UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
Palomar Holdings, Inc.
(Exact name of registrant as specified in its charter)
| | | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| | | |
| (Address of principal executive offices) | (Zip Code) |
(
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 |
| | | The |
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.
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).
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.
| | 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
Number of shares of the registrant’s common shares outstanding at May 1, 2025:
TABLE OF CONTENTS
| Page |
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| Item 1. |
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| Condensed Consolidated Balance Sheets at March 31, 2025 (Unaudited) and December 31, 2024 |
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| Notes to Condensed Consolidated Financial Statements (Unaudited) |
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| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 3. |
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| Item 4. |
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| Item 1. |
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| Item 1A. |
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| Item 2. |
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| Item 3. |
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| Item 4. |
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| Item 5. |
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| Item 6. |
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Item 1: Financial Statements
Palomar Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except shares and par value data)
| March 31, | December 31, | |||||||
| 2025 | 2024 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Investments: | ||||||||
| Fixed maturity securities available for sale, at fair value (amortized cost: $ in 2025; $ in 2024) | $ | $ | ||||||
| Equity securities, at fair value (cost: $ in 2025; $ in 2024) | ||||||||
| Equity method investment | ||||||||
| Other investments | ||||||||
| Total investments | ||||||||
| Cash and cash equivalents | ||||||||
| Restricted cash | ||||||||
| Accrued investment income | ||||||||
| Premiums receivable | ||||||||
| Deferred policy acquisition costs, net of ceding commissions and fronting fees | ||||||||
| Reinsurance recoverable on paid losses and loss adjustment expenses | ||||||||
| Reinsurance recoverable on unpaid losses and loss adjustment expenses | ||||||||
| Ceded unearned premiums | ||||||||
| Prepaid expenses and other assets | ||||||||
| Deferred tax assets, net | ||||||||
| Property and equipment, net | ||||||||
| Goodwill and intangible assets, net | ||||||||
| 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 | ||||||||
| Total liabilities | ||||||||
| Stockholders' equity: | ||||||||
| Preferred stock, $ par value, shares authorized, shares issued and outstanding as of March 31, 2025 and December 31, 2024 | ||||||||
| Common stock, $ par value, shares authorized, and shares issued and outstanding as of March 31, 2025 and December 31, 2024, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Retained earnings | ||||||||
| Total stockholders' equity | ||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||
See accompanying notes.
Palomar Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Income and Comprehensive Income (Loss) (Unaudited)
(in thousands, except shares and per share data)
| Three Months Ended |
||||||||
| March 31, |
||||||||
| 2025 |
2024 |
|||||||
| Revenues: |
||||||||
| Gross written premiums |
$ | $ | ||||||
| Ceded written premiums |
( |
) | ( |
) | ||||
| Net written premiums |
||||||||
| Change in unearned premiums |
( |
) | ( |
) | ||||
| Net earned premiums |
||||||||
| Net investment income |
||||||||
| Net realized and unrealized (losses) gains on investments |
( |
) | ||||||
| Commission and other income |
||||||||
| Total revenues |
||||||||
| Expenses: |
||||||||
| Losses and loss adjustment expenses |
||||||||
| Acquisition expenses, net of ceding commissions and fronting fees |
||||||||
| Other underwriting expenses |
||||||||
| Interest expense |
||||||||
| Total expenses |
||||||||
| Income before income taxes |
||||||||
| Income tax expense |
||||||||
| Net income |
$ | $ | ||||||
| Other comprehensive income, net: |
||||||||
| Net unrealized gains (losses) on securities available for sale |
( |
) | ||||||
| Net comprehensive income |
$ | $ | ||||||
| Per Share Data: |
||||||||
| Basic earnings per share |
$ | $ | ||||||
| Diluted earnings per share |
$ | $ | ||||||
| Weighted-average common shares outstanding: |
||||||||
| Basic |
||||||||
| Diluted |
||||||||
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, 2023 |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
| Other comprehensive loss, net of tax |
— | ( |
) | ( |
) | |||||||||||||||||||
| Stock-based compensation |
— | |||||||||||||||||||||||
| Issuance of common stock via employee stock purchase plan |
||||||||||||||||||||||||
| Issuance of common stock via equity incentive plan |
||||||||||||||||||||||||
| Policyholder contribution to surplus |
— | |||||||||||||||||||||||
| Net income |
— | |||||||||||||||||||||||
| Balance at March 31, 2024 |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
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, 2024 |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
| Other comprehensive income, net of tax |
— | |||||||||||||||||||||||
| Stock-based compensation |
— | |||||||||||||||||||||||
| Issuance of common stock via employee stock purchase plan |
||||||||||||||||||||||||
| Issuance of common stock via equity incentive plan |
||||||||||||||||||||||||
| Policyholder contribution to surplus |
— | |||||||||||||||||||||||
| Offering Costs (related to prior year offering) |
— | ( |
) | ( |
) | |||||||||||||||||||
| Net income |
— | |||||||||||||||||||||||
| Balance at March 31, 2025 |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
See accompanying notes.
