 5,496 ​ ( 18,461 ) ​ ​ ​ ​ ​ ​ ​ Amounts reclassified from AOCI ​ ( 28 ) ​ ​ ( 2 ) Federal income tax expense ​ 6 ​ ​ — Amounts reclassified from AOCI, net of tax ​ ( 22 ) ​ ( 2 ) ​ ​ ​ ​ ​ ​ ​ Other comprehensive income (loss) ​ 5,474 ​ ( 18,463 ) Balance at end of period ​ $ ( 31,041 ) ​ $ ( 13,151 ) ​ ​ 16 ​ 7. Underwriting Information The Company has a single reportable segment and offers primarily property and casualty insurance products. The Company also writes premiums under fronting agreements where it cedes the majority of the premium and risk in exchange for a fronting fee. Gross written premiums (“GWP”) by product are presented below: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, ​ ​ 2023 ​ 2022 ​ ​ ($ in thousands) ​ ​ ​ ​ ​ % of ​ ​ ​ ​ % of ​ ​ Amount ​ GWP ​ Amount ​ GWP Product ​ ​ ​ Fronting Premiums ​ $ 91,755 ​ 36.7 % $ 29,845 ​ 17.5 % Residential Earthquake ​ ​ 55,725 ​ 22.3 % ​ 46,336 ​ 27.1 % Commercial Earthquake ​ 37,770 ​ 15.1 % 25,144 ​ 14.7 % Inland Marine ​ ​ 31,049 ​ 12.4 % ​ 18,237 ​ 10.7 % Casualty ​ ​ 11,733 ​ 4.7 % ​ 5,007 ​ 2.9 % Commercial All Risk ​ ​ 8,376 ​ 3.3 % ​ 11,210 ​ 6.6 % Hawaii Hurricane ​ 8,073 ​ 3.2 % 6,914 ​ 4.0 % Residential Flood ​ 4,235 ​ 1.7 % 2,993 ​ 1.8 % Specialty Homeowners ​ ( 59 ) ​ — % 16,284 ​ 9.5 % Other ​ ​ 1,455 ​ 0.6 % ​ 8,964 ​ 5.2 % Total Gross Written Premiums ​ $ 250,112 100.0 % $ 170,934 100.0 % ​ Gross written premiums by state are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, ​ ​ 2023 ​ 2022 ​ ​ ($ in thousands) ​ ​ ​ ​ ​ % of ​ ​ ​ ​ % of ​ ​ Amount ​ GWP ​ Amount ​ GWP State ​ ​ ​ California ​ $ 131,889 ​ 52.7 % $ 68,718 ​ 40.2 % Texas ​ ​ 23,210 ​ 9.3 % ​ 18,979 ​ 11.1 % Florida ​ ​ 12,096 ​ 4.8 % ​ 4,962 ​ 2.9 % Washington ​ 11,972 ​ 4.8 % 6,881 ​ 4.0 % Hawaii ​ ​ 10,105 ​ 4.0 % ​ 8,540 ​ 5.0 % Oregon ​ ​ 6,780 ​ 2.7 % ​ 4,373 ​ 2.6 % Illinois ​ ​ 4,702 ​ 1.9 % ​ 4,273 ​ 2.5 % New York ​ 3,871 ​ 1.5 % 2,380 ​ 1.4 % Other ​ 45,487 ​ 18.3 % 51,828 ​ 30.3 % Total Gross Written Premiums ​ $ 250,112 100.0 % $ 170,934 100.0 % ​ ​ Gross written premiums by insurance subsidiary are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, ​ ​ 2023 ​ 2022 ​ ​ ($ in thousands) ​ ​ ​ ​ ​ % of ​ ​ ​ ​ % of ​ ​ Amount ​ GWP ​ Amount ​ GWP Subsidiary ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ PSIC ​ $ 150,704 ​ 60.3 % $ 104,004 ​ 60.8 % PESIC ​ ​ 99,408 ​ 39.7 % ​ 66,930 ​ 39.2 % Total Gross Written Premiums ​ $ 250,112 100.0 % $ 170,934 100.0 % ​ ​ 17 ​ 8. Income Taxes The Company calculates its tax provision in interim periods using its best estimate of the effective tax rate expected for the full year. During the three months ended March 31, 2023, the Company’s income tax rate of 23.5 % was higher than the statutory rate of 21 % due primarily to non-deductible executive compensation expense. During the three months ended March 31, 2022, the Company’s income tax rate of 23.8 % was higher than the statutory rate of 21 % also due primarily to non-deductible executive compensation expense. 9. Earnings Per Share The following table sets out earnings per share of common stock: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended March 31, ​ 2023 2022 ​ (in thousands, except shares and per share data) Net income ​ $ 17,313 ​ $ 14,537 Weighted average common shares outstanding: ​ ​ ​ ​ ​ ​ Basic ​ 24,969,703 ​ 25,362,179 Common Share equivalents ​ ​ 473,198 ​ ​ 537,111 Diluted ​ ​ 25,442,902 ​ ​ 25,899,290 ​ ​ ​ ​ ​ ​ ​ Earnings per share: ​ ​ ​ ​ ​ ​ Basic ​ $ 0.69 ​ $ 0.57 Diluted ​ $ 0.68 ​ $ 0.56 ​ Common share equivalents relate primarily 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. 10. Reinsurance 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. As of March 31, 2023, the Company’s catastrophe event retention is $ 12.5 million for all perils. As of March 31, 2023, the Company’s XOL reinsurance structure provides protection up to $ 2.15 billion for earthquake events, $ 1.01 billion for Hawaii hurricane events, and $ 250 million for continental U.S. hurricane events. In addition to reinsurance purchased from traditional reinsurers, the Company has 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. ​ 11. Credit Agreements ​ U.S. Bank Credit Agreement ​ In December 2021, the Company entered into a 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 18 ​ 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 the Company’s 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. In addition to interest on funds borrowed, the Company must pay an unused line fee of 0.25 % on any amounts not borrowed. ​ 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 include requirements to maintain a permissible debt to capital ratio, a minimum consolidated net worth, a minimum risk based capital ratio and minimum A.M. Best financial strength rating. The Credit Agreement also contains customary events of default, such as non-compliance with financial covenants. If an event of default occurs, any debt may be declared immediately due and payable. As of March 31, 2023, the Company was in compliance with all debt covenants. ​ As of March 31, 2023, the Company had $ 35.0 million of borrowings outstanding on the Credit Agreement at a rate of 6.55 %. Interest expense on the Credit Agreement was $ 0.6 million for the three months ended March 31, 2023. ​ 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 equal to 5 % 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 March 31, 2023, the Company had $ 36.4 million of borrowings outstanding through the FHLB at the overnight rate of 5.04 %. Interest expense on the FHLB line of credit was $ 0.4 million for the three months ended March 31, 2023. ​ ​ ​ ​ 19 ​