SEC Filing - Palomar Holdings, Inc.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

☐ 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		83-3972551
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

7979 Ivanhoe Avenue, Suite 500 La Jolla, California		92037
(Address of principal executive offices)		(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	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	PLMR	Nasdaq Global Select Market

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 ☒	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☐
Emerging growth 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 is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

Number of shares of the registrant’s common shares outstanding at November 1, 2022: 25,232,736

PALOMAR HOLDINGS, INC.

TABLE OF CONTENTS

			Page
PART I. FINANCIAL INFORMATION

Item 1.		Financial Statements
		Condensed Consolidated Balance Sheets at September 30, 2022 (Unaudited) and December 31, 2021	3
		Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) (Unaudited) for the Three and Nine Months Ended September 30, 2022 and 2021	4
		Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Nine Months Ended September 30, 2022 and 2021	5
		Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2022 and 2021	6
		Notes to Condensed Consolidated Financial Statements (Unaudited)	7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.		Controls and Procedures	46

PART II. OTHER INFORMATION

Item 1.		Legal Proceedings	48
Item 1A.		Risk Factors	48
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	72
Item 3.	Defaults Upon Senior Securities		72
Item 4.	Mine Safety Disclosures		72
Item 5.	Other Information		72
Item 6.	Exhibits		72
	Signatures		73

Part I: FINANCIAL INFORMATION

Item 1: Financial Statements

Palomar Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except shares and par value data)


	September 30,		December 31,
	2022		2021
	(Unaudited)
Assets
Investments:
Fixed maturity securities available for sale, at fair value (amortized cost: $530,992 in 2022; $426,122 in 2021)	$	476,794	$	432,682
Equity securities, at fair value (cost: $42,111 in 2022; $31,834 in 2021)		35,468		33,261
Total investments		512,262		465,943
Cash and cash equivalents		29,471		50,284
Restricted cash		73		87
Accrued investment income		3,333		2,725
Premiums receivable, net		186,850		88,012
Deferred policy acquisition costs, net of ceding commissions		57,000		55,953
Reinsurance recoverable on unpaid losses and loss adjustment expenses		131,575		127,947
Reinsurance recoverable on paid losses and loss adjustment expenses		45,393		29,368
Ceded unearned premiums		182,657		58,315
Prepaid expenses and other assets		46,414		37,072
Deferred tax assets, net		12,200		—
Property and equipment, net		663		527
Intangible assets, net		8,575		9,501
Total assets	$	1,216,466	$	925,734
Liabilities and stockholders' equity
Liabilities:
Accounts payable and other accrued liabilities	$	20,655	$	21,284
Reserve for losses and loss adjustment expenses		205,823		173,366
Unearned premiums		443,463		284,665
Ceded premium payable		145,918		37,460
Funds held under reinsurance treaty		6,362		10,882
Deferred tax liabilities, net		—		3,908
Borrowings from credit agreements		26,400		—
Total liabilities		848,621		531,565
Stockholders' equity:
Preferred stock, $0.0001 par value, 5,000,000 shares authorized, 0 shares issued and outstanding as of September 30, 2022 and December 31, 2021		—		—
Common stock, $0.0001 par value, 500,000,000 shares authorized, 25,229,486 and 25,428,929 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively		3		3
Additional paid-in capital		330,381		318,902
Accumulated other comprehensive income (loss)		(42,629)		5,312
Retained earnings		80,090		69,952
Total stockholders' equity		367,845		394,169
Total liabilities and stockholders' equity	$	1,216,466	$	925,734

See accompanying notes.

Palomar Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) (Unaudited)

(in thousands, except shares and per share data)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Revenues:
Gross written premiums	$	253,128	$	152,332	$	642,751	$	385,267
Ceded written premiums		(161,930)		(58,073)		(374,109)		(153,005)
Net written premiums		91,198		94,259		268,642		232,262
Change in unearned premiums		(13,256)		(29,539)		(34,403)		(66,274)
Net earned premiums		77,942		64,720		234,239		165,988
Net investment income		3,744		2,236		9,462		6,649
Net realized and unrealized losses on investments		(2,356)		(313)		(8,369)		(752)
Commission and other income		1,362		1,018		3,129		2,735
Total revenues		80,692		67,661		238,461		174,620
Expenses:
Losses and loss adjustment expenses		30,900		28,475		60,251		31,288
Acquisition expenses		27,210		26,412		83,928		68,150
Other underwriting expenses		17,114		12,652		51,233		39,438
Interest expense		270		—		475		—
Total expenses		75,494		67,539		195,887		138,876
Income before income taxes		5,198		122		42,574		35,744
Income tax expense (benefit)		912		(124)		9,163		6,529
Net income		4,286		246		33,411		29,215
Other comprehensive income (loss), net:
Net unrealized losses on securities available for sale for the three and nine months ended September 30, 2022 and 2021, respectively		(15,412)		(1,655)		(47,941)		(5,144)
Net comprehensive income (loss)	$	(11,126)	$	(1,409)	$	(14,530)	$	24,071
Per Share Data:
Basic earnings per share	$	0.17	$	0.01	$	1.32	$	1.15
Diluted earnings per share	$	0.17	$	0.01	$	1.29	$	1.12

Weighted-average common shares outstanding:
Basic		25,209,368		25,388,630		25,258,333		25,473,006
Diluted		25,787,625		26,043,680		25,808,387		26,133,664

See accompanying notes.