Palomar Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
| Three Months Ended |
||||||||
| March 31, |
||||||||
| 2025 |
2024 |
|||||||
| Operating activities |
||||||||
| Net cash provided by operating activities |
$ | $ | ||||||
| Investing activities |
||||||||
| Purchases of property and equipment |
( |
) | ||||||
| Capitalized software costs |
( |
) | ( |
) | ||||
| Purchases of fixed maturity securities |
( |
) | ( |
) | ||||
| Purchases of equity securities |
( |
) | ||||||
| Sales and maturities of fixed maturity securities |
||||||||
| Sales of equity securities |
||||||||
| Change in securities receivable or payable, net |
( |
) | ||||||
| Investments in limited partnerships |
( |
) | ( |
) | ||||
| Acquisitions, net of cash acquired |
( |
) | ||||||
| Net cash used in investing activities |
( |
) | ( |
) | ||||
| Financing activities |
||||||||
| Net (payments on) proceeds from line of credit |
( |
) | ||||||
| Offering costs (related to prior year offering) |
( |
) | ||||||
| Proceeds from common stock issued via employee stock purchase plan |
||||||||
| Proceeds from common stock issued via stock option exercises |
||||||||
| Policy holder contribution to surplus |
||||||||
| Net cash provided by (used in) financing activities |
( |
) | ||||||
| Net increase 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 |
$ | $ | ||||||
| Supplementary cash flow information: |
||||||||
| Cash paid for income taxes |
$ | $ | ||||||
| Cash paid for interest |
$ | $ | ||||||
The following table summarizes our cash and cash equivalents and restricted cash and cash equivalents within the condensed consolidated balance sheets (in thousands):
| March 31, |
December 31, |
|||||||
| 2025 |
2024 |
|||||||
| (unaudited) |
||||||||
| Cash and cash equivalents |
$ | $ | ||||||
| Restricted cash |
||||||||
| Cash and cash equivalents and restricted cash |
$ | $ | ||||||
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”), a California domiciled property and casualty insurance agency, Palomar Insurance Agency, Inc., DBA Palomar General Insurance Agency (“PGIA”), a Delaware incorporated management company, Palomar Underwriters Exchange Organization, Inc. ("PUEO"), that provides services to a Hawaii domiciled reciprocal exchange, Laulima Exchange (“Laulima”), as its attorney-in-fact, a New Jersey domiciled insurance carrier specializing in surety bonds, First Indemnity of America Insurance Co. ("FIA") and a Delaware incorporated insurance management company, Palomar Crop Insurance Services, Inc. ("PCIS").
Segment Reporting
The Company has a single operating segment, the property and casualty insurance business. The Company's chief operating decision maker ("CODM") is the Chief Executive Officer. The significant segment expenses provided to the CODM are consistent with the categories shown in the Company's Condensed Consolidated Statements of Income and Comprehensive Income and there are no other segment items used by the CODM. The CODM reviews the Company's revenue, expenses and net income as reported under U.S. generally accepted accounting principles (“GAAP”), which is the primary measure of segment profit or loss. The CODM reviews these measures, comparing them to prior periods and expectations, and makes resource allocation decisions based on the analysis. While the Company’s CODM also 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 condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and include the accounts of the Company and its wholly‑owned subsidiaries. The condensed consolidated financial statements also include the accounts of Laulima, as Laulima is a variable interest entity ("VIE") for which the Company is the primary beneficiary.
