Palomar
Annual Report 2020
20 20: Palomar Year a t a Glan c e
Ta b le o f Co n t ents
•
•
2020 Market Cap: $2.26B1
1 2020: Palomar Year at a Glance
Launch of Palomar Excess and Surplus Insurance
2 Letter from Mac Armstrong
Company (“PESIC”)
• A.M. Best A- (Excellent) FSC group rating
• Nationwide scope through PESIC
6 Business Growth and Evolution
9 Continuous Innovation in
Underwriting Technology
• Admitted insurer in 32 states
11 A Growing Executive Team
13 Investing in Our Company
Culture and Corporate
Citizenship
17 Form 10-K
•
•
•
•
41% growth in gross written premiums
24%2 growth in earthquake premiums
87% growth in non-earthquake premiums
95% growth in commercial lines premiums
• Adjusted net income for 2020: $8.9 million
• Published inaugural Sustainability & Citizenship Report
• Notable executive hires including Chief Legal Officer,
Chief Strategy Officer, Chief Technology Officer
• Debuted new branding and website
•
Full 404 Sarbanes-Oxley compliance
1 As of December 31, 2020
2 Excludes the impact of unearned premiums assumed upon inception of two residential carrier
partnerships during 2019
1
© Palomar 2021 Letter from Mac Armstrong
“I am exceptionally proud of the Palomar workforce
and their steadfast commitment to problem-solving this year.
2020 saw substantial growth in our business, our executive
leadership team, and our Company’s community engagement.”
—Mac Armstrong, Chief Executive Officer and Chairman of the Board
Dear Shareholders,
It’s likely not news to anyone reading this report that 2020 was a difficult year for all Americans. For Palomar
Holdings, Inc. (“Palomar”), it was a year that further solidified our mission, vision, and values—and reminded
us of our common purpose to protect the families and businesses that turn to us for innovative insurance
protection against a range of disasters. From this perspective, our dynamic, entrepreneurial team provided
exceptional results and service to our policyholders.
While agility is in our corporate DNA, the last year has required us to be even more nimble than usual,
adjusting to significant changes in our day-to-day operations because of the pandemic. Even with this
unforeseen backdrop, Palomar continued to execute on its strategic plan of building a leading company in
the specialty insurance marketplace. The experience of 2020, our first full calendar year as a public company,
will enable us to face and conquer new challenges and expand our business in beneficial directions.
Before I discuss our year in review, I’d like to touch on the history and philosophy of our Company.
THE PALOMA R STORY
We founded Palomar in 2014 because we saw a unique opportunity to write profitable business in specialty
property insurance markets, including those that have historically been underserved by the industry. We are
continuously identifying market segments where we feel competitors are mispricing risk or offering limited
coverage. Our commercial and residential products are grounded in innovative technologies that use data to
assess risk and granularly price policies consistently and accurately, and not at a broad zonal level.
We believe our analytically-driven underwriting process coupled with the decades of specialty property
underwriting experience embedded within our management team combine to provide better oversight of our
exposure and, ultimately, a competitive advantage. As we launch new products, forge new partnerships, and
2
Palomar Annual Report 2020PLMR.com© Palomar 2021 acquire new lines of business, we look to apply certain attributes of existing products—illustratively granular
pricing, flexible coverage, distribution network, and systems—to reduce the cost of entry into the market as
well as the overall execution risk.
In April 2019, Palomar successfully priced its initial public offering (the “IPO”) and began trading on the
Nasdaq Global Select Market (“NASDAQ”: PLMR). The IPO was a crucial step in our evolution, allowing us to
access the equity markets to help execute our growth strategy. In 2020, we successfully transitioned from an
emerging growth private equity-backed company to a 404 compliant non-controlled publicly owned company.
A D A PT IVE SPECIALTY PR OD UC T S
202 0 IN REVIE W
For the year ended December 31, 2020, our Gross Written Premium (“GWP”) grew to $354 million, a 41%
increase from 2019. Our market-leading earthquake franchise grew 24% year-over-year, constituting 56%
of our book of business. Non-earthquake business grew 87% highlighted by our Inland Marine and Flood
products. As we have refined our product framework and underwriting process, we have made substantial
progress diversifying our business mix by product, distribution channel, and geography.
As our admitted Specialty Property products, with their flexible features, granular pricing, and bespoke
coverage, are often more akin to those in Excess and Surplus (“E&S”) line markets, we saw a major
opportunity this year to formally enter the E&S market. Palomar Excess and Surplus Insurance Company
(“PESIC”) launched in June 2020, received a Long-Term Issuer Credit Rating of A- from A.M. Best in July
2020, and began writing business in earnest in August 2020. PESIC affords us the opportunity to enter
segments of the property market, notably large national accounts, new geographies—we can write business
in all 50 states, and expand our franchise into the casualty market in a disciplined and prudent fashion.
3
Palomar Annual Report 2020PLMR.com© Palomar 2021 Other notable operational accomplishments over the course of the year include our acquisition of GeoVera’s
residential wind book in Hawaii, leveraging our technology to roll out multiple new partnerships with
insurance carriers, bringing the total to more than twenty, and the launch of our first casualty product, Real
Estate Agents Errors & Omissions. We believe these endeavors will not only diversify Palomar, but also
continue our trajectory of scalable, sustainable growth.
Our culture of agility will foster growth; at the same time our culture emphasizes, if not demands, continuous
improvement. As a result, certain lines of business were deemphasized at the end of the remarkable 2020
wind season that will improve the profitability of the business and the consistency of our operating results.
RES PONDING TO C OVID -1 9
The past year has put our agile corporate culture to the test, and we have successfully withstood and adapted
to every challenge. At the onset of the COVID-19 pandemic, we quickly moved to a remote work plan to
ensure the physical safety of our teammates. Palomar has both a cloud-based operating and technology
infrastructure and a specialization in disaster response that enables a seamless pivot to a remote work
environment. I am pleased to report that this aggressive approach has kept our team members safe and
healthy without compromising productivity in any way.
No definition of health, however, is complete without addressing mental health and wellness. The stress and
anxiety associated with the COVID-19 pandemic and the racial, civil, and social unrest in our nation exact
an unseen toll on the mental health of millions of Americans. At Palomar, we have created new channels
for team member communication, provided valuable tools, and performed mental health check-ins with all
our team members. We refer to Palomar as a family, and in tough times families look out for one another.
GROWING OU R T EA M A ND IM PA C T
Speaking of the Palomar family, 2020 was a year of spectacular growth for our team at every level of
the Company. We now have 125 full-time employees
nationwide, in cities including San Diego, Minneapolis,
and Charlotte. Over the past year, we announced multiple
hires for our executive team, all of whom are profiled
later in this report.
Additionally, our response to the COVID-19 pandemic
speaks to our business values more broadly—and 2020
DIVERSITY
saw many positive changes for our Company culture.
EQUALITY
INCLUSION
We believe that Palomar has a responsibility to not only
our shareholders but also the environment and our local
communities in which we work and live.
While the carbon and environmental footprint of Palomar
might be smaller than larger corporations with extensive
supply chains and manufacturing infrastructure, we
believe every company, regardless of size or industry,
COMMUNITY &
ENGAGEMENT
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Palomar Annual Report 2020PLMR.com© Palomar 2021 should commit to responsible environmental stewardship and sustainability. As part of our ethic of
partnership and our interest in economic and social justice, Palomar has also made financial commitments to
groups working to create a more just society, and to a minority-owned financial institution providing capital
to home and business owners in underserved communities. Finally, the events of last summer inspired the
formation of the Palomar Diversity, Inclusion, Community Engagement and Equality Council (“D.I.C.E.”).
D.I.C.E. is a team member-led effort that advises management on diversity and inclusion initiatives and
best practices in four areas of the Company: governance, recruitment, internal/external partnerships, and
community engagement.
You can read more about our commitment to strengthening communities through environmental
stewardship, racial equity, and economic justice in our inaugural Sustainability & Citizenship Report, which
we released in 2020. The report is available on our website, PLMR.com.
LOOKING AHE A D
Over a year has passed since we entered a global pandemic that upended our lives and businesses. Though
we now see a light at the end of the tunnel with the introduction of vaccines, we know that we still have a
long way to go before we can resume a more “normal” way of living. Our thoughts are, first and foremost,
with the millions of people affected by this virus.
Our Company and community is built to not only endure trying times, whether they involve hurricanes,
earthquakes, or pandemics, but to learn and ultimately thrive in them. Moreover, we will continue to fortify
the Palomar business model to weather uncertain times such as those that we face today and generate
exceptional risk adjusted returns. Our balance sheet is strong in that we are conservatively capitalized and
debt free; our COVID-19 exposure is minimal; our products are short tail in nature with very strong premium
retention; and our team is seamlessly adapting to a remote work environment offering continuity and value
to all constituents.
As I look to the year ahead, we see momentum across our existing lines of business and growth in the
new market segments we have entered in the past year. We will capitalize on these dynamics but will do
so in a prudent fashion through underwriting, risk transfer, and capital allocation, since profitable growth
supersedes growth at any cost. Regardless of external events, however, we will continue to work hard for
our policyholders, distribution partners, reinsurers, and shareholders.
Thank you for your support.
Best wishes,
Mac Armstrong
Chief Executive Officer and Chairman of the Board
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Palomar Annual Report 2020PLMR.com© Palomar 2021 Business Growth & Evolution
The past year has been one of tremendous growth and evolution for Palomar. We have grown our
presence in our existing primary markets, while expanding our geographic footprint through admitted
and surplus lines.
PALOMAR IS NOW NATIONWID E
In 2020, the Company launched Palomar Excess and Surplus Insurance Company, a subsidiary company
organized to provide Excess and Surplus insurance on a surplus lines basis. PESIC is a natural extension of
Palomar’s business, enabling us to extend the breadth and reach of our product suite. PESIC provides the
flexibility to enter a new program, enter new market segments in an expedient fashion and, in some cases,
enter lines of business or geographies the Company was previously precluded from as an admitted insurer.
PESIC also gives Palomar the opportunity to participate in national property layered and shared business for
Commercial Earthquake, Commercial All Risk, and Inland Marine business.
PA LOMA R GEOG RAP HI C FOOTPR IN T
PESIC complements the admitted business products offered by Palomar, and is a crucial element of the
company’s strategic plan in the following ways:
National Scope
• PESIC allows Palomar to underwrite risk across the United States, creating the company’s first truly
national footprint (pending approval in two states). This will allow us to extend our proven underwriting
expertise to customers in new locations. It will also enhance the ability of Palomar to successfully
compete for national accounts, many of whom require a 50-state solution from providers. Through this
geographic expansion, we expect to both increase the number of programs we support and create new
alignment with a greater variety of partners.
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Palomar Annual Report 2020PLMR.com© Palomar 2021 Increased Flexibility
• Palomar prides itself on its agility and flexibility in creating bespoke insurance products for our customers.
Through PESIC, we will hone these strengths through a new capability to respond immediately to change
events and market conditions. PESIC will extend the company’s proven underwriting expertise into the
E&S market within existing and new lines of business to optimize risk participation and profitability.
Enhanced Customer Service
• E&S offerings through PESIC serve certain risks that admitted products offered by Palomar cannot
currently satisfy. Through PESIC, we will be able to identify new opportunities and create products
tailored to the needs of both existing and future customers in the $43B U.S. E&S market. A dislocated
property market has contributed to an increasing rate environment, improving terms and conditions,
and a surge in submissions for E&S property insurers. This made 2020 the ideal year to launch PESIC,
and truly serve a nationwide customer base.
PESIC Highlights:
•
Launched in June 2020, began writing business in Q3 2020
• Received A- (Excellent) rating from A.M. Best in July 2020; FSC IX
•
2020 GWP of $29.5 million; 128% sequential growth in Q4
• Achievement of national recognition by surplus lines associations
• Primary lines of business: Commercial Earthquake, Commercial All Risk, and Inland Marine
• New lines of business announced in 2021: Builder’s Risk and Excess Liability
• Actively writing in-house business as well as through select program administrators
• Continued robust product pipeline
AD APT ING TO CH A NGIN G CO N DI TION S
We believe Palomar occupies a unique position in the market, given our ability to use data analytics to
accurately price risk at location level. Historically we targeted occupancy types including homeowners’
association, retail stores, hotels, motels, and office buildings. However, the 2020 hurricane season and its
unprecedented frequency presented our Company with multiple learning opportunities that not only changed
our underwriting appetite, but also proved our ability to quickly adapt to changing market conditions.
Palomar swiftly responded to the lessons learned by exiting the Commercial All Risk and Louisiana Specialty
Homeowners markets, moving admitted all-risk business to the E&S market, strengthening underwriting
guidelines, targeting layered and shared business off-coast, and reducing limits. These actions offer us
more flexibility in underwriting, pricing, and spread of risk, and ultimately superior risk adjusted returns and
catastrophe payback.
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Palomar Annual Report 2020PLMR.com© Palomar 2021 Palomar Annual Report 2020
PLMR.com
DEEPENING OU R C OMM IT MEN T TO E XISTI N G M A R K ETS
In November 2020, the Company announced an agreement between Palomar Specialty Insurance Company
and GeoVera Holdings, Inc. to acquire the renewal rights to GeoVera’s Hawaii Residential Hurricane policies.
The transaction will further deepen the company’s presence in Hawaii, a market that we have served since
2015. Palomar is currently in the process of reaching out to current GeoVera residential customers as their
annual policies renew and collaborating with GeoVera to ensure a smooth transition.
The Hawaii market is one we have been proud to serve for several years, and this transaction enables us to
expand and solidify our commitment to the community by providing flexible, affordable hurricane coverage
to homeowners across the state.
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© Palomar 2021 Continuous Innovation
in Underwriting Technology
Since our company’s inception, we’ve embraced the power of data analytics and invested in best-of-class
technology to help us offer competitive, granular pricing while adhering to strict underwriting guidelines. In
2020, we continued to innovate our tools and processes to keep us ahead of the competition. The Company’s
use of technology is a differentiator by providing a turnkey solution with distribution partners.
HI GHLY CUSTOM IZED POLIC IE S TH R OU G H D ATA A N A LY TICS
Our proprietary operating platform employs best practices derived from the Palomar management team’s
extensive prior underwriting experience, but is not burdened by outdated legacy technology and processes
used by older companies.
Our underwriting strategy can be summed up in four words: “Write what we know.” We avoid overly
complex exposures and have honed our ability to write business with limited attritional loss potential.
Thankfully, our proprietary granular data modeling tools use extensive geographic and actuarial data to
greatly expand “what we know” about a given property’s level of risk. This allows us to price policies by
geocode or ZIP code level. This is in contrast to our competitors using less granular analytics and more
manual underwriting processes, and only able to price policies within broad regions.
Washington Earthquake Pricing Model:
PALOMAR V. LEA DIN G C OM PE T ITOR
Our Residential Earthquake products assess risks of each individual address using a number of factors,
giving us 23,000 pricing zones versus a leading competitor’s three statewide in Washington.
Underwriting Strategy
• Broad appetite to underwrite
specialty risks within both admitted
and surplus lines markets
• Avoid exposures that are overly
complex
• Proprietary granular data modeling
drives analytical pricing
• Ability to adapt quickly to market
conditions
• Adherence to strict underwriting
guidelines
• Fee income generated by
underwriting on the behalf of other
insurance companies
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Palomar Annual Report 2020PLMR.com© Palomar 2021 California Flood Pricing Model:
PALOMAR V. NATIONA L FL OOD IN SU R A N CE PR OG RA M
Our Residential Flood products, offered under the Flood Guard brand in 11 states, primarily compete with
the National Flood Insurance Program (“NFIP”)’s residential flood policies. While the NFIP caps coverage at
$250,000 and prices risk using broadly defined zones, Palomar underwrites flood risk at the distinct address
level and offers property coverage up to $5 million.
PA LOMA R
N F IP
Photo Source: https://msc.fema.gov/portal/home
API FUNCTIONA LITY FOR PA RT N ER S
We use multiple Application Programming Interfaces (“APIs”) that enable us to integrate with many larger
carrier providers, and rapidly quote and bind policies. API development is done through our internal Palomar
Automated Submission System (“PASS”). PASS acts as our interface with retail agents and wholesale
brokers, and the conduit to our policy administration system integrating policy issuance, underwriting,
billing, and portfolio analytics. This platform also allows us to run detailed risk-management analytics for
internal and external constituents including distribution partners, carrier partners, and reinsurers.
GROWING IN -HOU SE CA PAB IL IT IES
Every year, we focus on bringing more technological capabilities in-house to provide a seamless experience
to both our clients and partners. In 2020, we expanded our PEGA insurance software capabilities to build
underwriting products and automate more business processesses.
Additionally, 2020 was a year that saw our technology team grow to the second-largest department in
the entire Company, with 24 full-time staff. The promotion of Britt Morries to Chief Operating Officer in
September also paved the way for our hire of Mark Brose as our Chief Technology Officer. Technology and
innovation will always be at the core of the Palomar strategic vision and plan.
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Palomar Annual Report 2020PLMR.com© Palomar 2021
A Growing Executive Team
As our book of business grows, Palomar continues to expand its executive leadership team. Here are this
year’s most prominent new hires and promotions.
B ILL BOLD
Chief Strategy Officer
M ARK B ROSE
Chief Technology Officer
In May 2020, Palomar announced the appointment
In January 2021, Palomar hired Mark Brose as Chief
of Bill Bold as Chief Strategy Officer. In this role, Mr.
Technology Officer. Mr. Brose brings over 25 years
Bold reports directly to CEO Mac Armstrong, and is
of creating and, more importantly, leading high-
responsible for strategy, external communications,
performing software engineering and technical
policy, legal, and regulatory affairs. He has spent
operation teams. In the role of CTO, he oversees
the majority of his 30-year career focusing on public
the adoption and development of technologies
policy and its relationships with government entities
that accelerate Palomar business development. He
and related organizations at the
international,
succeeds Britt Morries, now Chief Operating Officer
federal, state, and local levels.
at Palomar.
JON CH RIST IANS ON
Chief Underwriting Officer
AN GELA GRAN T
Chief Legal Officer
Jon Christianson assumed the role of Chief
In November 2020, we welcomed Chief Legal Officer
Underwriting Officer in May 2020, after serving as
Angela Grant to the Palomar executive team. Ms.
Chief Operating Officer. A member of the founding
Grant has over 30 years of operational and legal
team at Palomar, Mr. Christianson continues to
experience in the insurance industry. Her approach
guide the execution of our strategic plan. He brings
to ethics and compliance, as well as business
two decades of industry experience, including
development, makes her an excellent cultural fit at
extensive work in the areas of catastrophe risk and
Palomar. She oversees all in-house and corporate
multiple executive positions.
counsel duties, and plays a prominent role in
regulatory, compliance, and strategic matters.
11
Palomar Annual Report 2020PLMR.com© Palomar 2021 MIC H EL LE JOHN SON
Chief Talent & Diversity Officer
BR ITT M ORRIES
Chief Operating Officer
Palomar began 2021 with an announcement of
Britt Morries was promoted to Chief Operating
Michelle Johnson’s promotion to Chief Talent &
Officer of Palomar in September 2020. Mr. Morries
Diversity Officer. Ms. Johnson was previously
simultaneously served in his previous role of Chief
Senior Vice President of People & Talent, having
Technology Officer until the hire of Mark Brose as
served in this role since joining the Company in
his replacement. He has been a driver of change and
2019. She brings over 20 years of experience in HR
operational improvement since he joined Palomar
leadership positions, and will continue to cultivate
in 2017, building our technology team, platform,
the dynamic Palomar workforce, while expanding
and infrastructure from the ground up. He succeeds
the company’s diversity and inclusion practices.
Jon Christianson, now Chief Underwriting Officer at
Palomar.
JA S ON S EA RS
Senior Vice President and Head of Programs
In August 2020, Palomar hired Jason Sears to lead
the newly minted Palomar Excess and Surplus
Insurance Company. Since his arrival, Mr. Sears has
continuously worked to build new programs and
Managing General Agency (“MGA”) relationships
for the new E&S platform, diversifying the company’s
portfolio, while expanding our underwriting team.
He brings nearly three decades of experience,
including executive roles with multiple nationwide
insurance providers.
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Palomar Annual Report 2020PLMR.com© Palomar 2021 Investing in Our Company Culture
and Corporate Citizenship
We consider it part of the Palomar mission to support our team and insureds while strengthening our local
communities. While we acknowledge that this is a continuous process, with much more work to do, the
Company has made significant strides this year toward creating economic opportunities, responding to
climate change, and promoting social justice—all while rapidly adjusting to the challenges posed by the
COVID-19 pandemic. Additionally, we rolled out a new branding aesthetic, corporate website, and logo
that reinforces the company’s mission, vision, and values, while solidifying our commitment to agility,
innovation, and problem solving for our insureds and partners.
INAUGURAL SU STAIN A BILIT Y & C ITIZE N SH IP R EPO RT
In December 2020, we released the inaugural Palomar Sustainability & Citizenship
Sustainability & Citizenship Report
PLMR.com
Report, as part of our commitment to exceeding traditional Environmental,
Social Responsibility and Governance (“ESG”) standards. The report outlines
meaningful steps the Company has taken to address a range of issues, including
climate change and economic and social justice, while continuing to build a
compassionate workplace.
Along with outlining goals and achievements in these areas, the Sustainability
and Citizenship Report also details how the Company has addressed employee
mental health amid the COVID-19 pandemic and the social unrest that has
occurred across the country this year. The full report is available online at (https://
Sustainability &
Citizenship Report
DECEMBER 2020
plmr.com/palomar-publishes-inaugural-sustainability-citizenship-report/).
© Palomar 2020
1
RACIAL EQUITY IN ITIAT IV ES
Following the racial, civil, and social unrest that gripped America in the summer months, Palomar renewed
its commitment to building stronger communities through advancing racial equity. As CEO Mac Armstrong
stated, “We believe this is an important opportunity for all leaders to demonstrate our values in an effort to
heal the country and build a more just society.”
In 2020, these initiatives included:
• Partnership with Broadway Federal Bank
As part of our corporate ethic of partnership, we wanted to take
a meaningful role in creating economic and wealth creation
opportunities for historically marginalized populations, including Black home and business owners.
Palomar will allocate up to $10 million to open accounts with Broadway Federal Bank, a Los Angeles-
based financial institution founded in 1946 that is majority Black-owned.
• Donation to the Center for Policing Equity
In the wake of the social and political unrest following George Floyd’s
death, Palomar made a financial contribution to the Center for Policing
13
Palomar Annual Report 2020PLMR.com© Palomar 2021 Equity, the nation’s top non-profit addressing racial inequities in policing and law enforcement. We also
asked our team members to select a non-profit focusing on economic recovery and social justice, and
the Company made a small contribution to each of those organizations in their name.
•
Formation of the Palomar D.I.C.E. Committee
Palomar has created the D.I.C.E. Council, a team member-led effort that advises company leadership on
initiatives and best practices in this important area. The group’s charter statement, which emphasizes
commitment to these principles, has been adopted by the entire Company.
BRAND EVOLU T ION
Even before last year, we knew that we needed to
evolve our brand in order to convey our innovative,
forward-looking approach to specialty insurance.
The rebranding
initiative was undertaken
in
tandem with our significant expansion into new
markets, as well as the further articulation of our
mission, vision, and values. In early January 2021,
we debuted the new Palomar branding aesthetic,
corporate website, and logo, after many months’
work with our marketing agency partner.
The new PLMR.com is optimized for user experience, highlighting the Company’s unique offerings in both
commercial and residential specialty property insurance for agents, brokers, and policyholders alike. It aims
to showcase the Company’s fresh approach to covering homes and businesses against major catastrophes,
as well as its dedication to building strong, resilient communities. The upgraded navigation and functionality,
as well as a simplified layout, allow visitors to easily locate the information and services they need.
The website now features a smart help bot, available 24/7, 365 days a year, to give users the answers
they need right away to commonly asked questions. A new Policyholders page provides a central hub for
customer information, and an updated Resources page offers guidance on hurricane, earthquake, and flood
preparedness, as well as data on these events across the U.S. This streamlined approach even extended to
the site’s new URL, PLMR.com, which has replaced the previous URL, palomarspecialty.com.
Notably, the new PLMR.com showcases the Company’s thought leadership and dedication to corporate
social responsibility. In addition to its natural disaster information, the updated Resources page now houses
all announcements from Palomar, as well as thought leadership articles by Palomar voices on topics relevant
to the specialty insurance industry. The Company’s revamped social media pages are featured prominently,
to make it easier for visitors to engage with Palomar online.
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Palomar Annual Report 2020PLMR.com© Palomar 2021 BOARD OF
DIRECTORS
EXECUTIVE
MANAGEMENT
Mac Armstrong
Chief Executive Officer and
Chairman of the Board
Mac Armstrong
Chief Executive Officer and
Chairman of the Board
Richard H. Taketa
Lead Independent Director
Heath Fisher
President
Daryl Bradley
Director
Bill Bold
Chief Strategy Officer
Robert E. Dowdell
Director
Mark Brose
Chief Technology Officer
Catriona M. Fallon
Director
Jon Christianson
Chief Underwriting Officer
Martha Notaras
Director
Angela Grant
Chief Legal Officer
Michelle Johnson
Chief Talent & Diversity Officer
Jon Knutzen
Chief Risk Officer
Britt Morries
Chief Operating Officer
Elizabeth Seitz
Chief Accounting Officer
Chris Uchida
Chief Financial Officer
COMPANY
MANAGEMENT
Jake Armstrong
Senior Vice President,
Underwriting
Robert Beyerle
Senior Vice President,
Underwriting
George Dobrev
Senior Vice President,
Analytics
Jeffery Lim
Senior Vice President Legal,
Compliance and Claims
John MacDonald
Senior Vice President,
Marketing
Kyle Morgan
Senior Vice President,
Corporate Development &
Strategy
Jason Sears
Senior Vice President, Head
of Programs
CORPORATE
INFORMATION
Corporate
Headquarters
7979 Ivanhoe Avenue,
Suite 500
La Jolla, CA 92037
Transfer Agent
Computershare, Inc.
PO Box 505000
Louisville KY 40233-5000
Independent
Registered Public
Accounting Firm
Ernst & Young LLP
560 Mission Street, Suite 1600
San Francisco, CA 98105
INVESTOR
INFORMATION
Investor Relations
investors@plmr.com
619-771-1743
Media Contact
news@plmr.com
240-630-0316
BOARD COMMITTEES
Independence
Adult Committee
Compensation
Committee
Nominating
& Corporate
Governance
Committee
Environmental,
Social, & Corporate
Governance (ESG)
Committee
Mac Armstrong
N
Richard H. Taketa
Daryl Bradley
Robert E. Dowdell
Catriona M Fallon
Martha Notaras
I
I
I
I
I
cc
cc
$ cc
$ = Financial Expert CC = Chairperson = Member I = Independent N = Non-Independent
cc
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Palomar Annual Report 2020PLMR.com© Palomar 2021 Form 10-K
© Palomar 2021
17
Palomar Annual Report 2020PLMR.com UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 001-38873
Palomar Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
7979 Ivanhoe Avenue, Suite 500
La Jolla, California
(Address of principal executive offices)
83-3972551
(I.R.S. Employer Identification No.)
92037
(Zip Code)
(619) 567-5290
Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.0001 per share
Trading Symbol(s)
PLMR
Name of each exchange on which registered
Nasdaq Global Select Market
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-
T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer ☒
Non-accelerated filer ☐
Emerging growth company ☐
Accelerated filer ☐
Smaller reporting company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
Aggregate market value of shares of the registrant’s common stock held by non-affiliates as of June 30, 2020 was approximately $2,053,685,544.
Number of shares of the registrant’s common shares outstanding at March 5, 2021: 25,570,868
Portions of the registrant’s definitive proxy statement relating to its 2021 annual meeting of stockholders (the "2021 Proxy Statement") are incorporated by reference
into Part III of this Annual Report on Form 10-K. The 2021 Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end
of the fiscal year covered by this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE:
TABLE OF CONTENTS
PART I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A.
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B.
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4.
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Selected Consolidated Financial and Other Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . .
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
3
27
51
51
52
52
52
53
55
87
89
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . .
134
Item 9A.
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
134
Item 9B.
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
135
PART III
Item 10.
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
135
Item 11.
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
135
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . .
135
Item 13.
Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
135
Item 14.
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
135
PART IV
Item 15.
Exhibits and Financial Statement Schedules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
136
Item 16.
Form 10 K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
137
2
Item 1. Business
Who We Are
PART I
We are a rapidly growing and innovative insurer focused on providing specialty insurance to residential and
commercial customers. Our underwriting and analytical expertise allow us to concentrate on certain markets that we
believe are underserved by other insurance companies, such as the markets for earthquake, hurricane and flood
insurance. We use proprietary data analytics and a modern technology platform to offer our customers flexible products
with customized and granular pricing for both the admitted and excess and surplus lines (“E&S”) markets.
We provide admitted insurance products through our Oregon domiciled insurance company, Palomar Specialty
Insurance Company (“PSIC”), and non-admitted insurance products through our Arizona domiciled surplus lines
insurance company, Palomar Excess and Surplus Insurance Company (“PESIC”). We distribute our products through
multiple channels, including retail agents, program administrators, wholesale brokers, and partnerships with other
insurance companies. Our business strategy is supported by a comprehensive risk transfer program with reinsurance
coverage that we believe reduces earnings volatility and provides appropriate levels of protection from catastrophic
events. Our management team combines decades of insurance industry experience across specialty underwriting,
reinsurance, program administration, distribution, and analytics.
Founded in 2014, we have significantly grown our business and have generated attractive returns. We have
organically increased gross written premiums from $16.6 million in our first year of operations to $354.4 million for the
year ended December 31, 2020, which reflects a compound annual growth rate of approximately 66%. For the year
ended December 31, 2020, we experienced average monthly premium retention rates above 93% for our Residential
Earthquake and Hawaii Hurricane lines and approximately 87% overall across all lines of business, providing strong
visibility into future revenue.
In February 2014, PSIC was awarded an “A−” rating from A.M. Best Company (“A.M. Best”), a leading rating
agency for the insurance industry. An “A−” rating is categorized by A.M. Best as an excellent rating and indicates a
stable outlook. In April 2020, A.M. Best affirmed the “A−” rating for PSIC and affirmed our “A−” group rating for
Palomar Holdings, Inc. (“PHI”). In July 2020, PESIC was also awarded an “A−” rating by A.M. Best. These ratings
reflect A.M. Best’s opinion of our financial strength, operating performance, and ability to meet obligations to
policyholders and are not an evaluation directed towards the protection of investors.
We received regulatory approval for PESIC during the second quarter of 2020 and capitalized PESIC with
approximately $100 million in initial surplus. PESIC is domiciled in the State of Arizona and licensed in Arizona to
transact across all our existing lines of business. We believe that the underwriting acumen and market expertise we have
established in the admitted insurance market is also applicable to the non-admitted market (also known as the “surplus
lines” or “E&S” market), and that PESIC enables us to serve certain risks that our admitted products cannot currently
satisfy. We began writing E&S business on a national basis during the third quarter of 2020.
We believe that our market opportunity, distinctive products, and differentiated business model position us to
grow our business profitably.
Our Business
Our management team founded our company to address unmet needs that we perceived to exist in certain
specialty insurance markets. These markets have primarily been served by either large generalist insurance companies
and state-managed entities applying “one-size-fits-all” pricing and policy forms across broad geographies, or by surplus
lines companies. We sell both admitted and surplus lines products. For our admitted products, the rates and policy forms
have been approved by the insurance department of each state in which we sell our policies thus providing a further level
of security to policyholders through our backing from state guaranty funds. As a result, our admitted products typically
charge lower taxes and fees than alternatives sold by surplus lines carriers. We believe that for our personal lines
3
products, both our customers and distribution partners prefer the ease of use and security of admitted products with
flexible coverages. As a result of the third quarter 2020 launch of PESIC, our surplus lines insurance company, we also
have the ability to write surplus lines policies for risks that our admitted products cannot satisfy. As the E&S market
does not involve the same level of regulation and required approvals as the admitted market, PESIC enables us to react
quickly to changing market conditions.
We believe that we can generate superior risk-adjusted returns through underwriting which better reflects our
customers’ underlying risk by applying a more granular approach to pricing than what is typically offered by standard
carriers. We believe this market acceptance and return potential is evidenced by the fact that we have quickly and
profitably grown to be the 3rd largest earthquake insurer in the state of California and the 5th largest earthquake insurer in
the United States. We continue to experience growth and profitability across our other lines of business.
Our primary lines of business include: Residential Earthquake, Commercial Earthquake, Specialty
Homeowners, Commercial All Risk, Hawaii Hurricane, Inland Marine and Residential Flood. We seek to write a diverse
mix of business by loss exposure, customer type and geography in order to mitigate the potential impact of any single
catastrophe event, reduce our cost of reinsurance, and position us to capitalize on emerging market opportunities. The
following table outlines our primary lines of business and the market opportunities that they address:
Risk
Earthquake
Opportunity
Palomar Lines of Business
• Competitors’ products have limited options
and are priced in broad territorial zones.
• Earthquake is an optional coverage that
many property owners choose not to
purchase due to the high price and limited
coverage options.
• Our Residential and Commercial
Earthquake products are priced at a
granular level and offer flexible product
features.
• Our Earthquake products seek to expand
the earthquake insurance market by
attracting buyers who may not otherwise
acquire protection.
• Our Residential products are primarily
admitted and backed by state guaranty
funds, which we believe makes them easier
to sell.
• Our Specialty Homeowners products are
offered in markets that we identified
through detailed analysis of pricing
dynamics and historical loss ratios.
• Our Commercial All Risk products are
based on technical analysis (including a
proprietary risk pricing methodology)
developed to identify a subset of target
occupancies that we believe enables us to
select and price risk appropriately.
• Our Hawaii Hurricane products are
preferred by local retail agents due to our
“A−” rating and our easy to use
technology platform.
• Coverage is only provided for named
hurricanes, which eliminates our exposure
to attritional losses.
Wind
• We identified specific hurricane-exposed
geographic markets in the Southeastern
United States with limited homeowners
and commercial property insurance
product offerings due to the perceived risk
of windstorms.
Hawaii Hurricane
• There are a limited number of highly rated
insurers writing standalone residential
hurricane business in Hawaii.
• Coverage is required for homeowners that
carry a mortgage for their homes in the
state of Hawaii.
4
Inland Marine
• Many admitted inland marine carriers
• Our Inland Marine products utilize a
Residential Flood
avoid markets with perceived exposure to
windstorms and earthquakes.
technical risk pricing methodology that we
believe enables us to select and price risk
appropriately.
• We believe the current private market
flood product offerings are scarce and
outdated.
• Our primary flood competitor is the
National Flood Insurance Program
(“NFIP”), which caps dwelling coverage at
$250,000 and prices risks using broad
territorial zones.
• Our Residential Flood products offer
property coverage up to $5 million and
price risk at the specific geocode level.
• Our Residential Flood products also
provide broader coverage than the NFIP
and have a more streamlined approval
process with no required elevation
certificate or waiting period.
Since our founding, we have made substantial progress diversifying our business by product, market, and
geography. In 2014, our first year of operations, all of our premiums were related to earthquake insurance. For the year
ended December 31, 2020, 56% of our gross written premiums were related to earthquake insurance. For the same time
period, 60% of our gross written premiums were attributable to personal lines and 40% of gross written premiums were
attributable to commercial lines business. For the year ended December 31, 2020, non-earthquake related premiums
grew 87% while earthquake related premiums grew 18% versus the prior year.
Our principal insurance subsidiary, PSIC, is licensed in 32 states and we have the flexibility to write nationally
through our surplus lines subsidiary, PESIC. Currently, California and Texas represent our largest exposures with 49%
and 19% of our gross written premiums for the year ended December 31, 2020, respectively. Our business strategy is to
continue diversifying our book of business by extending our geographic reach and expanding our product portfolio. The
5
following charts illustrate our business mix by product, residential versus commercial markets, and geography for the
year ended December 31, 2020:
We employ a highly granular and analytical underwriting process to assess each insurance policy that we write,
and we ensure that the risk characteristics of business assumed through our channel partnerships are consistent with our
underwriting of direct business. Our systems enable us to underwrite all of our personal lines business automatically
within minutes by leveraging our proprietary modeling techniques to analyze data at the geocode or ZIP code level. For
example, our 2016 Residential Earthquake rate and policy form filing with the Washington State Office of the Insurance
Commissioner has over 20,000 distinct pricing zones that take into account nuanced regional differences in soil types,
liquefaction potential and distance from known faults. In contrast, we believe most competing earthquake insurance rate
filings in Washington are based on broad territorial pricing zones across the entire state. With our commercial products,
we balance automation with human expertise and controls to underwrite more complex risks. Because the data we
collect through our underwriting process is highly granular, we are able to utilize detailed portfolio analytics to actively
manage aggregation of policies and to ensure an appropriate dispersion of risks across our full portfolio.
6
Our Competitive Strengths
We believe that our competitive strengths include:
Focus on capturing market share and expanding underserved markets. We focus on specialty insurance
markets that we believe are underserved, and where we believe we can capture market share and expand the market to
new customers. In our target markets, there are few direct competitors who focus exclusively on specialty risks. With our
specialized knowledge of these risks and our customized products, pricing and risk management, we believe we can
better serve these markets than our competitors. Furthermore, we are able to expand our markets by creating products
that attract insureds who previously had not obtained coverage. Our focus and expertise have enabled us to rapidly
increase our market share; for example, we have grown to become the 3rd largest earthquake insurer in California and the
5th largest earthquake insurer in the United States. In markets with similar characteristics, we are experiencing growth
and profitability across our other lines of business. We believe that our focus on addressing the needs of underserved
specialty markets provides us with a competitive advantage.
Differentiated products built with the customer in mind. We have invested significant time and resources into
developing what we believe are innovative and unique product offerings to address customer needs within our target
markets. Our products generally offer our customers flexible features that are not typical of standard products in our
markets. By offering our customers the ability to choose deductibles and other a la carte coverage options, we believe we
have created products that are attractive both to those who have existing coverages with our competitors, and to those
who have not historically bought insurance in our target markets. Furthermore, since our admitted products have been
approved by individual state regulators and have been supported by proprietary pricing models since inception, we
believe that these products are not easily replaceable, particularly by existing carriers who would face the burden of
gathering data, building new models and revising existing rates and policy forms with regulators. Finally, our policy
forms and ratings methodology provide us with significant flexibility to manage coverage options and pricing. For the
year ended December 31, 2020, we experienced average monthly premium retention rates above 93% for our Residential
Earthquake and Hawaii Hurricane lines and 87% overall across all lines of business, providing strong visibility into
future revenue.
Product offerings in both the admitted and surplus lines markets. We believe that our core capabilities can be
applied to both the admitted as well as the E&S insurance markets. Admitted products are backed by state guarantee
funds and, as a result, are subject to more regulation, as admitted insurance companies must receive approval for rates
and policy forms from individual state regulators. Our admitted insurance company subsidiary, PSIC, is licensed to write
business in 32 states. We primarily serve the personal lines insurance market through the sale of admitted insurance
products as those risks tend to be more homogenous in nature and retail agents prefer the sale of admitted products. For
certain risks which our admitted products cannot satisfy, we offer E&S insurance products through our surplus lines
insurance company subsidiary, PESIC, which is licensed to do business on a national basis. We primarily serve the
commercial lines insurance market through the sale of E&S insurance products as those markets are better suited to the
flexibility of rate and form available to E&S carriers. Having surplus lines offerings allows us to react quickly to
changing market conditions and to accelerate the expansion of our business nationally as we do not have to go through
the process of receiving required approvals from individual state regulators.
Analytically driven, disciplined and scalable underwriting. Our underwriting approach combines decades of
specialized underwriting experience of our management team with sophisticated, customized modeling tools we have
developed that utilize extensive geospatial and actuarial data across all of our lines of business. Our proprietary models
enable automated pricing of risks at the geocode or ZIP code level, in contrast to our competitors who we believe use
less granular analytics and more manual underwriting processes. For example, our Residential Flood products
underwrite risks at the distinct address level compared to the broader pricing zones of the NFIP product offerings. Our
analytical pricing framework is embedded in all facets of our business and is incorporated into our filings, pricing,
underwriting and risk management. We believe that our analytically-driven underwriting approach has been the
foundation of our ability to generate attractive risk-adjusted underwriting margins.
Multi-channel distribution model. Our open architecture distribution framework allows us to attract and
underwrite business from multiple channels. We work with a wide variety of retail agents, program administrators, and
7
wholesale brokers. We serve over twenty insurance companies as a specialty partner either by issuing companion
policies or providing reinsurance for their in-force risks that fit our strict underwriting parameters. The breadth and
flexibility of our distribution model allows us to generate premium from many different parts of the insurance ecosystem
and to rapidly take advantage of changing market conditions.
Sophisticated and conservative risk transfer program. We manage our exposure to catastrophe events through
several risk mitigation strategies, including the purchase of reinsurance. We believe that our reinsurance program
provides appropriate levels of protection and improves visibility into our earnings. We believe our current reinsurance
program provides coverage well in excess of our theoretical losses from any recorded historical event. We regularly
model our hypothetical losses from historically significant catastrophes, including the 1906 San Francisco and 1994
Northridge earthquakes. Under our current reinsurance program, should an event equivalent to either of these two events
recur, our hypothetical net loss would be capped at $11 million, equivalent to approximately 3.0% of our total
stockholders’ equity as of December 31, 2020, inclusive of any amounts retained through our Bermuda reinsurance
subsidiary. While we select reinsurers whom we believe to have acceptable credit and a minimum A.M. Best rating of
“A−”, if our reinsurers are unable to pay the claims for which they are responsible, we ultimately retain primary liability
to our policyholders. In addition, at each reinsurance treaty renewal, we consider any plans to change the underlying
insurance coverage we offer, our current capital, our risk appetite, and the cost and availability of reinsurance coverage,
which may vary from time to time. In addition to the magnitude of coverage, we believe our reinsurance program
provides us with significant protection and stability during potential periods of multiple severe catastrophes or market
volatility due to our use of aggregate reinsurance protection as well as features such as prepaid reinstatements and
expanded coverage windows for catastrophe events and our diverse panel of more than 90 highly rated reinsurers and
capital markets investors. Given that our reinsurance purchases are driven primarily by our peak zone earthquake
exposure, as we scale and diversify our book of business into uncorrelated geographies and perils, we have been able to
secure multi-peril coverage that reduces the cost of reinsurance per dollar of risk.
Emphasis on the use of technology and analytics across our business. As a recently formed insurance
company, we have built a proprietary operating platform that employs best practices derived from our management
team’s extensive prior experience. Our technology platform is not burdened by outdated legacy technology and process
which may be utilized by older insurance companies. In building our platform, we have emphasized automated processes
that use granular data and analytics consistently across all aspects of our business. Our internally developed Palomar
Automated Submission System (“PASS”) acts as our interface with retail agents and wholesale brokers. PASS serves as
the conduit to our policy administration system that integrates policy issuance, underwriting, billing and portfolio
analytics. Our platform enables us to rapidly quote and bind policies via automated processing, and also to run detailed
risk-management analytics for internal and external constituents including distribution partners, carrier partners and
reinsurers. We believe that this real-time access to data and analytics provides us with an advantage in distributing our
products, managing our risk, and purchasing reinsurance.