Palomar Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

(in thousands, except share data)


	Number of					Accumulated
	Common			Additional		Other				Total
	Shares	Common		Paid-In		Comprehensive		Retained		Stockholders'
	Outstanding	Stock		Capital		Income (Loss)		Earnings		Equity
Balance at December 31, 2020	25,525,796	$	3	$	310,507	$	13,246	$	39,957	$	363,713
Other comprehensive loss, net of tax	—		—		—		(5,144)		—		(5,144)
Stock-based compensation	—		—		3,370		—		—		3,370
Issuance of common stock via employee stock purchase plan	9,793		—		719		—		—		719
Issuance of common stock via equity incentive plan	118,806		—		1,756		—		—		1,756
Repurchases of common stock	(239,096)		—		—		—		(15,852)		(15,852)
Net income	—		—		—		—		29,215		29,215
Balance at September 30, 2021	25,415,299	$	3	$	316,352	$	8,102	$	53,320	$	377,777

Balance at December 31, 2021	25,428,929		3	$	318,902	$	5,312	$	69,952	$	394,169
Other comprehensive loss, net of tax	—		—		—		(47,941)		—		(47,941)
Stock-based compensation	—		—		8,556		—		—		8,556
Issuance of common stock via employee stock purchase plan	13,990		—		759		—		—		759
Issuance of common stock via equity incentive plan	185,765		—		2,164		—		—		2,164
Repurchases of common stock	(399,198)		—		—		—		(23,273)		(23,273)
Net income	—		—		—		—		33,411		33,411
Balance at September 30, 2022	25,229,486	$	3	$	330,381	$	(42,629)	$	80,090	$	367,845

See accompanying notes.

Palomar Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)


	Nine Months Ended
	September 30,
	2022		2021
Operating activities
Net cash provided by operating activities	$	94,544	$	37,030
Investing activities
Purchases of property and equipment		(307)		(18)
Capitalized software costs		(4,138)		(3,612)
Purchases of fixed maturity securities		(279,064)		(88,755)
Purchases of equity securities		(10,277)		(35,675)
Sales and maturities of fixed maturity securities		172,380		70,696
Sales of equity securities		—		41,553
Change in securities receivable or payable, net		—		17
Payment of additional costs associated with purchase of policy renewal rights		(16)		(11)
Net cash used in investing activities		(121,422)		(15,805)
Financing activities
Proceeds from line of credit		26,400		—
Proceeds from common stock issued via employee stock purchase plan		2,164		719
Proceeds from common stock issued via stock option exercises		760		1,756
Repurchases of common stock		(23,273)		(15,852)
Net cash provided by (used in) financing activities		6,051		(13,377)
Net decrease in cash, cash equivalents and restricted cash		(20,827)		7,848
Cash, cash equivalents and restricted cash at beginning of period		50,371		33,786
Cash, cash equivalents and restricted cash at end of period	$	29,544	$	41,634
Supplementary cash flow information:
Cash paid for income taxes	$	18,870	$	2,104

The following table summarizes our cash and cash equivalents and restricted cash and cash equivalents within the condensed consolidated balance sheets (in thousands):


	September 30,		December 31,
	2022		2021
	(unaudited)
Cash and cash equivalents	$	29,471	$	50,284
Restricted cash		73		87
Cash and cash equivalents and restricted cash	$	29,544	$	50,371

See accompanying notes.

Palomar Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Summary of Operations and Basis of Presentation

Summary of Operations

Palomar Holdings, Inc. (the “Company”) is a Delaware incorporated insurance holding company that was founded in 2014. The Company has several wholly owned subsidiaries including an Oregon domiciled insurance company, Palomar Specialty Insurance Company (“PSIC”), a Bermuda based reinsurance company, Palomar Specialty Reinsurance Company Bermuda Ltd. (“PSRE”), an Arizona domiciled surplus lines insurance company, Palomar Excess and Surplus Insurance Company (“PESIC”), and a California domiciled property and casualty insurance agency, Palomar Insurance Agency, DBA Palomar General Insurance Agency (“PGIA”).

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and include the accounts of the Company and its wholly-owned subsidiaries. These condensed consolidated financial statements do not contain all information and footnotes required by U.S. GAAP for complete consolidated financial statements. For a more complete description of the Company’s business and accounting policies, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 24, 2022 (the “2021 Annual Report on Form 10-K”).