These condensed consolidated financial statements do not contain all information and footnotes required by 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, 2024, filed with the SEC on February 25, 2025 (the “2024 Annual Report on Form 10-K”). In the opinion of management, all adjustments necessary for a fair presentation of the condensed consolidated financial statements have been included. Such adjustments consist only of normal recurring items. All intercompany balances and transactions have been eliminated in consolidation. Interim results are not necessarily indicative of results of operations for the full year.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the condensed consolidated financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein. All revisions to accounting estimates are recognized in the period in which the estimates are revised. Significant estimates reflected in the Company’s condensed consolidated financial statements include, but are not limited to, reserves for losses and loss adjustment expenses, reinsurance recoverables on unpaid losses, and the fair values of investments.
Recent Accounting Pronouncements
Recently adopted accounting pronouncements
The Company has not adopted any new accounting guidance during the three months ended March 31, 2025.
Recently issued accounting pronouncements not yet adopted
Income Taxes
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures ("ASU 2023-09"). ASU 2023-09 requires public business entities to disclose additional information with respect to the reconciliation of the effective tax rate to the statutory rate. Additionally, public business entities will need to disaggregate federal, state and foreign taxes paid in their financial statements. ASU 2023-09 is effective for public business entities for fiscal years beginning after December 15, 2024. The Company will adopt this guidance beginning with the Annual Report on Form 10-K for the year ending December 31, 2025 and the adoption is not expected to have a significant impact on the Company's required disclosures.
Income Statement Expenses
In November 2024, the FASB issued ASU No. 2024-03, Disaggregation of Income Statement Expenses ("ASU 2023-03"), which will require disclosure of additional information about specific expense categories in the notes to financial statements for all public business entities. ASU 2024-03 is effective for annual reporting beginning with the fiscal year ending December 31, 2027, and for interim periods thereafter. Early adoption is permitted. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.
2. Investments
The Company’s available‑for‑sale investments are summarized as follows:
| Gross | Gross | Allowance | ||||||||||||||||||
| Amortized | Unrealized | Unrealized | for | Fair | ||||||||||||||||
| March 31, 2025 | Cost or Cost | Gains | Losses | Credit Losses | Value | |||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Fixed maturities: | ||||||||||||||||||||
| U.S. Governments | $ | $ | $ | ( | ) | $ | $ | |||||||||||||
| U.S. States, Territories, and Political Subdivisions | ( | ) | ||||||||||||||||||
| Special revenue excluding mortgage/asset-backed securities | ( | ) | ||||||||||||||||||
| Corporate and other | ( | ) | ||||||||||||||||||
| Mortgage/asset-backed securities | ( | ) | ||||||||||||||||||
| Total available-for-sale investments | $ | $ | $ | ( | ) | $ | $ | |||||||||||||
| Gross | Gross | Allowance | ||||||||||||||||||
| Amortized | Unrealized | Unrealized | for | Fair | ||||||||||||||||
| December 31, 2024 | Cost or Cost | Gains | Losses | Credit Losses | Value | |||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Fixed maturities: | ||||||||||||||||||||
| U.S. Governments | $ | $ | $ | ( | ) | $ | $ | |||||||||||||
| U.S. States, Territories, and Political Subdivisions | ( | ) | ||||||||||||||||||
| Special revenue excluding mortgage/asset-backed securities | ( | ) | ||||||||||||||||||
| Corporate and other | ( | ) | ( | ) | ||||||||||||||||
| Mortgage/asset-backed securities | ( | ) | ||||||||||||||||||
| Total available-for-sale investments | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
Security holdings in an unrealized loss position
As of March 31, 2025, the Company held
The aggregate fair value and gross unrealized losses of the Company’s investments aggregated by investment category and the length of time these individual securities have been in a continuous unrealized loss position as of March 31, 2025 and December 31, 2024, are as follows:
| Less Than 12 Months | More Than 12 Months | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| March 31, 2025 | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Fixed maturity securities: | ||||||||||||||||||||||||
| U.S. Governments | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| U.S. States, Territories, and Political Subdivisions | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Special revenue excluding mortgage/asset-backed securities | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Corporate and other | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Mortgage/asset-backed securities | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Total available-for-sale investments | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| Less Than 12 Months | More Than 12 Months | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| December 31, 2024 | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Fixed maturity securities: | ||||||||||||||||||||||||
| U.S. Governments | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| U.S. States, Territories, and Political Subdivisions | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Special revenue excluding mortgage/asset-backed securities | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Corporate and other | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Mortgage/asset-backed securities | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Total available-for-sale investments | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
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 Note 1 of the Notes to the Consolidated Financial Statements in the 2024 Annual Report on Form 10-K.