Entrepreneurial and highly experienced management team and board. Our management team is highly
qualified, with an average of more than twenty years of relevant experience in insurance, reinsurance and capital
markets. We are led by our Chairman and Chief Executive Officer, Mac Armstrong, who prior to founding Palomar was
President of Arrowhead General Insurance Agency (“Arrowhead”). Many of our management team members such as
Mr. Armstrong, Heath Fisher, our President and Co-Founder, and Chris Uchida, our Chief Financial Officer, have a long
history of working together. For example, while at Arrowhead, Mac Armstrong worked closely with Chris Uchida, who
served as Executive Vice President and Chief Accounting Officer of Arrowhead. As owners of approximately 4.6% of
our outstanding common stock as of December 31, 2020, we believe our management team has closely aligned interests
with our stockholders. Additionally, our Board of Directors is comprised of accomplished industry veterans who bring
decades of experience from their prior roles working in insurance and financial services companies.
8
Our Strategy
We believe that our approach to our business will allow us to achieve our goals of both growing our business
and generating attractive returns. Our strategy involves:
Expand our presence in existing markets. We primarily compete in lines of business and states that
represented over $55 billion in total written premiums during 2019. By comparison, we generated $354.4 million of
gross written premiums for the year ended December 31, 2020. We believe that our differentiated product offerings will
enable us to continue growing in our existing markets by (i) gaining market share from competitors who have less
flexible product offerings; (ii) continuing to expand our strong distribution network; and (iii) increasing the total
addressable market by providing attractive products to customers who previously elected not to purchase coverage.
Extend our geographic reach and product portfolio. Our admitted insurance company, PSIC, is licensed in 32
states that represented over $43 billion in total written premiums in our primary lines of business during 2019, while our
E&S company competes in lines of business and states that represented an additional $12 billion in total E&S written
premiums during 2019. We continue to evaluate additional geographic markets and lines of business where we believe
we can generate attractive risk-adjusted returns by harnessing our core competencies.
Maintain our distinctive combination of profitability and growth. Our analytically informed risk selection and
disciplined underwriting guidelines enable us to identify segments of the market that are both underserved and
mispriced. As a result, we are able to generate an attractive underwriting profit through expanding the addressable
market and winning market share with our distinctive products. For the years ended December 31, 2020 and 2019, our
adjusted return on equity was 3.0% and 24.1%, respectively, with our results for the most recent year reflecting
profitability in spite of losses sustained by several severe weather events. Additionally, we will look to achieve industry
leading combined ratios to ensure we are achieving attractive risk-adjusted returns. As we seek premium growth, we
intend to remain disciplined in our pricing, underwriting, and risk management processes, including closely managing
our net probable maximum loss (“PML”), average annual loss (“AAL”), and spread of risk. We will remain focused on
lines of business with attractive pricing dynamics and a favorable risk / return profile, and we will not participate in
markets where we believe our business model cannot add incremental value.
Maintain a diversified book of business. We currently write a book comprised primarily of specialty insurance
that is diversified by underlying loss exposure, customer type and geography. Our major product lines and exposures are
uncorrelated, such that events contributing to a loss in one line of business are unlikely to generate material losses in our
other lines of business. The diversification of our book of business improves our risk-adjusted returns, reduces our
reinsurance cost per dollar of premium, insulates us from swings in any single insurance or reinsurance market, and
allows us to capitalize on market shifts opportunistically. As we grow, we intend to maintain a diversified book of
business to continue to capitalize on these advantages.
Pursue new opportunities via our surplus lines company. Our surplus lines company, PESIC, began writing
business in the third quarter of 2020. Our current strategy with our surplus lines company primarily involves addressing
segments of our core markets, such as commercial lines insurance, where the flexibility of premium rates and forms is
better suited to the market. Our surplus lines company is licensed to write on a national basis and we intend to use it to
grow our national footprint including through partnerships with program administrators that target national account
business.
Leverage our underwriting, analytics, and risk transfer acumen to generate fee income. We generate fee
income by underwriting on behalf of other insurance companies and through the use of quota share reinsurance treaties
whereby third party reinsurers pay us a ceding commission in order to access attractive pools of risk. Our multi-channel
distribution model produces attractive business that we aim to translate into a balanced mix of underwriting and fee
income. As a result, we have an increasing number of partnerships where we write policies on behalf of other insurance
and reinsurance companies who pay us a ceding commission to access the business. We believe these partnerships are an
important validation of the intellectual property and expertise we have developed, and that this strategy enables us to
scale our business more quickly and profitably and provides a growing and valuable fee stream to complement our
profitable underwriting operations.
9
Continue to purchase conservative reinsurance coverage, while optimizing for risk-adjusted returns. We
believe that protecting our earnings and balance sheet through the use of reinsurance is critical to our business and
supports our ability to meet obligations to our policyholders and other constituents, and generate strong returns for our
stockholders. We plan to maintain a conservative, robust reinsurance program to help ensure that we are adequately
protected against potential severe or frequent catastrophe losses. Our goal is to protect our earnings by constructing a
reinsurance program that mitigates losses and ensures profitability in spite of potential catastrophic activity. As we
grow, we expect that we will benefit from increased scale and diversification of risk in our business, and we plan to
optimize our reinsurance program continuously by adjusting terms, structure, pricing, and participants in an effort to
maximize our risk-adjusted returns.
Strengthen and harness our strong and growing capital base. The markets we currently serve are capital
intensive, and as a recently established entrant, we compete with larger, more longstanding insurers. Nevertheless, we
were awarded an “A−” (Excellent) (Outlook Stable) rating from A.M. Best at our formation, which we believe has been
a source of competitive differentiation in certain markets where we operate. As we continue to demonstrate profitable
operations and generate additional equity, we believe we will have access to more distribution sources, particularly in
commercial lines insurance, that may have been reluctant to refer business to us earlier in our operating history.
Continue to invest in proprietary technology assets that deepen our competitive advantage. We believe that
the success of our business is centered upon our relentless commitment to apply technology to improve our business. For
example, we have dedicated software developers focused on building application programming interfaces (“APIs”),
which enable seamless integration into the point of sale systems of our partner carriers and distribution partners. This
integration increases the ease of use for our partners, embeds us within their systems, and facilitates real-time sharing of
information between our distribution, underwriting, and risk management functions. We will continue to evaluate and
invest in proprietary and third-party technology assets, which deepen our competitive advantage, strengthen our
operations and improve our returns.
History
We are an insurance holding company that was originally incorporated under the laws of the Cayman Islands in
October 2013. In March 2019, we (i) implemented a domestication pursuant to Section 388 of the Delaware General
Corporation Law and became a Delaware corporation. We were initially capitalized by Genstar capital (“Genstar”), a
private equity firm with a focus on the financial services sector, as well as our management team. After our April 2019
initial public offering (“IPO”), Genstar gradually exited its ownership interest in us. As of June 30 2020, Genstar no
longer held any ownership interest in us.
Our primary operating subsidiary, PSIC, is an insurance company domiciled in the state of Oregon and is an
admitted insurer licensed to write business in 32 states as of December 31, 2020. PSIC was formed in February 2014. In
August 2014, we incorporated Palomar Specialty Reinsurance Company Bermuda Ltd.(“PSRE”), a Bermuda-based
reinsurance subsidiary that provides reinsurance support exclusively to PSIC. In August 2015, we incorporated Prospect
General Insurance Agency, Inc. (“PGIA”), formed to underwrite specialty insurance products on behalf of third-party
insurance companies. During 2020, we received regulatory approval for and capitalized PESIC with approximately $100
million in initial surplus. PESIC is domiciled in the State of Arizona and licensed in Arizona to write surplus lines
business on a nationwide basis across all our existing lines of business.
10
Our Structure
Our entities are structured are follows:
Palomar Holdings, Inc.
Palomar Insurance Holdings, Inc.
Palomar Specialty Reinsurance Company
B ermuda LTD
Palomar Specialty Insurance Company
Palomar Excess and Surplus Insurance Company
Palomar Insurance Agency, Inc.
Our Products
We provide personal and commercial specialty insurance products in our target markets. With the goal of
giving customers better options, we designed an analytical framework to create flexible, admitted products with
innovative coverages and pricing that we believe better reflects the underlying risk. Using this framework, we initially
introduced residential and commercial earthquake products in 2014 and have subsequently expanded our product
portfolio to cover multiple specialty risks in several regions of the United States. We have grown our business by
entering markets that demonstrated one or more of the following attributes: (i) have loss characteristics, including
limited attritional losses, similar to our initial earthquake product, (ii) can benefit from our technology platform, data
analytics and customer centric products, and/or (iii) allow us to leverage our existing underwriting talent, reinsurance
expertise and/or distribution relationships.
Our primary insurance products include Residential and Commercial Earthquake, Commercial All Risk,
Specialty Homeowners, Inland Marine, Hawaii Hurricane and Residential Flood. We aim to develop a diversified
portfolio with exposure spread across geographic regions with limited correlation. Our largest exposure remains in the
state of California and we have expanded to address regions including the New Madrid Seismic zone in the Midwestern
United States, wind-exposed markets in the southeastern United States and in the state of Hawaii. We tailor our risk
participation to optimize our returns depending on the conditions of specific markets. In total, we are licensed as an
admitted insurer in 32 total states.
11
The following table shows our gross written premium by state for the years ended December 31, 2020, 2019
and 2018:
State
2020
Year Ended December 31,
2019
($ in thousands)
2018
Amount
% of
GWP
Amount
% of
GWP
Amount
% of
GWP
California . . . . . . . . . . . . $
Texas . . . . . . . . . . . . . . . .
Hawaii . . . . . . . . . . . . . . .
Washington . . . . . . . . . . .
North Carolina . . . . . . . .
Oregon . . . . . . . . . . . . . . .
South Carolina . . . . . . . .
Mississippi . . . . . . . . . . .
All other states . . . . . . . .
Total Gross Written
172,765
67,974
16,398
14,328
11,143
10,038
9,196
7,461
45,057
48.8 % $
19.2 %
4.6 %
4.0 %
3.1 %
2.8 %
2.6 %
2.1 %
12.8 %
141,743
44,087
11,851
9,607
3,894
7,396
6,185
4,769
22,429
56.3 % $
17.5 %
4.7 %
3.8 %
1.5 %
2.9 %
2.5 %
1.9 %
8.9 %
82,119
32,568
8,128
5,658
1,568
5,286
3,208
2,585
13,771
53.0 %
21.0 %
5.2 %
3.7 %
1.0 %
3.4 %
2.1 %
1.7 %
8.9 %
Premiums . . . . . . . . . . . $
354,360
100.0 % $
251,961
100.0 % $
154,891
100.0 %
We believe that maintaining a balanced book of personal and commercial lines business is beneficial. For
example, while our Residential Earthquake products experience higher premium retention rates, our Commercial
Earthquake products provide more flexibility on pricing, which enables us to increase premium rates more quickly when
market conditions accommodate price increases. For the year ended December 31, 2020, 60% of our gross written
premium consisted of personal lines business and 40% of gross written premium consisted of commercial lines business,
compared to 71% personal lines business and 29% commercial lines business during the year ended December 31, 2019.
The following table shows gross written premium (“GWP”) by product line for the years ended December 31, 2020,
2019 and 2018:
2020
Year Ended December 31,
2019
($ in thousands)
2018
Amount
% of
GWP
Amount
% of
GWP
Amount
% of
GWP
Product
Residential Earthquake . . . . . . . $ 140,934
58,890
Commercial Earthquake. . . . . . .
53,933
Commercial All Risk . . . . . . . . .
49,849
Specialty Homeowners . . . . . . .
15,423
Inland Marine . . . . . . . . . . . . . . .
13,824
Hawaii Hurricane . . . . . . . . . . . .
8,176
Residential Flood . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . .
13,331
Total Gross Written Premiums . $ 354,360
39.8 % $ 130,473
38,741
16.6 %
30,358
15.2 %
32,788
14.1 %
2,465
4.3 %
10,764
3.9
5,216
2.3 %
1,156
3.8 %
100.0 % $ 251,961
51.8 % $
15.4 %
12.0 %
13.0 %
1.0 %
4.3
2.1 %
0.4 %
81,679
20,946
14,338
27,680
—
8,128
2,120
—
100.0 % $ 154,891
52.7 %
13.5 %
9.3 %
17.9 %
— %
5.2
1.4 %
— %
100.0 %
Premium Retention Rates
Our products demonstrate strong renewal rate trends, which we believe are an indication of the distinctive value
we provide to insureds and which provide visibility into future earned premium.
12
The following table shows our renewal retention by product for the years ended December 31, 2020 and 2019:
Average monthly premium retention by product:
Residential Earthquake . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Earthquake . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial All Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Homeowners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hawaii Hurricane . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential Flood . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential Earthquake
Year Ended
December 31,
2020
2019
93 %
83 %
87 %
79 %
97 %
89 %
94 %
85 %
89 %
74 %
97 %
89 %
We offer Residential Earthquake products in 17 states on an admitted basis and nationwide on an E&S basis.
Our products insure against damage to the home, contents and any appurtenant structures, and reimburse for temporary
housing costs in the event of an earthquake. We design our products to provide agents and policyholders with coverage
flexibility, including a full range of deductible options and the ability to tailor limits to a customer’s individual
preferences. We aim to sell our products to buyers who may not have previously purchased earthquake coverage. We
believe that our pricing model is a distinctive feature of our product offering. Using data from industry-leading
catastrophe models we are able to evaluate and accurately price exposures at the ZIP code or geocode level based on
characteristics particular to the risk. For example, we believe competing earthquake insurance products in California are
commonly based on broad territorial pricing zones that do not take into account regional differences in soil types,
liquefaction potential and include little price differentiation between risks with varying proximity to known faults. Our
ability to divide geographies into highly resolute grids, or ZIP codes, and price according to more detailed information
relating to the exposure allows us to obtain a more appropriate rate for the risk, and often allows us to offer rate relief,
particularly in low risk areas that historically have low earthquake insurance penetration. We write policy limits up to
$15 million; all policies involve automated underwriting and lower limit policies are issued via automated processing.
Commercial Earthquake
We offer Commercial Earthquake products, commonly known as “Difference in Conditions” policies, in 16
states on both an admitted and E&S basis. Our Commercial Earthquake products focus on providing coverage for benign
commercial risks where the business interruption exposure is typically less than 15% of the total insured value (“TIV”).
We attempt to avoid risks where the contents are hard to value or represent a disproportionate percentage of the value.
We write policy limits up to $25 million with the ability to serve larger accounts through the use of facultative
reinsurance.
Commercial All Risk
We offer Commercial All Risk insurance on a surplus lines basis nationwide and, prior to the fourth quarter of
2020, on an admitted basis in Alabama, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, and Texas. The
All Risk policy covers the perils of fire and wind, with wind including hurricane, tornado, and hail storm. For additional
premium, the policy can include the peril of earthquake. We believe we occupy a unique position in the market given our
ability to generate location level pricing informed by windstorm exposure. We target occupancy types including
homeowner’s associations, retail stores, hotels, motels and office buildings.
Specialty Homeowners
Our Specialty Homeowners product provides admitted insurance coverage to homeowners in wind-exposed
coastal regions. We sell homeowners coverage through our distribution partners in certain counties in Alabama,
Louisiana, Mississippi, New Jersey, North Carolina, South Carolina, Rhode Island, and Texas. We believe that the
homeowners insurance market on a national level is highly competitive but that there are specific geographic markets
13
with attractive return potential that many insurance companies avoid due to windstorm exposure. For example, our
Texas program focuses on counties that face lower frequency windstorm exposure rather than higher frequency exposure
to tornado and hail perils experienced by inland counties. Similarly, our programs in Alabama, Mississippi and North
Carolina target newer construction in areas no closer than a quarter mile from the coast, which we believe optimizes the
catastrophe premium we are able to price into the risk while minimizing the relative exposure.
Hawaii Hurricane
We offer admitted residential property coverage for named hurricanes in the state of Hawaii. This is a required
coverage for homeowners that carry a mortgage on their properties in the state. Similar to our residential earthquake
product, insureds have the ability to tailor limits to their preferences. The policies we write only trigger coverage if wind
damage occurs while the insured risk is in a county that is under a hurricane watch or warning as deemed by the Pacific
division of the National Weather Service. Coverage only remains in effect for a period of 72 hours after the hurricane
watch or warning expires. Therefore, there is no exposure to attritional losses with this product. We believe our products
are preferred by local retail agents due to our “A−” (Excellent) (Outlook Stable) rating by A.M. Best. We write policy
limits up to $15 million; all policies involve automated underwriting and policies under $5 million in limit are issued via
automated processing.
Inland Marine
Our Inland Marine division currently offers Builder’s Risk, Contractor’s Equipment, Motor Truck Cargo, and
Miscellaneous Floaters coverage on an admitted and E&S basis. Our Builder’s Risk policy covers buildings under
construction against the perils of fire and wind, with wind including hurricane, tornado, and hail storm. For additional
premium the policy can include the peril of earthquake. We write policy limits up to $10 million for various construction
and occupancy types. Our Contractor’s Equipment policy covers owned, rented, and employee tools on a single policy
and offers policy limits up to $500 thousand for any single piece of equipment. Our Motor Truck Cargo policy is
designed for intermediate and long-haul carriers with coverage extending to full and half loads as well as coverage for
property at terminals in transit. We write policy limits up to $500 thousand for any single loss. Our Miscellaneous
Floaters policy covers personal property and equipment that can be either stationary or in transit but excludes
contractor’s equipment. We write policy limits up to $500 thousand for any single item.
Residential Flood
We provide admitted residential flood products under the Flood Guard brand in 11 states across the United
States. Our products primarily compete against those of the NFIP, which caps dwelling coverage at $250,000 and prices
risk using broadly defined zones. We offer higher limits than the NFIP and price risk at the specific geocode level having
developed detailed granular models of all current markets in partnership with a leading national catastrophe modeling
agency. Furthermore, due to our proprietary pricing grid models we eliminate the need for a waiting period or an
elevation certificate prior to binding and issuance of policies. We write policy limits up to $5 million, all of which
involve automated underwriting and are issued via automated processing.
Other
We continue to develop product offerings for lines of business that harness our core competencies and where
we believe we can generate attractive risk-adjusted returns. Additional product offerings we have developed include:
Assumed Reinsurance, Commercial Flood, Real Estate Errors & Omissions and Real Estate Investors. We believe these
product offerings share the same attributes as our existing markets and offer a similar opportunity to generate profitable
underwriting revenue.
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Marketing and Distribution
We market and distribute our products through a multi-channel, open architecture distribution model which
includes retail agents, wholesale brokers, program administrators and carrier partnerships. We have well-defined
underwriting criteria and have designed our distribution model to access our targeted risks through what we believe to be
the most efficient channels.
Retail Agents: We primarily distribute our personal lines products through retail agents. We believe that retail
agents are an important pillar of our distribution model due to the high retention rates and rate stability that we are able
to achieve with policies sold through this channel. We believe this outcome is a result of the distinctive offering we
provide agents with flexible products that are preferred by end consumers and are easier for agents to sell. In many
cases, we provide agents with direct access to our policy management system that enables them to quote, bind and issue
policies in a matter of minutes. We believe this ease of use and quick speed-to-quote serves as a competitive advantage.
Wholesale Brokers: We distribute our commercial lines products primarily through wholesale brokers.
Wholesale brokers are an important channel for commercial property insurance products as they control much of the
premium in these segments. We select wholesale brokers based on our management’s review of their experience,
knowledge and business plan. We target brokers with the experience to serve our target markets and with business plans
consistent with our strategy and underwriting objectives. Brokers must demonstrate an ability to produce both the quality
and quantity of business that we seek. To assist with this goal, our underwriters regularly visit with brokers to market
and discuss the products we offer. We terminate brokers who are unable to produce consistently profitable business or
who produce unacceptably low volumes of business.
Program Administrators: Within select lines of business, we partner with program administrators in order to
harness the efficiency and scale of their existing marketing and distribution infrastructures. Generally, all policies bound
by our program administrators are pre-underwritten using our pricing models which have been programmed into the
policy administration system of each partner. For business that is not automatically underwritten, we set strict
underwriting guidelines to which our partners must adhere. We audit the underwriting, systems, financial strength and
reporting capabilities of all of our program administrators on a regular basis. Most notably, for our Value Select
Residential Earthquake products, we have a mutually exclusive program administrator agreement with Arrowhead for
the states of California, Oregon and Washington. Under this agreement, which accounts for $110.1 million of our gross
written premiums for the year ended December 31, 2020, we conduct product development and underwriting while our
program administrator manages a base of over 1,000 retail agents who individually bind policies through PASS or an
internal system which automatically applies our pricing and underwriting guidelines to new policies, and is subjected to
our disciplined risk management. The fees payable by us to Arrowhead under the agreement are based upon our
premiums written in each state. The agreement remains in effect until terminated by either party upon 180 days’ prior
written notice to the other party for cause. In addition, our Specialty Homeowner products are sold through program
administrators with local expertise in their respective markets and that participate in the economics of produced business
through risk sharing agreements, which we believe strengthens the alignment of interests toward generating underwriting
profit. Finally, we have partnered with several program administrators that focus on specific areas of the E&S market as
we pursue the growth of PESIC, our surplus lines insurance carrier.
Carrier Partnerships: Given our unique specialty focus and underwriting expertise, we are a carrier of choice
for other insurance companies seeking a specialty insurance partner in order to transfer certain classes of risk, satisfy
insurance department mandatory offer requirements or provide a more comprehensive risk solution to their customers.
As of December 31, 2020, we had partnerships with over twenty insurance companies. Several carriers invite us to
provide a companion offer for residential earthquake insurance alongside their homeowners’ insurance policy offerings.
Other carriers will direct their captive agents to our online system so that they may quote, bind and issue policies
directly. Finally, we offer assumed reinsurance arrangements to carriers whereby we assume up to 100% of the
underlying risk for specific classes of business, typically Residential Earthquake, in exchange for a ceding commission.
Our assumed reinsurance treaties represent risks that we would ordinarily underwrite on a primary basis and that fit well
within our risk tolerance, however, the cedant either (i) has already written these policies or (ii) the cedant wants to issue
the policies on their paper but not retain any of the risk and as such prefers an assumed reinsurance partnership. We
believe that our carrier partnerships with sophisticated industry participants speak to the value and quality of our
15
products, service offering and systems. Furthermore, carrier partnerships are a highly scalable distribution model as they
enable us to tap into a sizable customer base and to quickly build scale in new markets. With all partnerships, we review
pricing at the policy level to ensure that the risk characteristics of both new and assumed business are consistent with our
underwriting of direct business. We intend to pursue additional carrier partnerships in the future including those that
involve PESIC, our E&S company.
Underwriting
Our underwriting team combines comprehensive data analysis with experienced underwriting techniques to
build a profitable, stable and diversified book of business. Our underwriting process involves securing an adequate level
of underwriting information, classifying and evaluating each individual risk exposure, assessing the impact of the risk
upon our existing portfolio, and pricing the risk accordingly. Our overarching underwriting philosophy is ‘to write what
we know’; therefore, our underwriters tend to avoid exposures that are overly complex or cannot easily be recognized
from a photograph. This straightforward approach allows our underwriters to focus on business they understand and can
process quickly without sacrificing diligence and attention to detail.
We develop our underwriting guidelines and pricing models through traditional underwriting metrics,
management experience, and advanced data analytics that allow us to assess information about construction type,
contingent exposure, location, occupancy type and size and granularly rate exposure at the ZIP code or geocode level.
We access data for our pricing models provided from multiple leading risk modeling vendors, and use our information
from proprietary extensions of catastrophe models to assist in evaluating soil types, proximity to faults, and loss
estimates in the form of modeled marginal impact, AAL and PML. This analytical underwriting framework enables us to
offer rate relief in low risk areas and to accurately price locations that are at higher risk.
Personal lines policies are issued via automated underwriting and account for approximately 60% of our gross
written premium for the year ended December 31, 2020. Using our predefined underwriting guidelines, distribution
partners can rapidly quote and bind accounts lower in limit via automated processing. We believe that automated
underwriting of personal lines policies improves efficiency, reduces errors, and enhances the customer experience.
Since commercial lines risks involve additional complexity and do not lend themselves to highly automated
underwriting, we use our customized operating platform to evaluate individual risk and to quote business efficiently. We
regularly audit data gathered during our underwriting process to determine the accuracy of rating information and risk
pricing. For example, we often inspect properties as part of our underwriting process to discover any unrepaired damage
and identify any other conditions that affect the insurability of the property. Additionally, we continue to assess the use
of new technology enabled tools to assist us with inspections and other components of the underwriting process.
Ongoing risk management of our portfolio in aggregate is a critical component of our underwriting process. We
use third-party catastrophe modeling software to evaluate our ongoing risk exposure. We regularly review the output of
these models to evaluate the geographic spread of our risk, including the evaluation of AAL and PML by line of business
and for the portfolio as a whole. This review enables us to monitor our exposure to correlated risks and optimize the
design and pricing of our reinsurance program including the purchase of appropriate reinsurance coverage.
Claims Management
Given the low frequency nature of the primary perils that we insure, we outsource our claims handling
infrastructure to third-party administrators (“TPAs”) to eliminate the expense associated with maintaining full time
dedicated claims personnel. We currently contract with multiple TPAs to reduce our reliance on any single TPA, as well
as to benefit from expertise of individual vendors in specific lines of business. Our management team, led by our Senior
Vice President of Legal, Compliance and Claims, is responsible for overseeing our TPAs, including the management of
loss reserves, event preparation, settlement, arbitration, and mediation. Claims are reported directly to us and the
applicable TPA, which adheres to agreed upon service level standards.
In the case of a catastrophe event, our technology infrastructure and data analytics enable us to identify
potentially affected policies immediately and begin assisting our customers by notifying our TPAs, our reinsurance
16
partners and other potentially impacted parties. A network of TPAs improves our ability to mobilize claims adjusters
immediately to the areas where our customers are most affected and helps insulate us from the “demand surge”
following a catastrophe event. In order to prepare for a potential catastrophe event, we run simulations and work closely
with our TPAs to ensure there are dedicated desk and field adjusters to handle the volume of claims that would be
expected in each loss scenario. Using each earthquake and hurricane scenario, we project losses and identify an
individualized and optimal catastrophe response plan for each event.
We review claims files and claims reports from our TPAs for accuracy and reasonableness on an ongoing basis.
We review all claims received from our TPAs to validate coverage, limits, and deductibles prior to making payment.
Additionally, we have certain managerial requirements of our TPAs around notification, reserve approval, payment
management, correspondence with insureds, and reports for all claims in excess of the claims analyst’s authority. We
also monitor possible litigation and litigation trends associated with our claims.
Reinsurance
We purchase a significant amount of reinsurance from third parties that we believe enhances our business by
reducing our exposure to potential catastrophe losses, limiting volatility in our underwriting performance, and providing
us with greater visibility into our future earnings. Reinsurance involves transferring, or ceding, a portion of our risk
exposure on policies that we write to another insurer, the reinsurer, in exchange for a premium. To the extent that our
reinsurers are unable to meet the obligations they assume under our reinsurance agreements, we remain liable for the
entire insured loss; see “Risk Factors—Risks Related to Our Business and Industry—We may be unable to purchase
third-party reinsurance or otherwise expand our catastrophe coverage in amounts we desire on commercially acceptable
terms or on terms that adequately protect us, and this inability may materially adversely affect our business, financial
condition and results of operations.”
We use treaty reinsurance and, on a limited basis, facultative reinsurance coverage. Treaty coverage refers to a
reinsurance contract that is applied to a group or class of business where all the risks written meet the criteria for that
class. Our treaty reinsurance program primarily consists of catastrophe XOL, in which the reinsurer(s) agree to assume
all or a portion of the ceding company’s losses relating to a group of policies occurring in relation to specified events,
subject to customary exclusions, in excess of a specified amount. Additionally, we buy program specific reinsurance
coverage for specific lines of business on a quota share, property per risk or a facultative basis. In quota share
reinsurance, the reinsurer agrees to assume a specified percentage of the ceding company’s losses arising out of a
defined class of business in exchange for a corresponding percentage of premiums, net of a ceding commission. Property
per risk coverage is similar to catastrophe excess of loss except that the treaty applies in individual property losses rather
than in the aggregate for all claims associated with a single catastrophic loss occurrence. Facultative coverage refers to a
reinsurance contract on individual risks as opposed to a group or class of business. We use facultative reinsurance
selectively to supplement limits or to cover risks or perils excluded from other reinsurance contracts.
We have a robust program utilizing a mix of traditional reinsurers and insurance linked securities. We currently
purchase reinsurance from over 90 reinsurers, who either have an “A−” (Excellent) (Outlook Stable) or better financial
strength rating by A.M. Best or post collateral. Our reinsurance contracts include special termination provisions that
allow us to cancel and replace any participating reinsurer that is downgraded below a rating of “A−” (Excellent)
(Outlook Stable) from A.M. Best, or whose surplus drops by more than 20%. In addition to limit purchased from
traditional reinsurers, we have historically incorporated collateralized protection from the insurance linked securities
(“ILS”) market. In May 2017, we closed a $166 million 144A catastrophe bond offering completed through Torrey Pines
Re Ltd., a special purpose insurer in Bermuda, that provided fully collateralized protection over a three-year risk period,
ending in May 2020. We may seek to expand our catastrophe XOL coverage through similar bond offerings in the
future.
17
Our largest single XOL reinsurer comprises 5.4% of the total catastrophe XOL reinsurance limit we have in
effect. The table below reflects the ratings of our largest individual reinsurers.
Reinsurer Ratings
Vermeer Reinsurance Ltd (RenaissanceRe Holdings Ltd.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . A+
Houston Casualty Company- UK Branch (Tokio Marine Holdings, Inc.) . . . . . . . . . . . . . . . . A++
Lloyd's # 1084 - Chaucer Syndicates Ltd (China Reinsurance Corp.) . . . . . . . . . . . . . . . . . . . A
Fidelis Insurance Bermuda Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-
Lancashire Insurance Company Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A
Elementum Re Ltd. fronted by Allianz Risk Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A+
Fidelis Underwriting Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-
Axis Specialty Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A+
Peak Reinsurance Company Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-
Munich Reinsurance America, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A+
A.M Best
S&P
NR
AA-
A+
A-
A-
AA-
A-
A+
NR
AA-
Catastrophe XOL Reinsurance Coverage
Our catastrophe event retention is currently $10 million for all perils and we retain $1 million as a vertical co-
participation in selected layers of our reinsurance program that we believe present a compelling risk adjusted return. Our
reinsurance coverage exhausts at $1.4 billion for earthquake events and $600 million for hurricane events, providing
coverage in excess of our 1:250 year peak zone PML and in excess of our A.M. Best requirement. In addition, we
maintain reinsurance coverage equivalent to or better than the 1 in 250 year PML for our other lines. As of December 31,
2020, our first event retention represented approximately 3.0% of our stockholders’ equity.
In the event that multiple catastrophe events occur in a period, many of our contracts include the right to
reinstate reinsurance limits for potential future recoveries during the same contract year and preserve our limit for
subsequent events. This feature for subsequent event coverage is known as a “reinstatement.” In addition, to provide
further coverage against the potential for frequent catastrophe events we have secured $25 million of aggregate XOL
reinsurance limit effective April 1, 2021. This coverage, applying within our per occurrence retention, has an attachment
point of $30 million and applies across all perils including but not limited to earthquakes, hurricanes, convective storms,
and floods above a qualifying level of $2.0 million in ultimate gross loss.
To assess the sufficiency of our catastrophe XOL reinsurance coverage, we continuously quantify our exposure
to catastrophes including earthquakes, hurricanes, tornadoes and hail storms. We evaluate and monitor the total policy
limit insured for each peril and in each geographic region, and we use third-party catastrophe models to evaluate the
AAL as well as the estimated PML at various intervals. Our PML modeling is consistent with standards established
by A.M. Best and includes “demand surge,” and loss amplification. To protect against model bias, we perform
probabilistic modeling as well as deterministic modeling using a variety of industry models including AIR Touchstone
for all perils and regions and RMS RiskLink for all perils and regions.
18
We believe our current reinsurance program provides coverage well in excess of our theoretical losses from any
recorded historical event. This coverage includes events such as the 1906 San Francisco and 1994 Northridge
earthquakes. Under our current reinsurance program, because the PML for each of the historical events is less than
$1.4 billion, the amount covered by our current reinsurance program, should an event equivalent to either of these two
events or other historical events recur, our hypothetical net loss would be capped at our current net retention of
$11 million as demonstrated in the following table:
Historical Event
12/31/20
modeled PML
($ millions)
CA 1906 San Francisco M7.8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CA 1994 Northridge M6.7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CA 1971 San Fernando M6.7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CA 1868 Hayward M7.0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NM 1811‑12 sequence M7.8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
HI 1992 Hurricane Iniki . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CA 1857 Fort Tejon M7.9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CA 1933 Long Beach M6.4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NW 1949 Puget Sound M7.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,024
852
463
353
294
250
229
219
189
While we only select reinsurers whom we believe to have acceptable credit and a minimum A.M. Best rating of
“A−”, if our reinsurers are unable to pay the claims for which they are responsible, we ultimately retain primary liability
to our policyholders. In addition, at each reinsurance treaty renewal, we consider any plans to change the underlying
insurance coverage we offer, our current capital, our risk appetite, and the cost and availability of reinsurance coverage,
which may vary from time to time.
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Catastrophe XOL Treaty Summary
Our current catastrophe XOL treaty which began June 1, 2020 is summarized below with modeled losses from
historical events included for reference based on our in-force portfolio as of December 31, 2020:
$1.4B
$600M
$10M
Earthquake Only
Earthquake + Wind
Retention
1906 San Francisco EQ
($1.02B)
1994 Northridge EQ ($852M)
1992 Hurricane Iniki
($250M)
Our catastrophe XOL treaty provides total coverage up to $1.4 billion for earthquake events and $600 million
for wind events, with this coverage well in excess of the 1 in 250 year PML for each peril. We believe our treaty
provides expansive coverage as many of our contracts have features including prepaid reinstatements and expanded
coverage windows for earthquake and wind events. We purchase coverage from a mix of traditional reinsurers and
collateralized protection from the ILS market, and our reinsurance contracts largely mirror the form of our insurance
policies in order to minimize any gaps between the coverage we offer to insureds and the coverage we purchase from
reinsurance partners.
In the event of an earthquake or windstorm that impacts our catastrophe XOL treaty, our total available
coverage for subsequent earthquake and windstorm events depends on the magnitude of the first event, as we may have
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coverage remaining from layers that were not previously fully exhausted. In addition, to provide further coverage against
the potential for frequent catastrophe events we have secured $25 million of aggregate XOL reinsurance limit effective
April 1, 2021. This coverage, applying within our per occurrence retention, has an attachment point of $30 million and
applies across all perils including but not limited to earthquakes, hurricanes, convective storms, and floods above a
qualifying level of $2.0 million in ultimate gross loss.
Program Specific Reinsurance Coverage
In addition to our catastrophe XOL coverage, we purchase reinsurance for specific programs in order to control
our net exposure for any single risk, manage our exposure to attritional losses and improve our economics through
ceding a portion of the risk to reinsurers in exchange for a ceding commission. We purchase program specific
reinsurance, consisting primarily of quota share coverage, for our Commercial Earthquake, Commercial All Risk,
Specialty Homeowners, Inland Marine and Flood lines of business.
Third-Party Capacity
In order to utilize our internal product development, underwriting and distribution expertise on behalf of third-
party insurance companies, we launched an affiliated managing general agent called Prospect General Insurance Agency
(“PGIA”) in 2016. During 2020, Prospect General Insurance Agency was renamed to Palomar Insurance Agency, DBA
Palomar General Insurance Agency (“PGIA”). PGIA is an approved Coverholder by Lloyd’s of London and currently
manages our REI program with delegating authority to write on behalf of capacity provided by syndicates at Lloyd’s of
London. In 2019, we entered into a new partnership to underwrite commercial flood risk on behalf of affiliates of SCOR
SE. While we generate commission and fee income from the sale of REI products, we do not retain any of the underlying
risk of losses incurred by those policies. We will continue to develop third-party capacity relationships that support our
products.
Technology
Our integrated technology systems form the backbone of our business as they enable us to offer quality and
timely service to our policyholders and producers, communicate seamlessly with reinsurers and partner carriers, and run
our business more efficiently and cost effectively. As a recently formed insurance company, we have the benefit of
having built a proprietary operating platform that employs the best practices of our management team’s extensive prior
experience and that is not burdened by outdated legacy technology and processes. Our systems offer greater ease of use
to distribution partners and provide seamless integration between our pricing models, quoting tools, policy
administration systems and portfolio analytics databases. Our proprietary operating platform is based on applications
licensed from multiple third-party software vendors. We have invested significantly in customizing, building on top of
and extending these applications to increase automation and enhance efficiency. We have dedicated in-house software
developers as well as external resources, all of whom report to our Chief Technology Officer. Our internally developed
PASS provides producers direct access to our retail and wholesale distributed products including Hawaii Hurricane,
Residential Earthquake, Residential Flood, and Commercial Earthquake. PASS also serves as the administration system
for select policy data and the access point for business written through direct personal lines partnerships. PASS enables
the effective use of predefined underwriting, providing efficiency and optimization to our production partners and
real-time transparency in underwriting and aggregate management. Our software development team develops
programing interfaces where applicable so that partner carriers and distribution partners can seamlessly access our
system.
Our pricing models are based on the most recent versions of catastrophe models from industry leading vendors
and our internal expertise. For certain products where limited models are available, we have worked directly with the
vendors to develop proprietary models. We update all of our pricing models as new versions are released, which
mitigates our exposure to changes in our business following industry-wide model changes. For personal lines products
issued through automated underwriting, our pricing models integrate directly into our policy administration system as
well as the systems of program administrator partners. Since our commercial lines products do not lend themselves to
highly automated underwriting, we have built a customized operating platform that our underwriters use to evaluate risk
21
and to efficiently quote business. Our custom application platform seamlessly integrates policy administration, billing
and maintenance.
We emphasize the use of technology in our analytics and enterprise risk management (“ERM”) operations. Our
analytics team, which reports to our Chief Risk Officer, uses multiple catastrophe modeling software applications to
evaluate our ongoing risk exposure. Our data analytics enable us to provide real-time reporting of our in-force portfolio
to our reinsurers, TPAs and distribution partners on a regular basis and during severe weather events. This reporting
combines content from the catastrophe models that we license with internally developed content. Event reporting is an
element of our overall ERM framework which monitors our risks and ensures that we have appropriate controls and
preparations are in place. Our technology infrastructure is designed to function through any major disruption, with all
data stored offsite and employees provided with the resources to work remotely.
Reserves
When a claim is reported to us or when an event occurs, we establish loss reserves to cover our estimated
ultimate losses under all insurance policies that we underwrite, and loss adjustment expenses relating to the investigation
and settlement of policy claims. These reserves include estimates of the cost of the claims reported to us (case reserves)
and estimates of the cost of claims that have been incurred but not yet reported (“IBNR”) and are net of estimated related
salvage, subrogation recoverables and reinsurance recoverables. Reserves are estimates involving actuarial projections of
the expected ultimate cost to settle and administer claims at a given time, but are not expected to represent precisely the
ultimate liability. Estimates are based upon past loss experience modified for current trends as well as prevailing
economic, legal and social conditions. Such estimates will also be based on facts and circumstances then known, but are
subject to significant uncertainty based on the outcome of various factors, such as future events, future trends in claim
severity, inflation and changes in the judicial interpretation of policy provisions relating to the determination of
coverage.
When a claim is reported and investigated by a claims adjuster, we establish a case reserve for the estimated
amount of the ultimate payment after an appropriate assessment of coverage, damages and other information as
applicable. The estimate is based on general insurance reserving practices and on the claim adjuster’s experience and
knowledge of the nature and value of the specific type of claim. Case reserves are revised periodically based on
subsequent developments associated with each claim.
We establish IBNR reserves 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 take into account quantitative loss
experience data and, where appropriate, qualitative factors.
We regularly review our loss reserves using a variety of actuarial techniques. We also update the reserve
estimates as historical loss experience develops, additional claims are reported and/or settled and new information
becomes available. Additionally, our loss reserving is reviewed annually for reasonableness by a reputable third-party
actuarial firm. A reserve can be increased or decreased over time as claims move towards settlement, which can impact
earnings in the form of either adverse development or reserve releases.
22
The following tables present the development of our loss reserves by accident year on a gross basis and net of
reinsurance recoveries during each of the below calendar years:
Gross Ultimate Loss and LAE
Accident Year
Calendar Year
2017
2018
2019
Development- (Favorable) Unfavorable
2018 to
2019
2017 to
2018
2019 to
2020
2020
(in thousands)
Prior . . . . . . . . . . . . . . . . . . . . . . . . $ 43,112 $ 39,935 $ 40,667 $ 40,841 $ (3,177) $
2018 . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . .
14,865
22,797
171,470
15,984
25,127
—
17,667
—
—
—
—
—
—
—
—
732 $
(1,683)
—
—
174
(1,119)
(2,330)
—
(951) $ (3,275)
$ (3,177) $
Net Ultimate Loss and LAE
Accident Year
Calendar Year
2017
2018
2019
2020
(in thousands)
Development- (Favorable) Unfavorable
2018 to
2019
2019 to
2020
2017 to
2018
Prior . . . . . . . . . . . . . . . . . . . . . . . $ 22,102 $ 20,211 $ 20,094 $ 20,079 $ (1,891) $
2018 . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . .
7,940
5,885
64,179
8,166
—
—
8,102
5,772
—
—
—
—
—
—
—
$ (1,891) $
(117) $
(64)
—
—
(181) $
(15)
(162)
113
—
(64)
Investments
Investment income is an important component of our earnings. We collect premiums and are required to hold a
portion of these funds in reserves until claims are paid. We invest these reserves, primarily in fixed maturity investments.
Our fixed maturity investment portfolio is managed by Conning and Company, an investment advisory firm that is an
experienced manager of insurance company assets, and operates under guidelines approved by our Board of Directors.
We believe our investment strategy allows us to eliminate the expense of a treasury department while allowing our
management to maintain oversight over the investment portfolio.
In the years that we make an underwriting profit, we are able to retain all investment income. Underwriting
losses may require us to dedicate a portion of our investment income or capital to cover insurance claims and expenses.
Our cash and invested assets consist of fixed maturity securities, short-term investments, cash and cash
equivalents, mutual funds and exchange traded funds. Our fixed maturity securities are classified as “available-for-sale”
and are carried at fair value with unrealized gains and losses on these securities reported, net of tax, as a separate
component of accumulated other comprehensive income (loss). Our equity investments are measured at fair value with
changes in fair value recognized in net income. Fair value generally represents quoted market value prices for securities
traded in the public market or prices analytically determined using bid or closing prices for securities not traded in the
public marketplace. Short-term investments are reported at cost and include investments that are both readily convertible
to known amounts of cash and have maturities of 12 months or less upon acquisition by us.
23
Our investment securities available totaled $422.3 million and $239.5 million at December 31, 2020 and 2019
respectively, and are summarized as follows:
December 31, 2020
Fixed maturities:
Fair
Value
% of Total
Fair Value
U.S. Governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
States, territories, and possessions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Political subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special revenue excluding mortgage/asset‑backed securities . . . . . . . . . . . . . . . . . . . . . .