In the opinion of management, all adjustments necessary for a fair presentation of the condensed consolidated financial statements have been included. Such adjustments consist only of normal recurring items. All intercompany balances and transactions have been eliminated in consolidation. Interim results are not necessarily indicative of results of operations for the full year.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the condensed consolidated financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein. All revisions to accounting estimates are recognized in the period in which the estimates are revised. Significant estimates reflected in the Company’s condensed consolidated financial statements include, but are not limited to, reserves for losses and loss adjustment expenses, reinsurance recoverables on unpaid losses, and the fair values of investments.

Recent Accounting Pronouncements

Recently adopted accounting pronouncements

The Company has not adopted any new accounting guidance during the three months ended September 30, 2022.

Recently issued accounting pronouncements not yet adopted

There are not currently any recent accounting pronouncements or pending accounting guidance that have significance, or potential significance, to the Company’s consolidated financial statements.

2. Investments

The Company’s available-for-sale investments are summarized as follows:


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2022	Cost or Cost		Gains		Losses		Value

	(in thousands)
Fixed maturities:
U.S. Governments	$	52,021	$	—	$	(2,423)	$	49,598
States, territories, and possessions		7,671		—		(958)		6,713
Political subdivisions		4,922		—		(677)		4,245
Special revenue excluding mortgage/asset-backed securities		42,409		—		(6,334)		36,075
Corporate and other		269,308		5		(28,893)		240,420
Mortgage/asset-backed securities		154,661		4		(14,922)		139,743
Total available-for-sale investments	$	530,992	$	9	$	(54,207)	$	476,794


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2021	Cost or Cost		Gains		Losses		Value

	(in thousands)
Fixed maturities:
U.S. Governments	$	16,713	$	347	$	(190)	$	16,870
States, territories, and possessions		3,789		288		(63)		4,014
Political subdivisions		6,295		107		(22)		6,380
Special revenue excluding mortgage/asset-backed securities		43,301		1,273		(76)		44,498
Corporate and other		245,064		5,873		(1,891)		249,046
Mortgage/asset-backed securities		110,960		1,377		(463)		111,874
Total available-for-sale investments	$	426,122	$	9,265	$	(2,705)	$	432,682

Security holdings in an unrealized loss position

As of September 30, 2022, the Company held 380 fixed maturity securities in an unrealized loss position with a total estimated fair value of $475.8 million and total gross unrealized losses of $54.2 million. As of December 31, 2021, the Company held 231 fixed maturity securities in an unrealized loss position with a total estimated fair value of $170.1 million and total gross unrealized losses of $2.7 million.

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 September 30, 2022 and December 31, 2021, are as follows:


	Less Than 12 Months				More Than 12 Months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
September 30, 2022	Value		Losses		Value		Losses		Value		Losses

	(in thousands)
Fixed maturity securities:
U.S. Governments	$	43,268	$	(1,673)	$	6,330	$	(750)	$	49,598	$	(2,423)
States, territories, and possessions		5,243		(618)		1,470		(340)		6,713		(958)
Political subdivisions		4,245		(677)		—		—		4,245		(677)
Special revenue excluding mortgage/asset-backed securities		31,254		(4,841)		4,821		(1,493)		36,075		(6,334)
Corporate and other		200,092		(21,298)		39,574		(7,595)		239,666		(28,893)
Mortgage/asset-backed securities		131,692		(13,840)		7,813		(1,082)		139,505		(14,922)
Total	$	415,794	$	(42,947)	$	60,008	$	(11,260)	$	475,802	$	(54,207)


	Less Than 12 Months				More Than 12 Months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2021	Value		Losses		Value		Losses		Value		Losses

	(in thousands)
Fixed maturity securities:
U.S. Governments	$	5,968	$	(147)	$	1,457	$	(43)	$	7,425	$	(190)
States, territories, and possessions		1,444		(63)		—		—		1,444		(63)
Political subdivisions		1,815		(22)		—		—		1,815		(22)
Special revenue excluding mortgage/asset-backed securities		6,280		(76)		—		—		6,280		(76)
Corporate and other		94,020		(1,468)		5,570		(423)		99,590		(1,891)
Mortgage/asset-backed securities		51,246		(412)		2,319		(51)		53,565		(463)
Total	$	160,773	$	(2,188)	$	9,346	$	(517)	$	170,119	$	(2,705)

The Company reviews all securities with unrealized losses on a quarterly basis to assess whether the decline in the securities fair value necessitates the recognition of an allowance for credit losses. The Company considers numerous factors in its review as described in Footnote 1 of the Notes to the Consolidated Financial Statements in the 2021 Annual Report on Form 10-K.