Based on the Company’s review as of March 31, 2025, 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 March 31, 2025, by contractual maturity, are shown below.
| Amortized | Fair | |||||||
| Cost | Value | |||||||
| (in thousands) | ||||||||
| 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 | ||||||||
| $ | $ | |||||||
Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.
Net investment income summary
Net investment income is summarized as follows:
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2025 | 2024 | |||||||
| (in thousands) | ||||||||
| Interest income | $ | $ | ||||||
| Dividend income | ||||||||
| Investment expense | ( | ) | ( | ) | ||||
| Net investment income | $ | $ | ||||||
Net realized and unrealized investment gains and losses
The following table presents net realized and unrealized investment gains and losses:
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2025 | 2024 | |||||||
| (in thousands) | ||||||||
| 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 losses | ( | ) | ( | ) | ||||
| Change in allowance for credit losses | ||||||||
| Net unrealized (losses) gains on equity securities | ( | ) | ||||||
| Net unrealized losses on equity method investment | ( | ) | ( | ) | ||||
| Net unrealized gains on other investments | ||||||||
| Net realized and unrealized (losses) gains on investments | $ | ( | ) | $ | ||||
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 $
Proceeds from the sale of equity securities were $
The Company places securities on statutory deposit with certain state agencies to retain the right to do business in those states. These securities are included in available‑for‑sale investments on the balance sheet. As of March 31, 2025 and December 31, 2024, the carrying value of securities on deposit with state regulatory authorities was $
The Company has investments in limited partnerships, recorded in the Other Investments line of the Unaudited Condensed Consolidated Balance Sheets. These investments represent capital commitments to private equity funds structured as limited partnerships, which primarily hold illiquid securities. The funds have a ten-year term with no redemption rights. Capital is contributed as called by the general partners, and distributions are received as proceeds are generated from the underlying investments. These investments are measured at estimated fair value utilizing a net asset value per share (or its equivalent) as a practical expedient. As of March 31, 2025, the Company had unfunded commitments to invest an additional $
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 March 31, 2025 and December 31, 2024.
| March 31, 2025 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| (in thousands) | ||||||||||||||||
| Assets: | ||||||||||||||||
| Fixed maturity securities | ||||||||||||||||
| U.S. Governments | $ | $ | $ | $ | ||||||||||||
| U.S. States, Territories, and Political Subdivisions | $ | |||||||||||||||
| Special revenue excluding mortgage/asset-backed securities | $ | |||||||||||||||
| Corporate and other | $ | |||||||||||||||
| Mortgage/asset-backed securities | ||||||||||||||||
| Equity securities | ||||||||||||||||
| Cash, cash equivalents, and restricted cash | ||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
| December 31, 2024 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| (in thousands) | ||||||||||||||||
| Assets: | ||||||||||||||||
| Fixed maturity securities | ||||||||||||||||
| U.S. Governments | $ | $ | $ | $ | ||||||||||||
| U.S. States, Territories, and Political Subdivisions | ||||||||||||||||
| Special revenue excluding mortgage/asset-backed securities | ||||||||||||||||
| Corporate and other | ||||||||||||||||
| Mortgage/asset-backed securities | ||||||||||||||||
| Equity securities | ||||||||||||||||
| Cash, cash equivalents, and restricted cash | ||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
The carrying amounts of financial assets and liabilities reported in the accompanying condensed consolidated balance sheet including cash and cash equivalents, restricted cash, receivables, reinsurance recoverable, and accounts payable and other accrued liabilities approximate fair value due to their short term‑maturity. The carrying amount of any borrowings under the Federal Home Loan Bank (“FHLB”) line of credit and U.S. Bank credit agreement (the “Credit Agreement”) approximate fair value as the credit agreements have variable rates which frequently reprice at market rates.