Industrial and miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage/asset‑backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
17,059
6,636
2,152
41,227
245,360
85,553
397,987
24,322
422,309
4.0 %
1.6 %
0.5 %
9.8 %
58.1 %
20.3 %
94.3 %
5.7 %
100.0 %
December 31, 2019
Fixed maturities:
Fair
Value
% of Total
Fair Value
U.S. Governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
States, territories, and possessions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Political subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special revenue excluding mortgage/asset‑backed securities . . . . . . . . . . . . . . . . . . . . . .
Industrial and miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage/asset‑backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
13,679
2,445
1,942
18,436
129,013
51,636
217,151
22,328
239,479
5.7 %
1.0 %
0.8 %
7.7 %
53.9 %
21.6 %
90.7 %
9.3 %
100.0 %
Our primary investment focus is to preserve capital to support our insurance operations through investing
primarily in high quality fixed maturity securities with a secondary focus on maximizing our risk adjusted investment
returns. Investment policy is set by our Board of Directors, subject to the limits of applicable regulations.
Our investment policy imposes strict requirements for credit quality, with a minimum average credit quality of
the portfolio being rated “A” or higher by Standard & Poor’s or the equivalent rating from another nationally recognized
rating agency. Our investment policy also imposes restrictions on concentrations of securities by class and issuer and any
new asset class must be approved by management and our Board of Directors. Given our existing exposure to property
values, notably in the state of California, we have imposed restrictions on municipal obligations in the state of California
and CMBS single issuers concentrated in the state of California.
Enterprise Risk Management (“ERM”)
We maintain a dedicated ERM function that is responsible for analyzing and reporting our risks, monitoring
that risks remain within established tolerances, and monitoring, on an ongoing basis, that our ERM objectives are met.
These objectives include ensuring proper risk controls are in place, risks are effectively identified, assessed, and
managed, and key risks to which we are exposed are appropriately disclosed. Our ERM framework plays an important
role in fostering our risk management culture and practices. We continue to enhance our ERM framework, which is
guided by the Own Risk and Solvency Assessment (“ORSA”) model developed by the NAIC. These ongoing
enhancements include the creation of an executive risk management committee, creation and maintenance of a risk
register and regular reporting on risk management.
An additional important part of our ERM is business continuity, including in the circumstances of a catastrophe
event. We have established a business continuity team made up of executive management with predefined roles and
responsibilities in the event of an emergency response situation and a business continuity communication site where
24
employees are directed to receive instructions that are tailored to various scenarios. We store all data offsite and ensure it
is accessible remotely. Our communications, virtual file servers, underwriting and distribution systems, and claims portal
are hosted in geographically diverse data centers domestically and globally. We maintain a second office 55 miles north
of our La Jolla, California headquarters to use as a redundant location in the event of a disruptive event in San Diego,
and purchase business continuity services to support the La Jolla office in the event of a disruptive event.
Environmental and Climate Change Matters
Our economic model is closely tied to our coverages for natural disasters and catastrophes. We believe the
existing scientific consensus that man-made changes to climate conditions are leading to increases in sea levels and
global temperatures, and that the severity and frequency of weather-related natural disasters may increase relative to
historical experience. We believe that this increase in severe weather, coupled with currently projected demographic
trends in catastrophe-exposed regions, contributes to factors that will increase the average economic value of expected
losses, increase the number of people exposed per year to natural disasters and in general exacerbate disaster risk,
including risks to infrastructure, global supply chains and agricultural production. In addition to the impacts that
environmental incidents have on our business, changes to law and regulation related to climate change could also
directly affect our business, including state insurance regulations that could impact the Company’s ability to manage
property exposures in areas vulnerable to significant climate driven losses, and possible new requirements that insurers
integrate the financial risk of climate change into business operations and governance.
From an underwriting standpoint, we carefully consider the development and deployment of insurance products
in coastal areas that may be impacted by rising sea levels, and we incorporate scenarios into our catastrophe modeling
that involve elevated sea surface temperatures and other relevant data. From an operations standpoint, our efforts include
establishing a standing environmental, social, and governance (“ESG”) committee of the Board of Directors that works
with the company to establish and measure progress toward several metrics related to climate change and environmental
health. The company considers ESG factors as part of its investment strategy and reviews individual investments to
ensure congruence with company goals in this area. We have also made commitments to automate manual or paper-
intensive processes and promote the paperless delivery of documents to our policyholders and producers. We will remain
proactive in our efforts to evolve our business in response to our changing natural environment.
Competition
The specialty insurance industry is highly competitive. While we currently target underserved markets, some of
our competitors have greater financial, marketing and management resources and experience than we do. Our primary
competitors include national insurance companies, including American International Group, Inc., Chubb Limited, State
Farm Mutual Automobile Insurance Company and Zurich Insurance Group Ltd., as well as specialty insurers such as
Zephyr Insurance Company, a subsidiary of Heritage Insurance Holdings, and GeoVera Holdings, Inc. We also compete
with the E&S market, including Lloyd’s of London in some of our lines. In addition, we compete against state or other
publicly managed enterprises including the California Earthquake Authority, the National Flood Insurance Program and
the Texas Wind Insurance Association. We may also compete with new market entrants in the future. Competition is
based on many factors, including the reputation and experience of the insurer, coverages offered, pricing and other terms
and conditions, customer service, relationships with brokers and agents (including ease of doing business, service
provided and commission rates paid), size and financial strength ratings, among other considerations.
Ratings
Our insurance group, Palomar Holdings, Inc., currently has a rating of “A−” (Excellent) (Outlook Stable)
from A.M. Best, which rates insurance companies based on factors of concern to policyholders. A.M. Best currently
assigns 16 ratings to insurance companies, which currently range from “A++” (Superior) to “S” (Rating Suspended).
“A−” (Excellent) (Outlook Stable) is the fourth highest rating. In evaluating a company’s financial and operating
performance, A.M. Best reviews the company’s profitability, leverage and liquidity, as well as its book of business, the
adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its loss
and loss expense reserves, the adequacy of its surplus, its capital structure, the experience and competence of its
25
management and its market presence. A.M. Best’s ratings reflect its opinion of an insurance company’s financial
strength, operating performance and ability to meet its obligations to policyholders. These evaluations are not directed to
purchasers of an insurance company’s securities.
Intellectual Property
We have registered our logo as a trademark in the United States. We will pursue additional trademark
registrations and other intellectual property protection to the extent we believe it would be beneficial and cost effective.
Human Capital
Overview
We believe our greatest asset is our people. As of December 31, 2020, we employed 122 team
members. During 2020, the COVID-19 pandemic spotlighted the importance of being nimble and supporting
the engagement, health, and safety of our workforce. As a result, during 2020 we focused on virtual recruiting and
onboarding and retaining our hybrid workforce while keeping them engaged through ongoing communication and a
focus on wellness and flexibility.
Diversity and inclusion
During the third quarter of 2020, we formally launched our Diversity, Inclusion, Community Engagement and
Equality, or “DICE”, council. The DICE council is comprised of team members from various departments and
backgrounds and advises company leadership on initiatives and best practices on matters of racial and civic equality.
We are committed to increasing diversity within our Company. Currently, approximately 40% of our workforce
and 50% of our board of directors are women or people of underrepresented communities. We believe that diversity
yields greater creativity and productivity, helps us serve our customers and partners more effectively, and ultimately
returns greater value to our shareholders and to the communities in which we do business.
Compensation, Health and Well Being
We offer fair, competitive compensation and benefits to support our team members overall well-being. Our
compensation programs include base pay, annual incentive compensation and, in many cases, long-term equity-based
compensation. We offer team members a comprehensive and leading benefits program that includes a holistic approach
to health and wellness. We regularly benchmark programs to ensure our team has access to industry-leading benefits to
address all aspects of well-being — physical and mental health, family care, financial support, and community
engagement.
In response to the COVID-19 pandemic, most of our team members have been working from home since
March 2020. We provide team members a reimbursement to help manage incremental costs associated with remote
work. We have implemented safety protocols to protect the health of team members who are working in our offices. We
also regularly check-in with team members to assess their mental health and provide a company paid subscription to
Headspace, a meditation and wellness application.
Learning and Development
We encourage all team members to take advantage of company-supported training and learning opportunities
that help broaden industry and functional knowledge to help them excel in their current roles as well as advance their
overall career objectives. We believe in the dynamic allocation of talent, and therefore we encourage interested team
members to explore functions outside their current roles. To support this belief, we provide a $3,000 tuition and/or
certification reimbursement for ongoing development. Lastly, we have a methodical approach to talent development,
offering organizational advancement and mentoring services to all team members regardless of position or title.
26
Item 1A: Risk Factors
An investment in our common stock involves a high degree of risk. In deciding whether to invest, you should
carefully consider the following risk factors, as well as the financial and other information contained in this Annual
Report on Form 10-K, including our consolidated financial statements and related notes. Any of the following risks
could have a material adverse effect on our business, financial condition, results of operations or prospects and cause
the value of our stock to decline, which could cause you to lose all or part of your investment. Additional risks and
uncertainties of which we are unaware, or that we currently deem immaterial also may become important factors that
affect us.
Item 1A. Risk Factors
Summary Risk Factors
Our business is subject to numerous risks and uncertainties, these risks include, but are not limited to, the following:
• Claims arising from unpredictable and severe catastrophe events, including those caused by global climate
change, could reduce our earnings and stockholders' equity, and limit our ability to underwrite new insurance
policies;
• We and our customers could be negatively and adversely impacted by the COVID-19 Pandemic (“The
Pandemic”), which may result in a decline in demand for our products, a decrease in underwriting income and a
decrease in the value of our investment portfolio.
• Our reinsurers may not pay claims on a timely basis, or at all, which may materially adversely affect our
business, financial condition, and results of operations
• The inability to purchase third-party reinsurance or otherwise expand our catastrophe coverage in amounts we
desire on commercially acceptable terms or on terms that adequately protect us;
• Our risk management and loss limitation methods, including estimates and models, may fail to adequately
manage our exposure to losses from catastrophe events and our losses could be materially higher than our
expectations;
• A decline in our financial strength rating may adversely affect the amount of business we write;
•
In the event that the reinsurance we purchase is inadequate or a reinsurer is unable or unwilling to make timely
payments, our operating results and liquidity would be adversely impacted;
• Our business is concentrated in California and Texas and we are exposed more significantly to California and
Texas loss activity and regulatory environments;
• The potential loss of one or more key executives or an inability to attract and retain qualified personnel could
adversely affect our results of operations;
• We rely on a select group of brokers and program administrators to manage the distribution of a significant
portion of our Residential Earthquake, Commercial Earthquake, Specialty Homeowners and Hawaii Hurricane
products. Two program administrators with which we have long-standing relationships represented
approximately 54.0% of our gross written premiums for the year ended December 31, 2020, and such
relationships may not continue;
• There is intense competition for business in our industry;
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• The failure of our information technology and telecommunications systems could adversely affect our business;
• Unexpected changes in the interpretation of our coverage or provisions, including loss limitations and
exclusions, in our policies could have a material adverse effect on our financial condition or results of
operations;
• Any failure to protect our intellectual property rights could impair our ability to protect our intellectual
property, proprietary technology platform and brand, or we may be sued by third parties for alleged
infringement of their proprietary rights;
• We incur significant costs as a result of operating as a public company, and our management is required to
devote substantial time to complying with public company regulations; and
• Our operating results and stock price may be volatile, or may decline regardless of our operating performance,
and holders of our common stock could lose all or part of their investment.
Risks Related to Our Business and Industry
Claims arising from unpredictable and severe catastrophe events, including those caused by global climate change,
could reduce our earnings and stockholders’ equity and limit our ability to underwrite new insurance policies.
Our insurance operations expose us to claims arising from unpredictable catastrophe events, such as
earthquakes, hurricanes, windstorms, floods and other severe events. Furthermore, the actual occurrence, frequency and
magnitude of such events are uncertain. While there can be no certainty surrounding the timing and magnitude of
earthquakes, some observers believe that significant shifts in the tectonic plates, including the San Andreas Fault, may
occur in the future. Over the past several years, changing weather patterns and climatic conditions, such as global
warming, have added to the unpredictability and frequency of natural disasters in certain parts of the world, including the
markets in which we operate. Climate change may increase the frequency and severity of extreme weather events. This
effect has led to conditions in the ocean and atmosphere, including warmer-than-average sea-surface temperatures and
low wind shear that increase hurricane activity. Hurricane activity typically increases between June and November of
each year, though the actual occurrence and magnitude of such events is uncertain. The occurrence of a natural disaster
or other catastrophe loss could materially adversely affect our business, financial condition, and results of operations.
Additionally, any increased frequency and severity of such weather events, including hurricanes, could have a material
adverse effect on our ability to predict, quantify, reinsure and manage catastrophe risk and may materially increase our
losses resulting from such catastrophe events.
The extent of losses from catastrophes is a function of both the frequency and severity of the insured events and
the total amount of insured exposure in the areas affected. The frequency and severity of catastrophes are inherently
unpredictable and the occurrence of one catastrophe does not make the occurrence of another catastrophe more or less
likely. Increases in the replacement cost and concentrations of insured property, the effects of inflation, and changes in
cyclical weather patterns may increase the severity of claims from catastrophe events in the future. Claims from
catastrophe events could reduce our earnings and cause substantial volatility in our results of operations for any fiscal
quarter or year, which could materially adversely affect our financial condition, possibly to the extent of eliminating our
total stockholders’ equity. For example, Hurricane Harvey in August 2017 caused our gross losses and loss adjustment
expenses to increase significantly from the prior year and catastrophe losses from multiple storms during the third and
fourth quarters of 2020 also caused our gross loss and loss adjustment expenses to increase significantly from the prior
year. Our ability to underwrite new insurance policies could also be materially adversely impacted as a result of
corresponding reductions in our capital. In addition, a natural disaster could materially impact the financial condition of
our policyholders, resulting in loss of premiums.
Our catastrophe event retention is currently $10 million for all perils and we retain $1 million as a vertical co-
participation in selected layers of our reinsurance program. Effective June 1, 2020, our reinsurance coverage exhausts at
$1.4 billion for earthquake events and $600 million for hurricane events, with coverage in excess of our estimated peak
zone 1 in 250 year PML event and in excess of our A.M. Best requirement. While we only select reinsurers whom we
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believe to have acceptable credit, if our reinsurers are unable to pay the claims for which they are responsible, we
ultimately retain primary liability. Furthermore, our earthquake policies do not provide coverage for fire damage arising
from an earthquake. While we believe this risk transfer program reduces volatility in our earnings, one or more severe
catastrophe events could result in claims that substantially exceed the limits of our reinsurance coverage.
We and our customers could be negatively and adversely impacted by the Pandemic, which may result in a decline in
demand for our products, a decrease in underwriting income and a decrease in the value of our investment portfolio.
The ongoing Pandemic and response thereto have significantly impacted financial markets, businesses,
households, and communities and have caused a contraction in business activity and volatility in financial markets.
Continuation of the Pandemic could cause additional reduction in business activity and financial market instability. The
extent of the impact of the Pandemic on our operational and financial performance will depend on several factors,
including the duration of the Pandemic, actions taken and restrictions imposed by the government and health officials in
response, the ability for our customers to continue to pay premiums, contraction of the insurance and reinsurance
markets, and the ability for reinsurers to satisfy claims, all of which are uncertain and cannot be predicted. In addition,
the global macroeconomic effects of the Pandemic may persist for an indefinite period, even after the Pandemic has
subsided.
Disruptions to the economy from the Pandemic could cause our customers to have less need for insurance
coverage, cancel or cease payment on existing insurance policies, modify their coverage, or not renew the policies they
hold with us. Policyholders may exaggerate or even falsify claims to obtain higher claims payments. Any of these
outcomes would reduce our underwriting income.
We underwrite a significant amount of our commercial insurance policies for businesses such as hotels, motels,
retail stores, and professional services. These businesses largely require patrons to generate profits and their ability to
serve patrons has been significantly impacted by the Pandemic and restrictions placed on them in response. Prolonged
restrictions or ongoing changes in patron behavior as a result of the Pandemic would have a negative adverse impact on
these insureds and their revenue streams, which consequently will impact their ability to meet their financial obligations,
including purchasing or renewing insurance policies.
In addition, our results of operations depend, in part, on the performance of our investment portfolio. The
Pandemic’s impact on the economy and financial markets could reduce our net investment income and result in realized
investment losses in future periods.
Our reinsurers may not pay claims on a timely basis, or at all, which may materially adversely affect our business,
financial condition, and results of operations.
Our ability to grow our business is dependent in part in our ability to secure reinsurance for a substantial portion
of the risk associated with our policies. Although reinsurance makes the reinsurer liable to us to the extent the risk is
transferred or ceded to the reinsurer, it does not relieve us (the ceding insurer) of our primary liability to our
policyholders. Our current reinsurance program is designed to limit our risk retention to $10 million of risk per
earthquake or wind event, along with a $1 million vertical co-participation in selected layers, and provide coverage up to
$1.4 billion for earthquake events and $600 million for hurricane events, subject to customary exclusions. However,
particularly in the event of a major catastrophe, our reinsurers may not pay claims made by us on a timely basis, or they
may not pay some or all these claims. For example, the Pandemic has put financial pressure on the insurance market due
to several factors, including the inability of customers to pay premiums and increased claims for business interruption.
Increased claim demands for business interruption has put substantial financial pressure on the insurance and reinsurance
market which may lead to court action and impact the ability of insurers and reinsurers to satisfy the liability under their
policies.
In addition, reinsurers may default in their financial obligations to us as the result of insolvency, lack of
liquidity, operational failure, fraud, asserted defenses based on agreement wordings or the principle of utmost good faith,
asserted deficiencies in the documentation of agreements or other reasons. Any disputes with reinsurers regarding
coverage under reinsurance contracts could be time consuming, costly, and uncertain of success. If a catastrophic event
were to occur and our reinsurers were unable to satisfy their commitments to us, we may be unable to satisfy the liability
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to our policyholders. We evaluate each reinsurance claim based on the facts of the case, historical experience with the
reinsurer on similar claims and existing case law and consider including any amounts deemed uncollectible from the
reinsurer in a reserve for uncollectible reinsurance. As of December 31, 2020, we had $104.7 million of aggregate
reinsurance recoverables. These risks could cause us to incur increased net losses, and, therefore, adversely affect our
financial condition.
We may be unable to purchase third-party reinsurance or otherwise expand our catastrophe coverage in amounts we
desire on commercially acceptable terms or on terms that adequately protect us, and this inability may materially
adversely affect our business, financial condition and results of operations.
We purchase a significant amount of reinsurance from third parties that we believe enhances our business by
reducing our exposure to potential catastrophe losses and reducing volatility in our underwriting performance, providing
us with greater visibility into our future earnings. Reinsurance involves transferring, or ceding, a portion of our risk
exposure on policies that we write to another insurer, the reinsurer, in exchange for a premium. We primarily use treaty
reinsurance, consisting of catastrophe excess of loss (“XOL”) coverage, and, on a limited basis, facultative reinsurance
coverage. Treaty coverage refers to a reinsurance contract that is applied to a group or class of business where all the
risks written meet the criteria for that class. Facultative coverage refers to a reinsurance contract on individual risks as
opposed to a group or class of business. Our catastrophe XOL treaties are divided into multiple layers.
From time to time, market conditions have limited, and in some cases prevented, insurers from obtaining the
types and amounts of reinsurance they consider adequate for their business needs. As a result, we may not be able to
purchase reinsurance in the areas and for the amounts we desire or on terms we deem acceptable or at all. In addition to
reinsurance purchased from traditional reinsurers, we have historically incorporated collateralized protection from the
insurance linked securities market (i.e. catastrophe bonds). In May 2017, we closed a $166 million 144A catastrophe
bond offering completed through Torrey Pines Re Ltd., a special purpose insurer in Bermuda, that provided fully
collateralized protection over a three-year risk period, ending in May 2020. Although we do not currently have any
catastrophe bonds outstanding, we may seek to expand our catastrophe XOL coverage through similar bond offerings in
the future. There can be no assurances that we will be able to complete such offerings on acceptable terms, if at all. If we
are unable to renew our expiring contracts, enter into new reinsurance arrangements on acceptable terms or expand our
catastrophe coverage through future bond offerings or otherwise, our loss exposure could increase, which would increase
our potential losses related to catastrophe events. If we are unwilling to bear an increase in loss exposure, we could have
to reduce the level of our underwriting commitments, both of which could materially adversely affect our business,
financial condition and results of operations.
Many reinsurance companies have begun to exclude certain coverages from, or alter terms in, our reinsurance
contracts with them. As a result, we, like other insurance companies, write insurance policies which to some extent do
not have the benefit of reinsurance protection. These gaps in reinsurance protection expose us to greater risk and greater
potential losses.
We utilize several risk management and loss limitation methods, including relying on estimates and models. If these
methods fail to adequately manage our exposure to losses from catastrophe events, our losses could be materially
higher than our expectations, and our business, financial condition, and results of operations could be materially
adversely affected.
Our approach to risk management relies on subjective variables that entail significant uncertainties. We manage
our exposure to catastrophe losses by analyzing the probability and severity of the occurrence of catastrophe events and
the impact of such events on our overall underwriting and investment portfolio. We monitor and mitigate our exposure
through a number of methods designed to minimize risk, including underwriting specialization, modeling and data
systems, data quality control, strategic use of policy deductibles and regular review of aggregate exposure and probable
maximum loss reports, which report the maximum amount of losses that one would expect based on computer or
actuarial modeling techniques. These estimates, models, data and scenarios may not produce accurate predictions;
consequently, we could incur losses both in the risks we underwrite and to the value of our investment portfolio due to
the overall impact on financial markets from the occurrence of catastrophe events.
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In addition, output from our risk modeling software is based on third-party data that we believe to be reliable.
The estimates and assumptions we use are dependent on many variables, such as loss adjustment expenses,
insurance-to-value, storm or earthquake intensity, building code compliance and demand surge, which is the temporary
inflation of costs for building materials and labor resulting from increased demand for rebuilding services in the
aftermath of a catastrophe. Accordingly, if the estimates and assumptions used in our risk models are incorrect or if our
risk models prove to be an inaccurate forecasting tool, the losses we might incur from an actual catastrophe could be
materially higher than our expectation of losses generated from modeled catastrophe scenarios, and our business,
financial condition, and results of operations could be materially adversely affected. In addition, our third-party data
providers may change the estimates or assumptions that we use in our risk models and/or their data may be inaccurate.
Changes in these estimates or assumptions or the use of inaccurate third-party data could cause our actual losses to be
materially higher than our current expectation of losses generated by modeled catastrophe scenarios, which in turn could
materially adversely affect our business, financial condition, and results of operations.
We run many model simulations to understand the impact of these assumptions on a catastrophe’s loss
potential. Furthermore, there are risks associated with catastrophe events, which are either poorly represented or not
represented at all by catastrophe models. Each modeling assumption or un-modeled risk introduces uncertainty into
probable maximum loss estimates that management must consider. These uncertainties can include, but are not limited
to, the following:
• The models do not address all the possible hazard characteristics of a catastrophe peril (e.g., the precise
path and wind speed of a hurricane);
• The models may not accurately reflect the true frequency of events;
• The models may not accurately reflect a risk’s vulnerability or susceptibility to damage for a given event
characteristic;
• The models may not accurately represent loss potential to insurance or reinsurance contract coverage
limits, terms and conditions; and
• The models may not accurately reflect the impact on the economy of the area affected or the financial,
judicial, political, or regulatory impacts on insurance claim payments during or following a catastrophe
event.
As a result of these factors and contingencies, our reliance on assumptions and data used to evaluate our entire
risk portfolio and specifically to estimate a probable maximum loss is subject to a high degree of uncertainty that could
result in actual losses that are materially different from our probable maximum loss estimates and our financial results
could be adversely affected.
A decline in our financial strength rating may adversely affect the amount of business we write.
Participants in the insurance industry use ratings from independent ratings agencies, such as A.M. Best, as an
important means of assessing the financial strength and quality of insurers. In setting its ratings, A.M. Best performs
quantitative and qualitative analysis of a company’s balance sheet strength, operating performance and business
profile. A.M. Best financial strength ratings range from “A++” (Superior) to “F” for insurance companies that have been
publicly placed in liquidation. As of December 31, 2020, A.M. Best has assigned a financial strength rating of “A−”
(Excellent) (Outlook Stable) to us. A.M. Best assigns ratings that are intended to provide an independent opinion of an
insurance company’s ability to meet its obligations to policyholders and such ratings are not evaluations directed to
investors and are not a recommendation to buy, sell or hold our common stock or any other securities we may
issue. A.M. Best’s analysis includes comparisons to peers and industry standards as well as assessments of operating
plans, philosophy and management. A.M. Best periodically reviews our financial strength rating and may revise it
downward or revoke it at A.M. Best’s discretion based primarily on its analyses of our balance sheet strength (including
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capital adequacy and loss adjustment expense reserve adequacy), operating performance and business profile. Factors
that could affect such analyses include, but are not limited to:
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If we change our business practices from our organizational business plan in a manner that no longer
supports A.M. Best’s rating;
If unfavorable financial, regulatory or market trends affect us, including excess market capacity;
If our losses exceed our loss reserves;
If we have unresolved issues with government regulators;
If we are unable to retain our senior management or other key personnel;
If our investment portfolio incurs significant losses; or
If A.M. Best alters its capital adequacy assessment methodology in a manner that would adversely affect
our rating.
These and other factors could result in a downgrade of our financial strength rating. A downgrade or withdrawal
of our rating could result in any of the following consequences, among others:
• Causing our current and future distribution partners and insureds to choose other, more highly-rated
competitors;
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Increasing the cost or reducing the availability of reinsurance to us; or
• Severely limiting or preventing us from writing new and renewal insurance contracts.
In addition, in view of the earnings and capital pressures experienced by many financial institutions, including
insurance companies, it is possible that rating organizations will heighten the level of scrutiny that they apply to such
institutions, will increase the frequency and scope of their credit reviews, will request additional information from the
companies that they rate or will increase the capital and other requirements employed in the rating organizations’ models
for maintenance of certain ratings levels. If our credit rating were to be downgraded, or general market conditions were
to ascribe higher risk to our rating levels, due to the Pandemic, our access to capital markets and the cost of any equity or
debt financing will be negatively impacted. We can offer no assurance that our rating will remain at its current level. It is
possible that such reviews of us may result in adverse ratings consequences, which could have a material adverse effect
on our financial condition and results of operations.
Our business is concentrated in California and Texas and, as a result, we are exposed more significantly to
California and Texas loss activity and regulatory environments.
Our policyholders and insurance risks are currently concentrated in California and Texas, which generated 49%
and 19% of our gross written premiums, respectively, for the year ended December 31, 2020. We are exposed to
business, economic, political, judicial and regulatory risks due to this concentration that are greater than the risks faced
by insurance companies that conduct business over a more extensive geographic area. Any single, major catastrophe
event, series of events or other condition causing significant losses in California or Texas could materially adversely
affect our business, financial condition and results of operations. Additionally, unfavorable business, economic or
regulatory conditions in these states may result in a significant reduction of our premiums or increase our loss exposure.
Changes in California or Texas political climates could result in new or changed legislation affecting the
property and casualty insurance industry in general which could have a negative impact on our business.
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We could be adversely affected by the loss of one or more key executives or by an inability to attract and retain
qualified personnel.
We depend on our ability to attract and retain experienced personnel and seasoned key executives who are
knowledgeable about our business. The pool of talent from which we actively recruit is limited and may fluctuate based
on market dynamics specific to our industry and independent of overall economic conditions. As such, higher demand
for employees having the desired skills and expertise could lead to increased compensation expectations for existing and
prospective personnel, making it difficult for us to retain and recruit key personnel and maintain labor costs at desired
levels. In particular, our future success is substantially dependent on the continued service of our Co-Founder and Chief
Executive Officer, Mac Armstrong, and our Chief Financial Officer, Christopher Uchida. Should any of our key
executives terminate their employment with us, or if we are unable to retain and attract talented personnel, we may be
unable to maintain our current competitive position in the specialized markets in which we operate, which could
adversely affect our results of operations.
We rely on a select group of brokers and program administrators, and such relationships may not continue.
The distribution networks of our products are multi-faceted and distinct to each line of business. Our
relationship with our brokers or program administrators may be discontinued at any time. Even if the relationships do
continue, they may not be on terms that are profitable for us. We distribute a significant portion of our 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 person provisions, economics and exclusivity. These programs also
feature separate managerial oversight and leadership, policy administration systems and retail agents originating policies.
In total, these four products accounted for $191.3 or 54% of our gross written premiums for the year ended
December 31, 2020. This amount includes our Value Select Residential Earthquake program, which represents the
majority of our Residential Earthquake premium and is administered through a mutually exclusive program
administrator agreement with Arrowhead for the states of California, Oregon and Washington. The termination of a
relationship with one or more significant brokers or program administrators could result in lower gross written premiums
and could have a material adverse effect on our results of operations or business prospects.
Competition for business in our industry is intense.
We face competition from other specialty insurance companies, standard insurance companies and underwriting
agencies that are larger than we are and that have greater financial, marketing, and other resources than we do. Some of
these competitors also have longer operating history and more market recognition than we do in certain lines of business.
In addition, we compete against state or other publicly managed enterprises including the California Earthquake
Authority (“CEA”), the National Flood Insurance Program and the Texas Wind Insurance Association. If the CEA
decided to provide coverage to non-CEA member carriers or lessened the capital requirements for membership, we
would face additional competition in our markets, and our operating results could be adversely affected. Furthermore, it
may be difficult or prohibitively expensive for us to implement technology systems and processes that are competitive
with the systems and processes of these larger companies.
In particular, competition in the insurance industry is based on many factors, including price of coverage, the
general reputation and perceived financial strength of the company, relationships with brokers, terms and conditions of
products offered, ratings assigned by independent rating agencies, speed of claims payment and reputation, and the
experience and reputation of the members of our underwriting team in the particular lines of insurance and reinsurance
we seek to underwrite. In recent years, the insurance industry has undergone increasing consolidation, which may further
increase competition.
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Certain new, proposed or potential industry or legislative developments could further increase competition in
our industry. These developments include:
• An increase in capital-raising by companies in our lines of business, which could result in new entrants to
our markets and an excess of capital in the industry; and
• The deregulation of commercial insurance lines in certain states and the possibility of federal regulatory
reform of the insurance industry, which could increase competition from standard carriers.
We may not be able to continue to compete successfully in the insurance markets. Increased competition in
these markets could result in a change in the supply and demand for insurance, affect our ability to price our products at
risk-adequate rates and retain existing business, or underwrite new business on favorable terms. If this increased
competition so limits our ability to transact business, our operating results could be adversely affected.
Because we provide our program administrators with specific quoting and binding authority, if any of them fail to
comply with pre-established guidelines, our results of operations could be adversely affected.
We market and distribute certain of our insurance products through program administrators that have limited
quoting and binding authority and that in turn sell our insurance products to insureds through retail agents and wholesale
brokers. These program administrators can bind certain risks without our expressed approval. If any of these program
administrators fail to comply with our underwriting guidelines and the terms of their appointments, we could be bound
on a particular risk or number of risks that were not anticipated when we developed the insurance products or estimated
losses and loss adjustment expenses. Such actions could adversely affect our results of operations.
Because our business depends on insurance brokers and program administrators, we are exposed to certain risks
arising out of our reliance on these distribution channels that could adversely affect our results.
Certain premiums from policyholders, where the business is produced by brokers, are collected directly by the
brokers and forwarded to our insurance subsidiaries. In certain jurisdictions, when the insured pays its policy premium to
its broker for payment to us, the premium might be considered to have been paid under applicable insurance laws and
regulations. Accordingly, the insured would no longer be liable to us for those amounts, whether or not we have actually
received the premium from the broker. Consequently, we assume a degree of credit risk associated with the brokers with
which we work. We review the financial condition of potential new brokers before we agree to transact business with
them. Although the failure by any of our brokers to remit premiums to us has not been material to date, there may be
instances where our brokers collect premiums but do not remit them to us and we may be required under applicable law
to provide the coverage set forth in the policy despite the related premiums not being paid to us. Additionally, the loss or
disruption of business of a number of our agents and brokers or the failure or inability of these agents and brokers to
successfully market our insurance products, including impacts related to the Pandemic, could have a material adverse
effect on our business, financial condition, and results of operations.
Because the possibility of these events occurring depends in large part upon the financial condition and internal
operations of our brokers, we monitor broker behavior and review financial information on an as-needed basis. If we are
unable to collect premiums from our brokers in the future, our underwriting profits may decline and our financial
condition and results of operations could be materially and adversely affected.
Our failure to accurately and timely evaluate and pay claims could materially and adversely affect our business,
financial condition, results of operations, and prospects.
We must accurately and timely evaluate and pay claims that are made under our policies. Many factors affect
our ability to pay claims accurately and timely, including the training and experience of our claims representatives,
including our third party claims administrators (“TPAs”), the effectiveness of our management, and our ability to
develop or select and implement appropriate procedures and systems to support our claims functions and other factors.
Our failure to pay claims accurately and timely could lead to regulatory and administrative actions or material litigation,
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undermine our reputation in the marketplace and materially and adversely affect our business, financial condition, results
of operations, and prospects.
In addition, if we do not manage our TPAs effectively, or if our TPAs are unable to effectively handle our
volume of claims, our ability to handle an increasing workload could be adversely affected. In addition to potentially
requiring that growth be slowed in the affected markets, our business could suffer from decreased quality of claims work
which, in turn, could adversely affect our operating margins.
We may act based on inaccurate or incomplete information regarding the accounts we underwrite.
We rely on information provided by insureds or their representatives when underwriting insurance policies.
While we may make inquiries to validate or supplement the information provided, we may make underwriting decisions
based on incorrect or incomplete information. It is possible that we will misunderstand the nature or extent of the
activities or facilities and the corresponding extent of the risks that we insure because of our reliance on inadequate or
inaccurate information.
Our employees could take excessive risks, which could negatively affect our financial condition and business.
As an insurance enterprise, we are in the business of binding certain risks. The employees who conduct our
business, including executive officers and other members of management, underwriters, product managers and other
employees, do so in part by making decisions and choices that involve exposing us to risk. These include decisions such
as setting underwriting guidelines and standards, product design and pricing, determining which business opportunities
to pursue, and other decisions. We endeavor, in the design and implementation of our compensation programs and
practices, to avoid giving our employees incentives to take excessive risks. Employees may, however, take such risks
regardless of the structure of our compensation programs and practices. Similarly, although we employ controls and
procedures designed to monitor employees’ business decisions and prevent them from taking excessive risks, these
controls and procedures may not be effective. If our employees take excessive risks, the impact of those risks could have
a material adverse effect on our financial condition and business operations.
We may require additional capital in the future, which may not be available or may only be available on unfavorable
terms.
Our future capital requirements depend on many factors, including our ability to write new business
successfully and to establish premium rates and reserves at levels sufficient to cover losses. Many factors will affect the
amount and timing of our capital needs, including our growth rate and profitability, our claims experience, and the
availability of reinsurance, market disruptions, and other unforeseeable developments. If we need to raise additional
capital, equity or debt financing may not be available at all or may be available only on terms that are not favorable to
us. In the case of equity financings, dilution to our stockholders could result. In the case of debt financings, we may be
subject to covenants that restrict our ability to freely operate our business. In any case, such securities may have rights,
preferences and privileges that are senior to those of the shares of common stock offered hereby. If we cannot obtain
adequate capital on favorable terms or at all, we may not have sufficient funds to implement our operating plans and our
business, financial condition or results of operations could be materially adversely affected.
We may not be able to manage our growth effectively.
We intend to grow our business in the future, which could require additional capital, systems development and
skilled personnel. However, we must be able to meet our capital needs, expand our systems and our internal controls
effectively, allocate our human resources optimally, identify and hire qualified employees and effectively incorporate the
components of any businesses we may acquire in our effort to achieve growth. The failure to manage our growth
effectively could have a material adverse effect on our business, financial condition and results of operations.
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If actual renewals of our existing contracts do not meet expectations, our written premium in future years and our
future results of operations could be materially adversely affected.
Most of our contracts are written for a one-year term. In our financial forecasting process, we make
assumptions about the rates of renewal of our prior year’s contracts. The insurance and reinsurance industries have
historically been cyclical businesses with intense competition, often based on price. If actual renewals do not meet
expectations or if we choose not to write a renewal because of pricing conditions, our written premium in future years
and our future operations would be materially adversely affected.
In addition, during the fourth quarter of 2020, we purchased the renewal rights of certain Hawaii Hurricane
policies from another insurance company. There is no guarantee that current policyholders will renew their Hurricane
policies with the us and the ultimate impact of this purchase on our written premiums is uncertain and may be below our
expectations.
If we are unable to successfully scale our new excess and surplus insurance company, our business and future
prospects may be harmed.
We recently launched our excess and surplus lines (E&S) insurance product offerings via our recently formed
surplus lines subsidiary, PESIC. The E&S market is highly competitive and many of our competitors are better
capitalized and have a longer history in the market. While we believe that the underwriting acumen and market expertise
we have established through our admitted insurance company, PSIC, can be applied to the surplus lines market as well,
there can be no assurances that we will be successful in accurately analyzing risks and scaling a profitable operation in
the E&S market. If we are unable to underwrite profitably in the E&S market, our business and future prospects may be
adversely impacted.
We may change our underwriting guidelines or our strategy without stockholder approval.
Our management has the authority to change our underwriting guidelines or our strategy without notice to our
stockholders and without stockholder approval. As a result, we may make fundamental changes to our operations
without stockholder approval, which could result in our pursuing a strategy or implementing underwriting guidelines that
may be materially different from the strategy or underwriting guidelines described in our public filings.
Our operating results have in the past varied from quarter to quarter and may not be indicative of our long-term
prospects.
Our operating results are subject to fluctuation and have historically varied from quarter to quarter. We expect
our quarterly results to continue to fluctuate in the future due to a number of factors, including the general economic
conditions in the markets where we operate, the frequency of occurrence or severity of catastrophe or other insured
events, fluctuating interest rates, claims exceeding our loss reserves, competition in our industry, deviations from
expected premium retention rates of our existing policies and contracts, adverse investment performance, and the cost of
reinsurance coverage. Additionally, the rapid development and fluidity of the Pandemic precludes any prediction as to
the ultimate impact of COVID-19 on our business. The full extent of the impact and effects of COVID-19 on our
business, operations, liquidity, financial condition and results of operations remain uncertain at this time.
We seek to underwrite products and make investments to achieve favorable returns on tangible stockholders’
equity over the long term. Our opportunistic nature and focus on long-term growth in tangible equity may result in
fluctuations in gross written premiums from period to period as we concentrate on underwriting contracts that we believe
will generate better long-term, rather than short-term, results. Accordingly, our short-term results of operations may not
be indicative of our long-term prospects.
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Risks related to the Economic Environment
The effects of the Pandemic have significantly affected the global and U.S. economies and financial markets, and
may further disrupt our operations and the operations of our insureds, agents, and third parties upon which we rely.
The current Pandemic has caused significant disruption in the global and U.S. economies and financial markets.
The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school closures,
reduction in business activity, increased unemployment, supply chain interruptions, and overall economic and financial
market instability. There continue to be significant reported cases of infected individuals throughout the United States
and globally. Impacts to our business could be widespread and material impacts may result, including but not limited to,
the following:
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employees contracting COVID-19;
reductions in our operating effectiveness as our employees work from home;
unavailability of key personnel necessary to conduct our business activities;
volatility in financial markets that could materially affect our investment portfolio valuations and returns;
government mandates and/or legislative changes, including premium grace periods and presumed Pandemic
compensability for all or certain insured groups;
increases in frequency and/or severity of compensable claims;
increased credit risk;
business disruption to independent insurance agents and brokers and/or our partners that market and sell our
insurance products; and
business disruptions to third parties that we outsource certain business functions to and whose technology upon
which we rely.
We are taking precautions to protect the safety and well-being of our employees while providing uninterrupted
service to our policyholders and claimants. However, no assurance can be given that these actions will be sufficient, nor
can we predict the level of disruption that will occur to our employees' ability to continue to provide customer support
and service as they work from home. Furthermore, the macroeconomic effects of the Pandemic may persist for an
indefinite period, even after the pandemic has subsided, which could negatively impact demand for our insurance
products in the future and result in a material adverse effect on our results of operations and financial condition.
Adverse economic factors, including recession, inflation, periods of high unemployment or lower economic activity
could result in the sale of fewer policies than expected or an increase in the frequency of claims and premium
defaults, and even the falsification of claims, or a combination of these effects, which, in turn, could affect our
growth and profitability.
Factors, such as business revenue, economic conditions, the volatility and strength of the capital markets, and
inflation can affect the business and economic environment. These same factors affect our ability to generate revenue
and profits. In an economic downturn that is characterized by higher unemployment, declining spending, and reduced
corporate revenue, the demand for insurance products is generally adversely affected, which directly affects our
premium levels and profitability. Negative economic factors may also affect our ability to receive the appropriate rate for
the risk we insure with our policyholders and may adversely affect the number of policies we can write, and our
opportunities to underwrite profitable business. In an economic downturn, our customers may have less need for
insurance coverage, cancel or cease payment on existing insurance policies, modify their coverage, or not renew the
policies they hold with us. Existing policyholders may exaggerate or even falsify claims to obtain higher claims
payments. These outcomes would reduce our underwriting profit to the extent these factors are not reflected in the rates
we charge.
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We underwrite a significant portion of our insurance in California and Texas. Any economic downturn in either
state could have an adverse effect on our financial condition and results of operations.
Performance of our investment portfolio is subject to a variety of investment risks that may adversely affect our
financial results.
Our results of operations depend, in part, on the performance of our investment portfolio. We seek to hold a
diversified portfolio of investments that is managed by a professional investment advisory management firm in
accordance with our investment policy and routinely reviewed by our Board of Directors. Our investments are subject to
general economic conditions and market risks as well as risks inherent to particular securities.
Our primary market risk exposures relate to changes in interest rates and credit quality considerations. Future
increases in interest rates could cause the values of our fixed maturity securities portfolios to decline, with the magnitude
of the decline depending on the duration of securities included in our portfolio and the amount by which interest rates
increase. Some fixed maturity securities have call or prepayment options, which create possible reinvestment risk in
declining rate environments. Other fixed maturity securities, such as mortgage-backed and asset-backed securities, carry
prepayment risk or, in a rising interest rate environment, may not prepay as quickly as expected.
The value of our investment portfolio is subject to the risk that certain investments may default or become
impaired due to deterioration in the financial condition of one or more issuers of the securities we hold, or due to
deterioration in the financial condition of an insurer that guarantees an issuer’s payments on such investments.
Downgrades in the credit ratings of fixed maturities also have a significant negative effect on the market valuation of
such securities.
Such factors could reduce our net investment income and result in realized investment losses. Our investment
portfolio is subject to increased valuation uncertainties when investment markets are illiquid. The valuation of
investments is more subjective when markets are illiquid, thereby increasing the risk that the estimated fair value
(i.e., the carrying amount) of the securities we hold in our portfolio does not reflect prices at which actual transactions
would occur.
We also invest in marketable equity securities, generally through mutual funds and exchange-traded funds that
provide exposure to the U.S. investment-grade bond market. These securities are carried on the balance sheet at fair
market value and are subject to potential losses and declines in market value. Our equity invested assets totaled $24.3
million as of December 31, 2020.