The Company has recorded an insignificant allowance for credit losses pertaining to one investment security. Based on the Company’s review as of September 30, 2022, for the remainder of securities, the Company determined that the fixed maturity securities’ unrealized losses were primarily the result of the interest rate environment and not the credit quality of the issuers. The Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before the recovery of their amortized cost basis.

Contractual maturities of available-for-sale fixed maturity securities

The amortized cost and fair value of fixed maturity securities at September 30, 2022, by contractual maturity, are shown below.


	Amortized		Fair
	Cost		Value

	(in thousands)
Due within one year	$	37,321	$	36,730
Due after one year through five years		177,989		165,172
Due after five years through ten years		128,378		109,641
Due after ten years		32,643		25,508
Mortgage and asset-backed securities		154,661		139,743
	$	530,992	$	476,794

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.

Net investment income summary

Net investment income is summarized as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021

	(in thousands)				(in thousands)
Interest income	$	3,688	$	2,254	$	9,328	$	6,755
Dividend income		178		104		518		261
Investment expense		(122)		(122)		(384)		(367)
Net investment income	$	3,744	$	2,236	$	9,462	$	6,649

Net realized and unrealized investment gains and losses

The following table presents net realized and unrealized investment gains and losses:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021

		(in thousands)				(in thousands)
Realized gains:
Gains on sales of fixed maturity securities	$	2	$	117	$	10	$	335
Gains on sales of equity securities		—		188		—		1,416
Total realized gains		2		305		10		1,751
Realized losses:
Losses on sales of fixed maturity securities		(195)		—		(309)		(1)
Losses on sales of equity securities		—		—		—		—
Total realized losses		(195)		—		(309)		(1)
Net realized investment gains (losses)		(193)		305		(299)		1,750
Net unrealized losses on equity securities		(2,163)		(618)		(8,070)		(2,502)
Net realized and unrealized losses on investments	$	(2,356)	$	(313)	$	(8,369)	$	(752)

Realized gains and losses on disposition of investments are based on specific identification of the investments sold on the settlement date.

Proceeds from the sale of fixed maturity securities were insignificant and $1.0 million for the three months ended September 30, 2022 and 2021, respectively.

Proceeds from the sale of fixed maturity securities were $5.8 million and $12.1 million for the nine months ended September 30, 2022 and 2021, respectively.

The Company places securities on statutory deposit with certain state agencies to retain the right to do business in those states. These securities are included in available-for-sale investments on the balance sheet. As of September 30, 2022 and December 31, 2022, the carrying value of securities on deposit with state regulatory authorities was $8.5 million and $7.5 million, respectively.

3. Fair Value Measurements

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

The three-tier hierarchy of inputs is summarized in the three broad levels listed below:

Level 1—Unadjusted quoted prices are available in active markets for identical investments as of the reporting date.

Level 2—Pricing inputs are quoted prices for similar investments in active markets; quoted prices for identical or similar investments in inactive markets; or valuations based on models where the significant inputs are observable or can be corroborated by observable market data.

Level 3—Pricing inputs into models are unobservable for the investment. The unobservable inputs require significant management judgment or estimation.

To measure fair value, the Company obtains quoted market prices for its investment securities from its outside investment managers. If a quoted market price is not available, the Company uses prices of similar securities. The fair values obtained from the outside investment managers are reviewed for reasonableness and any discrepancies are investigated for final valuation.

The fair value of the Company’s investments in fixed maturity securities is estimated using relevant inputs, including available market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. An Option Adjusted Spread model is also used to develop prepayment and interest rate scenarios. Industry standard models are used to analyze and value securities with embedded options or prepayment sensitivities. These fair value measurements are estimated based on observable, objectively verifiable market information rather than market quotes. Therefore, these investments are classified and disclosed in Level 2 of the hierarchy.

The following tables present the hierarchy for financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021.


September 30, 2022	Level 1		Level 2		Level 3		Total

	(in thousands)
Assets:
Fixed maturity securities
U.S. Governments	$	—	$	49,598	$	—	$	49,598
States, territories, and possessions		—		6,713		—		6,713
Political subdivisions		—		4,245		—		4,245
Special revenue excluding mortgage/asset-backed securities		—		36,075		—		36,075
Corporate and other		—		240,420		—		240,420
Mortgage/asset-backed securities		—		139,743		—		139,743
Equity securities		35,468		—		—		35,468
Cash, cash equivalents, and restricted cash		29,544		—		—		29,544
Total assets	$	65,012	$	476,794	$	—	$	541,806


December 31, 2021	Level 1		Level 2		Level 3		Total

	(in thousands)
Assets:
Fixed maturity securities
U.S. Governments	$	—	$	16,870	$	—	$	16,870
States, territories, and possessions		—		4,014		—		4,014
Political subdivisions		—		6,380		—		6,380
Special revenue excluding mortgage/asset-backed securities		—