Transfers between Level 3 and Level 2 securities result from changes in the availability of observable market inputs and are recorded at the beginning of the reporting period. As of March 31, 2025 and December 31, 2024, the Company had
4. Reserve for Losses and Loss Adjustment Expenses
The following table represents a reconciliation of changes in the ending reserve balances for losses and loss adjustment expenses (“LAE”):
| Three Months Ended March 31, |
||||||||
| 2025 |
2024 |
|||||||
| (in thousands) |
||||||||
| Reserve for losses and LAE net of reinsurance recoverables at beginning of period |
$ | $ | ||||||
| Add: Balance acquired from FIA(1) |
||||||||
| Add: Incurred losses and LAE, net of reinsurance, related to: |
||||||||
| Current year |
||||||||
| Prior years |
( |
) | ||||||
| Total incurred |
||||||||
| Deduct: Loss and LAE payments, net of reinsurance, related to: |
||||||||
| Current year |
||||||||
| Prior years |
||||||||
| Total payments |
||||||||
| Reserve for losses and LAE net of reinsurance recoverables at end of period |
||||||||
| Add: Reinsurance recoverables on unpaid losses and LAE at end of period |
||||||||
| Reserve for losses and LAE gross of reinsurance recoverables on unpaid losses and LAE at end of period |
$ | $ | ||||||
(1) - Represents amounts recognized in Reserve for losses and LAE net of reinsurance recoverables upon acquisition of FIA on 1/1/2025, in accordance with ASC 805, Business Combinations. See Note 12 for additional information regarding the acquisition.
Considerable variability is inherent in the estimate of the reserve for losses and LAE. Although management believes the liability recorded for losses and LAE is adequate, the variability inherent in this estimate could result in changes to the ultimate liability, which may be material to stockholders’ equity.
The Company experienced favorable prior year development of $
Favorable prior year development during the three months ended March 31, 2025 was primarily due to lower than anticipated severity of attritional losses. Adverse prior year development during the three months ended March 31, 2024 was primarily due to higher than anticipated severity of attritional losses on certain discontinued lines of business.
5. Stockholders’ Equity
As of March 31, 2025 and December 31, 2024, the Company had
Common stock reserved for future issuance
Common stock reserved for future issuance consists of the following as of March 31, 2025:
| Stock options outstanding under 2019 Equity Incentive Plan | ||||
| Restricted stock units outstanding under 2019 Equity Incentive Plan | ||||
| Performance stock units outstanding under 2019 Equity Incentive Plan, at target | ||||
| Shares authorized for future issuance under 2019 Equity Incentive Plan | ||||
| Shares authorized for future issuance under 2019 Employee Stock Purchase Plan | ||||
| Total |
Stock based compensation
The below table summarizes the Company’s stock-based compensation expense for each period presented:
| Three Months Ended March 31, | ||||||||
| 2025 | 2024 | |||||||
| (in thousands) | ||||||||
| Stock-Based Compensation | $ | $ | ||||||
Stock-based compensation expense is recognized on a straight-line basis over the vesting period of equity-based awards. For performance stock units (“PSUs”), any changes to expense resulting from differences in actual performance versus target are recognized over the remaining vesting period of the awards. The Company does not apply a forfeiture rate to unvested awards and accounts for forfeitures as they occur. All stock-based compensation is included in other underwriting expenses in the Company’s unaudited condensed consolidated statement of income and comprehensive income.
2019 Equity Incentive Plan
On April 16, 2019, the Company's 2019 Equity Incentive Plan (the “2019 Plan”) became effective. The 2019 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance shares and units, and other cash-based or share-based awards. In addition, the 2019 Plan contains a mechanism through which the Company may adopt a deferred compensation arrangement in the future.