Risks for all types of securities are managed through the application of our investment policy, which establishes
investment parameters that include but are not limited to, maximum percentages of investment in certain types of
securities and minimum levels of credit quality, which we believe are within applicable guidelines established by the
National Association of Insurance Commissioners (“NAIC”), the Oregon Division of Financial Regulation and the
California and Arizona Departments of Insurance.
Although we seek to preserve our capital, we cannot be certain that our investment objectives will be achieved,
and results may vary substantially over time. In addition, although we seek to employ investment strategies that are not
correlated with our insurance and reinsurance exposures, losses in our investment portfolio may occur at the same time
as underwriting losses and, therefore, exacerbate the adverse effect of the losses on us.
Our investment portfolio could also be adversely impacted by ratings downgrades, increased bankruptcies and
credit spread widenings caused by economic downturns from pandemics or other events. Severe economic downturns
could cause impairments in our fixed income portfolio. In addition, declines in fixed income yields would result in
decreases in net investment income from future investment activity, including re-investments.
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We could be forced to sell investments to meet our liquidity requirements.
We invest the premiums we receive from our insureds until they are needed to pay policyholder claims.
Consequently, we seek to manage the duration of our investment portfolio based on the duration of our losses and loss
adjustment expense reserves to provide sufficient liquidity and avoid having to liquidate investments to fund claims.
Risks such as inadequate losses and loss adjustment reserves or unfavorable trends in litigation could potentially result in
the need to sell investments to fund these liabilities. We may not be able to sell our investments at favorable prices or at
all. Sales could result in significant realized losses depending on the conditions of the general market, interest rates, and
credit issues with individual securities.
Risks related to Technology
We employ third-party licensed software for use in our business, and the inability to maintain these licenses or
problems with the software we license could result in increased costs and reduced operational efficiency and service
levels, which would adversely affect our business.
Multiple areas of our business rely on certain third-party software obtained under licenses from other
companies. We anticipate that we will continue to rely on such third-party software in the future. Unforeseen issues may
arise in third-party software platforms which may have an adverse impact on our operations. Integration of new
third-party software or modifications to our existing third-party software may require substantial investment of our time
and resources. The inability to integrate or operate third-party software successfully or the inadequacy of third-party
software may have a material adverse impact on our operations. Our use of additional or alternative third-party software
would require us to enter into license agreements with third parties, which may not be available on commercially
reasonable terms or at all. Many of the risks associated with the use of third-party software cannot be eliminated, and
these risks could negatively affect our business.
Additionally, the software powering our technology systems incorporates software covered by open source
licenses. The terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that the
licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to operate our
systems. In the event that portions of our proprietary software are determined to be subject to an open source license, we
could be required to publicly release the affected portions of our source code or re-engineer all or a portion of our
technology systems, each of which could reduce or eliminate the value of our technology systems. Such risk could be
difficult or impossible to eliminate and could adversely affect our business, financial condition, and results of operations.
The failure of our information technology and telecommunications systems could adversely affect our business.
Our business is highly dependent upon our information technology and telecommunications systems, including
our underwriting system. We rely on these systems to interact with brokers and insureds, to underwrite business, to
prepare policies and process premiums, to perform actuarial and other modeling functions, to process claims and make
claims payments, and to prepare internal and external financial statements and information. Some of these systems may
include or rely on third-party systems not located on our premises or under our control. Events such as natural
catastrophes, pandemics (including the COVID-19 Pandemic), terrorist attacks, industrial accidents or computer viruses
may cause our systems to fail or be inaccessible for extended periods of time. While we have implemented business
contingency plans and other reasonable plans to protect our systems, sustained or repeated system failures or service
denials could severely limit our ability to write and process new and renewal business, provide customer service, pay
claims in a timely manner or otherwise operate in the ordinary course of business.
Our operations depend on the reliable and secure processing, storage, and transmission of confidential and other
data and information in our computer systems and networks. Computer viruses, hackers, employee misconduct, and
other external hazards could expose our systems to security breaches, cyber-attacks or other disruptions. In addition, we
routinely transmit and receive personal, confidential and proprietary data and information by electronic means and are
subject to numerous data privacy laws and regulations enacted in the jurisdictions in which we do business, including
recent laws in California whose impact on our business are difficult to predict.
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While we have implemented security measures designed to protect against breaches of security and other
interference with our systems and networks, our systems and networks may be, and at times are, subject to breaches or
interference. Any such event may result in operational disruptions as well as unauthorized access to or the disclosure or
loss of our proprietary information or our customers’ data and information, which in turn may result in legal claims,
regulatory scrutiny and liability, reputational damage, the incurrence of costs to eliminate or mitigate further exposure,
the loss of customers or affiliated advisors, reputational harm or other damage to our business. In addition, the trend
toward general public notification of such incidents could exacerbate the harm to our business, financial condition and
results of operations. Even if we successfully protect our technology infrastructure and the confidentiality of sensitive
data, we could suffer harm to our business and reputation if attempted security breaches are publicized. We cannot be
certain that advances in criminal capabilities, discovery of new vulnerabilities, attempts to exploit vulnerabilities in our
systems, data thefts, physical system or network break-ins or inappropriate access, or other developments will not
compromise or breach the technology or other security measures protecting the networks and systems used in connection
with our business.
Recently, the majority of our employees have been working outside of our primary offices as a result of the
Pandemic. We believe this additional remote work increases the need for our information technology and
telecommunications systems to work properly and creates additional operational risk and difficulty should these systems
fail.
Risks Related to Laws and Regulations
We are subject to extensive regulation, which may adversely affect our ability to achieve our business objectives. In
addition, if we fail to comply with these regulations, we may be subject to penalties, including fines and suspensions,
which may adversely affect our financial condition and results of operations.
Palomar Specialty Insurance Company (“PSIC”) is subject to extensive regulation in Oregon, its state of
domicile, California, where it is commercially domiciled, and to a lesser degree, the other states in which it operates.
Palomar Excess and Surplus Insurance Company (‘‘PESIC’’) is subject to extensive regulation in Arizona, its state of
domicile, and to a lesser degree, the other states in which it writes business. Our Bermuda based reinsurance subsidiary,
Palomar Specialty Reinsurance Company Bermuda Ltd. (“PSRE”), is subject to regulation in Bermuda.
Most insurance regulations are designed to protect the interests of insurance policyholders, as opposed to the
interests of investors or stockholders. These regulations generally are administered by a department of insurance in each
state and relate to, among other things, capital and surplus requirements, investment and underwriting limitations,
affiliate transactions, dividend limitations, changes in control, solvency and a variety of other financial and non-financial
aspects of our business. Significant changes in these laws and regulations could further limit our discretion or make it
more expensive to conduct our business. State insurance regulators and the Bermuda Monetary Authority (“the BMA”),
also conduct periodic examinations of the affairs of insurance and reinsurance companies and require the filing of annual
and other reports relating to financial condition, holding company issues and other matters. These regulatory
requirements may impose timing and expense constraints that could adversely affect our ability to achieve some or all of
our business objectives.
Our U.S. insurance subsidiaries are part of an “insurance holding company system” within the meaning of
applicable California, Oregon and Arizona statutes and regulations. As a result of such status, certain transactions
between our U.S. insurance subsidiaries and one or more of their affiliates, such as a tax sharing agreement or cost
sharing arrangement, may not be effected unless the insurer has provided notice of that transaction to the California
Department of Insurance, the Oregon Division of Financial Regulation, or the Arizona Department of Insurance, as
applicable, at least 30 days prior to engaging in the transaction and the California Department of Insurance, the Oregon
Division of Financial Regulation, or the Arizona Department of Insurance, as applicable, has not disapproved such
transaction within the 30-day time period. These prior notification requirements may result in business delays and
additional business expenses. If any of our U.S. insurance subsidiaries fail to file a required notification or fail to comply
with other applicable insurance regulations in California, Oregon or Arizona, as applicable, we may be subject to
significant fines and penalties and our working relationship with the California Department of Insurance, the Oregon
Division of Financial Regulation, or the Arizona Department of Insurance, as applicable, may be impaired.
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In addition, state insurance regulators have broad discretion to deny, suspend, or revoke licenses for various
reasons, including the violation of regulations. In some instances, where there is uncertainty as to applicability, we
follow practices based on our interpretations of regulations or practices that we believe generally to be followed by the
industry. These practices may turn out to be different from the interpretations of regulatory authorities. If we do not have
the requisite licenses and approvals or do not comply with applicable regulatory requirements, state insurance regulators
could preclude or temporarily suspend us from carrying on some or all of our activities or could otherwise penalize us.
This could adversely affect our ability to operate our business. Further, changes in the level of regulation of the
insurance industry or changes in laws or regulations themselves or interpretations by regulatory authorities could
interfere with our operations and require us to bear additional costs of compliance, which could adversely affect our
ability to operate our business.
Our U.S. insurance subsidiaries are subject to risk-based capital requirements, based upon the “risk based
capital model” adopted by the NAIC, and other minimum capital and surplus restrictions imposed under Arizona,
Oregon and California law. These requirements establish the minimum amount of risk-based capital necessary for a
company to support its overall business operations. It identifies property and casualty insurers that may be inadequately
capitalized by looking at certain inherent risks of each insurer’s assets and liabilities and its mix of net written premium.
Insurers falling below a calculated threshold may be subject to varying degrees of regulatory action, including
supervision, rehabilitation or liquidation. Failure by any of our U.S. subsidiaries to maintain risk-based capital at the
required levels could adversely affect their ability to maintain regulatory authority to conduct business.
PSRE is subject to regulation from the European Union. The European Union adopted the Economic Substance
Act 2018 and the Economic Substance Regulations 2018 (together, the “ES Requirements”). As an insurance company,
our Bermuda subsidiary conducts a relevant activity and will be subject to the ES Requirements. As a result, our
Bermuda subsidiary may be required to change or increase our business operations in Bermuda to meet the new
requirements. Compliance with the ES Requirements is required with effect from July 1, 2019.
Unexpected changes in the interpretation of our coverage or provisions, including loss limitations and exclusions, in
our policies could have a material adverse effect on our financial condition and results of operations.
There can be no assurances that specifically negotiated loss limitations or exclusions in our policies will be
enforceable in the manner we intend. As industry practices and legal, judicial, social, and other conditions change,
unexpected and unintended issues related to claims and coverage may emerge. For example, many of our policies limit
the period during which a policyholder may bring a claim, which may be shorter than the statutory period under which
such claims can be brought against our policyholders. While these limitations and exclusions help us assess and mitigate
our loss exposure, it is possible that a court or regulatory authority or an executive action could nullify or void a
limitation or exclusion, such as limitations on business interruption claims caused by pandemics or other crises, or
legislation could be enacted modifying or barring the use of such limitations or exclusions. These types of governmental
actions could result in higher than anticipated losses and loss adjustment expenses, which could have a material adverse
effect on our financial condition or results of operations. In addition, court decisions, such as the 1995 Montrose decision
in California could read policy exclusions narrowly so as to expand coverage, thereby requiring insurers to create and
write new exclusions.
These issues may adversely affect our business by either broadening coverage beyond our underwriting intent
or by increasing the frequency or severity of claims. In some instances, these changes may not become apparent until
sometime after we have issued insurance contracts that are affected by the changes. As a result, the full extent of liability
under our insurance contracts may not be known for many years after a contract is issued.
We may become subject to additional government or market regulation, which may have a material adverse impact on
our business.
Our business could be adversely affected by changes in state laws, including those relating to asset and reserve
valuation requirements, surplus requirements, limitations on investments and dividends, enterprise risk and risk-based
capital requirements, and, at the federal level, by laws and regulations that may affect certain aspects of the insurance
industry, including proposals for preemptive federal regulation. The U.S. federal government generally has not directly
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regulated the insurance industry except for certain areas of the market, such as insurance for flood, nuclear and terrorism
risks. However, the federal government has undertaken initiatives or considered legislation in several areas that may
affect the insurance industry, including tort reform, corporate governance and the taxation of reinsurance companies. In
addition, the Bermuda reinsurance regulatory framework has become subject to increased scrutiny in many jurisdictions.
As a result, the BMA has implemented and imposed additional requirements on the companies it regulates, which
requirements could adversely impact the operations of PSRE.
Any government mandates and/or legislative changes related to the ongoing Pandemic, including mandated
premium refunds or credits and extended premium grace periods, could have a material adverse effect on our results of
operations and financial condition. Premium grace periods could significantly increase our expenses while decreasing
our short-term revenues which would adversely impact our liquidity.
Changes in tax laws as a result of the enactment of tax legislation could impact our operations and profitability.
Legislation commonly known as the Tax Cuts and Jobs Act (“the Tax Act”) was signed into law on
December 22, 2017. The Tax Act made significant changes to the U.S. federal income tax rules for taxation of
individuals and corporations, generally effective for taxable years beginning after December 31, 2017. In the case of
individuals, the tax brackets have been adjusted, the top federal income rate has been reduced to 37%, special rules have
reduced taxation of certain income earned through pass-through entities and various deductions have been eliminated or
limited, including limiting the deduction for state and local taxes to $10,000 per year, decreasing the mortgage interest
deduction on new homes to $750,000 and eliminating the home equity line of credit interest deduction for loans that are
not considered home acquisition debt.
Changes in these deductions may affect taxpayers in states with high residential home prices and high state and
local taxes, such as California, and may also negatively impact the housing market. This in turn may negatively impact
our growth in these markets if there is lower demand in the housing market as a consequence of the Tax Act.
If states increase the assessments that we are required to pay, our business, financial condition and results of
operations would suffer.
Certain jurisdictions in which PSIC is admitted to transact business require property and casualty insurers doing
business within that jurisdiction to participate in insurance guaranty associations. These organizations pay contractual
benefits owed pursuant to insurance policies issued by impaired, insolvent or failed insurers. They levy assessments, up
to prescribed limits, on all member insurers in a particular state on the basis of the proportionate share of the premiums
written by member insurers in the lines of business in which the impaired, insolvent or failed insurer is engaged. States
may also assess admitted companies in order to fund their respective department of insurance operations. Some states
permit member insurers to recover assessments paid through full or partial premium tax offset or in limited
circumstances by surcharging policyholders.
PSIC is licensed to conduct insurance operations on an admitted basis in 32 states. As PSIC grows, its share of
any assessments in each state in which it underwrites business on an admitted basis may increase. PSIC paid assessments
of $1.1 million in 2018, $14,750 in 2019 and $0.4 million in 2020. The increase in assessments paid during 2018 was
primarily amounts assessed by the Texas Windstorm Insurance Association and Texas Fair Plan Association relating to
Hurricane Harvey, with such amounts recovered from our reinsurers. We cannot predict with certainty the amount of
future assessments, because they depend on factors outside our control, such as insolvencies of other insurance
companies as well as the occurrence of significant catastrophes similar to Hurricane Harvey. Generally speaking,
assessments are covered by our catastrophe XOL treaties and, to the extent we have experienced a net loss from an event
in excess of our net retention, assessments would be recovered from our reinsurers with no additional expense to us.
However, although reinsurance makes the reinsurer liable to us to the extent the risk is transferred or ceded to the
reinsurer, it does not relieve us (the ceding insurer) of our primary liability to our policyholders. Significant assessments
could result in higher than expected operating expenses and have a material adverse effect on our business, financial
condition or results of operations. In addition, while some states permit member insurers to recover assessments paid
through full or partial premium tax offset or, in limited circumstances, by surcharging policyholders, there is no certainty
that offsets or surcharges will be permitted in connection with any future assessments.
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Because we are a holding company and substantially all of our operations are conducted by our insurance
subsidiaries, our ability to pay dividends depends on our ability to obtain cash dividends or other permitted payments
from our insurance subsidiaries.
The continued operation and growth of our business will require substantial capital. We do not intend to declare
and pay cash dividends on shares of our common stock in the foreseeable future. Because we are a holding company
with no business operations of our own, our ability to pay dividends to stockholders largely depends on dividends and
other distributions from our insurance subsidiaries, PSIC, PESIC and PSRE. State insurance laws, including the laws of
Oregon, California, Arizona, and the laws of Bermuda restrict the ability of our subsidiaries to declare stockholder
dividends. State insurance regulators require insurance companies to maintain specified levels of statutory capital and
surplus. The maximum dividend distribution absent the approval or non-disapproval of the insurance regulatory
authority in Oregon, California and Arizona is limited by Oregon law at ORS 732.576, California law at Cal. Ins.
Code 1215.5(g) and Arizona Revised Statute 20-481. Under Oregon statute, dividend payments from PSIC are further
limited to that part of available policyholder surplus that is derived from net profits on our business. State insurance
regulators have broad powers to prevent the reduction of statutory surplus to inadequate levels, and there is no assurance
that dividends up to the maximum amounts calculated under any applicable formula would be permitted. Moreover, state
insurance regulators that have jurisdiction over the payment of dividends by PSIC and PESIC may in the future adopt
statutory provisions more restrictive than those currently in effect.
PSRE is highly regulated and is required to comply with various conditions before it is able to pay dividends or
make distributions to us. Bermuda law, including the Insurance Act 1978, as amended (“Insurance Act”) and the
Companies Act 1981, as amended (“Companies Act”) impose restrictions on PSRE’s ability to pay dividends to us based
on solvency margins and surplus and capital requirements. These restrictions, and any other future restrictions adopted
by the BMA, could have the effect, under certain circumstances, of significantly reducing dividends or other amounts
payable to us by PSRE without affirmative approval of the BMA.
Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will
depend upon results of operations, financial condition, restrictions imposed by applicable law and other factors our
Board of Directors deems relevant. Consequently, investors may need to sell all or part of their holdings of our common
stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment.
Investors seeking immediate cash dividends should not purchase our common stock.
The effects of litigation on our business are uncertain and could have an adverse effect on our business.
As is typical in our industry, we continually face risks associated with litigation of various types, including
disputes relating to insurance claims under our policies as well as other general commercial and corporate litigation.
Although we are not currently involved in any material litigation with our customers, other members of the insurance
industry are the target of class action lawsuits and other types of litigation, some of which involve claims for substantial
or indeterminate amounts, and the outcomes of which are unpredictable. This litigation is based on a variety of issues,
including insurance and claim settlement practices. We cannot predict with any certainty whether we will be involved in
such litigation in the future or what impact such litigation would have on our business.
We rely on the use of credit scoring in pricing and underwriting certain of our insurance policies and any legal or
regulatory requirements that restrict our ability to access credit score information could decrease the accuracy of our
pricing and underwriting process and thus decrease our ability to be profitable.
We use credit scoring as a factor in pricing and underwriting decisions where allowed by state law. Consumer
groups and regulators have questioned whether the use of credit scoring unfairly discriminates against some groups of
people and are calling for laws and regulations to prohibit or restrict the use of credit scoring in underwriting and
pricing. Laws or regulations that significantly curtail or regulate the use of credit scoring, if enacted in a large number of
states in which we operate, could impact the integrity of our pricing and underwriting processes, which could, in turn,
materially and adversely affect our business, financial condition, results of operations and prospects, and make it harder
for us to be profitable over time.
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Any failure to protect our intellectual property rights could impair our ability to protect our intellectual property,
proprietary technology platform and brand, or we may be sued by third parties for alleged infringement of their
proprietary rights.
Our success and ability to compete depend in part on our intellectual property, which includes our rights in our
proprietary technology platform and our brand. We primarily rely on copyright, trade secret and trademark laws, and
confidentiality agreements with our employees, customers, service providers, partners and others to protect our
intellectual property rights. However, the steps we take to protect our intellectual property may be inadequate. Litigation
brought to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to
management and could result in the impairment or loss of portions of our intellectual property. Additionally, our efforts
to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the
validity and enforceability and scope of our intellectual property rights. Our failure to secure, protect and enforce our
intellectual property rights could adversely affect our brand and adversely impact our business.
Our success also depends in part on us not infringing on the intellectual property rights of others. Our
competitors, as well as a number of other entities and individuals, may own or claim to own intellectual property relating
to our industry. In the future, third parties may claim that we are infringing on their intellectual property rights, and we
may be found to be infringing on such rights. Any claims or litigation could cause us to incur significant expenses and, if
successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us
from offering our services, or require that we comply with other unfavorable terms. Even if we were to prevail in such a
dispute, any litigation could be costly and time-consuming and divert the attention of our management and key personnel
from our business operations.
Changes in accounting practices and future pronouncements may materially affect our reported financial results.
Developments in accounting practices may require us to incur considerable additional expenses to comply,
particularly if we are required to prepare information relating to prior periods for comparative purposes or to apply the
new requirements retroactively. Our consolidated financial statements are prepared in accordance with Generally
Accepted Accounting Principles (“GAAP”). The impact of changes in GAAP cannot be predicted but may affect the
calculation of net income, stockholders’ equity and other relevant financial statement line items.
In addition to compliance with GAAP on a consolidated basis, PSIC, PESIC, and PSRE are required to comply
with statutory accounting principles (“SAP”). SAP and various components of SAP are subject to constant review by the
NAIC and its task forces and committees, as well as state insurance departments, in an effort to address emerging issues
and otherwise improve financial reporting. Various proposals are pending before committees and task forces of the
NAIC, some of which, if enacted, could have negative effects on insurance industry participants. The NAIC
continuously examines existing laws and regulations. We cannot predict whether or in what form such reforms will be
enacted and, if so, whether the enacted reforms will positively or negatively affect us.
We incur significant costs as a public company, and our management is required to devote substantial time to
complying with public company regulations.
As a public company, we incur certain legal, accounting and other expenses that we would not incur as a private
company. We are subject to the reporting requirements of the Exchange Act, which require, among other things, that we
file with the SEC annual, quarterly and current reports with respect to our business and financial condition and therefore
we need to have the ability to prepare financial statements that comply with all SEC reporting requirements on a timely
basis. In addition, we are subject to other reporting and corporate governance requirements, including certain
requirements of and certain provisions of the Sarbanes-Oxley Act and the regulations promulgated thereunder, which
impose significant compliance obligations upon us. In particular, we must perform system and process evaluation and
testing of our internal control over financial reporting to allow management and our independent registered public
accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404
of the Sarbanes-Oxley Act. Our compliance with Section 404 requires that we incur substantial accounting expense and
expend significant management efforts. We must maintain accounting and financial staff and consultants with
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appropriate public company reporting, technical accounting, and internal control knowledge to satisfy the ongoing
requirements of Section 404 and provide internal audit services.
The Sarbanes-Oxley Act and the Dodd-Frank Act, as well as new rules subsequently implemented by the SEC
and Nasdaq, have increased regulation of, and imposed enhanced disclosure and corporate governance requirements on,
public companies. Our efforts to comply with these evolving laws, regulations and standards increases our operating
costs and divert management’s time and attention from revenue-generating activities.
These requirements also place significant additional demands on our finance and accounting staff and on our
financial accounting and information systems. We must retain accounting and financial staff with appropriate public
company reporting experience and technical accounting knowledge. Other expenses associated with being a public
company include increased auditing, accounting and legal fees and expenses, investor relations expenses, increased
directors’ fees and director and officer liability insurance costs, registrar and transfer agent fees and listing fees, as well
as other expenses. As a public company, we are required, among other things, to:
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prepare and file periodic reports and distribute other stockholder communications, in compliance with the
federal securities laws and requirements of Nasdaq;
define and expand the roles and the duties of our Board of Directors and its committees;
institute comprehensive compliance and investor relations functions; and
evaluate and maintain our system of internal control over financial reporting, and report on management’s
assessment thereof, in compliance with rules and regulations of the SEC and the Public Company
Accounting Oversight Board.
We may not be successful in complying with these requirements, and compliance with them could materially
adversely affect our business. These requirements increase our costs and may cause us to reduce costs in other areas of
our business or increase the prices of our products or services. For example, these rules and regulations to make it more
difficult and more expensive for us to obtain director and officer liability insurance. We cannot predict or estimate the
amount or timing of additional costs we may incur to respond to these requirements. The impact of these requirements
could also make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors, our
Board committees or as executive officers.
In addition, if we fail to implement and maintain the required controls with respect to our internal accounting
and audit functions, our ability to report our results of operations on a timely and accurate basis could be impaired. If we
do not implement the required controls in a timely manner or with adequate compliance, we may be subject to sanctions
or investigation by regulatory authorities, such as the SEC or Nasdaq. Any such action could harm our reputation and the
confidence of our investors and customers and could negatively affect our business and cause the price of our shares of
common stock to decline.
We are required by Section 404 of the Sarbanes-Oxley Act to evaluate the effectiveness of our internal control over
financial reporting. If we are unable to achieve and maintain effective internal controls, our operating results and
financial condition could be harmed and the market price of our common stock may be negatively affected.
As a public company with SEC reporting obligations, we are required to document and test our internal control
procedures to satisfy the requirements of Section 404(b) of the Sarbanes-Oxley Act, which requires annual assessments
by management of the effectiveness of our internal control over financial reporting beginning with this Annual Report on
form 10-K. We must implement and maintain substantial internal control systems and procedures to satisfy the reporting
requirements under the Exchange Act.
During our assessments, we may identify deficiencies that we are unable to remediate in a timely manner.
Testing and maintaining our internal control over financial reporting may also divert management’s attention from other
matters that are important to the operation of our business. We may not be able to conclude on an ongoing basis that we
have effective internal control over financial reporting in accordance with Section 404(b) of Sarbanes-Oxley. If we
conclude that our internal control over financial reporting is not effective, the cost and scope of remediation actions and
their effect on our operations may be significant. Moreover, any material weaknesses or other deficiencies in our internal
45
control over financial reporting may impede our ability to file timely and accurate reports with the SEC. Any of the
above could cause investors to lose confidence in our reported financial information or our common stock listing on
Nasdaq to be suspended or terminated, which could have a negative effect on the trading price of our common stock.
Applicable insurance laws may make it difficult to effect a change of control.
Under applicable Oregon, California and Arizona insurance laws and regulations, no person may acquire
control of a domestic insurer until written approval is obtained from the state insurance commissioner following a public
hearing on the proposed acquisition. Such approval would be contingent upon the state insurance commissioner’s
consideration of a number of factors including, among others, the financial strength of the proposed acquiror, the
acquiror’s plans for the future operations of the domestic insurer and any anti-competitive results that may arise from the
consummation of the acquisition of control. Oregon, California and Arizona insurance laws and regulations pertaining to
changes of control apply to both the direct and indirect acquisition of ten percent or more of the voting stock of an
insurer domiciled in that state. Accordingly, the acquisition of ten percent or more of our common stock would be
considered an indirect change of control of Palomar Holdings, Inc. and would trigger the applicable change of control
filing requirements under Oregon, California and Arizona insurance laws and regulations, absent a disclaimer of control
filing and its acceptance by the Oregon, California and Arizona Insurance Departments. These requirements may
discourage potential acquisition proposals and may delay, deter or prevent a change of control of Palomar Holdings, Inc.,
including through transactions that some or all of the stockholders of Palomar Holdings, Inc. might consider to be
desirable.
Risks Related to Ownership of Our Common Stock
Future transactions where we raise capital may negatively affect our stock price.
We are currently a “Well-Known Seasoned Issuer” and may file automatic shelf registration statements at any
time with the SEC. Sales of substantial amounts of shares of our common stock or other securities under our current or
future shelf registration statements could lower the market price of our common stock and impair our ability to raise
capital through the sale of equity securities.
Our operating results and stock price may be volatile, or may decline regardless of our operating performance, and
holders of our common stock could lose all or part of their investment.
Our quarterly operating results are likely to fluctuate in the future as a publicly traded company. In addition,
securities markets worldwide have experienced, and are likely to continue to experience, significant price and volume
fluctuations. This market volatility, as well as general economic, market or political conditions, could subject the market
price of our shares to wide price fluctuations regardless of our operating performance. Although we believe we have
adequate sources of liquidity over the short- and long-term, the success of our operations, the global economic outlook,
and the pace of sustainable growth in our markets, in each case, in light of the market volatility and uncertainty as a
result of the Pandemic, among other factors, could impact our business and liquidity. You should consider an
investment in our common stock to be risky, and you should invest in our common stock only if you can withstand a
significant loss and wide fluctuation in the market value of your investment. The market price of our common stock is
likely to continue to be subject to significant fluctuations in response to the factors described in this “Risk Factors”
section and other factors, many of which are beyond our control. Among the factors that could affect our stock price are:
• market conditions in the broader stock market;
•
•
•
•
actual or anticipated fluctuations in our quarterly financial and operating results;
introduction of new products or services by us or our competitors;
issuance of new or changed securities analysts’ reports or recommendations;
results of operations that vary from expectations of securities analysis and investors;
46
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
short sales, hedging and other derivative transactions in our common stock;
guidance, if any, that we provide to the public, any changes in this guidance or our failure to meet this
guidance;
strategic actions by us or our competitors;
announcement by us, our competitors or our acquisition targets;
sales, or anticipated sales, of large blocks of our stock, including by our directors, executive officers and
principal stockholders;
additions or departures in our Board or Directors, senior management or other key personnel;
regulatory, legal or political developments;
public response to press releases or other public announcements by us or third parties, including our filings
with the SEC;
litigation and governmental investigations;
changing economic conditions, including those caused by the Pandemic;
changes in accounting principles;
any indebtedness we may incur or securities we may issue in the future;
default under agreements governing our indebtedness;
exposure to capital and credit market risks that adversely affect our investment portfolio or our capital
resources;
changes in our credit ratings;
exchange rate fluctuations; and
other events or factors, including those from natural disasters, war, pandemics, acts of terrorism, or
responses to these events.
The securities markets have from time to time experienced extreme price and volume fluctuations that often
have been unrelated or disproportionate to the operating performance of particular companies. As a result of these
factors, investors in our common stock may not be able to resell their shares at or above the price at which they
purchased their shares. These broad market fluctuations, as well as general market, economic and political conditions,
such as recessions, loss of investor confidence or interest rate changes, may negatively affect the market price of our
common stock.
In addition, the stock markets, including Nasdaq, have experienced extreme price and volume fluctuations that
have affected and continue to affect the market prices of equity securities of many companies. If any of the foregoing
occurs, it could cause our stock price to fall and may expose us to securities class action litigation that, even if
unsuccessful, could be costly to defend, divert management’s attention and resources or harm our business.
Anti-takeover provisions in our organizational documents could delay a change in management and limit our share
price.
Provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire
control of us even if such a change in control would increase the value of our common stock and prevent attempts by our
stockholders to replace or remove our current Board of Directors or management.
47
Our charter documents contain anti-takeover provisions that will hinder takeover attempts and could reduce the
market value of our common stock or prevent sale at a premium. Our anti-takeover provisions:
•
•
•
•
•
•
•
•
•
•
permit the Board of Directors to establish the number of directors and fill any vacancies and newly created
directorships;
provide that our Board of Directors are classified into three classes with staggered, three year terms and
that directors may only be removed for cause;
require super-majority voting to amend provisions in our certificate of incorporation and bylaws;
include blank-check preferred stock, the preference, rights and other terms of which may be set by the
Board of Directors and could delay or prevent a transaction or a change in control that might involve a
premium price for our common stock or otherwise benefit our stockholders;
eliminate the ability of our stockholders to call special meetings of stockholders;
specify that special meetings of our stockholders can be called only by our Board of Directors, the
chairman of our Board of Directors, or our chief executive officer;
prohibit stockholder action by other than unanimous written consent;
provide that vacancies on our Board of Directors may be filled only by a majority of directors then in
office, even though less than a quorum;
prohibit cumulative voting in the election of directors; and
establish advance notice requirements for nominations for election to our Board of Directors or for
proposing matters that can be acted upon by stockholders at annual stockholder meetings.
In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation
Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding
voting stock, from merging or combining with us for a period of time.
Our certificate of incorporation and bylaws provide that the Court of Chancery of the State of Delaware is the
exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’
ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our certificate of incorporation and bylaws provide that the Court of Chancery of the State of Delaware is the
exclusive forum for the following civil actions:
•
•
•
•
•
any derivative action or proceeding brought on our behalf;
any action asserting a claim of breach of a fiduciary duty by any of our directors, officers, employees or
agents or our stockholders;
any action asserting a claim arising pursuant to any provision of the DGCL or our certificate of
incorporation or bylaws or as to which the DGCL confers jurisdiction on the Court of Chancery of the State
of Delaware;
any action to interpret, apply, enforce or determine the validity of our certificate of incorporation or our
bylaws; or
any action asserting a claim governed by the internal affairs doctrine.
However, this provision would not apply to suits brought to enforce a duty or liability created by the Exchange
Act. Furthermore, this provision applies to Securities Act claims and Section 22 of the Securities Act creates concurrent
jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act
or the rules and regulations thereunder. Accordingly, there is uncertainty as to whether a court would enforce such
provision, and our stockholders will not be deemed to have waived our compliance with the federal securities laws and
the rules and regulations thereunder. This choice of forum provision, if enforced, may limit a stockholder’s ability to
48
bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees,
which may discourage such lawsuits against us and our directors, officers and other employees, although our
stockholders will not be deemed to have waived our compliance with federal securities laws and the rules and
regulations thereunder. Alternatively, if a court were to find the choice of forum provision contained in our certificate of
incorporation and bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with
resolving such action in other jurisdictions, which could have a material adverse effect on our business, financial
condition or results of operations.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our
business, our stock price and trading volume could decline.
The trading market for our common stock depends, in part, on the research and reports that securities or
industry analysts publish about us or our business and our industry. If one or more of the analysts who cover us
downgrades our common stock or publishes inaccurate or unfavorable research about our business, our stock price
would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly,
demand for our common stock could decrease, which could cause our stock price and trading volume to decline.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal
securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate
to future events or our future financial or operating performance. In some cases, you can identify forward-looking
statements because they contain words such as “may”, “will”, “should”, “expects”, “plans”, “anticipates”, “could”,
“intends”, “target”, “projects”, “contemplates”, “believes”, “estimates”, “predicts”, “would”, “potential” or “continue” or
the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or
intentions. These forward-looking statements include, among others, statements relating to our future financial
performance, our business prospects and strategy, anticipated financial position, liquidity and capital needs and other
similar matters. These forward-looking statements are based on management’s current expectations and assumptions
about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to
predict.
Our actual results may differ materially from those expressed in, or implied by, the forward-looking statements
included in this Annual Report on Form 10-K as a result of various factors, including, among others:
•
•
•
claims arising from unpredictable and severe catastrophe events could reduce our earnings and
stockholders’ equity and limit our ability to underwrite new insurance policies;
the inability to purchase third-party reinsurance or otherwise expand our catastrophe coverage in amounts
that are commercially acceptable to us or on terms that adequately protect us;
the inherent uncertainty of models resulting in actual losses that are materially different than our estimates;
• we and our customers could be negatively and adversely impacted by The Pandemic;
•
•
•
•
a decline in our financial strength rating adversely affecting the amount of business we write;
reinsurance counterparty credit risk;
the concentration of our business in California and Texas;
the potential loss of one or more key executives or an inability to attract and retain qualified personnel
adversely affecting our results of operations;
49
•
•
•
•
•
•
•
our reliance on a select group of brokers;
the failure of any of the loss limitations or exclusions we employ, or changes in other claims or coverage
issues, having a material adverse effect on our financial condition or results of operations;
unexpected changes in the interpretation of our coverage or provisions;
adverse economic factors, including recession, inflation, periods of high unemployment or lower economic
activity resulting in the sale of fewer policies than expected or an increase in frequency or severity of
claims and premium defaults or both, affecting our growth and profitability;
the performance of our investment portfolio adversely affecting our financial results;
being forced to sell investments to meet our liquidity requirements;
extensive regulation adversely affecting our ability to achieve our business objectives or the failure to
comply with these regulations adversely affecting our financial condition and results of operations;
• we may become subject to additional government or market regulation;
•
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•
•
•
•
•
•
•
•
•
•
the possibility that states could increase the assessments that Palomar Specialty Insurance Company is
required to pay;
the ability to pay dividends being dependent on our ability to obtain cash dividends or other permitted
payments from our insurance subsidiary;
fluctuation and variance in our operating results;
the possibility that we act based on inaccurate or incomplete information regarding the accounts we
underwrite;
our employees, underwriters and other associates taking excessive risks;
our inability to obtain future additional capital or obtaining additional capital on unfavorable terms;
the failure of our information technology and telecommunications systems;
our inability to protect our trademarks or other intellectual property rights;
our inability to maintain, or errors in, our third-party and open source licensed software;
the inability to manage our growth effectively;
the intense competition for business in our industry;
the failure of renewals of our existing contracts to meet expectations could affect our written premiums in
the future;
our inability to underwrite risks accurately and charge competitive yet profitable rates to our policyholders;
the effects of litigation having an adverse effect on our business;
50
•
•
•
•
•
changes in accounting practices;
our failure to accurately and timely pay claims;
legal or regulatory requirements that restrict our ability to access credit score information for purposes of
pricing and underwriting our insurance policies;
increased costs as a result of being a public company; and
the failure to maintain effective internal controls in accordance with Sarbanes-Oxley.
We have based the forward-looking statements contained in this Annual Report on Form 10-K primarily on our
current expectations and projections about future events and trends that we believe may affect our business, financial
condition, results of operations, prospects, business strategy and financial needs. The outcome of the events described in
these forward-looking statements is subject to risks, uncertainties, assumptions and other factors described in the section
captioned “Risk Factors” and elsewhere in this Annual Report on Form 10-K. These risks are not exhaustive. Other
sections of this Annual Report on Form 10-K include additional factors that could adversely impact our business and
financial performance. Furthermore, new risks and uncertainties emerge from time to time and it is not possible for us to
predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Annual
Report on Form 10-K. We cannot assure you that the results, events and circumstances reflected in the forward-looking
statements will be achieved or occur, and actual results, events or circumstances could differ materially from those
described in the forward-looking statements.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant
subject. These statements are based upon information available to us as of the date of this Annual Report on Form 10-K,
and while we believe such information forms a reasonable basis for such statements, such information may be limited or
incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or
review of, all potentially available relevant information. These statements are inherently uncertain and investors are
cautioned not to unduly rely upon these statements.
You should read this Annual Report on Form 10-K and the documents that we reference in this Annual Report
on Form 10-K and have filed as exhibits to this Annual Report on Form 10-K with the understanding that our actual
future results, levels of activity, performance and achievements may be materially different from what we expect. We
qualify all of our forward-looking statements by these cautionary statements.
The forward-looking statements made in this Annual Report on Form 10-K relate only to events as of the date
on which such statements are made. We undertake no obligation to update any forward-looking statements after the date
of this Annual Report on Form 10-K or to conform such statements to actual results or revised expectations, except as
required by law.
Item 1B: Unresolved Staff Comments
None.
Item 2. Properties
Our primary executive offices and insurance operations are located in La Jolla, California, which occupy
approximately 14,700 square feet of office space for annual rent and rent-related operating payments of approximately
$0.7 million. The lease for this space expires in 2024. We also lease office space in various locations throughout the
United States which we use for operations and administration.
We do not own any real property. We believe that our facilities are adequate for our current needs.
51
Item 3. Legal Proceedings
We are subject to routine legal proceedings in the normal course of operating our insurance business. We are
not involved in any legal proceedings which reasonably could be expected to have a material adverse effect on our
business, results of operations or financial condition.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Our common shares began trading on the NASDAQ Global Select Market under the symbol “PLMR” on April 17, 2019.
Prior to that time, there was no public market for our common shares. As of March 3, 2021, there were approximately 11
holders of record of our common stock. Because most of our shares of common stock are held by brokers and other
institutions on behalf of our stockholders, this number is not representative our total stockholders.
The continued operation and growth of our business will require substantial capital. We do not intend to declare
and pay cash dividends on shares of our common stock in the foreseeable future. Because we are a holding company
with no business operations of our own, our ability to pay dividends to stockholders largely depends on dividends and
other distributions from our U.S. subsidiaries, PESIC and PSIC, and our Bermuda subsidiary, PSRE. State insurance
laws, including the laws of Arizona, Oregon and California, and the laws of Bermuda restrict the ability these
subsidiaries to declare stockholder dividends. State insurance regulators require insurance companies to maintain
specified levels of statutory capital and surplus and restrict dividend payments. Dividend payments are further limited to
that part of available policyholder surplus that is derived from net profits on our business. State insurance regulators
have broad powers to prevent the reduction of statutory surplus to inadequate levels, and there is no assurance that
dividends up to the maximum amounts calculated under any applicable formula would be permitted. Moreover, state
insurance regulators may in the future adopt statutory provisions more restrictive than those currently in effect.
Our Bermuda reinsurance subsidiary is highly regulated and is required to comply with various conditions
before it is able to pay dividends or make distributions to us. Bermuda law, including the Insurance Act 1978, as
amended (“Insurance Act”) and the Companies Act 1981, as amended (“Companies Act”) impose restrictions on our
Bermuda reinsurance subsidiary’s ability to pay dividends to us based on solvency margins and surplus and capital
requirements. These restrictions, and any other future restrictions adopted by the BMA, could have the effect, under
certain circumstances, of significantly reducing dividends or other amounts payable to us by our Bermuda reinsurance
subsidiary without affirmative approval of the BMA.
Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will
depend upon results of operations, financial condition, restrictions imposed by applicable law and other factors our
Board of Directors deems relevant. Consequently, investors may need to sell all or part of their holdings of our common
stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment.
Investors seeking immediate cash dividends should not purchase our common stock.
Performance Graph
The following performance graph compares the cumulative total shareholder return of an investment in (1) our
common stock, (2) the cumulative total returns to the Nasdaq Composite Index and (3) the cumulative total returns to the
Nasdaq Insurance Index, for the period from April 17, 2019 (the date our common stock began trading on Nasdaq)
through December 31, 2020.
52
The graph assumes an initial investment of $100. Such returns are based on historical results and are not
indicative of future performance.
Palomar Holdings, Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Nasdaq Composite Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Nasdaq Insurance Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
April 17, 2019 December 31, 2019 December 31, 2020
467.83
161.18
111.93
265.88 $
112.21 $
110.88 $
100.00 $
100.00 $
100.00 $
Item 6. Selected Consolidated Financial and Other Data
The following tables present selected consolidated financial and other data as of and for the periods indicated
below. This selected data has been derived from our audited consolidated financial statements.
Our historical results are not necessarily indicative of the results that should be expected in any future period.
You should read this data together with our audited consolidated financial statements and related notes which are
included elsewhere in this Annual Report on Form 10-K, as well as “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” also included elsewhere this Annual Report on Form 10-K.
53
Selected Operating Data and Key Ratios
2020
Year Ended December 31,
2019
2018
(in thousands except shares and per share data)
2017
2016
Results of Operations:
Gross written premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 354,360
(155,102)
Ceded written premiums . . . . . . . . . . . . . . . . . . . . . . . . . . .
199,258
Net written premiums . . . . . . . . . . . . . . . . . . . . . . . . . . .
155,068
Net earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
158,363
Total underwriting revenue (1) . . . . . . . . . . . . . . . . . . . . . .
64,115
Losses and loss adjustment expenses . . . . . . . . . . . . . . . . . .
(3,877)
Underwriting income (loss) (1) . . . . . . . . . . . . . . . . . . . . . .
6,257
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,867
Adjusted net income (1) . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 251,961
(108,332)
143,629
100,207
102,878
5,593
8,727
10,621
37,879
$ 154,891
(82,949)
71,942
69,897
72,302
6,274
19,847
18,219
19,824
$ 120,234
(46,951)
73,283
55,545
56,733
12,125
3,940
3,783
3,783
$ 82,287
(29,636)
52,651
40,322
40,582
7,292
5,797
6,614
6,614
Per Share Data:
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted adjusted earnings per share (1) . . . . . . . . . . . . . . . . $
0.24
0.35
$
$
0.49
1.73
$
$
1.07
1.17
$
$
0.22
0.22
$
$
0.39
0.39
Key Financial and Operating Metrics:
Return on equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted return on equity(1) . . . . . . . . . . . . . . . . . . . . . . . .
Loss ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted combined ratio (1) . . . . . . . . . . . . . . . . . . . . . . . .
Catastrophe losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,986
Catastrophe loss ratio (1) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted combined ratio excluding catastrophe losses (1) .
NM-Not Meaningful
2.1 %
3.0 %
41.3 %
61.2 %
102.5 %
100.4 %
$
32.9 %
67.5 %
6.7 %
24.1 %
5.6 %
85.7 %
91.3 %
63.3 %
—
$
— %
63.3 %
20.9 %
22.7 %
9.0 %
62.6 %
71.6 %
69.5 %
5,000
$
7.2 %
62.4 %
5.0 %
5.0 %
21.8 %
71.1 %
92.9 %
92.9 %
6,500
$
11.7 %
81.2 %
9.6 %
9.6 %
18.1 %
67.5 %
85.6 %
85.6 %
—
— %
85.6 %
(1) Indicates non-GAAP financial measure; see “Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Reconciliation of Non-GAAP Financial Measures” for a reconciliation of the non-GAAP
financial measures to their most directly comparable financial measures prepared in accordance with GAAP.
Selected Balance Sheet Data
2020
2019
December 31,
2018
(in thousands)
2017
2016
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 422,309 $ 239,479 $ 147,391 $ 125,499 $ 104,821
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . .
9,755
11,242
Premium receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . .
10,654
1,543
Reinsurance recoverable . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,648
Ceded unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,469
145,132
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,259
Accounts payable and other accrued liabilities . . . . . . . . . .
Reserve for losses and loss adjustment expenses . . . . . . . .
4,778
42,710
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded premium payable . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,582
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,721
Long‑term notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,973
72,023
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
73,109
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . .
9,525 10,780
18,633 15,087
14,052 15,161
14,562 14,632
3,175
18,284
4,021
8,687
231,134 188,355
6,497
16,061 17,784
79,130 61,976
5,069
10,607
1,528
720
19,079 17,087
134,842 109,941
96,292 78,414
33,119
36,237
25,201
17,255
26,105
18,066
395,462
13,555
16,821
130,373
11,383
4,774
—
176,906
218,556
33,538
48,842
35,481
104,728
35,031
49,163
729,092
20,730
129,036
183,489
22,233
9,891
—
365,379
363,713
9,245
54
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our historical results of operations and our liquidity and capital resources should
be read together with the consolidated financial statements and related notes that appear elsewhere in this Annual
Report on Form 10-K. In addition to historical financial information, this Annual Report on Form 10-K contains
“forward-looking statements.” You should review the “Special Note Regarding Forward-Looking Statements” and
“Risk Factors” sections of this Annual Report on Form 10-K for factors and uncertainties that may cause our actual
future results to be materially different from those in our forward-looking statements. Forward-looking statements in
this Annual Report on Form 10-K are based on information available to us as of the date hereof, and we assume no
obligation to update any such forward-looking statements.
Overview
We are a rapidly growing and innovative insurer focused on providing specialty insurance to residential and
commercial customers. Our underwriting and analytical expertise allow us to concentrate on certain markets that we
believe are underserved by other insurance companies, such as the markets for earthquake, hurricane and flood
insurance. We use proprietary data analytics and a modern technology platform to offer our customers flexible products
with customized and granular pricing for both the admitted and excess and surplus lines (“E&S”) markets.
We provide admitted insurance products through our Oregon domiciled insurance company, Palomar Specialty
Insurance Company (“PSIC”), and non-admitted insurance products through our Arizona domiciled surplus lines
insurance company, Palomar Excess and Surplus Insurance Company (“PESIC”). We distribute our products through
multiple channels, including retail agents, program administrators, wholesale brokers, and partnerships with other
insurance companies. Our business strategy is supported by a comprehensive risk transfer program with reinsurance
coverage that we believe reduces earnings volatility and provides appropriate levels of protection from catastrophic
events. Our management team combines decades of insurance industry experience across specialty underwriting,
reinsurance, program administration, distribution, and analytics.
Founded in 2014, we have significantly grown our business and have generated attractive returns. We have
organically increased gross written premiums from $16.6 million in our first year of operations to $354.4 million for the
year ended December 31, 2020, which reflects a compound annual growth rate of approximately 66%. For the year
ended December 31, 2020, we experienced average monthly premium retention rates above 93% for our Residential
Earthquake and Hawaii Hurricane lines and approximately 87% overall across all lines of business, providing strong
visibility into future revenue.
In February 2014, PSIC was awarded an “A−” rating from A.M. Best Company (“A.M. Best”), a leading rating
agency for the insurance industry. An “A−” rating is categorized by A.M. Best as an excellent rating and indicates a
stable outlook. In April 2020, A.M. Best affirmed the “A−” rating for PSIC and affirmed our “A−” group rating for
Palomar Holdings, Inc. (“PHI”). In July 2020, PESIC was also awarded an “A−” rating by A.M. Best. These ratings
reflect A.M. Best’s opinion of our financial strength, operating performance, and ability to meet obligations to
policyholders and are not an evaluation directed towards the protection of investors.
We received regulatory approval for PESIC during the second quarter of 2020 and capitalized PESIC with
approximately $100 million in initial surplus. PESIC is domiciled in the State of Arizona and licensed in Arizona to
transact across all our existing lines of business. We believe that the underwriting acumen and market expertise we have
established in the admitted insurance market is also applicable to the non-admitted market (also known as the “surplus
lines” or “E&S” market), and that PESIC enables us to serve certain risks that our admitted products cannot currently
satisfy. We began writing E&S business on a national basis during the third quarter of 2020.
We believe that our market opportunity, distinctive products, and differentiated business model position us to
grow our business profitably.
55
COVID-19 Update
The COVID-19 Pandemic ("the Pandemic") continues to impact businesses, households, communities, and
financial markets.
In response to the Pandemic, we have been taking several actions to protect the health of the public and our
employees while serving our policyholders and ensuring business continuity. Since March 2020, the majority of our
employees have been working from home and we have put all business travel on hold indefinitely. We have
implemented safeguards for employees in critical roles to ensure operational reliability and established safety protocols
for employees who interact directly with the public. We also provide employees a reimbursement to help manage
incremental costs associated with remote work. In addition, we are taking extra physical security and cybersecurity
measures to safeguard our systems to serve the operational needs of our remote workforce and ensure uninterrupted
service to our brokers and policyholders. We will continue to operate in this manner for the foreseeable future.
The mandated closures of certain business due to the Pandemic have caused a slowdown in certain sectors of
the economy and a corresponding increase in unemployment. We have experienced an increase in the number of
business interruption claims related to the Pandemic. Our All Risk and Commercial Earthquake (Difference in
Conditions or “DIC”) policies offer business interruption coverage for insureds for a loss in business income caused by
physical damage to the structure. Each of our All Risk policies has a virus and/or communicable disease exclusion. Our
DIC policies require physical damage to the structure caused by the covered perils, whether it be an earthquake or flood.
We are acknowledging, investigating, assessing and adjudicating each claim received and providing the policyholder
requisite consideration.
Our results of operations depend, in part, on the performance of our investment portfolio. During 2020 we
experienced volatility in the fair value of our investment portfolio due to unrealized losses and gains on our fixed income
securities. The economic impacts of the Pandemic could reduce our net investment income and result in realized
investment losses in future periods.
We have not seen a significant change in the growth rate of our gross written premiums since the beginning of
the Pandemic. However, adverse events such as health-related concerns about working in our offices, the inability to
travel, potential impact on our business partners and customers, and other matters affecting the general work and
business environment could harm our business and impact the implementation of our business strategy. The
macroeconomic effects of the Pandemic may persist for an indefinite period, even after the Pandemic has subsided and
we cannot anticipate all the ways in which the Pandemic could adversely impact our business in the future.
Components of our results of operations
Gross Written Premiums
Gross written premiums are the amounts received or to be received for insurance policies written or assumed by
us during a specific period of time without reduction for policy acquisition costs, reinsurance costs or other deductions.
The volume of our gross written premiums in any given period is generally influenced by:
• Volume of new business submissions in existing products or partnerships;
• Binding of new business submissions in existing products or partnerships into policies;
• Entrance into new partnerships or the offering of new types of insurance products;
• Renewal rates of existing policies; and
• Average size and premium rate of bound policies.
Our gross written premiums are also impacted when we assume unearned in-force premiums due to new
partnerships or other business reasons. In periods where we assume a large volume of unearned premiums, our gross
56
written premiums may increase significantly compared to prior periods and the increase may not be indicative of future
trends.
Ceded Written Premiums
Ceded written premiums are the amount of gross written premiums ceded to reinsurers. We enter into
reinsurance contracts to limit our exposure to potential losses and to provide additional capacity for growth. We cede
premiums primarily through excess of loss (“XOL”) agreements and quota share agreements. Ceded written premiums
are earned pro-rata over the period of risk covered. The volume of our ceded written premiums is impacted by the
amount of our gross written premiums and our decisions to increase or decrease limits or retention levels in our XOL
agreements and co-participation levels in our quota share agreements.
Our ceded written premiums can be impacted significantly in certain periods due to changes in quota share
agreements. In periods where we modify a quota share agreement, ceded written premiums may increase or decrease
significantly compared to prior periods and these fluctuations may not be indicative of future trends. In addition, our
XOL costs as a percentage of gross earned premiums vary over the life of XOL contracts due to changes of premium in
force during the contract period.
Net Earned Premiums
Net earned premiums represent the earned portion of our gross written premiums, less the earned portion that is
ceded to third-party reinsurers under our reinsurance agreements. Our insurance policies generally have a term of
one year and premiums are earned pro rata over the term of the policy.
Commission and Other Income
Commission and other income consist of commissions earned on policies written on behalf of third-party
insurance companies and where we have no exposure to the insured risk and certain fees earned in conjunction with
underwriting policies. Commission and other income are earned on the effective date of the underlying policy.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses represent the costs incurred for losses, net of any losses ceded to
reinsurers. These expenses are a function of the size and term of the insurance policies we write and the loss experience
associated with the underlying coverage. Certain policies we write subject us to attritional losses such as building fires.
In addition, most of the policies we write subject us to catastrophe losses. Catastrophe losses are certain losses resulting
from events involving multiple claims and policyholders, including earthquakes, hurricanes, floods, convective storms,
terrorist acts or other aggregating events. Our losses and loss adjustment expenses are generally affected by:
• The occurrence, frequency and severity of catastrophe events in the areas where we underwrite polices
relating to these perils;
• The occurrence, frequency and severity of non-catastrophe attritional losses;
• The mix of business written by us;
• The reinsurance agreements we have in place at the time of a loss;
• The geographic location and characteristics of the policies we underwrite;
• Changes in the legal or regulatory environment related to the business we write;
• Trends in legal defense costs; and
57
•
Inflation in housing and construction costs.
Losses and loss adjustment expenses are based on an actuarial analysis of the estimated losses, including losses
incurred during the period and changes in estimates from prior periods. Losses and loss adjustment expenses may be
paid out over multiple years.
Acquisition Expenses
Acquisition expenses are principally comprised of the commissions we pay retail agents, program
administrators and wholesale brokers, net of ceding commissions we receive on business ceded under certain reinsurance
contracts. In addition, acquisition expenses include premium-related taxes and other fees. Acquisition expenses related to
each policy we write are deferred and expensed pro-rata over the term of the policy.
Other Underwriting Expenses
Other underwriting expenses represent the general and administrative expenses of our insurance operations
including employee salaries and benefits, software and technology costs, office rent, stock-based compensation, licenses
and fees, and professional services fees such as legal, accounting, and actuarial services.
Interest Expense
Interest expense consists primarily of interest expense on our surplus notes through September 2018 and our
Floating Rate Notes after September 2018. In addition, we incurred interest expense related to prepayment penalties on
the payoff of our surplus notes in September 2018 and related to the redemption premium paid on our Floating Rate
Notes in May 2019.
Net Investment Income
We earn investment income on our portfolio of invested assets. Our invested assets are primarily comprised of
fixed maturity securities, and may also include cash and cash equivalents, and equity securities. The principal factors
that influence net investment income are the size of our investment portfolio, the yield on that portfolio and investment
management expenses. As measured by amortized cost, which excludes changes in fair value caused by changes in
interest rates, the size of our investment portfolio is mainly a function of our invested equity capital along with premium
we receive from our insureds, less payments on policyholder claims and other operating expenses.
Net Realized and Unrealized Gains and Losses on Investments
Net realized and unrealized gains and losses on investments are a function of the difference between the amount
received by us on the sale of a security and the security’s cost-basis, mark-to-market adjustments, and credit losses
recognized in earnings.
Income Tax Expense
Currently our income tax expense consists mainly of federal income taxes imposed on our operations. Our
effective tax rates are dependent upon the components of pretax earnings and the related tax effects.
58
Key Financial and Operating Metrics
We discuss certain key financial and operating metrics, described below, which provide useful information
about our business and the operational factors underlying our financial performance.
Underwriting revenue is a non-GAAP financial measure defined as total revenue, excluding net investment
income and net realized and unrealized gains and losses on investments. See “Reconciliation of Non-GAAP Financial
Measures” for a reconciliation of total revenue calculated in accordance with GAAP to underwriting revenue.
Underwriting income is a non-GAAP financial measure defined as income before income taxes excluding net
investment income, net realized and unrealized gains and losses on investments and interest expense. See
“Reconciliation of Non-GAAP Financial Measures” for a reconciliation of income before income taxes calculated in
accordance with GAAP to underwriting income.
Adjusted net income is a non-GAAP financial measure defined as net income excluding the impact of certain
items that may not be indicative of underlying business trends, operating results, or future outlook, net of tax impact. We
calculate the tax impact only on adjustments which would be included in calculating our income tax expense using the
estimated tax rate at which the company received a deduction for these adjustments. See “Reconciliation of Non-GAAP
Financial Measures” for a reconciliation of net income calculated in accordance with GAAP to adjusted net income.
Return on equity is net income expressed on an annualized basis as a percentage of average beginning and
ending stockholders’ equity during the period.
Adjusted return on equity is a non-GAAP financial measure defined as adjusted net income expressed on an
annualized basis as a percentage of average beginning and ending stockholders’ equity during the period. See
“Reconciliation of Non-GAAP Financial Measures” for a reconciliation of return on equity calculated using unadjusted
GAAP numbers to adjusted return on equity.
Loss ratio, expressed as a percentage, is the ratio of losses and loss adjustment expenses, to net earned
premiums.
Expense ratio, expressed as a percentage, is the ratio of acquisition and other underwriting expenses, net of
commission and other income to net earned premiums.
Combined ratio is defined as the sum of the loss ratio and the expense ratio. A combined ratio under 100%
generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss.
Adjusted combined ratio is a non-GAAP financial measure defined as the sum of the loss ratio and the expense
ratio calculated excluding the impact of certain items that may not be indicative of underlying business trends, operating
results, or future outlook. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of combined ratio
calculated using unadjusted GAAP numbers to adjusted combined ratio.
Diluted adjusted earnings per share is a non-GAAP financial measure defined as adjusted net income divided
by the weighted-average common shares outstanding for the period, reflecting the dilution which could occur if equity-
based awards are converted into common share equivalents as calculated using the treasury stock method. See
“Reconciliation of Non-GAAP Financial Measures” for a reconciliation of diluted earnings per share calculated in
accordance with GAAP to diluted adjusted earnings per share.
Catastrophe loss ratio is a non-GAAP financial measure defined as the ratio of catastrophe losses to net earned
premiums. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of loss ratio calculated using
unadjusted GAAP numbers to catastrophe loss ratio.
59
Adjusted combined ratio excluding catastrophe losses is a non-GAAP financial measure defined as adjusted
combined ratio excluding the impact of catastrophe losses. See “Reconciliation of Non-GAAP Financial Measures” for a
reconciliation of combined ratio calculated using unadjusted GAAP numbers to adjusted combined ratio excluding
catastrophe losses.
Tangible stockholders’ equity is a non-GAAP financial measure defined as stockholders’ equity less intangible
assets. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of stockholders’ equity calculated in
accordance with GAAP to tangible stockholders’ equity.
60
Results of operations
Year ended December 31, 2020 compared to year ended December 31, 2019
The following table summarizes our results for the years ended December 31, 2020 and 2019:
Year Ended December 31,
2019
2020
Change
Percent
Change
Gross written premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Ceded written premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net written premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commission and other income . . . . . . . . . . . . . . . . . . . . . . .
Total underwriting revenue (1) . . . . . . . . . . . . . . . . . . . .
Losses and loss adjustment expenses . . . . . . . . . . . . . . . . . .
Acquisition expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other underwriting expenses . . . . . . . . . . . . . . . . . . . . . . . .
Underwriting income (loss) (1) . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized and unrealized gains on investments . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
($ in thousands, except per share data)
251,961
(108,332)
143,629
100,207
2,671
102,878
5,593
37,259
51,299
8,727
(1,068)
5,975
4,443
18,077
7,456
10,621
354,360
(155,102)
199,258
155,068
3,295
158,363
64,115
64,041
34,084
(3,877)
—
8,612
1,488
6,223
(34)
6,257
40.6 %
$ 102,399
43.2 %
(46,770)
38.7 %
55,629
54.7 %
54,861
23.4 %
624
55,485
53.9 %
58,522 1,046.3 %
71.9 %
26,782
(33.6)%
(17,215)
(144.4)%
(12,604)
(100.0)%
1,068
44.1 %
2,637
(66.5)%
(2,955)
(11,854)
(65.6)%
(100.5)%
(7,490)
(41.1)%
(4,364)
Adjustments:
Expenses associated with IPO, tax restructuring,
secondary offerings, and one time
incentive cash bonuses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . .
Expenses associated with retirement of debt . . . . . . . . . . . .
Expenses associated with catastrophe bond . . . . . . . . . . . .
Tax impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted net income (1) . . . . . . . . . . . . . . . . . . . . . . . . . .
Key Financial and Operating Metrics
Annualized return on equity . . . . . . . . . . . . . . . . . . . . . . . . .
Annualized adjusted return on equity (1) . . . . . . . . . . . . . .
Loss ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted combined ratio (1) . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted adjusted earnings per share (1) . . . . . . . . . . . . . . . . $
Catastrophe losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Catastrophe loss ratio (1) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted combined ratio excluding catastrophe
708
2,167
—
399
(664)
8,867
$
2.1 %
3.0 %
41.3 %
61.2 %
102.5 %
100.4 %
$
$
$
32.9 %
0.24
0.35
50,986
3,007
24,103
1,297
—
(1,149)
37,879
(2,299)
(21,936)
(1,297)
399
485
$ (29,012)
NM
NM
NM
NM
NM
(76.6)%
6.7 %
24.1 %
5.6 %
85.7 %
91.3 %
63.3 %
0.49
1.73
—
— %
losses (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
67.5 %
63.3 %
NM-Not Meaningful
(1) Indicates non-GAAP financial measure; see “Reconciliation of Non-GAAP Financial Measures” for a
reconciliation of the non-GAAP financial measures to their most directly comparable financial measures
prepared in accordance with GAAP.
61
Gross Written Premiums
Gross written premiums were $354.4 million for the year ended December 31, 2020 compared to
$252.0 million for the year ended December 31, 2019, an increase of $102.4 million, or 40.6%. Premium growth was
primarily due to an increased volume of policies written across our lines of business which was driven by new business
generated with existing partners, strong premium retention rates for existing business, expansion of our products’
geographic and distribution footprint, and new partnerships. For commercial products, substantial rate increases also
contributed to premium growth.
The following table summarizes our gross written premiums by line of business and shows each line’s
percentage of total gross written premiums for each period:
Product
Year Ended December 31,
2020
2019
($ in thousands)
Amount
% of
GWP
Amount
% of
GWP
Change % Change
Residential Earthquake . . . . . . . . . . . . . . . . . . $ 140,934
58,890
Commercial Earthquake. . . . . . . . . . . . . . . . . .
53,933
Commercial All Risk . . . . . . . . . . . . . . . . . . . .
49,849
Specialty Homeowners . . . . . . . . . . . . . . . . . .
15,423
Inland Marine . . . . . . . . . . . . . . . . . . . . . . . . . .
13,824
Hawaii Hurricane . . . . . . . . . . . . . . . . . . . . . . .
8,176
Residential Flood . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,331
Total Gross Written Premiums . . . . . . . . . . . . $ 354,360 100.0 % $ 251,961 100.0 % $ 102,399
8.0 %
51.8 % $ 10,461
52.0 %
20,149
15.4 %
77.7 %
23,575
12.0 %
52.0 %
17,061
13.0 %
525.7 %
12,958
1.0 %
28.4 %
3,060
4.3 %
2,960
2.1 %
56.7 %
12,175 1,053.2 %
0.4 %
40.6 %
39.8 % $ 130,473
38,741
16.6 %
30,358
15.2 %
32,788
14.1 %
2,465
4.3 %
10,764
3.9 %
5,216
2.3 %
1,156
3.8 %
During the twelve months ended December 31, 2019, we entered two new Residential Earthquake partnerships
in which we assumed a total of $7.8 million of unearned premiums. Excluding the impact of these unearned premium
assumptions, our Residential Earthquake gross written premiums increased by $18.3 million, or 14.9%.
During the fourth quarter of 2020, we ceased offering Commercial All Risk products on an admitted basis and
will only offer them on an E&S basis going forward. This transition will impact the growth rate of our Commercial All
Risk line in future periods. In addition, during the fourth quarter of 2020, we purchased the renewal rights of certain
Hawaii Hurricane policies from another insurance company. We expect our Hawaii Hurricane written premiums to
increase related to this purchase. However, there is no guarantee that policyholders will renew their policies with us and
the ultimate impact to our future written premiums is uncertain.
Ceded Written Premiums
Ceded written premiums increased $46.8 million, or 43.2 %, to $155.1 million for the year ended December 31,
2020 from $108.3 million for the year ended December 31, 2019. The increase was primarily due to increased excess of
loss reinsurance (“XOL”) expense commensurate with growth in exposure. In addition, catastrophe losses occurring in
the third and fourth quarters of 2020 caused us to fully utilize portions of our XOL coverage. As a result, we incurred
charges of $7.0 million during the fourth quarter of 2020 related to the acceleration of XOL expenses and the purchase
and utilization of a backup XOL layer.
Premiums ceded under quota share arrangements also increased due to the growth in written premium lines
subject to quota share arrangements. Ceded written premiums as a percentage of gross written premiums slightly
increased to 43.8% for the year ended December 31, 2020 from 43.0% for the year ended December 31, 2019. This
increase was primarily due to increased XOL expense offset by changes in our quota share agreements in our Specialty
62
Homeowners and Commercial All Risk lines as we entered into new ceding arrangements on these lines which increased
the percentage of premiums we retained.
Net Written Premiums
Net written premiums increased $55.6 million, or 38.7%, to $199.3 million for the year ended December 31,
2020 from $143.6 million for the year ended December 31, 2019. The increase was primarily due to higher gross written
premiums, primarily in our Commercial Earthquake, Commercial All Risk, and Specialty Homeowners lines, offset by
increased ceded written premiums.
Net Earned Premiums
Net earned premiums increased $54.9 million, or 54.7%, to $155.1 million for the year ended December 31,
2020 from $100.2 million for the year ended December 31, 2019 due primarily to the earned portion of the higher gross
written premiums offset by the earned portion of the higher ceded written premiums. The table below shows the amount
of premiums we earned on a gross and net basis for each period presented:
Year Ended
December 31,
2020
2019
Change
% Change
($ in thousands)
Gross earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 301,457 $ 200,521 $ 100,936
Ceded earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(46,075)
54,861
Net earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 155,068 $ 100,207 $
(100,314)
(146,389)
50.3 %
45.9 %
54.7 %
Net earned premium ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
51.4%
50.0%
Commission and Other Income
Commission and other income increased $0.6 million, or 23.4%, to $3.3 million for the year ended
December 31, 2020 from $2.7 million for the year ended December 31, 2019 due primarily to an increase in policy
related fees associated with an increased volume of premiums written.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses increased $58.5 million, or 1,046.3%, to $64.1 million for the year ended
December 31, 2020 from $5.6 million for the year ended December 31, 2019. During the year ended December 31,
2020, losses were primarily attributable to catastrophe events occurring during the third and fourth quarters in our
Specialty Homeowners and Commercial All Risk lines of business. During the year ended December 31, 2019, losses
were primarily attributable to attritional losses in our Commercial All Risk and Specialty Homeowners lines of business
and windstorm exposure in Japan through our assumed reinsurance portfolio.
Losses and loss adjustment expenses consisted of the following elements during the respective periods:
Year Ended
December 31,
2020
2019
Change
% Change
Catastrophe losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Non-catastrophe losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total losses and loss adjustment expenses . . . . . . . . . . . . . . . . $
NM- not meaningful
50,986 $
13,129
64,115 $
63
($ in thousands)
— $
5,593
5,593 $
50,986
7,536
58,522
NM
134.7 %
NM
Our catastrophe loss ratio was 32.9% during the year ended December 31, 2020. Catastrophe losses primarily
included losses from Hurricanes Sally, Laura, Hanna and Zeta. We did not experience any catastrophe losses during the
year ended December 31, 2019.
Our non-catastrophe loss ratio was 8.5% for the year ended December 31, 2020 compared to 5.6% during the
year ended December 31, 2019. Non-catastrophe losses increased due mainly to a higher percentage of business in lines
subject to attritional losses such as Commercial All Risk, Specialty Homeowners, and Inland Marine.
Acquisition Expenses
Acquisition expenses increased $26.8 million, or 71.9%, to $64.0 million for the year ended December 31, 2020
from $37.3 million for the year ended December 31, 2019. The primary reason for the increase was increased
commissions and premium-related taxes due to higher earned premiums. Acquisition expenses as a percentage of gross
earned premiums were 21.2% for the year ended December 31, 2020 compared to 18.6% for the year ended
December 31, 2019. Acquisition expenses as a percentage of gross earned premiums increased due primarily to lower
earned ceding commissions. Earned ceding commissions decreased due to changes in our Specialty Homeowners and
All Risk ceding arrangements where we retained a higher percentage of premiums and received less ceding commission
as a result. Acquisition expenses as a percentage of gross earned premiums fluctuates based on mix of business produced
and quota share arrangements in place.
Other Underwriting Expenses
Other underwriting expenses decreased $17.2 million, or 33.6%, to $34.1 million for the year ended
December 31, 2020 from $51.3 million for the year ended December 31, 2019. This decrease was primarily due to a
decrease in expenses relating to unique items. During the prior year, the company incurred significant charges associated
with an IPO, tax restructuring, secondary offerings, retirement of debt, and one-time incentive cash bonuses. The
company also incurred a stock compensation charge of $23.0 million upon modification of its management incentive
plan in the prior year.
Other underwriting expenses as a percentage of gross earned premiums were 11.3% for the year ended
December 31, 2020 compared to 25.6% for the year ended December 31, 2019. Excluding the impact of expenses
relating to our IPO, tax restructuring, secondary offerings, one-time incentive cash bonuses, stock-based compensation,
retirement of debt, and catastrophe bonds, other underwriting expenses as a percentage of gross earned premiums were
10.2% for the year ended December 31, 2020 compared to 11.6% for the year ended December 31, 2019. This
percentage decreased due to higher gross earned premiums without a proportional increase to expenses.
Interest Expense
Interest expense decreased to zero for the year ended December 31, 2020 from $1.1 million for the year ended
December 31, 2019. We redeemed our Floating Rate Notes in May 2019 and did not have any long-term debt during the
year ended December 31, 2020 whereas we had outstanding Floating Rate Notes during a portion of the year ended
December 31, 2019.
Net Investment Income and Net Realized and Unrealized Gains (Losses) on Investments
Net investment income increased $2.6 million, or 44.1%, to $8.6 million for the year ended December 31, 2020
from $6.0 million for the year ended December 31, 2019. The increase was primarily due to a higher average balance of
investments during the year ended December 31, 2020 due primarily to proceeds from our January and June 2020 stock
offerings. The increase from a higher average investment balance was partially offset by lower yields on investments due
to a lower interest rate environment in 2020 versus 2019.
Net realized and unrealized gains on investments decreased $3.0 million, to a $1.5 million gain for the year
ended December 31, 2020 from a $4.4 million gain for the year ended December 31, 2019. We had a higher balance of
64
equity securities during the prior year period and experienced appreciation on those equity securities during that period.
We mainly invest in investment grade fixed maturity securities, including U.S. government issues, state government
issues, mortgage and asset-backed obligations, and corporate bonds with the remainder of investments in equity
securities. Our equity securities are comprised of mutual funds that provide exposure to the U.S. investment-grade bond
market. The following table summarizes the components of our investment income for each period presented:
Year Ended
December 31,
2020
Change
% Change
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment management fees and expenses . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized and unrealized gains on investments . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,100 $ 10,418 $
8,554 $
489
(431)
8,612
1,488
2,660
65
(88)
2,637
(2,955)
(318)
45.1 %
15.3 %
25.7 %
44.1 %
(66.5)%
(3.1)%
2019
($ in thousands)
5,894 $
424
(343)
5,975
4,443
Income Tax Expense (Benefit)
The company had an immaterial income tax benefit for the year ended December 31, 2020 compared to a $7.5
million expense for the year ended December 31, 2019 primarily because of lower pre-tax income during the year ended
December 31, 2020. During the year ended December 31, 2020, our income tax rate differed from the statutory rate of
21% due primarily to the tax impact of the permanent component of employee stock option exercises. For the year ended
December 31, 2019, our income tax expense was significantly impacted by the reversal of our U.S. federal deferred tax
valuation allowance in March 2019, offset by an addback related to a nondeductible stock compensation charge incurred
upon the modification of our management incentive plan in March 2019.
65
Year ended December 31, 2019 compared to year ended December 31, 2018
The following table summarizes our results for the years ended December 31, 2019 and 2018:
Year Ended December 31,
2018
2019
Change
Percent
Change
Gross written premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Ceded written premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net written premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commission and other income . . . . . . . . . . . . . . . . . . . . . . . .
Total underwriting revenue (1) . . . . . . . . . . . . . . . . . . . . .
Losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . .
Acquisition expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other underwriting expenses . . . . . . . . . . . . . . . . . . . . . . . . .
Underwriting income (1) . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized and unrealized (losses) gains on investments . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
$
($ in thousands except per share data)
154,891
(82,949)
71,942
69,897
2,405
72,302
6,274
28,224
17,957
19,847
(2,303)
3,238
(2,569)
18,213
(6)
18,219
251,961
(108,332)
143,629
100,207
2,671
102,878
5,593
37,259
51,299
8,727
(1,068)
5,975
4,443
18,077
7,456
10,621
$
$ 97,070
62.7 %
(25,383)
30.6 %
71,687
99.6 %
30,310
43.4 %
266
11.1 %
30,576
42.3 %
(681)
(10.9) %
9,035
32.0 %
33,342
185.7 %
(11,120)
(56.0) %
1,235
(53.6) %
84.5 %
2,737
7,012 (272.9) %
(0.7) %
(136)
NM %
7,462
(41.7) %
$ (7,598)
Adjustments:
Expenses associated with IPO, tax restructuring,
secondary offerings, and one time incentive cash
bonuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . .
Expenses associated with retirement of debt . . . . . . . . . . . . .
Tax impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted net income (1) . . . . . . . . . . . . . . . . . . . . . . . . . . $
Key Financial and Operating Metrics
Annualized return on equity . . . . . . . . . . . . . . . . . . . . . . . . . .
Annualized adjusted return on equity (1) . . . . . . . . . . . . . . .
Loss ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted combined ratio (1) . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted adjusted earnings per share (1) . . . . . . . . . . . . . . . . . $
Catastrophe losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Catastrophe loss ratio (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted combined ratio excluding catastrophe losses (1) . .
NM- Not Meaningful
3,007
24,103
1,297
(1,149)
37,879
$
1,110
—
495
—
19,824
1,897
24,103
802
(1,149)
$ 18,055
NM
NM
NM
NM
91.1 %
6.7 %
24.1 %
5.6 %
85.7 %
91.3 %
63.3 %
$
0.49
$
1.73
—
$
— %
63.3 %
20.9 %
22.7 %
9.0 %
62.6 %
71.6 %
69.5 %
1.07
1.17
5,000
7.2 %
62.4 %
(1) Indicates non-GAAP financial measure; see “Reconciliation of Non-GAAP Financial Measures” for a
reconciliation of the non-GAAP financial measures to their most directly comparable financial measures
prepared in accordance with GAAP.
Gross Written Premiums
Gross written premiums were $252.0 million for the year ended December 31, 2019 compared to $154.9
million for the year ended December 31, 2018, an increase of $97.1 million, or 62.7%. Premium growth was primarily
66
due to an increased volume of policies written across our lines of business which was driven by new business generated
with existing partners, strong premium retention rates for existing business, expansion of our products’ distribution
footprint, and new partnerships. The following table summarizes our gross written premiums by line of business and
shows each line’s percentage of total gross written premiums for each period:
Product
Year Ended December 31,
2019
2018
($ in thousands)
Amount
% of
GWP
Amount
% of
GWP
Change % Change
Residential Earthquake . . . . . . . . . . . . . . . . . . . . . $ 130,473
38,741
Commercial Earthquake. . . . . . . . . . . . . . . . . . . . .
30,358
Commercial All Risk . . . . . . . . . . . . . . . . . . . . . . .
32,788
Specialty Homeowners . . . . . . . . . . . . . . . . . . . . .
2,465
Inland Marine . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,764
Hawaii Hurricane . . . . . . . . . . . . . . . . . . . . . . . . . .
5,216
Residential Flood . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,156
Total Gross Written Premiums . . . . . . . . . . . . . . . $ 251,961 100.0 % $ 154,891 100.0 % $ 97,070
51.8 % $ 81,679
20,946
15.4 %
14,338
12.0 %
27,680
13.0 %
—
1.0 %
8,128
4.3 %
2,120
2.1 %
—
0.4 %
59.7 %
52.7 % $ 48,794
13.5 % 17,795
85.0 %
9.3 % 16,020 111.7 %
18.5 %
5,108
17.9 %
2,465 NM %
— %
5.2 % 2,636
32.4 %
1.4 % 3,096 146.0 %
— %
1,156 NM
62.7 %
NM- not meaningful
Approximately $19.4 million of the increase to Residential Earthquake premiums was due to a new partnership
with a homeowners carrier in which we assumed $6.6 million of unearned premiums and wrote an additional
$12.8 million in premiums.
Ceded Written Premiums
Ceded written premiums increased $25.4 million, or 30.6%, to $108.3 million for the year ended December 31,
2019 from $82.9 million for the year ended December 31, 2018. The increase was primarily due to increased cessions to
new quota share reinsurance partners in our Commercial All Risk line. We also incurred increased excess of loss
reinsurance expense commensurate with growth in exposure. Ceded written premiums as a percentage of gross written
premiums decreased to 43.0% for the year ended December 31, 2019 from 53.6% for the year ended December 31,
2018. The cession percentage was higher in the prior year due to an $11.8 million transfer of unearned premiums in
June 2018 related to our entering into a fronting arrangement in our Specialty Homeowners line in the state of Texas.
This fronting arrangement terminated in June 2019 in conjunction with the inception of our Specialty Homeowners
Facility (“SHF”).
Net Written Premiums
Net written premiums increased $71.7 million, or 99.6%, to $143.6 million for the year ended December 31,
2019 from $71.9 million for the year ended December 31, 2018. The increase was primarily due to higher gross written
premiums, primarily in our Residential Earthquake, Commercial Earthquake and Commercial All Risk lines, offset by
increased ceded written premiums.
Net Earned Premiums
Net earned premiums increased $30.3 million, or 43.4%, to $100.2 million for the year ended December 31,
2019 from $69.9 million for the year ended December 31, 2018 due primarily to the earned portion of the higher gross
written premiums offset by the earned portion of the higher ceded written premiums under reinsurance agreements.
67
The table below shows the amount of premiums we earned on a gross and net basis for each period presented:
Year Ended
December 31,
2019
2018
Change
% Change
($ in thousands)
Gross earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 200,521 $ 137,759 $
Ceded earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 100,207 $
69,897 $
(100,314)
(67,862)
62,762
(32,452)
30,310
45.6 %
47.8 %
43.4 %
Net earned premium ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50.0%
50.7%
Commission and Other Income
Commission and other income increased $0.3 million, or 11.1%, to $2.7 million for the year ended
December 31, 2019 from $2.4 million for the year ended December 31, 2018 due primarily to an increase in policy
related fees associated with an increased volume of premiums written.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses decreased $0.7 million, or 10.9%, to $5.6 million for the year ended
December 31, 2019 from $6.3 million for the year ended December 31, 2018.
Losses and loss adjustment expenses consisted of the following elements during the respective periods:
Catastrophe losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Non-catastrophe losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total losses and loss adjustment expenses . . . . . . . . . . . . . . . . $
NM- not meaningful
Year Ended
December 31,
2019
2018
Change
% Change
— $
5,593
5,593 $
($ in thousands)
5,000 $
1,274
6,274 $
(5,000)
4,319
(681)
NM
NM
(10.9)%
During the year ended December 31, 2019, losses were primarily attributable to attritional losses in our
Commercial All Risk and Specialty Homeowners lines of business and windstorm exposure in Japan through our
assumed reinsurance portfolio. During the year ended December 31, 2018, losses were primarily attributable a $5 million
catastrophe loss from Hurricane Florence and attritional losses in our Commercial All Risk and Specialty Homeowners
lines of business. Losses decreased during the year ended December 31, 2019 due to a reduction in the severity of
weather-related losses.
Our non-catastrophe loss ratio was 5.6% for the year ended December 31, 2019 compared to 1.8% during the
year ended December 31, 2018. Non-catastrophe losses increased due mainly to a higher percentage of business in lines
subject to attritional losses such as Commercial All Risk, Specialty Homeowners, and Inland Marine and due to losses
on our assumed reinsurance portfolio.
Acquisition Expenses
Acquisition expenses increased $9.1 million, or 32.0%, to $37.3 million for the year ended December 31, 2019
from $28.2 million for the year ended December 31, 2018. The primary reason for the increase was higher earned
premiums which resulted in higher commissions and premium-related taxes. Acquisition expenses as a percentage of
gross earned premiums were 18.6% for the year ended December 31, 2019 compared to 20.5% for the year ended
December 31, 2018. Acquisition expenses as a percentage of gross earned premiums decreased due to higher earned
ceding commissions related to our Specialty Homeowners and Commercial All Risk lines.
68
Other Underwriting Expenses
Other underwriting expenses increased $33.3 million, or 185.7%, to $51.3 million for the year ended
December 31, 2019 from $18.0 million for the year ended December 31, 2018. During the year ended December 31,
2019, we incurred increased payroll, professional fees, technology expenses, stock-based compensation and other
expenses necessary to support our growth. During the year ended December 31, 2019, other underwriting expenses
included a stock compensation charge of $23.0 million related to the modification of our former parent company’s
management incentive plan, $0.4 million of expenses associated with our IPO and tax restructuring, a $0.9 million
charge related to the write-off of debt amortization costs upon redemption of our Floating Rate Notes, and $2.6 million
of expenses from one-time incentive cash bonuses triggered by the September 2019 Secondary Offering and expenses
associated with both Secondary Offerings. During the year ended December 31, 2018, other underwriting expenses
included $1.1 million of expenses associated with our IPO and tax restructuring and $0.5 million of expenses related to
the repayment of our surplus notes in September 2018.
Other underwriting expenses as a percentage of gross earned premiums were 25.6% for the year ended
December 31, 2019 compared to 13.0% for the year ended December 31, 2018. Excluding the impact of expenses
relating to our IPO, tax restructuring, Secondary Offerings, one-time incentive cash bonuses, stock-based compensation
and retirement of debt, other underwriting expenses as a percentage of gross earned premiums were 11.6% for the year
ended December 31, 2019 compared to 12.0% for the year ended December 31, 2018. This percentage decreased due to
higher gross earned premiums without a proportional increase to expenses.
Interest Expense
Interest expense decreased $1.2 million, or 53.6%, to $1.1 million for the year ended December 31, 2019 from
$2.3 million for the year ended December 31, 2018. Interest expense decreased as we redeemed our Floating Rate
Notes in May 2019 and did not have any long-term debt after May 2019 whereas we had outstanding surplus notes and
Floating Rate Notes during the entire year ended December 31, 2018. In addition, interest expense for the year ended
December 31, 2019 includes a $0.4 million charge incurred upon redemption of our Floating Rate Notes in May 2019.
Interest expense for the year ended December 31, 2018 includes a $0.1 million charge incurred upon repayment of our
surplus notes in September 2018.
Net Investment Income and Net Realized and Unrealized Gains (Losses) on Investments
Net investment income increased $2.8 million, or 84.5%, to $6.0 million for the year ended December 31, 2019
from $3.2 million for the year ended December 31, 2018. The primary reason for the increase was a higher average
balance of investments during the year ended December 31, 2019 due primarily to proceeds from our IPO which were
received in April 2019.
Net realized and unrealized gains on investments increased $7.0 million, or 272.9%, to a $4.4 million gain for
the year ended December 31, 2019 from a loss of $2.6 million for the year ended December 31, 2018. The primary
reason for the increase was an improvement in the performance of our equity securities during the year ended
December 31, 2019 compared to the year ended December 31, 2018. We mainly invest in investment grade fixed
maturity securities, including U.S. government issues, state government issues, mortgage and asset-backed obligations,
and
69
corporate bonds with the remainder of investments in equity securities. The following table summarizes the components
of our investment income for the years ended December 31, 2019 and 2018:
Year Ended
December 31,
2019
2018
Change
% Change
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: investment management fees and expenses . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized and unrealized gains (losses) on investments . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,418 $
5,894 $
424
(343)
5,975
4,443
Income Tax Expense (Benefit)
($in thousands)
3,036 $
514
(312)
3,238
(2,569)
669 $
2,858
(90)
(31)
2,737
7,012
9,749
94.1 %
(17.5)%
9.9 %
84.5 %
(272.9)%
NM
Income tax expense increased to $7.5 million for the year ended December 31, 2019 from an immaterial
amount for the year ended December 31, 2018 as a result of positive taxable income during the year ended December 31,
2019 occurring after our U.S. domestication in March 2019 partially offset by the benefit from the reduction of the
valuation allowance on our federal deferred tax assets. For the year ended December 31, 2019, our income tax expense
was significantly impacted by the reversal of our U.S. federal deferred tax valuation allowance in March 2019, offset by
an addback related to a nondeductible stock compensation charge incurred upon the modification of our management
incentive plan in March 2019.
We are subject to income taxes in certain jurisdictions in which we operate. Our U.S. subsidiaries are subject to
federal and state income taxes. We earn income in Bermuda, a non-taxable jurisdiction, primarily as a result of quota
share reinsurance agreements between our U.S. insurance subsidiary and PSRE, and the investment income earned in
PSRE. Prior to July 1, 2019, our U.S. insurance subsidiary and PSRE were subject to a quota share reinsurance
agreement under which the U.S. insurance subsidiary ceded 50% of the earthquake and Hawaii hurricane gross
premiums earned as well as losses and loss adjustment expenses to PSRE in exchange for a 25% ceding commission.