A total of
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 period between and years with between
The following table summarizes stock option transactions for the three months ended March 31, 2025:
| Number of shares | Weighted-average exercise price | Weighted-average remaining contractual term (in years) | Aggregate intrinsic value (in thousands) | |||||||||||||
| Outstanding at January 1, 2025 | $ | $ | ||||||||||||||
| Options granted | — | — | ||||||||||||||
| Options exercised | ( | ) | ||||||||||||||
| Options cancelled | ( | ) | ||||||||||||||
| Outstanding at March 31, 2025 | $ | $ | ||||||||||||||
| Vested and Exercisable at March 31, 2025 | $ | $ | ||||||||||||||
As of March 31, 2025, the Company had immaterial unrecognized stock-based compensation expense related to stock options expected to be recognized over a weighted-average period of
Restricted Stock Units
RSUs are valued using the closing price of the Company’s common stock on their grant date. The Company has issued RSUs with vesting periods of to years. All vesting is subject to continued service.
The following table summarizes RSU transactions for the three months ended March 31, 2025:
| Number of shares | Weighted-average grant date fair value | |||||||
| Outstanding at January 1, 2025 | $ | |||||||
| Granted | ||||||||
| Released | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Non-vested outstanding at March 31, 2025 | $ | |||||||
As of March 31, 2025, the Company had approximately $
Performance Stock Units
The Company issues PSUs with a combination of service, performance, and market conditions.
The majority of PSUs were issued via grants made to certain executives during 2021. These PSUs are earned based on the achievement of stock price milestones. If the Company’s stock price reaches and remains at certain milestones for
For other PSUs outstanding, vesting of PSUs requires a period of future service and the number of shares that vest depends on performance relative to predetermined targets of the Company’s Gross Written Premiums and Adjusted Return on Equity as set by the Compensation Committee. The PSU’s performance period is primarily a three-year period beginning with the grant date. At the end of the performance period, the actual results are measured against the predetermined targets to determine the number of PSUs to be earned as compensation. The earned PSUs are also subject to a required service period of approximately years from the grant date before vesting and being issued as common stock.
Effective starting with 2025 grants, PSUs issued to executives include a relative total shareholder return (“RTSR”) modifier. The RTSR modifier adjusts PSU payouts up or down based on the Company's shareholder return relative to the S&P 1500 Property & Casualty Insurance Index (the “Index”) over a three-year measurement period.
The following table summarizes PSU transactions for the three months ended March 31, 2025:
| Number of shares | Weighted-average grant date fair value | |||||||
| Outstanding at January 1, 2025 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Non-vested outstanding at March 31, 2025 | $ | |||||||
The PSU grants above represent the number of shares that would vest based on achievement of all stock price milestones in the 2021 executive stock grants and the
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
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
Share repurchases
The Company's share repurchase program ended on March 31, 2024. There were share repurchases made during the three months ended March 31, 2025.
6. Accumulated Other Comprehensive Income
Changes in accumulated other comprehensive income (loss) (“AOCI”) are as follows:
| Three Months Ended March 31, | ||||||||
| 2025 | 2024 | |||||||
| (in thousands) | ||||||||
| Beginning Balance | $ | ( | ) | $ | ( | ) | ||
| Other comprehensive income (loss) before reclassification | ( | ) | ||||||
| Federal income tax (benefit) expense | ( | ) | ||||||
| Other comprehensive income (loss) before reclassification, net of tax | ( | ) | ||||||
| Amounts reclassified from AOCI | ||||||||
| Federal income tax benefit | ( | ) | ||||||
| Amounts reclassified from AOCI, net of tax | ||||||||
| Other comprehensive income (loss) | ( | ) | ||||||
| Balance at end of period | $ | ( | ) | $ | ( | ) | ||
7. Underwriting Information
The Company has a single reportable segment and offers specialty insurance products. Gross written premiums (“GWP”) by product are presented below:
| Three Months Ended March 31, |
||||||||||||||||
| 2025 |
2024 |
|||||||||||||||
| ($ in thousands) |
||||||||||||||||