As a result of our multinational operations our effective tax rate has historically been below that of a fully U.S.
based operation. All of our operations became subject to U.S. income tax in 2019 as a result of our domestication to the
United States.
Reconciliation of Non-GAAP Financial Measures
Underwriting Revenue
We define underwriting revenue as total revenue excluding net investment income and net realized and
unrealized gains and losses on investments. Underwriting revenue represents revenue generated by our underwriting
operations and allows us to evaluate our underwriting performance without regard to investment income. We use this
metric as we believe it gives our management and other users of our financial information useful insight into our
70
underlying business performance. Underwriting revenue should not be viewed as a substitute for total revenue calculated
in accordance with GAAP, and other companies may define underwriting revenue differently.
Total revenue calculated in accordance with GAAP reconciles to underwriting revenue as follows:
Year Ended
December 31,
2020
2019
2018
(in thousands)
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 168,463 $ 113,296 $ 72,971
(5,975) (3,238)
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized and unrealized (gains) losses on investments . . . . . . . . . . . . . . . . . . . . .
2,569
(4,443)
Underwriting revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 158,363 $ 102,878 $ 72,302
(8,612)
(1,488)
Underwriting Income
We define underwriting income as income before income taxes excluding net investment income, net realized
and unrealized gains and losses on investments, and interest expense. Underwriting income represents the pre-tax
profitability of our underwriting operations and allows us to evaluate our underwriting performance without regard to
investment income. We use this metric as we believe it gives our management and other users of our financial
information useful insight into our underlying business performance. Underwriting income should not be viewed as a
substitute for pre-tax income calculated in accordance with GAAP, and other companies may define underwriting
income differently.
Income before income taxes calculated in accordance with GAAP reconciles to underwriting income as follows:
2020
Year Ended
December 31,
2019
(in thousands)
2018
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized and unrealized (gains) losses on investments . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Underwriting income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,877) $
6,223 $ 18,077 $ 18,213
(5,975) (3,238)
2,569
(4,443)
1,068
2,303
8,727 $ 19,847
(8,612)
(1,488)
—
Adjusted Net Income
We define adjusted net income as net income excluding the impact of certain items that may not be indicative
of underlying business trends, operating results, or future outlook, net of tax impact. We calculate the tax impact only on
adjustments which would be included in calculating our income tax expense using the estimated tax rate at which the
company received a deduction for these adjustments. We use adjusted net income as an internal performance measure in
the management of our operations because we believe it gives our management and financial statement users useful
insight into our results of operations and our underlying business performance. Adjusted net income does not reflect the
overall profitably of our business and should not be viewed as a substitute for net income calculated in accordance with
GAAP. Other companies may define adjusted net income differently.
71
Net income calculated in accordance with GAAP reconciles to adjusted net income as follows:
2020
Year Ended December 31,
2019
(in thousands)
2018
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,257 $ 10,621 $ 18,219
Adjustments:
Expenses associated with IPO, tax restructuring, secondary offerings,
1,110
and one time incentive cash bonuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Expenses associated with retirement of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
495
Expenses associated with catastrophe bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Tax impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Adjusted net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,867 $ 37,879 $ 19,824
3,007
24,103
1,297
—
(1,149)
708
2,167
—
399
(664)
Adjusted Return on Equity
We define adjusted return on equity as adjusted net income expressed on an annualized basis as a percentage of
average beginning and ending stockholders’ equity during the period. We use adjusted return on equity as an internal
performance measure in the management of our operations because we believe it gives our management and financial
statement users useful insight into our results of operations and our underlying business performance. Adjusted return on
equity should not be viewed as a substitute for return on equity calculated using unadjusted GAAP numbers, and other
companies may define adjusted return on equity differently.
Adjusted return on equity is calculated as follows:
Year Ended December 31,
2019
2018
2020
Numerator: Adjusted net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Denominator: Average stockholder’s equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted return on equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,867
291,135
($ in thousands)
$ 37,879
157,424
$ 19,824
87,353
3.0 %
24.1 %
22.7 %
Adjusted Combined Ratio
We define adjusted combined ratio as the sum of the loss ratio and the expense ratio calculated excluding the
impact of certain items that may not be indicative of underlying business trends, operating results, or future outlook. We
use adjusted combined ratio as an internal performance measure in the management of our operations because we
believe it gives our management and financial statement users useful insight into our results of operations and our
underlying business performance. Adjusted combined ratio should not be viewed as a substitute for combined ratio
calculated using unadjusted GAAP numbers, and other companies may define adjusted combined ratio differently.
72
Adjusted combined ratio is calculated as follows:
Numerator: Sum of losses, loss adjustment expenses, underwriting, acquisition
($ in thousands)
Year Ended December 31,
2019
2020
2018
and other underwriting expenses, net of commission and other income . . . . . . $ 158,945 $ 91,480
Denominator: Net earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 155,068 $ 100,207
Combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to numerator:
Expenses associated with IPO, tax restructuring, secondary offerings, and one
102.5 %
$ 50,050
$ 69,897
91.3 %
71.6 %
time incentive cash bonuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portion of expenses associated with retirement of debt classified as other
underwriting expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses associated with catastrophe bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(708)
(2,167)
(3,007)
(24,103)
(1,110)
—
—
(399)
100.4 %
(897)
—
63.3 %
(345)
—
69.5 %
Diluted adjusted earnings per share
We define diluted adjusted earnings per share as adjusted net income divided by the weighted-average common
shares outstanding for the period, reflecting the dilution which could occur if equity-based awards are converted into
common share equivalents as calculated using the treasury stock method. We use diluted adjusted earnings per share as an
internal performance measure in the management of our operations because we believe it gives our management and
financial statement users useful insight into our results of operations and our underlying business performance. Diluted
adjusted earnings per share should not be viewed as a substitute for diluted earnings per share calculated in accordance
with GAAP, and other companies may define diluted adjusted earnings per share differently.
Diluted adjusted earnings per share is calculated as follows:
Year Ended December 31,
2019
(in thousands except shares and per share data)
2020
2018
Adjusted net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted-average common shares outstanding, diluted . . . . . . . . . . . . . .
Diluted adjusted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
8,867 $
37,879 $
25,598,647
21,834,934
0.35 $
1.73 $
19,824
17,000,000
1.17
Catastrophe Loss Ratio
Catastrophe loss ratio is defined as the ratio of catastrophe losses to net earned premiums. Although we are
inherently subject to catastrophe losses, the frequency and severity of catastrophe losses is unpredictable and their
impact on our operating results may vary significantly between periods and obscure other trends in our
business. Therefore, we are providing this metric because we believe it gives our management and other financial
statement users useful insight into our results of operations and trends in our financial performance without the volatility
caused by catastrophe losses. Catastrophe loss ratio should not be viewed as a substitute for loss ratio calculated using
unadjusted GAAP numbers, and other companies may define catastrophe loss ratio differently.
73
Catastrophe loss ratio is calculated as follows:
Year Ended December 31,
2020
2019
2018
Numerator: Losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . . . $ 64,115
Denominator: Net earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 155,068
Loss ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41.3 %
($ in thousands)
5,593
$
$ 100,207
$ 6,274
$ 69,897
5.6 %
9.0 %
Numerator: Catastrophe losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,986
Denominator: Net earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 155,068
Catastrophe loss ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32.9 %
$
—
$ 100,207
$ 5,000
$ 69,897
0.0 %
7.2 %
Adjusted Combined Ratio Excluding Catastrophe Losses
Adjusted combined ratio excluding catastrophe losses is defined as adjusted combined ratio excluding the
impact of catastrophe losses. Although we are inherently subject to catastrophe losses, the frequency and severity of
catastrophe losses is unpredictable and their impact on our operating results may vary significantly between periods and
obscure other trends in our business. Therefore, we are providing this metric because we believe it gives our
management and other financial statement users useful insight into our results of operations and trends in our financial
performance without the volatility caused by catastrophe losses. Adjusted combined ratio excluding catastrophe losses
should not be viewed as a substitute for combined ratio calculated using unadjusted GAAP numbers, and other
companies may define adjusted combined ratio excluding catastrophe losses differently.
Adjusted combined ratio excluding catastrophe losses is calculated as follows:
Numerator: Sum of losses and loss adjustment expenses,
Year Ended December 31,
2020
2019
2018
($ in thousands)
acquisition expenses, and other underwriting expenses, net of
commission and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 158,945
Denominator: Net earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 155,068
Combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to numerator:
Expenses associated with IPO, tax restructuring, secondary offerings,
$ 91,480
$ 100,207
$ 50,050
$ 69,897
102.5 %
91.3 %
71.6 %
and one-time incentive cash bonuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portion of expenses associated with retirement of debt classified as other
(708)
(2,167)
$ (3,007)
(24,103)
$ (1,110)
—
underwriting expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Expenses associated with catastrophe bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(399)
Catastrophe losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (50,986)
Adjusted combined ratio excluding catastrophe losses . . . . . . . . . . . . . . . . . . . .
67.5 %
74
(345)
—
(5,000)
(897)
—
—
63.3 %
62.4 %
Tangible Stockholders’ Equity
We define tangible stockholders’ equity as stockholders’ equity less intangible assets. Our definition of tangible
stockholders’ equity may not be comparable to that of other companies, and it should not be viewed as a substitute for
stockholders’ equity calculated in accordance with GAAP. We use tangible stockholders’ equity internally to evaluate
the strength of our balance sheet and to compare returns relative to this measure.
Stockholders’ equity calculated in accordance with GAAP reconciles to tangible stockholders’ equity as
follows:
Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 363,713 $ 218,556 $
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 352,201 $ 217,812 $
(11,512)
(744)
2020
December 31,
2019
(in thousands)
2018
96,292
(744)
95,548
Liquidity and Capital Resources
Sources and Uses of Funds
We operate as a holding company with no business operations of our own. Consequently, our ability to pay
dividends to stockholders and pay taxes and administrative expenses is largely dependent on dividends or other
distributions from our subsidiaries and affiliates, whose ability to pay us is highly regulated.
The Company’s U.S. insurance company subsidiaries, PSIC and PESIC are restricted by the statutes as to the
amount of dividends that they may pay without prior approval by state insurance commissioners.
Under California and Oregon statute which govern PSIC, dividends paid in a consecutive twelve month period
cannot exceed the greater of (i) 10% of an insurance company’s statutory policyholders’ surplus as of December 31 of
the preceding year or (ii) 100% of its statutory net income for the preceding calendar year. Any dividends or
distributions in excess of these amounts would require regulatory approval. In addition, under Oregon statute PSIC may
only declare a dividend from earned surplus, which does not include contributed capital. Surplus arising from unrealized
capital gains or revaluation of assets is not considered part of earned surplus. Based on the above restrictions, PSIC may
pay a dividend or distribution of no greater than $11.3 million in 2021 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. As such, PESIC is unable to pay a dividend or
distribution in 2021 without the approval of the Arizona Insurance Commissioner as it had a statutory net loss in 2020.
In addition to the above limitations, any dividend or distribution declared is also subject to state regulatory
approval prior to payment. In the future, state insurance regulatory authorities may adopt statutory provisions and
dividend limitations more restrictive than those currently in effect.
Insurance companies in the United States are also required by state law to maintain a minimum level of
policyholder’s surplus. State insurance regulators have a risk-based capital standard designed to identify property and
casualty insurers that may be inadequately capitalized based on inherent risks of the insurer’s assets and liabilities and its
mix of net written premium. Insurers falling below a calculated threshold may be subject to varying degrees of
regulatory action. As of December 31, 2020 and December 31, 2019, the total adjusted capital of PSIC and PESIC were
in excess of their respective prescribed risk-based capital requirements.
75
Under the Insurance Act and related regulations, our Bermuda reinsurance subsidiary is required to maintain
certain solvency and liquidity levels, which it maintained as of December 31, 2020 and December 31, 2019.
Our Bermuda reinsurance subsidiary 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% of the amount of its relevant liabilities for general
business. Relevant assets include cash and cash equivalents, fixed maturity securities, accrued interest income, premiums
receivable, losses recoverable from reinsurers, and funds withheld. The relevant liabilities include total general business
insurance reserves and total other liabilities, less sundry liabilities. As of December 31, 2020 and December 31, 2019,
we met the minimum liquidity ratio requirement.
Bermuda regulations limit the amount of dividends and return of capital paid by a regulated entity. A Class 3A
insurer is prohibited from declaring or paying a dividend if it is in breach of its minimum solvency margin, its enhanced
capital requirement, or its minimum liquidity ratio, or if the declaration or payment of such dividend would cause such a
breach. If a Class 3A insurer has failed to meet its minimum solvency margin on the last day of any financial year, it will
also be prohibited, without the approval of the BMA, from declaring or paying any dividends during the next
financial year. Furthermore, the Insurance Act limits the ability of our Bermuda reinsurance subsidiary to pay dividends
or make capital distributions by stipulating certain margin and solvency requirements and by requiring approval from the
BMA prior to a reduction of 15% or more of a Class 3A insurer’s total statutory capital as reported on its prior year
statutory balance sheet. Moreover, an insurer must submit an affidavit to the BMA, sworn by at least two directors and
the principal representative in Bermuda of the Class 3A insurer, at least seven days prior to payment of any dividend
which would exceed 25% of that insurer’s total statutory capital and surplus as reported on its prior year statutory
balance sheet. The affidavit must state that in the opinion of those swearing the declaration of such dividend has not
caused the insurer to fail to meet its relevant margins.
Further, under the Companies Act, our Bermuda reinsurance subsidiary may only declare or pay a dividend, or
make a distribution out of contributed surplus, if it has no reasonable grounds for believing that: (1) it is, or would after
the payment be, unable to pay its liabilities as they become due or (2) the realizable value of its assets would be less than
its liabilities.
Pursuant to Bermuda regulations, the maximum amount of dividends and return of capital available to be paid
by a reinsurer is determined pursuant to a formula. Under this formula, the maximum amount of dividends and return of
capital available from our Bermuda subsidiary during 2021 is calculated to be approximately $10.5 million. However,
this dividend amount is subject to annual enhanced solvency requirement calculations. There were no dividends
approved or paid in 2020 or 2019.
One of our insurance company subsidiaries, PSIC, is a member of the Federal Home Loan Bank of San Francisco
(FHLB). Membership allows PSIC access to collateralized advances, which may be used to support and enhance liquidity
management. The amount of advances that may be taken is dependent on statutory admitted assets. As of December 31,
2020, there are no advances outstanding under the FHLB facility.
Cash Flows
Our primary sources of cash flow are written premiums, investment income, reinsurance recoveries, sales and
redemptions of investments, and proceeds from offerings of debt and equity securities. We use our cash flows primarily
to pay operating expenses, losses and loss adjustment expenses, and income taxes.
Our cash flows from operations may differ substantially from our net income due to non-cash charges or due to
changes in balance sheet accounts.
The timing of our cash flows from operating activities can also vary among periods due to the timing by which
payments are made or received. Some of our payments and receipts, including loss settlements and subsequent
reinsurance receipts, can be significant. Therefore, their timing can influence cash flows from operating activities in any
given period. The potential for a large claim under an insurance or reinsurance contract means that our insurance
76
subsidiaries may need to make substantial payments within relatively short periods of time, which would have a negative
impact on our operating cash flows.
We generated positive cash flows from operations for each of the years ended December 31, 2020, 2019 and
2018. Management believes that cash receipts from premium, proceeds from investment sales and redemptions, and
investment income and reinsurance recoveries, if necessary, are sufficient to cover cash outflows in the foreseeable
future.
The following table summarizes our cash flows for the years ended December 31, 2020, 2019 and 2018:
2020
Year Ended December 31,
2019
($ in thousands)
2018
Cash provided by (used in):
Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 53,551 $ 41,700 $ 22,808
Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(25,365)
Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,549
Change in cash, cash equivalents, and restricted cash . . . . . . . . . . . . . . . . . . . . . . . $
437 $ 23,425 $ (1,008)
(181,443)
128,329
(80,566)
62,291
Our cash flow from operating activities has been positive in each of the last three years. Variations in operating
cash flow between periods are primarily driven by variations in our gross and ceded written premiums and the volume
and timing of premium receipts, claim payments, and reinsurance payments. In addition, fluctuations in losses and loss
adjustment expenses and other insurance operating expenses impact operating cash flow.
Cash used in investing activities for each of the last three years related primarily to purchases of fixed income
and equity securities in excess of sales and maturities.
Cash provided by financing activities for year ended December 31, 2020 was related to the receipt of $35.5
million in net proceeds from the January 2020 stock offering, the receipt of $90.1 million in net proceeds from the
June 2020 stock offering, the receipt of $0.7 million in proceeds related to the issuance of common stock via our
employee stock purchase plan, and the receipt of $2.0 million related to the issuance of common stock via stock option
exercises. Cash provided by financing activities for the year ended December 31, 2019 was related to the receipt of
$87.4 million in net proceeds from our IPO in April 2019, offset by $20.0 million of cash paid to redeem our Floating
Rate Notes in May 2019 and a one-time cash distribution of $5.1 million to our then sole stockholder, GC Palomar
Investor LP in March 2019. Cash provided by financing activities in 2018 was related to the issuance of Floating Rate
Notes and the payoff of surplus notes in September 2018.
We do not have any current plans for material capital expenditures other than current operating requirements.
We believe that we will generate sufficient cash flows from operations to satisfy our liquidity requirements for at least
the next 12 months and beyond. The key factor that will affect our future operating cash flows is the frequency and
severity of catastrophic loss events. To the extent our future operating cash flows are insufficient to cover our net losses
from catastrophic events, we had $456.1 million in cash and investment securities available at December 31, 2020. We
also have the ability to access additional capital through pursuing third-party borrowings, sales of our equity or debt
securities or entrance into a reinsurance arrangement.
Notes Payable
Surplus Notes
Prior to September 2018, the Company had $17.5 million in outstanding surplus notes which had been issued
by PSIC on February 3, 2015 for a term of seven years. The surplus notes bore interest at the rate of LIBOR plus 8.00%
and had restrictions as to payments of interest and principal. Any such payments required the prior approval of the
77
Oregon Insurance Commissioners before such payments could be made. Such payments could only be made from
surplus.
Floating Rate Notes
In September 2018, the Company completed a private placement financing of $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. As
part of the financing agreement, the Company immediately used surplus funds to pay down the existing $17.5 million in
surplus notes. As part of this pre-payment, the Company incurred a penalty of $0.1 million which, along with
unamortized debt issuance costs of $0.4 million, was charged to income in 2018.
The Floating Rate Notes were redeemed 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 in interest expense related to the Floating Rate Notes for the year ended
December 31, 2019 (inclusive of the $0.4 million redemption premium) and $0.6 million for the year ended
December 31, 2018 and paid $1.2 million and $0.5 million for each period, respectively. The Company incurred and
paid $1.2 million in interest expense related to the surplus notes for the year ended December 31, 2018.
Contractual Obligations and Commitments
The following table illustrates our contractual obligations and commercial commitments by due date as of
December 31, 2020:
One Year Three Years
Total
Less Than
to Less Than More Than
One Year Three Years Five Years Five Years
to Less Than
(in thousands)
Reserves for losses and loss adjustment expenses . . . . . . . $ 129,036 $ 94,067 $ 32,363 $
Operating lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . .
3,123
1,766
879
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 132,159 $ 94,946 $ 34,129 $
2,606 $
478
3,084 $
—
—
—
The reserve for losses and loss adjustment expenses represent management’s estimate of the ultimate cost of
settling losses. As more fully discussed in “—Critical Accounting Policies—Reserve for Losses and Loss Adjustment
Expenses” below, the estimation of the reserve for losses and loss adjustment expenses is based on various complex and
subjective judgments. Actual losses paid may differ, perhaps significantly, from the reserve estimates reflected in our
consolidated financial statements. Similarly, the timing of payment of our estimated losses is not fixed and there may be
significant changes in actual payment activity. The assumptions used in estimating the likely payments due by period are
based on our historical claims payment experience and industry payment patterns, but due to the inherent uncertainty in
the process of estimating the timing of such payments, there is a risk that the amounts paid can be significantly different
from the amounts disclosed above.
The amounts in the above table represent our gross estimates of known liabilities as of December 31, 2020 and
do not include any allowance for claims for future events within the time period specified. Accordingly, it is highly
likely that the total amounts of obligations paid by us in the time periods shown will be greater than those indicated in
the table.
78
Financial Condition
Stockholders’ Equity
At December 31, 2020 total stockholders’ equity was $363.7 million and tangible stockholders’ equity was
$352.2 million, compared to total stockholders’ equity of $218.6 million and tangible stockholders’ equity of
$217.8 million as of December 31, 2019. Stockholder’s equity increased primarily due to net income, receipt of proceeds
from our January 2020 and June 2020 common stock offerings, and unrealized gains on fixed maturity securities. It also
increased due to issuance of common stock and stock-based compensation expense from our equity compensation plans.
Stock-based compensation expense is treated as an additional paid-in-capital and increases stockholder’s equity.
Tangible stockholders’ equity is a non-GAAP financial measure. See “Reconciliation of Non-GAAP Financial
Measures” for a reconciliation of stockholders’ equity in accordance with GAAP to tangible stockholders’ equity.
Investment Portfolio
Our primary investment objectives are to maintain liquidity, preserve capital and generate a stable level of
investment income. We purchase securities that we believe are attractive on a relative value basis and seek to generate
returns in excess of predetermined benchmarks. Our Board of Directors approves our investment guidelines in
compliance with applicable regulatory restrictions on asset type, quality and concentration. Our current investment
guidelines allow us to invest in taxable and tax-exempt fixed maturities, as well as publicly traded mutual funds and
common stock of individual companies. Our cash and invested assets consist of cash and cash equivalents, fixed
maturity securities, and equity securities. As of December 31, 2020, the majority of our investment portfolio, or
$398.0 million, was comprised of fixed maturity securities that are classified as available-for-sale and carried at fair
value with unrealized gains and losses on these securities, net of applicable taxes, reported as a separate component of
accumulated other comprehensive income. Also included in our investment portfolio were $24.3 million of equity
securities, primarily comprised of mutual funds that provide exposure to the U.S. investment-grade bond market. In
addition, we maintained a non-restricted cash and cash equivalent balance of $33.5 million at December 31, 2020. Our
fixed maturity securities, including cash equivalents, had a weighted average effective duration of 3.96 and 3.49 years
and an average rating of “A2/A” and “A1/A+” at December 31, 2020 and December 31, 2019, respectively. Our fixed
income investment portfolio had a book yield of 2.27% as of December 31, 2020, compared to 2.90% as of
December 31, 2019.
At December 31, 2020 and December 31, 2019 the amortized cost and fair value on available-for-sale securities
were as follows:
December 31, 2020
Fixed maturities:
Amortized
Cost or Cost
Fair
Value
($ in thousands)
% of Total
Fair Value
U.S. Governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,308 $ 17,059
6,636
States, territories, and possessions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Political subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,152
Special revenue excluding mortgage/asset-backed securities . . . . . . . . . . . . . .
41,227
245,360
Industrial and miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage/asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
85,553
Total available-for-sale investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 381,279 $ 397,987
6,208
2,027
39,704
234,049
82,983
4.3 %
1.7 %
0.5 %
10.4 %
61.6 %
21.5 %
100.0 %
79
December 31, 2019
Fixed maturities:
Amortized
Cost or Cost
Fair
Value
($ in thousands)
% of Total
Fair Value
U.S. Governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,371 $ 13,679
States, territories, and possessions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,445
Political subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,942
Special revenue excluding mortgage/asset-backed securities . . . . . . . . . . . . . .
18,436
129,013
Industrial and miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage/asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
51,636
Total available-for-sale investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 211,278 $ 217,151
2,298
1,913
18,139
124,726
50,831
6.3 %
1.1 %
0.9 %
8.5 %
59.4 %
23.8 %
100.0 %
The following tables provide the credit quality of investment securities as of December 31, 2020 and
December 31, 2019:
December 31, 2020
Estimated % of
Total
Fair Value
($ in thousands)
Rating
AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BBB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NA/NR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
91,156
54,342
149,977
88,817
11,425
2,270
$ 397,987
22.9 %
13.7 %
37.7 %
22.3 %
2.9 %
0.5 %
100.0 %
December 31, 2019
Estimated % of
Total
Fair Value
($ in thousands)
Rating
AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BBB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B
83,821
24,321
69,488
32,138
7,383
$ 217,151
38.6 %
11.2 %
32.0 %
14.8 %
3.4 %
100.0 %
The amortized cost and fair value of our available-for-sale investments in fixed maturity securities summarized
by contractual maturity as of December 31, 2020 were as follows:
December 31, 2020
Due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Due after one year through five years . . . . . . . . . . . . . . . . . . . . .
Due after five years through ten years . . . . . . . . . . . . . . . . . . . . .
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage and asset-backed securities . . . . . . . . . . . . . . . . . . . . .
$
Amortized
Cost
Fair
Value
($ in thousands)
% of Total
Fair Value
11,222 $
146,302
99,194
41,578
82,983
381,279
$
11,351
151,123
106,600
43,360
85,553
397,987
2.9 %
37.9 %
26.8 %
10.9 %
21.5 %
100.0 %
Expected maturities may differ from contractual maturities because borrowers may have the right to call or
prepay obligations. See “Critical Accounting Policies and Estimates- Investment Valuation and Fair Value” for
discussion of investment valuation considerations.
80
Critical Accounting Policies and Estimates
We identified the accounting estimates below as critical to the understanding of our financial position and
results of operations. Critical accounting estimates are defined as those estimates that are both important to the portrayal
of our financial condition and results of operations and which require us to exercise significant judgment. We use
significant judgment concerning future results and developments in applying these critical accounting estimates and in
preparing our consolidated financial statements. These judgments and estimates affect the reported amounts of assets,
liabilities, revenue and expenses and the disclosure of material contingent assets and liabilities. Actual results may differ
materially from the estimates and assumptions used in preparing the consolidated financial statements. We evaluate our
estimates regularly using information that we believe to be relevant. For a detailed discussion of our accounting policies,
see the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
Reserve for Losses and Loss Adjustment Expenses
The reserve for losses and loss adjustment expenses represents our estimated ultimate cost of all reported and
unreported losses and loss adjustment expenses incurred and unpaid at the balance sheet date. We do not discount this
reserve. We seek to establish reserves that will ultimately prove to be adequate.
We categorize our reserves for unpaid losses and loss adjustment expenses into two types: case reserves and
reserves for incurred but not yet reported losses (“IBNR”). Through our third-party administrators (“TPAs”), we
generally are notified of losses by our insureds or their agents or brokers. Based on the information provided by the
TPAs, we establish initial case reserves by estimating the ultimate losses from the claim, including administrative costs
associated with the ultimate settlement of the claim. Our personnel use their knowledge of the specific claim along with
internal and external experts, including underwriters and legal counsel, to estimate the expected ultimate losses.
We establish IBNR reserves 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. With the assistance of an independent actuarial firm, we use statistical analysis to estimate the cost of losses and
loss adjustment expenses related to IBNR. Those estimates are based on our historical information, industry information
and practices, and estimates of trends that may affect the ultimate frequency of incurred but not reported claims and
changes in ultimate claims severity.
We regularly review our reserve estimates and adjust them as necessary as experience develops or as new
information becomes known to us. Such adjustments are included in current operations. During the loss settlement
period, if we have indications that claims frequency or severity exceeds our initial expectations, we generally increase
our reserves for losses and loss adjustment expenses. Conversely, when claims frequency and severity trends are more
favorable than initially anticipated, we generally reduce our reserves for losses and loss adjustment expenses once we
have sufficient data to confirm the validity of the favorable trends. Even after such adjustments, the ultimate liability
may exceed or be less than the revised estimates. Accordingly, the ultimate settlement of losses and the related loss
adjustment expenses may vary significantly from the estimate included in our consolidated financial statements.
The following tables summarize our gross and net reserves for unpaid losses and loss adjustment expenses at
December 31, 2020 and 2019.
Loss and Loss Adjustment Reserves . . . . . . . . .
Case reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IBNR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
74,296
54,740
129,036
($ in thousands)
57.6 % $
42.4 %
100.0 % $
18,447
16,023
34,470
53.5 %
46.5 %
100.0 %
Gross
% of Total
Net
% of Total
December 31, 2020
81
Loss and Loss Adjustment Reserves
Case reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IBNR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
5,832
10,989
16,821
34.7 % $
65.3 %
100.0 % $
1,322
2,547
3,869
34.2 %
65.8 %
100.0 %
Gross
% of Total
Net
% of Total
December 31, 2019
The process of estimating the reserves for losses and loss adjustment expenses requires a high degree of
judgment and is subject to several variables. On a quarterly basis, we perform an analysis of our loss development and
select the expected ultimate loss ratio for each of our product lines by accident year. In our actuarial analysis, we use
input from our TPAs and our underwriting departments, including premium pricing assumptions and historical
experience. Multiple actuarial methods are used to estimate the reserve for losses and loss adjustment expenses. These
methods utilize, to varying degrees, the initial expected loss ratio, detailed statistical analysis of past claims reporting
and payment patterns, claims frequency and severity, paid loss experience, industry loss experience, and changes in
market conditions, policy forms, exclusions, and exposures. The actuarial methods used to estimate loss and loss
adjustment expenses reserves are:
• Reported and/or Paid Loss Development Methods—Ultimate losses are estimated based on historical
reported and/or paid loss reporting patterns. Reported losses are the sum of paid and case losses. Industry
development patterns are substituted for historical development patterns when sufficient historical data is
not available.
•
IBNR-to-Case Reserve Ratio Method—This method calculates ratios of IBNR to case reserves based on
incurred and paid development factors from the development methods. Estimated IBNR equals the product
of case reserves and the IBNR-to-case reserve ratio. These IBNR amounts are added to the reported-to-date
amount to derive ultimate losses.
• Reported Bornhuetter-Ferguson Severity Method—Under this method, ultimate losses are estimated as the
sum of cumulative reported losses and estimated IBNR losses. IBNR losses are estimated based on
expected average severity, estimated ultimate claim counts and the historical development patterns of
reported losses.
• Paid Bornhuetter-Ferguson Pure Premium Method—Under this method, ultimate losses are estimated as
the sum of cumulative reported losses and estimated IBNR losses. IBNR losses are estimated based on
expected pure premium and on the historical development patterns of reported losses.
The method(s) used vary based on the line of business and the nature of the loss event. Development patterns
for catastrophic events are based on the time since event versus an accident quarter and year pattern used for non-
catastrophic events. Considering each of the alternative ultimate estimates, we select an estimate of ultimate loss for each
line of business. For Earthquake and “Difference in Conditions” policies, more emphasis is placed on reported methods.
For the remainder, a weighted average is selected.
Loss Adjustment Expense reserves are estimated based on the ratio of paid loss adjustment expense to paid loss,
which is estimated separately by line of business as well as split by hurricane and excluding hurricane. We then apply
this ratio to our estimated unpaid loss, by multiplying the ratio times 50% of loss case reserves and 100% of loss IBNR
reserves. This is applied by line of business and accident year to arrive at estimated unpaid loss adjustment expense on a
gross basis. We then add the estimated unpaid loss adjustment expense on a gross basis to the paid loss adjustment
expense to calculate estimated ultimate loss adjustment expense.
On a quarterly basis, the Chief Executive Officer, President, Chief Risk Officer, Chief Financial Officer, Chief
Accounting Officer, and Vice President Legal—Compliance & Claims, meet to review the recommendations made by
the independent actuarial consultant and use their best judgment to determine the best estimate to be recorded for the
reserve for losses and loss adjustment expenses on our balance sheet.
82
Our reserves are driven by several important factors, including litigation and regulatory trends, legislative
activity, climate change, social and economic patterns and claims inflation assumptions. Our reserve estimates reflect
current inflation in legal claims’ settlements and assume we will not be subject to losses from significant new legal
liability theories. Our reserve estimates assume that there will not be significant changes in the regulatory and legislative
environment. The impact of potential changes in the regulatory or legislative environment is difficult to quantify in the
absence of specific, significant new regulation or legislation. In the event of significant new regulation or legislation, we
will attempt to quantify its impact on our business, but no assurance can be given that our attempt to quantify such inputs
will be accurate or successful.
The table below quantifies the impact of potential reserve deviations from our carried reserve at December 31,
2020. We applied sensitivity factors to incurred losses for the three most recent accident years and to the carried reserve
for all prior accident years combined. We believe that potential changes such as these would not have a material impact
on our liquidity.
Net Ultimate
LLAE
December 31, 2020
Potential Impact
on 2020
Sensitivity
Accident Sensitivity Net Ultimate Net LLAE Pre‑tax
income
Incurred LLAE
Reserve
Factor
Year
Stockholders’
Equity*
Sample increases . . . . . . . . . . . . . . . . .
Sample decreases . . . . . . . . . . . . . . . . .
* Effective tax rate estimated to be 21%
($ in thousands)
2020
2019
Prior
2020
2019
Prior
5.0 % $
2.5 % $
1.0 % $
(5.0)% $
(2.5)% $
(1.0)% $
64,179 $ 32,300 $
2,143 $
5,885 $
28,019 $
27 $
64,179 $ 32,300 $
2,143 $
27 $
5,885 $
28,019 $
3,209 $
147 $
280 $
(3,209) $
(147) $
(280) $
2,535
116
221
(2,535)
(116)
(221)
The amount by which estimated losses differ from those originally reported for a period is known as
“development.” Development is unfavorable when the losses ultimately settle for more than the amount reserved or
subsequent estimates indicate a basis for reserve increases on unresolved claims. Development is favorable when losses
ultimately settle for less than the amount reserved, or subsequent estimates indicate a basis for reducing loss reserves on
unresolved claims. We reflect favorable or unfavorable development of loss reserves in the results of operations in the
period the estimates are changed.
The following tables present the development of our loss reserves by accident year on a gross basis and net of
reinsurance recoveries during each of the below calendar years:
Gross Ultimate Loss and LAE
Accident Year
2017
2018
2019
Calendar Year
2020
(in thousands)
Development- (Favorable) Unfavorable
2018 to
2019
2019 to
2020
2017 to
2018
Prior . . . . . . . . . . . . . . . . . . . . . . . $ 43,112 $ 39,935 $ 40,667 $ 40,841 $ (3,177) $
2018 . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . .
14,865
22,797
171,470
15,984
25,127
—
—
—
17,667
732 $
(1,683)
—
—
174
(1,119)
(2,330)
—
(951) $ (3,275)
$ (3,177) $
83
Net Ultimate Loss and LAE
Accident Year
Calendar Year
2017
2018
2019
2020
(in thousands)
Development- (Favorable) Unfavorable
2018 to
2019
2019 to
2020
2017 to
2018
Prior . . . . . . . . . . . . . . . . . . . . . . . $ 22,102 $ 20,211 $ 20,094 $ 20,079 $ (1,891) $
2018 . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . .
7,940
5,885
64,179
8,102
5,772
—
—
—
8,166
$ (1,891) $
(117) $
(64)
—
—
(181) $
(15)
(162)
113
—
(64)
During the year ended December 31, 2020, our gross incurred losses for accident years 2018 and prior
developed favorably by $3.3 million. The gross favorable development was due to reported losses emerging at a lower
level than expected, primarily in our homeowners and special property lines of business, offset by higher frequency and
severity of losses emerging in our assumed reinsurance line. The net favorable development of $0.1 million reflects the
effect of ceding the gross favorability under our reinsurance program.
During the year ended December 31, 2019, our gross incurred losses for accident years 2018 and prior
developed favorably by $1.0 million. This favorable development was due to reported losses emerging at a lower level
than expected, primarily in our Specialty Homeowners business, offset by higher frequency and severity of claims in our
special property lines of business. The net favorable development of $0.2 million reflects the effect of ceding the gross
favorability under our reinsurance program.
During the year ended December 31, 2018, our gross incurred losses for accident years 2017 and prior
developed favorably by $3.2 million. This favorable development was due to reported losses emerging at a lower level
than expected, primarily in our Specialty Homeowners business. The net favorable development of $1.9 million reflects
the effect of ceding the gross favorability under our reinsurance program.
Although we believe that our reserve estimates are reasonable, it is possible that our actual loss experience may
not conform to our assumptions. Specifically, our actual ultimate loss ratio could differ from our initial expected loss
ratio or our actual reporting and payment patterns could differ from our expected reporting and payment patterns, which
are based on our own data and industry data. Accordingly, the ultimate settlement of losses and the related loss
adjustment expenses may vary significantly from the estimates included in our financial statements. We regularly review
our estimates and adjust them as necessary as experience develops or as new information becomes known to us. Such
adjustments are included in the results of current operations.
Investment Valuation and Fair Value
We invest in a variety of investment grade fixed maturity securities, including U.S. government issues, state
government issues, mortgage and asset-backed obligations, and corporate bonds. All of our investments in fixed maturity
securities and equity securities are carried at fair value, defined as the price that we would receive upon selling an
investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the
investment. Market participants are assumed to be independent, knowledgeable, able and willing to transact an exchange
and not acting under duress.
In our disclosure of the fair value of our investments, we utilize a hierarchy based on the quality of inputs used
to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
Adjustments to transaction prices or quoted market prices may be required in illiquid or disorderly markets in order to
estimate fair value. The three levels of the fair value hierarchy are described below:
Level 1—Unadjusted quoted prices are available in active markets for identical investments as of the reporting
date.
84
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.
We use independent pricing sources to obtain the estimated fair values of investments. The fair value is based
on quoted market prices, where available. In cases where quoted market prices are not available, the fair value is based
on a variety of valuation techniques depending on the type of investment. The fair values obtained from independent
pricing sources are reviewed for reasonableness and any discrepancies are investigated for final valuation.
The fair value of our 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. 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.
The fair value of our investments in equity securities is based on quoted prices available in active markets and
classified and disclosed in Level 1 of the hierarchy.
Investment securities are subject to fluctuations in fair value due to changes in issuer-specific circumstances,
such as credit rating, and changes in industry-specific circumstances, such as movements in credit spreads based on the
market’s perception of industry risks. In addition, fixed maturities are subject to fluctuations in fair value due to changes
in interest rates. As a result of these potential fluctuations, it is possible to have significant unrealized gains or losses on
a security. Unrealized gains and losses on our fixed maturity securities are included in accumulated other comprehensive
income as a separate component of total 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. Prior to
2018, unrealized gains and losses on equity securities were included in accumulated other comprehensive income as a
separate component of stockholders’ equity.
The Company adopted new accounting guidance beginning with this Annual Report on 10-K, and is now
required to consider recognizing an allowance for credit losses on its financial assets, including its available-for-sale
securities. All financial assets measured at amortized cost are required to be presented at the net amount expected to be
collected by means of an allowance for credit losses that is included in net income. Credit losses relating to available-
for-sale debt securities are also required to be recorded through a reversible allowance for credit losses, but the
allowance is limited to the amount by which fair value is less than amortized cost. The previous accounting guidance
delayed the recognition of credit losses until it was probable a loss had been incurred.
The Company reviews all securities with unrealized losses on a regular basis to assess whether the decline in
the securities fair value necessitates the recognition of an allowance for credit losses. Factors considered in the review
include the extent to which the fair value has been less than amortized cost, and current market interest rates and whether
the unrealized loss is credit-driven or a result of changes in market interest rates. The Company also considers factors
specific to the issuer including the general financial condition of the issuer, the issuers industry and future business
prospects, any past failure of issuer to make scheduled interest or principal payments, and the payment structure of the
investment and the issuers ability to make contractual payments on the investment.
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
85
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. For fixed-maturity securities that the Company has the intent and ability to hold, the Company
compares the estimated present value of the cash flows expected to be collected to the amortized cost of the security. The
extent to which the estimated present value of the cash flows expected to be collected is less than the amortized cost of
the security represents the credit-related portion of the impairment, which is recognized in net income through an
allowance for credit losses. Any remaining decline in fair value represents the noncredit portion of the impairment,
which is recognized in other comprehensive income.
The Company reports accrued interest receivable as a component of accrued investment income on its
consolidated balance sheet which is presented separately from available-for-sale securities. 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 did not recognize any credit losses during the years ended December 31, 2020 and 2019 related
to its available-for-sale securities.
Deferred Income Taxes
We account for taxes under the asset and liability method, under which we record deferred income taxes as
assets or liabilities on our balance sheet to reflect the net tax effect of the temporary differences between the carrying
amount of assets and liabilities for financial reporting purposes and their respective tax bases. Deferred tax assets and
liabilities are measured by applying enacted tax rates in effect for the years in which such differences are expected to
reverse.
Our deferred tax assets result from temporary differences primarily attributable to unearned premiums and net
operating losses (“NOLs”). Our deferred tax liabilities result primarily from deferred acquisition costs and unrealized
gains in the investment portfolio. On a quarterly basis, we review our deferred tax assets and, if we determine that it is
more likely than not that some portion or all of the deferred tax assets will not be realized, we reduce our deferred tax
asset with a valuation allowance. The assessment requires significant judgement and review of all positive and negative
evidence to reach a conclusion that it is more likely than not that all or some of portion of the deferred tax asset will not
be realized. We consider multiple factors, including the nature and amount of the deferred tax asset, the expected timing
of when an asset will be used, and the historical profitability of our entities.
Prior to March 2019, the Company was a Cayman Islands incorporated holding company with U.K. tax
residency. In addition, the Company’s Bermuda based subsidiary, PSRE, was not required to pay any taxes on its income
or capital gains but was subject to a 1% U.S. federal excise tax on reinsurance premiums assumed. As a result of our
multinational operations our effective tax rate has historically been below that of a fully U.S. based operation. In 2019,
the Company became a Delaware corporation and all income and became subject to U.S. federal income tax.
Prior to 2019, the Company maintained a valuation allowance on the U.S. tax attributes due to significant
negative evidence, including cumulative U.S. losses in the most recent three-year period and our assessment that the
realization of the net deferred tax assets did not meet the “more likely than not” criteria under ASC 740, Income Taxes.
Management assessed available positive and negative evidence to estimate whether sufficient future taxable income
would be generated to permit use of the existing deferred tax assets. The projected reversal of temporary differences, the
Domestication, and projected future operating income in the U.S. represents significant positive evidence, which
outweighed the historical negative evidence.
Based on this evidence, management determined it was more likely than not that the federal deferred tax assets
are recoverable and therefore the associated valuation allowance was released as of March 31, 2019. We decreased the
86
valuation allowance on the federal deferred tax assets by $1.7 million because of this analysis. State NOL carryforwards,
due to the limited carryforward period, did not meet the “more likely than not” criteria and we continued to maintain a
valuation allowance on the associated deferred tax assets. 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.
Recent Accounting Pronouncements
See “Note 2—Recent Accounting Pronouncements” in the Notes to Consolidated Financial Statements included
in this Annual Report on Form 10-K for a discussion of accounting pronouncements recently adopted and recently issued
accounting pronouncements not yet adopted and their potential impact to our financial statements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements (as defined by applicable regulations of the SEC) that are
reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity,
capital expenditures or capital resources.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial
instrument as the result of changes in equity prices, interest rates, foreign currency exchange rates and commodity
prices. Our consolidated balance sheets include assets and liabilities with estimated fair values that are subject to market
risk. Our primary market risks have been equity price risk associated with investments in equity securities and interest
rate risk associated with investments in fixed maturities. We do not have material exposure to foreign currency exchange
rate risk or commodity risk.
Credit risk is the potential loss resulting from adverse changes in an issuer’s ability to repay its debt obligations.
General concern exists about the number of municipalities experiencing financial difficulties in light of the adverse
economic conditions experienced over the past several years. We manage the exposure to credit risk in our municipal
bond portfolio by investing in high quality securities and by diversifying our holdings, which are typically either general
obligation or revenue bonds related to essential products and services. We manage the exposure to credit risk in our
corporate bond portfolio by investing in high quality securities and by diversifying our holdings.
We monitor our investment portfolio to ensure that credit risk does not exceed prudent levels. The majority of
our investment portfolio is invested in high credit quality, investment grade fixed maturity securities. We also invest in
higher yielding fixed maturities and equity securities. Our fixed maturity portfolio has an average rating by at least one
nationally recognized rating organization of “AA−,” with approximately 74.2% rated “A−” or better. At December 31,
2020, 0.6% of our fixed maturity portfolio was unrated or rated below investment grade. Our fixed maturity portfolio
includes some securities issued with financial guaranty insurance. We purchase fixed maturities based on our assessment
of the credit quality of the underlying assets without regard to insurance.
Interest Rate Risk
We manage our exposure to interest rate risk through a disciplined asset/liability matching and capital
management process. In the management of this risk, the characteristics of duration, credit and variability of cash flows
are critical elements. We regularly assess these risks and balance them within the context of our liability and capital
position.
As of December 31, 2020 the estimated fair value of our fixed maturities was $398.0 million. We estimate that
a 100-basis point increase in interest rates would cause a 3.9% decline in the estimated fair value of our fixed maturities
portfolio, while a 100-basis point decrease in interest rates would cause a 4.2% increase in the estimated fair value of
87
that portfolio. The selected scenarios are not predictions of future events, but rather illustrate the effect that such events
may have on the fair value of our fixed maturities portfolio.
Inflation
We establish our insurance premiums prior to knowing the amount of losses and loss adjustment expenses or
the extent to which inflation may affect such amounts. We attempt to anticipate the potential impact of inflation in our
pricing and our establishing of reserves for losses and loss adjustment expenses. Inflation in excess of the levels we have
assumed could cause losses and loss adjustment expenses to be higher than we anticipated.
Substantial future increases in inflation could also result in future increases in interest rates, which in turn are
likely to result in a decline in the market value of the investment portfolio and cause unrealized losses or reductions in
total stockholders’ equity.
Seasonality
Our Commercial All Risk, Specialty Homeowners and Hawaii Hurricane businesses expose us to claims from
seasonal weather events such as hurricanes and windstorms. The occurrence of such events typically increases between
June and November of each year. As a result, we may experience increased losses in our Commercial All Risk, Specialty
Homeowners and Hawaii Hurricane lines of business during this period. Our Residential Earthquake and Commercial
Earthquake businesses are not subject to seasonality.
88
Item 8: Financial Statements
Palomar Holdings, Inc. and Subsidiaries
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Index to Audited Consolidated Financial Statements of Palomar Holdings, Inc. and Subsidiaries as
of December 31, 2020 and 2019 and for each of the Three Years Ended December 31, 2020, 2019
and 2018
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2020 and 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Consolidated Statements of Income and Comprehensive Income for the three years
ended December 31, 2020, 2019 and 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Consolidated Statements of Stockholders’ Equity for the three years ended December 31, 2020,
2019 and 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Consolidated Statements of Cash Flows for the three years ended December 31, 2020, 2019 and 2018 . . . . . . . 96
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Schedule II—Condensed Financial Information of Registrant—Parent Company only . . . . . . . . . . . . . . . . . . . . . . 129
Schedule V—Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
Schedules other than those listed are omitted for the reason that they are not required, are not applicable or that
equivalent information has been included in the financial statements or notes thereto or elsewhere herein.
89
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Palomar Holdings, Inc. and Subsidiaries
Opinion on Internal Control Over Financial Reporting
We have audited Palomar Holdings, Inc. and Subsidiaries' internal control over financial reporting as of December 31,
2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Palomar Holdings,
Inc. and Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2020, 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, 2020 and 2019, 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, 2020, and the related notes and financial statement schedules listed in the Index
at Item 15(a) and our report dated March 9, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained
in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Francisco, California
March 9, 2021
90
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Palomar Holdings, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Palomar Holdings, Inc. and Subsidiaries (the Company)
as of December 31, 2020 and 2019, 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, 2020, and the related
notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the “consolidated
financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2020, in conformity with U.S. 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, 2020, 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 9, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion
on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements
that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or
disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or
complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the
consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below,
providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Reserve for Losses and Loss Adjustment Expenses
Description of the
Matter
At December 31, 2020, the reserve for losses and loss adjustment expenses (LAE) is
$129,036 thousand. 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. 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
91
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.
IBNR reserves include an estimate for future loss payments on incurred claims not yet
reported and for expected development on reported claims. There is significant uncertainty
inherent in determining management’s best estimate of IBNR, which is sensitive to
significant assumptions including the selection of actuarial methods and reported and paid
loss emergence patterns.
Auditing management’s best estimate of IBNR reserves was complex due to the highly
judgmental nature of the assumptions, including selection of actuarial methods and reported
and paid loss emergence patterns, used in the valuation process. These assumptions have a
significant effect on the valuation of reserves for IBNR claims.
How We
Addressed the
Matter in Our
Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness
of the Company’s controls over the process for estimating IBNR reserves. This included,
among other procedures, testing management review controls in place over the review and
approval of methods and assumptions used in estimating IBNR reserves.
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. To evaluate the significant assumptions
used by management, we compared the assumptions to current and historical claims trends
and to current industry benchmarks. We compared the Company’s recorded reserves to a
range of reasonable reserve estimates developed by our actuarial specialists based on
independently selected methods and assumptions. We also compared the results of the
reserve study prepared by a third-party actuarial firm to management’s recorded reserve.
Additionally, we performed a hindsight analysis of the prior period estimates using
subsequent claims development.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2016
San Francisco, California
March 9, 2021
92
Palomar Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except shares and par value data)
December 31, December 31,
2020
2019
Assets
Investments:
Fixed maturity securities available for sale, at fair value (amortized cost:
$381,279 in 2020; $211,278 in 2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Equity securities, at fair value (cost: $22,291 in 2020; $21,336 in 2019) . . . . . . . .
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance recoverable on unpaid losses and loss adjustment expenses . . . . . . . .
Reinsurance recoverable on paid losses and loss adjustment expenses . . . . . . . . . .
Ceded unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Liabilities and stockholders' equity
Liabilities:
Accounts payable and other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Reserve for losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded premium payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Funds held under reinsurance treaty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income and excise taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders' equity:
Preferred stock, $0.0001 par value, 5,000,000 shares authorized as of December
31, 2020 and December 31, 2019, 0 shares issued and outstanding as of
December 31, 2020 and December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, $0.0001 par value, 500,000,000 shares authorized, 25,525,796
and 23,468,750 shares issued and outstanding as of December 31, 2020 and
December 31, 2019, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
See accompanying notes.
397,987 $
24,322
422,309
33,538
248
2,545
48,842
35,481
94,566
10,162
35,031
34,119
739
11,512
729,092 $
20,730 $
129,036
183,489
22,233
4,515
—
5,376
365,379
217,151
22,328
239,479
33,119
230
1,386
36,237
25,201
12,952
4,303
26,105
14,861
845
744
395,462
13,555
16,821
130,373
11,383
1,658
1,117
1,999
176,906
—
—
3
310,507
13,246
39,957
363,713
729,092 $
2
180,012
4,686
33,856
218,556
395,462
93
Palomar Holdings, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
(in thousands, except shares and per share data)
Revenues:
Gross written premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Ceded written premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net written premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized and unrealized gains (losses) on investments . . . . . . . . . . . . .
Commission and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses:
Losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other underwriting expenses (includes stock-based compensation of
$2,167, $24,103 and $0 for the years ended December 31,
2020, 2019 and 2018, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income, net:
Net unrealized gains (losses) on securities available for sale,
Year Ended December 31,
2019
2018
2020
354,360 $
(155,102)
199,258
(44,190)
155,068
8,612
1,488
3,295
168,463
251,961 $
(108,332)
143,629
(43,422)
100,207
5,975
4,443
2,671
113,296
154,891
(82,949)
71,942
(2,045)
69,897
3,238
(2,569)
2,405
72,971
64,115
64,041
5,593
37,259
6,274
28,224
34,084
—
162,240
6,223
(34)
6,257
51,299
1,068
95,219
18,077
7,456
10,621
17,957
2,303
54,758
18,213
(6)
18,219
net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
8,560
14,817 $
5,249
15,870 $
(341)
17,878
Per Share Data:
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.25 $
0.24 $
0.49 $
0.49 $
1.07
1.07
Weighted-average common shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,872,251
25,598,647
21,501,541
21,834,934
17,000,000
17,000,000
See accompanying notes.
94
Palomar Holdings, Inc. and Subsidiaries
Consolidated Statements of Stockholder’s Equity
(in thousands, except share data)
Balance at December 31, 2017 . . . . . . . . . . 17,000,000 $
Other comprehensive income, net of tax . .
Cumulative effect of adopting ASU
—
Number of
Common
Shares
Outstanding
Stock
Income (Loss) Earnings
Common
Comprehensive Retained Stockholders'
Additional
Paid-In
Capital
2 $ 68,498 $
—
—
2,993 $ 6,921 $
(341)
—
Total
Equity
78,414
(341)
Accumulated
Other
2016-01 . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2018 . . . . . . . . . . 17,000,000 $
—
—
—
—
2 $ 68,498 $
—
—
(3,215)
—
3,215
18,219
(563) $ 28,355 $
—
18,219
96,292
Balance at December 31, 2018 . . . . . . . . . . 17,000,000 $
Other comprehensive income, net of tax . .
Distribution to stockholder . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . .
Issuance of common stock in initial
—
—
—
2 $ 68,498 $
—
—
—
—
—
24,103
(563) $ 28,355 $
5,249
—
—
—
(5,120)
—
96,292
5,249
(5,120)
24,103
public offering, net of offering costs . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2019 . . . . . . . . . . 23,468,750 $
6,468,750
—
87,411
—
—
—
2 $ 180,012 $
—
—
—
10,621
87,411
10,621
4,686 $ 33,856 $ 218,556
Balance at December 31, 2019 . . . . . . . . . . 23,468,750 $
Cumulative effect of adopting ASU
2 $ 180,012 $
4,686 $ 33,856 $ 218,556
—
—
—
—
—
—
—
—
2,167
—
8,560
—
(156)
—
(156)
8,560
2,167
2016-13 (Note 2) . . . . . . . . . . . . . . . . . . .
Other comprehensive income, net of tax . .
Stock-based compensation . . . . . . . . . . . . .
Issuance of common stock in
January 2020 stock offering, net of
offering costs . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock in June 2020
750,000
—
35,464
stock offering, net of offering costs . . . .
1,150,000
1
90,082
Issuance of common stock via employee
stock purchase plan . . . . . . . . . . . . . . . . .
28,367
—
741
Issuance of common stock via equity
—
—
—
—
35,464
—
90,083
—
741
incentive plan . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2020 . . . . . . . . . . 25,525,796 $
128,679
—
—
—
3 $ 310,507 $
2,041
—
—
—
—
2,041
6,257
6,257
13,246 $ 39,957 $ 363,713
See accompanying notes.
95
Palomar Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
2019
2018
2020
Operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income to net cash provided by operating activities:
6,257 $
10,621 $ 18,219
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization and write-off of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on asset disposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized and unrealized losses (gains) on investments . . . . . . . . . . . . . . . . . . .
Amortization of premium on fixed maturity securities . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance recoverables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve for losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . .
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded premiums payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Funds held under reinsurance treaty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,167
1,336
—
—
(1,488)
1,214
1,094
(1,159)
(12,754)
(10,280)
(87,473)
(8,926)
(20,356)
5,998
112,215
53,116
10,850
2,857
(1,117)
53,551
24,103
216
921
1
(4,443)
431
646
(652)
(17,604)
(11,149)
(2,693)
(7,821)
(8,998)
3,287
760
51,243
776
938
1,117
41,700
—
212
443
—
2,569
481
—
54
(3,546)
1,109
70
(15,109)
(4,603)
2,748
(1,723)
17,154
5,538
(797)
(11)
22,808
Investing activities
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of fixed maturity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and maturities of fixed maturity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales of equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities receivable or payable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of policy renewal rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(132)
(295,002)
(46,944)
124,243
45,983
(2,523)
(7,068)
(181,443)
(115)
(211,587)
(58,858)
124,151
64,820
1,023
—
(80,566)
(332)
(102,745)
(33,712)
81,215
29,959
250
—
(25,365)
Financing activities
Proceeds from initial public offering, net of offering costs . . . . . . . . . . . . . . . . . . . . .
Repayment of surplus notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution to stockholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of Floating Rate Notes, net of issuance costs . . . . . . . . . . . .
Redemption of Floating Rate Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from January 2020 stock offering, net of offering costs . . . . . . . . . . . . . . . .
Proceeds from June 2020 stock offering, net of offering costs . . . . . . . . . . . . . . . . . .
Proceeds from common stock issued via employee stock purchase plan . . . . . . . . . .
Proceeds from common stock issued via stock option exercises . . . . . . . . . . . . . . . . .
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in cash, cash equivalents and restricted cash . . . . .
Cash, cash equivalents and restricted cash at beginning of period . . . . . . . . . . . . . . .
Cash, cash equivalents and restricted cash at end of period . . . . . . . . . . . . . . . . . . . . . $ 33,786 $
—
—
—
—
—
35,464
90,083
741
2,041
128,329
437
33,349
87,411
—
(5,120)
—
(20,000)
—
—
—
—
62,291
23,425
9,924
33,349 $
—
(17,500)
—
19,049
—
—
—
—
—
1,549
(1,008)
10,932
9,924
Supplementary cash flow information:
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
7,182 $
— $
5,645 $
1,162 $
11
1,727
96
The following table summarizes our cash and cash equivalents and restricted cash within the consolidated balance sheets (in
thousands):
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents and restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
See accompanying notes.
2020
33,538 $
248
33,786 $
2019
33,119
230
33,349
December 31, December 31,
97
Palomar Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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”).
PSIC is a property and casualty insurance company domiciled in the state of Oregon. 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. PSIC is licensed to underwrite insurance on an admitted basis in 32 states in the United States, as of
December 31, 2020, mainly through managing general insurance agencies, wholesale brokers, and independent agents.
PSRE is a Bermuda captive reinsurance company that has historically been used to reinsure certain premiums
on a quota share basis exclusively for PSIC.
PESIC is an Arizona domiciled surplus lines insurance company. PESIC is licensed in Arizona to write surplus
lines policies across all the Company’s lines of business and was formed and began writing policies in 2020.
PGIA is a property and casualty general insurance agency for PSIC, PESIC, and unaffiliated insurance carriers.
As a general insurance agency, PGIA assists in developing insurance products, underwriting insurance policies, and
receiving and disbursing funds from premium and loss transactions under contracts on behalf of insurance companies.
PGIA earns commissions from the product development, marketing, and servicing of the insurance companies’
programs. PGIA also earns fee income from policyholder transactions.
The Company operates as an insurance holding company system and is subject to the insurance holding
company laws of the States of Oregon and Arizona, the states in which PSIC and PESIC are domiciled. The Company is
also commercially domiciled in California, making it subject to California insurance holding company laws. These
statutes require that each insurance company in the system register with the insurance department of its state of domicile
and furnish information concerning the operations of companies within the holding company system that may materially
affect the operations, management or financial condition of the insurers within the system and domiciled in that state.
The Company has a single operating segment, the property and casualty insurance business. While the
Company’s chief operating decision-maker reviews the revenue streams attributable to individual products, operations
are managed, resources are allocated, and financial performance is evaluated on a consolidated basis.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally
accepted accounting principles (“GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries.
All intercompany balances and transactions have been eliminated in consolidation.
98
Stock Split
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
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect amounts reported in the 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 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.
2. Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents include time deposits and marketable securities with original maturities of
three months or less at acquisition and are stated at cost, which approximates fair value. The Company maintains cash
balances in federally insured financial institutions.
Restricted Cash
Restricted cash includes cash on deposit with reinsurance carriers. Restricted cash also includes cash held in a
fiduciary capacity for the benefit of third-party insurance carriers.
Investments
All of the Company’s investments in fixed maturity securities are classified as available-for-sale and are carried
at fair value.
Investment income consists primarily of interest and dividends. Interest income is recognized on an accrual
basis. Premiums and discounts on mortgage-backed securities and asset-backed securities are amortized or accrued using
the prospective method which considers anticipated prepayments at the date of purchase. To the extent that the estimated
lives of such securities change as a result of changes in estimated prepayment rates, the adjustments are included in net
investment income using the prospective method. Dividend income is recognized on the ex-dividend date. Net
investment income represents investment income, net of expenses.
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
99
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.
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. Factors considered in the review
include the extent to which the fair value has been less than amortized cost, and current market interest rates and whether
the unrealized loss is credit-driven or a result of changes in market interest rates. The Company also considers factors
specific to the issuer including the general financial condition of the issuer, the issuers industry and future business
prospects, any past failure of issuer to make scheduled interest or principal payments, and the payment structure of the
investment and the issuers ability to make contractual payments on the investment.
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.
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. For fixed-maturity securities that the Company has the intent and ability to hold, the Company
compares the estimated present value of the cash flows expected to be collected to the amortized cost of the security. The
extent to which the estimated present value of the cash flows expected to be collected is less than the amortized cost of
the security represents the credit-related portion of the impairment, which is recognized in net income through an
allowance for credit losses. Any remaining decline in fair value represents the noncredit portion of the impairment,
which is recognized in other comprehensive income.
The Company reports accrued interest receivable as a component of accrued investment income on its
consolidated balance sheet which is presented separately from available-for-sale securities. 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.
Prior to the adoption of ASU 2016-13, the Company evaluated fixed maturity securities for credit losses and
any losses were bifurcated into the credit-related loss and the loss related to all other factors. The credit-related
impairment loss would have been recognized as a realized loss in the statement of income and comprehensive income
and the cost basis of the security would have been reduced. The impairment related to other factors would have remained
in accumulated other comprehensive income.
The Company did not recognize any credit losses during the years ended December 31, 2020 and 2019 related
to its available-for-sale securities.
Fair Value
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.
100
Level 2—Pricing inputs are quoted prices for similar investments in active markets; quoted prices for identical
or similar investments in inactive markets; or valuation 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.
The fair value of the Company’s investments in equity securities is based on quoted prices available in active
markets and classified and disclosed in Level 1 of the hierarchy.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally
of cash and cash equivalents, fixed maturity securities and reinsurance recoverables. The Company places its cash and
cash equivalents with high credit quality financial institutions and its fixed maturity securities in securities of the U.S.
government, U.S. government agencies, and high credit quality issuers of debt securities. The Company evaluates the
financial condition of its reinsurers and reinsures its business with highly rated reinsurers and sometimes requires letters
of credit or retains funds from reinsurers (see Note 10).
Premiums Receivable
Premiums receivable represent amounts due from policyholders, insurance agents, or program administrators
for policies written. Generally, premiums are collected prior to providing risk coverage, minimizing the Company’s
exposure to credit risk. Premiums receivable are short-term in nature and due within a year. The Company has
established an allowance for uncollectable premiums related to its credit risk, which it reviews on a quarterly basis and
adjusts as appropriate. The company considers the current economic environment, specific regulatory developments, and
historic payment and cancelation trends by line of business and location when determining whether to record an
allowance for uncollectable premiums.
Prior to December 31, 2019, the Company did not have an allowance for uncollectable premiums. An initial
allowance for uncollectable premiums of $0.2 million was established upon adoption of ASC 2016-13 on January 1,
2020 and the company recognized an immaterial amount of credit losses relating to uncollectable premiums during the
year ended December 31, 2020.
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.
101
Premiums Earned
Gross premiums written are recorded at policy inception and are earned as revenue ratably over the term of the
respective policies. Premiums written not yet recognized as revenue are reflected as unearned premiums on the balance
sheet, or as advanced premiums if received prior to the policy effective date. Premiums written where cash is not yet
received are recognized as premiums receivable.
A premium deficiency is recognized if the sum of expected losses and loss adjustment expenses, unamortized
acquisition costs, and policy maintenance costs exceeds the remaining unearned premiums. 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. The Company does not consider anticipated investment income when determining if a premium
deficiency exists. There was no premium deficiency at December 31, 2020 or 2019.
Commission and Other Income
Commission and other income is comprised of commissions earned on policies where the Company has no
exposure to underlying risk and fees earned in conjunction with underwriting policies. Commission and fee income is
earned at the time the policy is written.
Property and Equipment
Property and equipment are capitalized and carried at cost less accumulated depreciation. Depreciation for
property and equipment is calculated on a straight-line basis using useful lives of 3 to 5 years. 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. 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.
Capitalized Software
Costs associated with the implementation of certain internal systems are capitalized and carried at capitalized cost less
accumulated amortization and are included as a component of prepaid expenses and other assets on the Company’s
consolidated balance sheet. Costs capitalized include internal personnel costs, external developer costs, and interest. The
implementation costs relate to systems built on software which the Company purchases under a cloud computing
arrangement and accounts for as a service contract. As such, capitalized costs are amortized over the term of the service
contract, which currently ends in December 2024.
Intangible Assets
Intangible assets consist of both finite and indefinite lived assets. Finite lived intangible assets consist of
customer relationships acquired from another insurer during 2020. 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. No impairments
of intangible assets were recognized for the years ended December 31, 2020, 2019 or 2018.
Impairment of Long-Lived Assets
Long-lived assets with finite lives are tested for impairment whenever recognized events or changes in
circumstances indicate the carrying value of these assets may not be recoverable. If indicators of impairment are present,
the fair value is calculated using estimated future cash flows expected to be generated from the use of those assets. An
impairment loss is recognized only if the carrying amount of a long-lived asset or asset group is not recoverable and
exceeds its fair value. The carrying amount of a long-lived asset or asset group is not recoverable if it exceeds the sum of
102
the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group. This
assessment is based on the carrying amount of the asset or asset group at the date it is tested for recoverability. An
impairment loss is measured as the amount by which the carrying amount of a long-lived asset or asset group exceeds its
fair value. No impairments of long-lived assets were recognized for the years ended December 31, 2020, 2019 and 2018.
Reserve for Losses and Loss Adjustment Expenses
The reserve for unpaid losses and loss adjustment expenses includes estimates 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. 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.
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. Estimation by management of the ultimate
losses and loss adjustment expenses resulting from catastrophic events is inherently difficult because of the potential
severity of property catastrophe claims. Therefore, the Company uses both proprietary and commercially available
models, as well as historic claims experience, for purposes of providing an estimate of ultimate losses and loss
adjustment expenses.
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.
Ultimate losses and loss adjustment expenses may vary materially from the amounts provided in the
consolidated financial statements. Estimates of unpaid losses and loss adjustment expenses are reviewed regularly and,
as experience develops and new information becomes known, the liabilities are adjusted as necessary. Such adjustments,
if any, are reflected in operations in the period in which they become known and are accounted for as changes in
estimates. The Company does not discount its liability for unpaid losses and loss adjustment expenses.
The Company does not write insurance policies covering toxic clean-up, asbestos-related illness or other
environmental remediation exposures.
Reinsurance
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. Amounts applicable to ceded unearned premiums are
reported as assets in the accompanying consolidated balance sheets. Premiums earned and losses and loss adjustment
expenses incurred are stated in the accompanying consolidated statements of income and comprehensive income net of
amounts ceded to reinsurers.
Reinsurance recoverables represent balances due to the Company from its reinsurers for paid and unpaid losses
and loss adjustment expenses. The Company is exposed to credit losses from reinsurers being unable to meet their
obligations. The Company evaluates the financial condition of potential reinsurers and reinsures its business only with
highly rated reinsurers with a rating of “A-“ (Excellent) (Outlook Stable) or better from A.M. Best. Reinsurers who do
not meet the Company’s rating criteria are required to post collateral. The Company reviews credit quality of its
reinsurers on a quarterly basis. The Company’s reinsurance contracts also include special termination provisions that
allow the Company to cancel and replace any participating reinsurer that is downgraded below a rating of “A−”
from A.M. Best, or whose surplus drops by more than 20%. Historically, the Company has not experienced any credit
103
losses from reinsurance recoverables and did not have an allowance for uncollectable reinsurance recoverables as of
December 31, 2020 or December 31, 2019.
Stock Based Compensation Expense
Stock-based compensation expense is recognized on a straight-line basis over the vesting period of awards. The
Company does not apply a forfeiture rate to unvested awards and accounts for forfeitures as they occur. For stock option
grants, the fair value of awards is estimated using the Black Scholes Model. The fair value of restricted stock units is
determined using the closing price of the Company's common stock on the grant date. All stock-based compensation is
included in other underwriting expenses in the Company’s consolidated statements of income and comprehensive
income.
Income Taxes
The Company is taxed as a property/casualty insurer for federal income tax purposes. 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.
Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company recognizes the tax benefit of uncertain tax positions where the position is more likely than not to
be sustained assuming examination by taxing authorities. Based on its evaluation for the tax years ended December 31,
2020 and 2019, the Company has concluded that there are no significant uncertain tax positions requiring recognition in
its financial statements. The Company recognizes interest and penalties related to uncertain tax positions, if any, as a
component of income tax expense. The Company has not been assessed interest or penalties by any major tax
jurisdictions for the respective tax years ended December 31, 2020, 2019, and 2018.
Earnings Per Share
Basic earnings per share is calculated by dividing net income by the weighted-average common shares
outstanding for the period. Diluted earnings per share reflects the dilution which could occur if equity-based awards are
converted into common share equivalents as calculated using the treasury stock method. When inclusion of additional
common share equivalents increases the earnings per share or reduces the loss per share, the effect on earnings per share
is anti-dilutive, and the diluted net earnings or net loss per share is computed excluding these common share equivalents.
Recently adopted accounting pronouncements
Clarification on change in filing status and prior quarterly information
Prior to December 31, 2020, the Company qualified as an emerging growth company (“EGC”) under the Jumpstart Our
Business Startups Act of 2012, or the JOBS Act. The Company was previously electing to adopt new or revised
accounting guidance within the same time periods as private companies as permitted by its status as an EGC.
The Company became a large accelerated filed on December 31, 2020 and must now adopt new accounting
guidance within the same time periods as public companies, beginning with this 2020 Annual Report on Form 10-K.
Prior to this annual report, the Company’s 2020 quarterly filings did not reflect adoption of the below guidance as the
Company was not required to have adopted it. Upon adoption of the below guidance, the Company updated its financials
as if the below guidance was adopted on January 1, 2020, however, this adoption had a negligible impact on previously
filed quarterly information.
104
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance for accounting for
leases, ASU 2016-02, Leases (Topic 842) and subsequently issued multiple clarifying updates to the guidance. This
updated guidance requires the recognition of a right-of-use (“ROU”) asset and a corresponding lease liability, discounted
to the present value, for all leases that extend beyond 12 months. Under the previous guidance, leases were only included
on the balance sheet if the criteria to classify the agreement as a capital lease were met.
The Company adopted this new guidance as of January 1, 2020. The Company adopted this guidance using the
modified retrospective transition method, applying the transition provisions on the date of adoption and not restating
prior periods. The Company elected to use a number of practical expedients permitted under the transition guidance, but
did not elect to use hindsight in determining the lease term. Upon adoption, the Company recognized a ROU asset of
$2.9 million and lease liabilities of $3.8 million, with the difference representing the reclassification of deferred rent and
lease incentive liabilities (the difference between the straight-line rent expenses and cash paid for rent under the leases)
to operating lease ROU assets from other liabilities. The ROU asset and corresponding liability recognized pertained to
various operating leases for office space. The Company did not have any cumulative-effect adjustment because of the
adoption.
Measurement of credit losses
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326) and
subsequently issued multiple clarifying updates to the guidance. This updated guidance requires financial assets
measured at amortized cost to be presented at the net amount expected to be collected by means of an allowance for
credit losses that is included in net income. Credit losses relating to available-for-sale debt securities are also required to
be recorded through a reversible allowance for credit losses, but the allowance is limited to the amount by which fair
value is less than amortized cost. The previous accounting guidance delayed the recognition of credit losses until it was
probable a loss had been incurred.
The Company adopted this guidance on January 1, 2020 using the modified retrospective approach and
recorded a $0.2 million cumulative effect adjustment to beginning retained earnings upon adoption relating to an
allowance for credit losses on the Company’s premium receivables. The adoption of this accounting guidance did not
have an impact on value of the Company’s fixed maturity securities or its reinsurance recoverables.
Recently issued accounting pronouncements not yet adopted
Income Taxes
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 will adopt this guidance in the first fiscal quarter of 2021 and does not expect adoption to have a
material impact on its consolidated financial statements.
105
3. Investments
The Company’s available-for-sale investments are summarized as follows:
Gross
Gross
December 31, 2020
Fixed maturities:
Amortized Unrealized Unrealized
Gains
Cost or Cost
Losses
Fair
Value
(in thousands)
U.S. Governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,308 $
States, territories, and possessions . . . . . . . . . . . . . . . . . . . . . . . .
Political subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special revenue excluding mortgage/asset-backed securities . . .
Industrial and miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage/asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . .
6,208
2,027
39,704
234,049
82,983
756 $
428
125
1,525
11,602
2,785
Total available-for-sale investments . . . . . . . . . . . . . . . . . . . . . . . . . $ 381,279 $ 17,221 $
(5) $ 17,059
6,636
—
2,152
—
(2)
41,227
(291)
245,360
85,553
(215)
(513) $ 397,987
Gross
Gross
December 31, 2019
Fixed maturities:
Amortized Unrealized Unrealized
Gains
Cost or Cost
Losses
Fair
Value
(in thousands)
U.S. Governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,371 $
States, territories, and possessions . . . . . . . . . . . . . . . . . . . . . . . .
Political subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special revenue excluding mortgage/asset-backed securities . . .
Industrial and miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage/asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . .
2,298
1,913
18,139
124,726
50,831
Total available-for-sale investments . . . . . . . . . . . . . . . . . . . . . . . . . $ 211,278 $
321 $
147
29
343
4,326
824
5,990 $
(13) $ 13,679
2,445
—
—
1,942
(46)
18,436
129,013
(39)
51,636
(19)
(117) $ 217,151
Security holdings in an unrealized loss position
As of December 31, 2020, the Company held 90 fixed maturity securities in an unrealized loss position with a
total estimated fair value of $41.5 million and total gross unrealized losses of $0.5 million. None of the fixed maturity
securities with unrealized losses has ever missed, or been delinquent on, a scheduled principal or interest payment. As of
December 31, 2019, the Company held 51 fixed maturity securities in an unrealized loss position with a total estimated
fair value of $20.9 million and total gross unrealized losses of $0.1 million. None of the fixed maturity securities with
unrealized losses has ever missed, or been delinquent on, a scheduled principal or interest payment.
106
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
December 31, 2020 and 2019, are as follows:
Less Than 12 Months
More Than 12 Months
Total
December 31, 2020
Fixed maturity securities:
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
(in thousands)
U.S. Governments . . . . . . . . . . . . . . . . . . . . . . . $ 1,496 $
States, territories, and possessions
Political subdivisions
Special revenue excluding mortgage/asset-
—
—
backed securities . . . . . . . . . . . . . . . . . . . . . . .
Industrial and miscellaneous . . . . . . . . . . . . . . .
Mortgage/asset-backed securities . . . . . . . . . . .
520
22,718
16,092
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,826 $
(5) $
—
—
— $
—
—
— $ 1,496 $
—
—
—
—
(5)
—
—
(2)
(234)
(211)
(452) $
—
203
496
699 $
520
22,921
16,588
—
(57)
(4)
(61) $ 41,525 $
(2)
(291)
(215)
(513)
December 31, 2019
Fixed maturity securities:
Less Than 12 Months
More Than 12 Months
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
(in thousands)
U.S. Governments . . . . . . . . . . . . . . . . . . . . . . . $ 1,235 $
States, territories, and possessions
Political subdivisions
Special revenue excluding mortgage/asset-
—
—
(11) $ 1,827 $
—
—
—
—
(2) $ 3,062 $
—
—
—
—
(13)
—
—
backed securities . . . . . . . . . . . . . . . . . . . . . . .
Industrial and miscellaneous . . . . . . . . . . . . . . .
Mortgage/asset-backed securities . . . . . . . . . . .
3,548
6,929
7,035
(46)
(38)
(19)
—
188
182
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,747 $
(114) $ 2,197 $
—
(1)
—
(3) $ 20,944 $
3,548
7,117
7,217
(46)
(39)
(19)
(117)
The Company reviewed the above securities at each balance sheet date to consider whether it was necessary to
recognize a credit loss or other-than-temporary impairment (OTTI) related to any of these securities. Based on the
reviews, 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 for both periods. The Company does not intend to sell
the investments and it is not more likely than not that that the Company will be required to sell the investments before
the recovery of their amortized cost basis. Therefore, the Company did not recognize an allowance for credit losses
related to any of these securities for the year ended December 31, 2020 and did not recognize any OTTI charges for the
year ended December 31, 2019.
107
Contractual maturities of available-for-sale fixed maturity securities
The amortized cost and fair value of fixed maturity securities at December 31, 2020, by contractual maturity,
are shown below.
Amortized
Cost
Fair
Value
(in thousands)
Due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,222 $ 11,351
Due after one year through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
151,123
Due after five years through ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
106,600
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
43,360
Mortgage and asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
85,553
$ 381,279 $ 397,987
146,302
99,194
41,578
82,983
Expected maturities may differ from contractual maturities because borrowers may have the right to call or
prepay obligations.
Change in unrealized gains (losses) of investments
The following table presents the change in available-for-sale gross unrealized gains or losses by investment
type:
2020
Year Ended December 31,
2019
(in thousands)
2018
Change in net unrealized gains (losses)
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,835 $
Net increase (decrease) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,835 $
6,602 $
6,602 $
(341)
(341)
Net investment income summary
Net investment income is summarized as follows:
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment management fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
8,554 $
489
(431)
8,612 $
5,894 $
424
(343)
5,975 $
3,036
514
(312)
3,238
2020
December 31,
2019
(in thousands)
2018
108
Net realized and unrealized investment gains and losses
The following table presents net realized and unrealized investment gains and losses:
Realized gains:
Gains on sales of fixed maturity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gains on sales of equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized losses:
Losses on sales of fixed maturity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Losses on sales of equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized gains (losses) on equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized and unrealized gains (losses) on investments . . . . . . . . . . . . . . . . . . . . . . $
2020
Year Ended
December 31,
2019
(in thousands)
2018
501 $
62
563
1,405 $
177
1,582
19
4,287
4,306
(46)
(68)
(114)
449
1,039
1,488 $
(418)
(84)
(421)
(64)
(839)
(148)
1,434
3,467
3,009 (6,036)
4,443 $ (2,569)
Proceeds from the sale of fixed maturity securities were $39.8 million, $46.3 million and $48.5 million for the
years ended December 31, 2020, 2019 and 2018, 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 consolidated balance sheets. At
December 31, 2020 and 2019, the carrying value of securities on deposit with state regulatory authorities was $7.5
million and $5.1 million, respectively.
4. Fair value measurements
The following tables present the Company’s fair value hierarchy for financial assets and liabilities measured at
fair value on a recurring basis as of December 31, 2020 and 2019:
December 31, 2020
Assets:
Fixed maturity securities
Level 1
Level 2
Level 3
Total
(in thousands)
U.S. Governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
States, territories, and possessions . . . . . . . . . . . . . . . . . . . .
Political subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special revenue excluding mortgage/asset-backed
— $
—
—
17,059 $
6,636
2,152
— $
—
—
17,059
6,636
2,152
securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial and miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage/asset-backed securities . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash, cash equivalents, and restricted cash . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
—
—
24,322
33,786
58,108 $ 397,987 $
41,227
245,360
85,553
—
—
41,227
—
245,360
—
85,553
—
24,322
—
—
33,786
— $ 456,095
109
December 31, 2019
Assets:
Level 1
Level 2
Level 3
Total
(in thousands)
Fixed maturity securities
U.S. Governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
States, territories, and possessions . . . . . . . . . . . . . . . . . . . .
Political subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special revenue excluding mortgage/asset-backed
— $
—
—
13,679 $
2,445
1,942
— $
—
—
13,679
2,445
1,942
securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial and miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage/asset-backed securities . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash, cash equivalents, and restricted cash . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
—
—
22,328
28,350
50,678 $ 220,650 $
18,436
129,013
50,136
—
4,999
—
—
1,500
—
—
18,436
129,013
51,636
22,328
33,349
1,500 $ 272,828
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, 2019, the Company had $1.5
million of fixed income securities classified as Level 3 due to the availability of market observable inputs. These
securities were transferred to Level 2 during the year ended December 31, 2020.
5. Policy Acquisition Costs
The following tables present the policy acquisition costs deferred and amortized over the terms of the policies
in force:
Deferred Policy Acquisition Costs:
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,201 $ 14,052 $ 15,161
Additions to deferred balance:
2020
December 31,
2019
(in thousands)
2018
36,934
Direct commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(15,218)
Ceding commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,362
Premium taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,078
Total net additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of net policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(26,187)
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,481 $ 25,201 $ 14,052
Acquisition expenses:
Amortization of net policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,159 $ 36,506 $ 26,187
Period costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,037
Total Acquisition expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 64,041 $ 37,259 $ 28,224
82,786
(19,371)
7,024
70,439
(60,159)
59,676
(17,257)
5,236
47,655
(36,506)
3,882
753
110
6. Intangible Assets
Intangible assets consist of the following:
December 31,
2020
2019
(in thousands)
Indefinite-lived intangibles:
State insurance licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
744 $
744
Finite-lived intangibles:
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated amortization on finite-lived intangibles
Total intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
10,768
—
11,512 $
—
—
744
State insurance licenses consist of licenses acquired at the inception of PSIC.
Customer relationships represents the fair value of policy renewal rights acquired by PSIC from another
insurance company in November 2020. The policy renewals pertaining to this intangible asset will begin in early 2021
and the Company intends to amortize this customer relationship intangible over a period of 8 years.
7. Capitalized Assets
Capitalized software balances are as follows:
December 31, 2020
Cost
Accumulated
Amortization
(in thousands)
Net
Book Value
Capitalized Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
8,450 $
(1,767) $
6,683
December 31, 2019
Cost
Accumulated
Amortization
(in thousands)
Net
Book Value
Capitalized Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4,567 $
(669) $
3,898
Amortization expense relating to capitalized software for the years ended December 31, 2020, 2019 and 2018
was $1.1 million, $0.6 million and $0.03 million, respectively.
Property and Equipment consists of the following:
December 31, 2020
Cost
Accumulated
Depreciation Book Value
(in thousands)
Net
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Computer hardware . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office equipment and furniture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
879 $
276
519
1,674 $
(459) $
(100)
(376)
(935) $
420
176
143
739
December 31, 2019
Cost
Accumulated
Depreciation Book Value
Net
(in thousands)
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Computer hardware . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office equipment and furniture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
879 $
144
519
1,542 $
(342) $
(64)
(291)
(697) $
537
80
228
845
111
Depreciation expense for the years ended December 31, 2020, 2019 and 2018 was $0.2 million, $0.2 million,
and $0.2 million respectively.
8. Leases
The Company has operating leases for office space used to conduct its insurance operations and administration
activities. Operating lease ROU assets are a component of prepaid expenses and other assets and operating lease
liabilities are included in accounts payable and other accrued liabilities in the Company's consolidated balance sheets.
The Company determines whether an arrangement is a lease at its inception. Operating lease ROU assets and
liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the
lease term. To determine the present value of lease payments, the Company uses its incremental borrowing rate, which it
calculates based on information available at the lease commencement date. For certain leases that contain options to extend,
the options are included in lease liabilities only if the company is reasonably certain the option will be exercised. Variable
lease costs such as parking are expensed in the period the obligation is incurred and are not included in the Company’s
operating lease liability. The Company's lease agreements do not contain any residual value guarantees.
Operating lease costs for the years ended December 31, 2020, 2019 and 2018 were $0.7 million, $0.6 million and
$0.6 million, respectively. Operating lease costs are comprised of rental expense for operating leases. Lease expense is
recognized on a straight-line basis over the lease term and is included as a component of other underwriting expenses in
the Company’s consolidated statements of income and comprehensive income.
The following tables provide supplementary information about the Company’s leases:
Year ended December 31, 2020
Operating cash outflows from operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Right of use assets obtained in exchange for new operating lease liabilities
$
(in thousands)
842
—
December 31, 2020
Operating lease ROU assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average remaining lease term-operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average discount rate-operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
($ in thousands)
2,274
$
3,012
$
3.5 years
2.1 %
Future minimum lease payments as of December 31, 2020 are as follows:
Years ending December 31,
(in thousands)
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025
Total future minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: imputed interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating lease liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
879
904
862
478
—
3,123
(111)
3,012
9. Reserve for Losses and Loss Adjustment Expenses
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, 2020, 2019, and 2018. The Company does not
discount loss and loss adjustment expense reserves. The reserves for unpaid losses and loss adjustment expenses are
112
estimated using individual case-basis valuations and statistical analyses. Those estimates are subject to the effects of
trends in loss severity and frequency.
In addition to case reserves, which are generally based on reported claims, the Company establishes reserves for
incurred but not reported claims (“IBNR”). IBNR reserves are developed 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. With the assistance of an independent, actuarial firm, the
Company uses statistical analysis to estimate the cost of losses and loss adjustment expenses related to IBNR. Those
estimates are based on historical information, industry information and practices, and estimates of trends that may affect
the ultimate frequency of incurred but not reported claims and changes in ultimate claims severity.
The Company regularly reviews its reserve estimates and adjusts them as necessary as experience develops or
as new information becomes known. Such adjustments are included in current operations. During the loss settlement
period, if there are indications that claims frequency or severity exceeds initial expectations, the Company generally
increases its reserves for losses and loss adjustment expenses. Conversely, when claims frequency and severity trends
are more favorable than initially anticipated, the Company generally reduces its reserves for losses and loss adjustment
expenses once it has sufficient data to confirm the validity of the favorable trends. Even after such adjustments, the
ultimate liability may exceed or be less than the revised estimates. Accordingly, the ultimate settlement of losses and the
related loss adjustment expenses may vary significantly from the estimate included in the Company’s consolidated
financial statements.
Although considerable variability is inherent in such estimates, management believes the reserves for losses
and loss adjustment expenses are adequate. The estimates are continually reviewed and adjusted as necessary as
experience develops or new information becomes known. Any adjustments to estimates are recorded in the current
period.
The following table provides a reconciliation of the beginning and ending reserve balances for losses and LAE
on a net of reinsurance basis to the gross amounts reported in the accompanying consolidated balance sheets:
Reserve for losses and loss adjustment expenses net of reinsurance recoverables
at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: Incurred losses and loss adjustment expenses, net of reinsurance,
related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deduct: Loss and loss adjustment expense payments, net of reinsurance,
related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve for losses and loss adjustment expense net of reinsurance recoverables
Year Ended December 31,
2020
2019
2018
(in thousands)
$
3,869 $ 4,165 $ 4,432
64,179
(64)
64,115
5,774
8,165
(181) (1,891)
5,593 6,274
31,879
1,635
33,514
2,179
3,710
4,409
2,132
5,889 6,541
at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34,470
3,869 4,165
Add: Reinsurance recoverables on unpaid losses and loss adjustment expenses
at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
94,566
12,952 11,896
Reserve for losses and loss adjustment expenses gross of reinsurance recoverables
on unpaid losses and loss adjustment expenses at end of period . . . . . . . . . . . . . . .
$ 129,036 $ 16,821 $ 16,061
The foregoing reconciliation shows loss and loss adjustment expense reserve redundancies of $0.1 million,
$0.2 million, and $1.9 million developed in 2020, 2019 and 2018, respectively. During 2020, this favorable reserve
development related to lower than anticipated frequency and severity of claims in our homeowners and special property
113
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. During 2018, this favorable reserve development was
primarily due to favorable development in our homeowners lines of business due to lower than originally anticipated
frequency and severity of claims.
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. For
the purpose of defining claims frequency, the number of reported claims is by loss occurrence and includes claims that
do not result in a liability or payment associated with them.
The Company analyzed the usefulness of disaggregation of its results and determined the characteristics
associated with the policies and the related unpaid loss reserves, incurred losses, and payment patterns are similar in
nature. The Company separates its special property and other claim experience from its homeowner claim experience
when analyzing losses and allocated loss adjustment expenses incurred and paid development and claim count triangles,
as there are distinct differences in the development and claim count emergence patterns as well as methods of IBNR
projection. The Special Property classification includes fire, allied lines, inland marine, and earthquake claims.
As such, the following tables show the Company’s historical homeowner and special property incurred and
cumulative paid losses and LAE development, net of reinsurance, as well as IBNR loss reserves and the number of
reported claims on an aggregate basis as of December 31, 2020 for each of the previous two accident years.
The information provided herein about incurred and paid accident year claims development for the years ended
December 31, 2018 and prior is presented as unaudited supplementary information.
Incurred Losses and Allocated Loss Adjustment Expenses,
Net of Reinsurance Homeowners’ Insurance (in thousands)
Year Ended December 31,
2015(1) 2016(1) 2017(1) 2018(1) 2019
Accident Year
2015 . . . . . . . . . . . . . . . . . . . . . . $ 2,048 $ 1,785 $ 1,658 $ 1,636 $ 1,642 $ 1,636 $
2016 . . . . . . . . . . . . . . . . . . . . . .
6,069
2017 . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . .
5,622
6,388
1,930
838
19,100
$ 35,514 $
5,636
6,630
2,008
914
5,721
7,418
2,193
5,878
9,354
2020
—
—
3
3
98
2,995
3,099
381
1,083
2,973
789
1,178
3,223
9,627
As of December 31, 2020
Incurred but Cumulative
Not Reported Number of
Liabilities
Claims
114
Cumulative Paid Losses and Allocated Loss Adjustment Expenses,
Net of Reinsurance Homeowners’ Insurance (in thousands)
Year Ended December 31,
2015(1) 2016(1) 2017(1) 2018(1)
Accident Year
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 860 $ 1,379 $ 1,523 $ 1,615 $ 1,634 $ 1,636
5,619
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,371
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,922
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
685
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,588
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 29,821
Reserve for losses and loss adjustment expense, net of
5,607
6,628
1,853
546
5,585
7,375
1,550
5,356
7,135
4,120
2020
2019
reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5,693
(1) Data presented for these calendar years is required supplementary information, which is unaudited.
Average Annual Percentage Payout of Incurred Claims by Age,
Net of Reinsurance Homeowners’ Insurance (unaudited)
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Payout percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75.69 % 17.95 % 1.19 % 0.66 % 0.69 % 0.12 %
Incurred Losses and Allocated Loss Adjustment Expenses,
Net of Reinsurance Special Property Insurance (in thousands)
Accident Year
2015 . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2015(1) 2016(1) 2017(1) 2018(1) 2019
$ 630 $ 719 $ 671 $
671 $ 678 $
677 $
1,381
1,249
3,071
1,251
3,475
5,970
1,454
4,014
6,095
3,661
1,453
4,264
6,009
3,385
42,334
$ 58,122 $
—
—
—
—
332
9,554
9,886
381
1,103
3,068
949
1,339
1,240
8,080
As of December 31, 2020
Incurred but Cumulative
Not Reported Number of
Liabilities
Claims
2020
Cumulative Paid Losses and Allocated Loss Adjustment Expenses,
Net of Reinsurance Special Property Insurance (in thousands)
Accident Year
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve for losses and loss adjustment
expense, net of reinsurance . . . . . . . . . . . . . . .
Year Ended December 31,
2016(1)
2017(1)
2018(1)
2019
2020
2015(1)
$
265 $
438 $
703
586 $
626 $
1,064
1,967
1,216
3,344
2,859
666 $
1,444
4,011
6,036
1,633
673
1,453
4,269
6,009
2,825
18,274
33,503
24,619
(1) Data presented for these calendar years is required supplementary information, which is unaudited.
115
Average Annual Percentage Payout of Incurred Claims by Age,
Net of Reinsurance Special Property Insurance (unaudited)
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Payout percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45.44 % 34.16 % 11.88 % 9.22 % 3.26 % 1.03 %
The reconciliation of the net incurred and paid claims development tables to the liability for claims and claim
adjustment expenses in the consolidated balance sheets is as follows:
Net outstanding liabilities:
Homeowners’ insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance- Nonproportional assumed property(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve for losses and loss adjustment expense, net of reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance recoverable on unpaid claims:
Homeowners’ insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total reinsurance recoverable on unpaid claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total reserve for losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020
(in thousands)
$
$
$
5,693
24,619
4,110
48
34,470
14,640
79,825
101
94,566
129,036
(1) Reflects the Company’s share of Loss and Loss Adjustment Expense related to non-proportional assumed
reinsurance business. This amount reflects gross and net reserves related to this treaty and the ultimate incurred
amount reflects IBNR only. The Company does not have direct access to individual claim information
underlying the assumed quota arrangement. The Company does not use claim frequency information in the
determination of loss reserves or for other internal purposes. Based on these considerations, the Company does
not believe providing claims frequency information is practicable as it relates to this line of business.
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.
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. Historically, the Company has had a retention of between $5 million
and $15 million for hurricane and earthquake events. As of December 31, 2020, the Company’s catastrophe event
retention is $10 million for all perils and $1 million as a vertical co-participation in selected layers. As of December 31,
2020, the Company’s XOL reinsurance structure provides protection up to $1.4 billion for earthquake events and $600
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 All Risk and Specialty Homeowners lines currently accounting for the largest
amount of ceded written premiums. For Texas Homeowners, a component of Specialty Homeowners, the Company
ceded substantially all exposure between June 2018 and June 2019 and ceded a significant portion of exposure
thereafter. Ceded written premium related to the Texas Homeowners line was $14.6 million, $20.4 million and
$24.9 million for the years ended December 31, 2020, 2019 and 2018, respectively. Ceded written premium related to
the Commercial All Risk line was $19.2 million, $19.0 million and $7.2 million for the years ended December 31, 2020,
2019 and 2018, respectively. The Company also began ceding a small portion of its Commercial Earthquake premiums
116
in November 2020, which accounted for approximately $7.1 million in ceded written premiums for the year ended
December 31, 2020. No other quota share program accounted for more than 10% of total ceded written premiums for
those years.
The Company recognizes ceded unearned premiums related to quota share agreements as an asset on its
consolidated balance sheets. As of December 31, 2020 and 2019, ceded unearned premiums totaled $35.0 million and
$26.1 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.
As part of its reinsurance program, in May 2017, the Company obtained catastrophe protection through a
reinsurance agreement with Torrey Pines Re Ltd. (“TPRe”). In connection with the reinsurance agreement, TPRe issued
notes to unrelated investors in an amount equal to the full $166 million of coverage provided under the reinsurance
agreement covering a three-year period, ending May 31, 2020. At the time of the agreement, the Company performed an
evaluation of TPRe to determine if it meets the definition of a variable interest entity (“VIE”). The Company concluded
that TPRe is a VIE but it does not have a variable interest in the entity, as the variability in results is expected to be
absorbed entirely by the investors in TPRe. Accordingly, TPRe is not consolidated in the Company’s financial
statements. The premium ceded to TPRe for the year ended December 31, 2020 was approximately $5.0 million.
The effect of reinsurance on premiums written and earned and on losses and LAE incurred for the years ended
December 31, 2020, 2019 and 2018, is as follows:
Premiums Written and Earned:
2020
2019
Written
Earned
Written
Earned
Written
2018
Earned
(in thousands)
Direct . . . . . . . . . . . . . . . . . . . . . . . . . . $ 324,253 $ 271,887 $ 220,568 $ 178,536 $ 144,821 $ 129,071
Assumed . . . . . . . . . . . . . . . . . . . . . . .
8,688
Ceded . . . . . . . . . . . . . . . . . . . . . . . . .
(67,862)
Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 199,258 $ 155,068 $ 143,629 $ 100,207 $ 71,942 $ 69,897
31,393
(108,332)
21,985
(100,314)
29,569
(146,388)
30,107
(155,102)
10,070
(82,949)
Losses and LAE Incurred:
Losses
2020
LAE
(in thousands)
Total
Direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 145,774 $ 18,777 $ 164,551
Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,644
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(104,080)
64,115
Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 57,290 $
3,485
(91,969)
159
(12,111)
6,825 $
Losses and LAE Incurred:
Losses
2019
LAE
(in thousands)
Total
Direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,105 $
Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,201
(16,564)
4,742 $
34
(2,020)
2,837 $ 22,942
1,235
(18,584)
5,593
851 $
117
Losses
2018
LAE
(in thousands)
Total
Losses and LAE Incurred:
Direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,153 $
Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
46
(6,580)
5,619 $
6
(1,464)
2,113 $ 14,266
52
(8,044)
6,274
655 $
The ceding of insurance does not legally discharge the Company from its primary liability for the full amount
of the policy coverage, and therefore the Company will be required to pay the loss and bear collection risk if the
reinsurer fails to meet its obligations under the reinsurance agreement. To minimize exposure to significant losses from
reinsurance insolvencies, the Company evaluates the financial condition of its reinsurers and monitors concentrations of
credit risk.
To reduce credit exposure to reinsurance recoverable balances, the Company obtains letters of credit from
certain reinsurers that are not authorized as reinsurers under U.S. state insurance regulations. In addition, under the terms
of its reinsurance contracts, the Company may retain funds due from reinsurers as security for those recoverable
balances. As of December 31, 2020 and 2019, the Company had retained $4.5 million and $1.7 million in funds from
reinsurers, respectively. The Company is able to use the funds in the ordinary course of its business. The funds are held
in cash and cash equivalents and investments with an offsetting liability on the accompanying consolidated balance
sheets.
For the year ended December 31, 2020, reinsurance premiums ceded to the Company’s three largest reinsurers
totaled $9.7 million, $8.6 million, and $6.0 million, representing 22.4% of the total balance. For the year ended
December 31, 2019, reinsurance premiums ceded to the Company’s three largest reinsurers totaled $21.7 million,
$7.5 million, and $4.9 million, representing 31.5% of the total balance. For the year ended December 31, 2018,
reinsurance premiums ceded to the Company’s three largest reinsurers totaled $7.5 million, $7.2 million, and
$5.2 million, representing 24.0% of the total balance.
At December 31, 2020 reinsurance recoverable on unpaid losses by the Company’s three largest reinsurers were
$36.0 million, $5.8 million, and $3.1 million representing 42.8% of the total balance. At December 31, 2019 reinsurance
recoverables on paid and unpaid losses by the Company’s three largest reinsurers were $2.7 million, $1.9 million, and
$1.9 million representing 38.2% of the total balance. All of the Company’s reinsurers post collateral or have an A.M.
best rating of A− (excellent) or better.
11. Long-term Debt
Prior to September 2018, the Company had $17.5 million in outstanding surplus notes which had been issued
by PSIC on February 3, 2015 for a term of seven years. The surplus notes bore interest at the rate of LIBOR plus 8.00%
and had restrictions as to payments of interest and principal and any such payment required the prior approval of the
Oregon Insurance Commissioners before such payment could be made. Such payments could only be made from
surplus.
In September 2018, the Company completed a private placement financing of $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. As
part of the financing agreement, the Company immediately used surplus funds to pay down the existing $17.5 million in
surplus notes. As part of this pre-payment, the Company incurred a penalty of $0.1 million which, along with
unamortized debt issuance costs of $0.4 million, was charged to income in 2018.
The Floating Rate Notes were redeemed 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
118
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 in interest expense related to the Floating Rate Notes for the year ended
December 31, 2019 (inclusive of the $0.4 million redemption premium) and $0.6 million for the year ended
December 31, 2018 and paid $1.2 million and $0.5 million for each period, respectively. The Company incurred and
paid $1.2 million in interest expense related to the surplus notes for the year ended December 31, 2018.
12. Stockholders’ Equity
As of December 31, 2020 and December 31, 2019, the Company has 5,000,000 preferred shares authorized
with a par value of $0.0001 and no preferred shares issued and outstanding. As of December 31, 2020 and December 31,
2019, the Company has 500,000,000 common shares authorized and 25,525,796 and 23,468,750 common shares issued
and outstanding, respectively, with a par value of $0.0001. Additional paid in capital is $310.5 million as of
December 31, 2020 and $180.0 million as of December 31, 2019.
In March 2019, the Company made a one-time cash distribution totaling approximately $5.1 million to its then-
sole stockholder, GC Palomar Investor LP, enabling it to distribute funds to its partners in order to allow such partners to
satisfy tax obligations incurred as a result of the Domestication transactions.
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. The Company received net proceeds of approximately $87.4 million, after
deducting underwriting discounts and commissions and offering costs.
On January 9, 2020, the Company sold 750,000 shares of common stock to the public at a price of $49.00 per
share (along with 5,000,000 shares sold by existing stockholders) in an underwritten public offering. The Company
received net proceeds of approximately $35.5 million, after deducting underwriting discounts and commissions and
offering costs.
On June 26, 2020, the Company sold 1,150,000 shares of common stock to the public at a price of $82.00 per
share in an underwritten public offering. The Company received net proceeds of approximately $90.1 million, after
deducting underwriting discounts and commissions and offering costs.
Common stock reserved for future issuance consists of the following as of December 31, 2020:
Stock options outstanding under 2019 Equity Incentive Plan . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units outstanding under 2019 Equity Incentive Plan . . . . . . . . . . . . . . . . .
Shares authorized for future issuance under 2019 Equity Incentive Plan . . . . . . . . . . . . . .
Shares authorized for future issuance under 2019 Employee Stock Purchase Plan . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,008,648
14,734
1,952,001
451,633
3,427,016
The below table summarizes the Company’s stock-based compensation expense for each period presented:
Stock-Based Compensation Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,167 $
24,103 $
—
Stock-based compensation expense is recognized on a straight-line basis over the vesting period of awards. The
Company does not apply a forfeiture rate to unvested awards and accounts for forfeitures as they occur. All stock-based
2020
Year ended December 31,
2019
(in thousands)
2018
119
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, 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
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 are 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 or four year period with 25% or 50% vesting on the first anniversary of the grant date and
the remainder vesting monthly over the remaining period, subject to continued service to the Company. Stock options
expire ten years after the grant date.
120
The following table summarizes stock option transactions for the year ended December 31, 2020:
Number of Weighted-average
shares
exercise price
Weighted average
remaining
contractual term
(in years)
Aggregate
intrinsic value
(in thousands)
35,039
9.33 $
Outstanding at January 1, 2020 . . . . . . . . . . . . . . . . . . . . . .
Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2020 . . . . . . . . . . . . . . . . . . .
Vested and Exercisable at December 31, 2020 . . . . . . . . . .
1,046,373 $
109,374
(122,613)
(24,486)
1,008,648 $
522,464 $
17.05
80.90
16.65
21.46
23.92
15.78
8.43 $
8.29 $
66,028
38,170
The total intrinsic value of stock options exercised during the year ended December 31, 2020 was $7.7 million.
No options were exercised prior to 2020. As of December 31, 2020, the Company had approximately $3.7 million of
total unrecognized stock-based compensation expense related to stock options expected to be recognized over a
weighted-average period of 2.27 years.
The fair value of each option granted was estimated on the grant date using the Black-Scholes option pricing
model with the following assumptions in each year presented:
Risk free rate of return (1) . . . . . . . . . . . . . . . . . . . . .
0.32% - 1.52%
Expected share price volatility (2) . . . . . . . . . . . . . . . 18.13% - 25.67%
5.63-6.08
Expected life in years (3) . . . . . . . . . . . . . . . . . . . . . .
0%
Dividend yield (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020
Year ended December 31,
2019
(in thousands)
1.59% - 2.45%
18.12% - 18.45%
5.64-6.08
0%
2018
—
—
—
—
(1) Determined based on the U.S. Treasury yield in effect at the time of the grant for zero-coupon U.S. Treasury notes
with remaining terms similar to the expected term of the options.
(2) Determined based on analysis of the historical volatility of a peer group of publicly traded companies.
(3) Determined using the “simplified method” for estimating the expected option life, which is the average of the
weighted-average vesting period and contractual term of the option as the Company does not have sufficient
historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period
of time its common stock has been publicly traded.
(4) Determined to be zero as the Company does not currently plan to issue dividends.
Restricted Stock Units
Restricted stock units are valued on their grant date and generally vest either on the first anniversary of the
grant date or over a three-year period with one third vesting on each anniversary date, subject to continued service with
the Company. The fair value of RSUs is determined using the closing price of the Company's common stock on the grant
date.
121
The following table summarizes RSU transactions for the year ended December 31, 2020:
Non vested outstanding at January 1, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited
Non vested outstanding at December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
shares
6,066 $
14,734
(6,066)
—
14,734 $
Number of
grant date
fair value
16.49
95.86
16.49
—
95.86
Weighted-average
As of December 31, 2020, the Company had approximately $1.2 million of total unrecognized stock-based
compensation expense related to RSUs expected to be recognized over a weighted-average period of 2.41 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 28,367 shares pursuant to the ESPP during the year ended December 31, 2020.
13. Accumulated Other Comprehensive Income
Changes in accumulated other comprehensive income (loss) (“AOCI”) are as follows:
2020
Year Ended December 31,
2019
(in thousands)
2018
Balance as of January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Effect of equity accounting guidance adoption . . . . . . . . . . . . . . . . . . . . . . .
Beginning Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) before reclassification . . . . . . . . . . . . .
Federal income tax (expense) benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) before reclassification, net of tax . . . .
Amounts reclassified from AOCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts reclassified from AOCI, net of tax . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4,686 $
—
4,686
11,292
(2,371)
8,921
(456)
95
(361)
8,560
13,246 $
(563) $
—
(563)
6,555
(1,344)
5,211
47
(9)
38
5,249
4,686 $
2,993
(3,215)
(222)
(740)
76
(664)
399
(76)
323
(341)
(563)
122
14. Underwriting Information
The Company has a single reportable segment and offers primarily earthquake, wind, and flood insurance
products. Gross written premiums (“GWP”) by product are presented below:
Product
2020
Year Ended December 31,
2019
($ in thousands)
2018
Amount
% of
GWP
Amount
% of
GWP
Amount
% of
GWP
52.7 %
Residential Earthquake . . . . . . . . . . . . . . . . . . . . $ 140,934
13.5 %
58,890
Commercial Earthquake. . . . . . . . . . . . . . . . . . . .
Commercial All Risk . . . . . . . . . . . . . . . . . . . . . .
9.3 %
53,933
Specialty Homeowners . . . . . . . . . . . . . . . . . . . .
17.9 %
49,849
15,423
Inland Marine . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— %
5.2 %
13,824
Hawaii Hurricane . . . . . . . . . . . . . . . . . . . . . . . . .
Residential Flood . . . . . . . . . . . . . . . . . . . . . . . . .
1.4 %
8,176
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— %
13,331
Total Gross Written Premiums . . . . . . . . . . . . . . $ 354,360 100.0 % $ 251,961 100.0 %$ 154,891 100.0 %
39.8 % $ 130,473
16.6 % 38,741
15.2 % 30,358
14.1 % 32,788
4.3 %
2,465
3.9 % 10,764
5,216
2.3 %
1,156
3.8 %
51.8 %$ 81,679
15.4 % 20,946
12.0 % 14,338
13.0 % 27,680
—
1.0 %
8,128
4.3 %
2,120
2.1 %
—
0.4 %
Gross written premiums by state are as follows:
2020
Year Ended December 31,
2019
($ in thousands)
2018
Amount
% of
GWP
Amount
% of
GWP
Amount
% of
GWP
State
56.3 %$ 82,119 53.0 %
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 172,765
21.0 %
32,568
17.5 %
67,974
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.2 %
8,128
4.7 %
16,398
Hawaii . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.7 %
5,658
3.8 %
14,328
1.0 %
1,568
1.5 %
11,143
North Carolina . . . . . . . . . . . . . . . . . . . . . . . . . . .
Oregon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.4 %
5,286
2.9 %
10,038
2.1 %
3,208
2.5 %
9,196
South Carolina . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.7 %
1.9 %
2,585
7,461
Mississippi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.9 %
8.9 % 13,771
45,057
Total Gross Written Premiums . . . . . . . . . . . . . . $ 354,360 100.0 % $ 251,961 100.0 %$ 154,891 100.0 %
48.8 % $ 141,743
44,087
19.2 %
11,851
4.6 %
9,607
4.0 %
3,894
3.1 %
7,396
2.8 %
6,185
2.6 %
2.1 %
4,769
12.8 % 22,429
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. These programs also feature separate managerial oversight and leadership, policy
administration systems and retail agents originating policies. In total, these four products accounted for $191.3 million or
54.0% of the Company’s gross written premiums for the year ended December 31, 2020, $148.6 million or 59.0% of the
Company’s gross written premiums for the year ended December 31, 2019 and $104.9 million or 67.7% of the
Company’s gross written premiums for the year ended December 31, 2018.
123
15. Retirement and Post-Employment Retirement Plans
For employees meeting certain eligibility requirements, the Company provides a defined contribution
retirement plan under IRC Section 401(k). Under a safe-harbor plan, the Company contributes 3% of each participant’s
gross wages regardless of the employee’s contribution. For the years ended December 31, 2020, 2019, and 2018 the
Company’s contributions to the plan were $0.3 million, $0.3 million and $0.2 million, respectively.
16. Income Taxes
Prior to March 2019, the Company was a Cayman Islands incorporated holding company with U.K. tax
residency. On March 14, 2019, the Company implemented a domestication (“the Domestication”) pursuant to
Section 388 of the Delaware General Corporation Law and Section 206 of the Companies Law (2018 Revision), as
amended, of the Cayman Islands pursuant to which it became a Delaware corporation and no longer subject to the laws
of the Cayman Islands.
Historically, the Company’s Bermuda based subsidiary, PSRE, was not required to pay any taxes on its income
or capital gains but was subject to a 1% U.S. federal excise tax on reinsurance premiums assumed. The Company has
elected for PSRE to be taxed as a U.S. domestic corporation under Section 953(d) of the Code effective January 1, 2019.
The components of the Company’s federal income tax expense (benefit) are as follows:
2020
December 31,
2019
(in thousands)
2018
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,128) $
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(34) $
1,094
6,810 $
646
7,456 $
(6)
—
(6)
As of December 31, 2020 and 2019, significant components of the Company’s deferred tax assets and liabilities
were as follows:
Deferred tax assets:
December 31,
2020
2019
(in thousands)
Losses and LAE reserve discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net operating losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized organizational costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Deferred tax liabilities:
238 $
680
—
6,272
244
511
652
8,597 $
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Unrealized gains on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Internally developed software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax liability before valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(7,454) $
(3,884)
(1,283)
(672)
(13,293)
(4,696)
(680)
(5,376) $
10
74
85
3,748
274
—
390
4,581
(4,468)
(1,396)
(640)
(2)
(6,506)
(1,925)
(74)
(1,999)
124
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.
The following is a reconciliation of the statutory federal income tax rate to the Company’s effective tax rate for
the tax years ended December 31, 2020, 2019 and 2018:
2020
Years Ended December 31,
2019
($ in thousands)
2018
Expense computed at federal tax rate . . . . . . . . . . . . . $ 1,321 21.00 % $ 3,802 21.00 % $ 3,825 21.00 %
(24.21)%
Non‑U.S. group member income . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . .
— %
Dividend received deduction and
(1,538) (24.44)% 4,822 26.63 %
— % (4,409)
—
— %
—
—
tax‑exempt interest . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . $
(67) (1.06)%
606
(356) (5.67)%
(36)
9.63 % (1,677)
545
(0.20)%
(9.27)%
3.01 %
(34) (0.54)% $ 7,456 41.17 % $
(144)
678
44
(6)
(0.79)%
3.72 %
0.24 %
(0.04)%
The stock-based compensation difference shown above relates primarily to the permanent component of
employee stock option exercises for the year ended December 31, 2020. 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 year ended December 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, 2020 and 2019, the Company had no uncertain tax positions that required either
recognition or disclosure in the consolidated financial statements. This is not expected to change significantly during the
next twelve months. The Company classifies interest and penalties, if any, related to the liability for unrecognized tax
benefits as a component of the provision for income taxes. The Company’s income tax returns for 2015 through 2019
remain subject to examination by the tax authorities.
17. Earnings Per Share
The following table sets forth the computation of earnings per share of common stock:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted average common shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common Share equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year ended December 31,
2019
(in thousands, except shares and per share data)
2018
2020
6,257 $
10,621 $
18,219
24,872,251
726,396
25,598,647
21,501,541 17,000,000
—
21,834,934 17,000,000
333,393
Earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.25 $
0.24 $
0.49 $
0.49 $
1.07
1.07
Common share equivalents relate to outstanding stock options and RSUs under the 2019 Plan and unpurchased
shares under the 2019 ESPP and are calculated using the treasury stock method.
125
18. Statutory financial information
U.S.
U.S. state insurance laws and regulations prescribe accounting practices for determining statutory net income
and capital and surplus for insurance companies. In addition, state regulators may permit statutory accounting practices
that differ from prescribed practices. Statutory accounting practices (“SAP”) prescribed or permitted by regulatory
authorities for the Company’s insurance subsidiaries differ from U.S. GAAP. The principal differences between SAP
and GAAP as they relate to the financial statements of the Company’s insurance subsidiaries are (a) policy acquisition
costs are expensed as incurred under SAP, whereas they are deferred and amortized under GAAP, (b) certain assets are
not admitted for purposes of determining surplus under SAP, (c) investments in fixed income securities are carried at fair
value under GAAP whereas such securities are carried at amortized cost under SAP, and (d) the criteria for recognizing
net DTAs and the methodologies used to determine such amounts are different under SAP and GAAP.
Combined statutory net income and statutory capital surplus for the U.S. insurance subsidiaries, PSIC and
PESIC as of December 31, 2020, 2019 and 2018 and for the years then ended are summarized as follows:
2020
December 31,
2019
(in thousands)
2018
Statutory net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Statutory capital and surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,753 $ (17,911) $
213,721
116,296
9,609
63,731
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. As of December 31, 2020 and 2019, the company’s capital and surplus exceeds its authorized
control level.
Bermuda
Under the Bermuda Insurance Act, 1978 and related regulations, PSRE is required to maintain certain solvency
and liquidity levels. The minimum statutory solvency margin required at December 31, 2020 and 2019 was
approximately $1.2 million and $1.2 million, respectively. Actual statutory capital and surplus at December 31, 2020 and
2019 was $39.2 million and $38.3 million, respectively. PSRE had statutory net income of $0.9 million, $18.5 million
and $17.3 million for 2020, 2019 and 2018, respectively.
PSRE had stockholder’s equity of $41.9 million and $39.7 million on a GAAP basis at December 31, 2020 and
2019, 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 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. Relevant assets include
cash and cash equivalents, fixed maturity securities, accrued interest income, premiums receivable, losses recoverable
from reinsurers, and funds withheld. The relevant liabilities include total general business insurance reserves and total
other liabilities, less sundry liabilities. As of December 31, 2020 and 2019, the Company met the minimum liquidity
ratio requirement.
126
19. Dividend Restrictions
U.S.
The Company’s U.S. insurance company subsidiaries, PSIC and PESIC are restricted by the statutes as to the
amount of dividends that they may pay without prior approval by state insurance commissioners.
Under California and Oregon statute which govern PSIC, dividends paid in a consecutive twelve month period
cannot exceed the greater of (i) 10% of an insurance company’s statutory policyholders’ surplus as of December 31 of
the preceding year or (ii) 100% of its statutory net income for the preceding calendar year. Any dividends or
distributions in excess of these amounts would require regulatory approval. In addition, under Oregon statute, PSIC may
only declare a dividend from earned surplus, which does not include contributed capital. Surplus arising from unrealized
capital gains or revaluation of assets is not considered part of earned surplus. Based on the above restrictions, PSIC may
pay a dividend or distribution of no greater than $11.3 million in 2021 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. As such, PESIC is unable to pay a dividend or
distribution in 2021 without the approval of the Arizona Insurance Commissioner as it had a statutory net loss in 2020.
In addition to the above limitations, any dividend or distribution declared is also subject to state regulatory
approval prior to payment. In the future, state insurance regulatory authorities may adopt statutory provisions and
dividend limitations more restrictive than those currently in effect.
Bermuda
Bermuda regulations limit the amount of dividends and return of capital paid by a regulated entity. A Class 3A
insurer is prohibited from declaring or paying a dividend if it is in breach of its minimum solvency margin, its enhanced
capital requirement, or its minimum liquidity ratio, or if the declaration or payment of such dividend would cause such a
breach, or if there are reasonable grounds for believing there has been such a breach. Pursuant to Bermuda regulations,
the maximum amount of dividends and return of capital available to be paid by a reinsurer is determined pursuant to a
formula. Under this formula, the maximum amount of dividends and return of capital available to the Company from
PSRE during 2021 is calculated to be approximately $10.5 million. However, this dividend amount is subject to annual
enhanced solvency requirement calculations.
20. Commitments and Contingencies
Litigation
The Company is subject to legal proceedings arising from the normal conduct of its business. In the opinion of
management, any ultimate liability that may arise from these proceedings will not have a material effect on the
Company’s financial position.
Letters of Credit
As of December 31, 2020, 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, $0.5 million and $0.4 million. The $1.5 million and $0.4 million letters of credit expire December 31,
2021 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.
127
21. Selected Quarterly Financial Data (unaudited)
The following is a summary of the Company’s unaudited quarterly results of operations:
First
Second
Third
Fourth
2020 Quarter
Gross written premiums . . . . . . . . . . . . . $
Total revenues (1) . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . .
Comprehensive income (loss) . . . . . . . .
Earnings per share (2):
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . $
71,494
38,019
11,776
5,943
0.49
0.48
$
$
$
$
($ in thousands, except per share data)
102,967
44,998
(15,682)
(14,773)
83,807
43,149
12,012
22,688
96,092
42,295
(1,849)
959
$
2020
Year
$
354,360
168,463
6,257
14,817
0.49
0.48
$
$
(0.62)
(0.62)
$
$
(0.07)
(0.07)
$
$
0.25
0.24
First
Second
Third
Fourth
2019 Quarter
$
$
($ in thousands, except per share data)
66,242
30,461
7,454
8,428
58,346
25,905
6,698
9,996
73,342
34,623
10,880
9,670
$
2019
Year
$
251,961
113,296
10,621
15,870
54,031
Gross written premiums . . . . . . . . . . . . . $
Total revenues . . . . . . . . . . . . . . . . . . . .
22,307
Net income (loss) . . . . . . . . . . . . . . . . . . (14,411)
Comprehensive income (loss) . . . . . . . . (12,224)
Earnings per share (2):
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(0.85)
(0.85)
(1) Due to rounding differences, quarterly total revenues does not add up to the yearly total.
0.30
0.30
0.32
0.31
$
$
$
$
$
$
0.46
0.45
$
$
0.49
0.49
(2) Due to differences in weighted-average common shares outstanding between periods, quarterly earnings per
share may not add up to the totals reported for the full year.
128
Palomar Holdings, Inc. and Subsidiaries
Balance Sheets (Parent Company)
(In Thousands, except shares and par value data)
Schedule II
December 31, December 31,
2020
2019
Assets
Investments:
Fixed maturity securities available for sale, at fair value (amortized cost: $50,177 in
2020, $28,413 in 2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Equity securities, at fair value: (cost: $1,661 in 2020, $1,661 in 2019) . . . . . . . . . . . . . . .
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receivables from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,120
1,696
30,816
1,654
126
36
—
189,313
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 387,106 $ 221,945
Liabilities and Stockholders' equity
Liabilities:
51,252 $
1,727
52,979
7,290
300
7,322
1,552
317,663
Accounts payable and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Payables to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders' equity:
94 $
17,923
—
5,376
23,393
268
—
1,122
1,999
3,389
Preferred stock, $0.0001 par value, 5,000,000 shares authorized as of December 31, 2020
and December 31, 2019, respectively, 0 shares issued and outstanding as of
December 31, 2020 and December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, $0.0001 par value, 500,000,000 shares authorized, 25,525,796 and
—
—
23,468,750 shares issued and outstanding as of December 31, 2020 and
2
December 31, 2019, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
180,012
Additional paid‑in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,686
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33,856
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
218,556
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 387,106 $ 221,945
3
310,507
13,246
39,957
363,713
See accompanying notes.
129
Palomar Holdings, Inc. and Subsidiaries
Statements of Income (Parent Company)
(In Thousands)
Schedule II
Year Ended December 31,
2019
2018
2020
Revenues:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net realized and unrealized losses on investments . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses:
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before equity in net income of subsidiaries . . . . . . . . . . . . . . . .
Equity in net income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
939 $
63
1,002
1,039 $
131
1,170
61
(2)
59
8,696
(7,694)
(34)
(7,660)
13,917
6,257
8
1,162
7,441
(6,279)
16,900
10,621
—
59
—
59
18,160
18,219
Other comprehensive income:
Net unrealized losses on securities available for sale . . . . . . . . . . . . . . . . . . . . . . .
Equity in other comprehensive income of subsidiaries, net of taxes . . . . . . . . . . .
(87)
(254)
Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,817 $ 15,870 $ 17,878
1,075
7,485
708
4,541
See accompanying notes.
130
Palomar Holdings, Inc. and Subsidiaries
Statements of Cash Flows (Parent Company)
(In Thousands)
Schedule II
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating
$
6,257 $ 10,621 $ 18,219
Year Ended December 31,
2019
2020
2018
activities:
Equity in undistributed earnings of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . .
Net realized and unrealized losses on investments . . . . . . . . . . . . . . . . . . . . . .
Amortization of premium on fixed maturity securities . . . . . . . . . . . . . . . . . . .
Deferred income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities: . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . . .
Investing activities
Purchases of fixed maturity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and maturities of fixed maturity securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash received from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . .
Proceeds from June 2020 stock offering, net of offering costs . . . . . . . . . . . . . . .
Proceeds from common stock issued via equity incentive plans . . . . . . . . . . . . . .
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Supplementary cash flow information:
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(13,917)
(63)
350
1,094
—
7,772
1,493
(16,900)
(131)
114
646
—
4,218
(1,432)
(18,160)
2
—
—
546
(67)
540
(71,048)
6,651
(59,789)
—
(124,186)
(73,901)
13,930
—
226
(59,745)
—
—
—
35,464
90,083
2,782
128,329
5,636
1,654
7,290 $
87,411
(5,120)
(20,000)
—
—
—
62,291
1,114
540
1,654 $
—
—
—
—
—
—
—
—
—
—
—
540
—
540
7,182 $
5,645 $
—
See accompanying notes.
131
Schedule II
1.Accounting Policies
Organization
Palomar Holdings, Inc. (“the Company”), is an insurance holding company that domesticated in Delaware in
March 2019. Prior to domestication in Delaware, the Company was known as GC Palomar Holdings (“GCPH”), which
was a Cayman Islands incorporated insurance holding company formed on October 4, 2013 when GC Palomar
Investor LP (“GCPI”) acquired control of GCPH.
Basis of Presentation
The accompanying condensed financial statements have been prepared using the equity method. Under the
equity method, the investment in consolidated subsidiaries is stated at cost plus equity in undistributed earnings of
consolidated subsidiaries since the date of acquisition. These condensed financial statements should be read in
conjunction with the Company’s consolidated financial statements.
Estimates and Assumptions
Preparation of the financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and accompanying disclosures. Those estimates
are inherently subject to change, and actual results may ultimately differ from those estimates.
132
Schedule V
Palomar Holdings, Inc. and Subsidiaries
Valuation and Qualifying Accounts
Balance at
Beginning
(in thousands)
Year Ended December 31, 2020
Valuation Allowance for deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . $
Valuation Allowance for premium receivable . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31, 2019
Valuation Allowance for deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . $
Deductions
Additions
Amounts
Amounts
Charged to Written
Balance at
End of
Period
of Period Expense Off
74 $
150
606 $
53
— $
—
680
203
1,677 $
— $ (1,603) $
74
133
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and our principal financial officer,
evaluated, as of the end of the period covered by this Annual Report on Form 10-K, the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended, or the Exchange Act). Based on that evaluation, our principal executive officer and principal financial officer
have concluded that as of December 31, 2020, our disclosure controls and procedures were effective at the reasonable
assurance level. Management recognizes that any controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving their objectives and our management necessarily applies its
judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our
internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles in the United States of America. Our internal control over financial reporting includes those
policies and procedures that:
(i) Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of our assets;
(ii) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being
made only in accordance with authorizations of our management and directors; and
(iii) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31,
2020. In making this assessment, management used the framework in Internal Control-Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment
included an evaluation of the design of our internal control over financial reporting and testing of the operational
effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the
audit committee of our board of directors.
Based on that assessment under the framework in Internal Control-Integrated Framework (2013), management
concluded that the company’s internal control over financial reporting was effective as of December 31, 2020. Pursuant
to Section 404(c) of the Sarbanes-Oxley Act, our independent registered public accounting firm has issued an attestation
134
report on the effectiveness of our internal control over financial reporting for the year ended December 31, 2020, which
is included above.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the
evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter
ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated herein by reference to our Proxy Statement with respect to
our 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered
by this Annual Report on Form 10-K.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to our Proxy Statement with respect to
our 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered
by this Annual Report on Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated herein by reference to our Proxy Statement with respect to
our 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered
by this Annual Report on Form 10-K.
Item 13. Certain Relationships and Related Transaction and Director Independence
The information required by this item is incorporated herein by reference to our Proxy Statement with respect to
our 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered
by this Annual Report on Form 10-K.
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated herein by reference to our Proxy Statement with respect to
our 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered
by this Annual Report on Form 10-K.
135
Item 15. Exhibits and Financial Statement Schedules
PART IV
(a) (1) and (2) Financial Statements and Financial Statement Schedules- All financial statement schedules are filed as
part of this report under Item 8- Financial Statements.
(3) Exhibits
Exhibit
Number
Exhibit Description
3.1
3.2
3.3
4.1
Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Registration
Statement on Form S-1, filed with the SEC on March 15, 2019).
Certificate of Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 3.2 to the
Company’s Registration Statement on Form S-1, filed with the SEC on March 15, 2019).
Bylaws (incorporated by reference to Exhibit 3.3 to the Company’s Amendment No. 1 to Registration
Statement on Form S-1, filed with the SEC on April 1, 2019).
Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s
Amendment No. 2 to Registration Statement on Form S-1, filed with the SEC on April 8, 2019).
4.2 Description of the Registrant’s Securities
10.1+
10.2+
10.3+
10.4+
10.5+
10.6+
10.7†
2019 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Registration
Statement on Form S-1, filed with the SEC on March 15, 2019).
2019 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.2 to the Company’s
Registration Statement on Form S-1, filed with the SEC on March 15, 2019).
Employment Agreement, dated April 10, 2014, by and between the Registrant and Mac Armstrong as
amended by that certain First Amendment to Employment Agreement, dated March 5, 2018, by and
between the Registrant and Mac Armstrong (incorporated by reference to Exhibit 10.3 to the Company’s
Registration Statement on Form S-1, filed with the SEC on March 15, 2019).
Employment Agreement, dated April 15, 2014, by and between the Registrant and Heath Fisher as
amended by that certain First Amendment to Employment Agreement, dated March 1, 2018, by and
between the Registrant and Heath Fisher (incorporated by reference to Exhibit 10.4 to the Company’s
Registration Statement on Form S-1, filed with the SEC on March 15, 2019).
Employment Agreement, dated April 10, 2014, by and between the Registrant and Jon Christianson as
amended by that certain First Amendment to Employment Agreement, dated March 5, 2018, by and
between the Registrant and Jon Christianson (incorporated by reference to Exhibit 10.5 to the Company’s
Registration Statement on Form S-1, filed with the SEC on March 15, 2019).
Form of Indemnification Agreement (incorporated by reference to Exhibit 10.6 to the Company’s
Registration Statement on Form S-1, filed with the SEC on March 15, 2019).
Program Administrator Agreement, dated as of February 19, 2014 (as amended by that certain First
Amendment to Program Administrator Agreement, dated as of July 14, 2014, that certain Second
Amendment to Program Administrator Agreement, dated as of March 21, 2016, that certain Third
Amendment to Program Administrator Agreement, dated as of May 29, 2018 and that certain Second
Amendment to Schedule H of the Program Administrator Agreement, dated as of August 29, 2018), by
and between Palomar Specialty Insurance Company and Arrowhead General Insurance Agency, Inc.
(incorporated by reference to Exhibit 10.7 to the Company’s Amendment No. 2 to Registration Statement
on Form S-1, filed with the SEC on April 8, 2019).
10.8+ Form of Notice of Grant of Performance Stock Units under 2019 Equity Incentive Plan
136
Exhibit
Number
Exhibit Description
10.9+ Form of Performance Stock Units Agreement under 2019 Equity Incentive Plan
21.1 List of subsidiaries of the Company
23.1 Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
31.1 Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
101.INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
+ Management contract or compensatory plan or arrangement.
† Portions of this exhibit have been redacted in compliance with Regulation S-K Item 601(b)(10).
* This certification is deemed not filed for purposes of section 18 of the Exchange Act, or otherwise subject to the
liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or
the Exchange Act.
Item 16. Form 10-K Summary
None.
137
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 9, 2021.
SIGNATURES
Palomar Holdings, Inc.
By:
/s/ Mac Armstrong
Mac Armstrong
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Mac Armstrong
Mac Armstrong
Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
March 9, 2021
/s/ T. Christopher Uchida
T. Christopher Uchida
Chief Financial Officer (Principal Financial and
Accounting Officer)
March 9, 2021
March 9, 2021
March 9, 2021
March 9, 2021
March 9, 2021
March 9, 2021
/s/ Daryl Bradley
Daryl Bradley
/s/ Robert E. Dowdell
Robert E. Dowdell
/s/ Catriona M. Fallon
Catriona M. Fallon
/s/ Martha Notaras
Martha Notaras
/s/ Richard H. Taketa
Richard H. Taketa
Director
Director
Director
Director
Director
138
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