| % of |
% of |
|||||||||||||||
| Amount |
GWP |
Amount |
GWP |
|||||||||||||
| Product |
||||||||||||||||
| Earthquake |
$ | % | $ | % | ||||||||||||
| Casualty |
% | % | ||||||||||||||
| Inland Marine and Other Property |
% | % | ||||||||||||||
| Fronting |
% | % | ||||||||||||||
| Crop |
% | % | ||||||||||||||
| Total Gross Written Premiums |
$ | % | $ | % | ||||||||||||
Gross written premiums by state are as follows:
| Three Months Ended March 31, |
||||||||||||||||
| 2025 |
2024 |
|||||||||||||||
| ($ in thousands) |
||||||||||||||||
| % of |
% of |
|||||||||||||||
| Amount |
GWP |
Amount |
GWP |
|||||||||||||
| State |
||||||||||||||||
| California |
$ | % | $ | % | ||||||||||||
| Texas |
% | % | ||||||||||||||
| Hawaii |
% | % | ||||||||||||||
| Florida |
% | % | ||||||||||||||
| Washington |
% | % | ||||||||||||||
| New York |
% | % | ||||||||||||||
| New Mexico |
% | % | ||||||||||||||
| Colorado |
% | % | ||||||||||||||
| Other |
% | % | ||||||||||||||
| Total Gross Written Premiums |
$ | % | $ | % | ||||||||||||
Gross written premiums by insurance subsidiary are as follows:
| Three Months Ended March 31, |
||||||||||||||||
| 2025 |
2024 |
|||||||||||||||
| ($ in thousands) |
||||||||||||||||
| % of |
% of |
|||||||||||||||
| Amount |
GWP |
Amount |
GWP |
|||||||||||||
| Subsidiary |
||||||||||||||||
| PSIC |
$ | % | $ | % | ||||||||||||
| PESIC |
% | % | ||||||||||||||
| Laulima |
% | % | ||||||||||||||
| FIA |
% | % | ||||||||||||||
| Total Gross Written Premiums |
$ | % | $ | % | ||||||||||||
8. Income Taxes
The Company calculates its tax provision in interim periods using its best estimate of the effective tax rate expected for the full year. During the three months ended March 31, 2025, the Company’s income tax rate of
9. Earnings Per Share
The following table sets out earnings per share of common stock:
| Three Months Ended March 31, |
||||||||
| 2025 |
2024 |
|||||||
| (in thousands, except shares and per share data) |
||||||||
| Net income |
$ | $ | ||||||
| Weighted average common shares outstanding: |
||||||||
| Basic |
||||||||
| Common Share equivalents |
||||||||
| Diluted |
||||||||
| Earnings per share: |
||||||||
| Basic |
$ | $ | ||||||
| Diluted |
$ | $ | ||||||
Common share equivalents relate primarily to outstanding stock options, RSUs and PSUs under the 2019 Plan and unpurchased shares under the 2019 ESPP and are calculated using the treasury stock method.
10. Reinsurance
The Company utilizes reinsurance in order to limit its exposure to losses and enable it to underwrite policies with sufficient limits to meet policyholder needs. The Company utilizes both excess of loss (XOL) and quota share reinsurance.
As of March 31, 2025, the Company’s catastrophe event retention is $
In addition to reinsurance purchased from traditional reinsurers, the Company has historically incorporated collateralized protection from the insurance linked securities market via catastrophe bonds. During the second quarter of 2022, the Company closed a $
11. Credit Agreements
U.S. Bank Credit Agreement
In December 2021, the Company entered into a Credit Agreement with U.S. Bank National Association which provides a revolving credit facility of up to $
The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among other things, financial covenants, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness and dividends and other distributions. The financial covenants include requirements to maintain a permissible debt to capital ratio, a minimum consolidated net worth, a minimum risk-based capital ratio and minimum A.M. Best financial strength rating. The Credit Agreement also contains customary events of default, such as non-compliance with financial covenants. If an event of default occurs, any debt may be declared immediately due and payable. As of March 31, 2025, the Company was in compliance with all debt covenants.
As of March 31, 2025 and December 31, 2024, the Company had
FHLB Line of Credit
The Company’s PSIC subsidiary is a member of the Federal Home Loan Bank of San Francisco (“FHLB”). Membership in the FHLB provides PSIC access to collateralized advances, which can be drawn for general corporate purposes and used to enhance liquidity management. All borrowings are fully secured by a pledge of specific investment securities of PSIC and the borrowing capacity is equal to
As of March 31, 2025 and December 31, 2024, the Company had
12. Business Acquisitions
On January 1, 2025, the Company completed the acquisition of FIA. The acquisition was accounted for as a business combination in accordance with Accounting Standards Codification (ASC) 805, Business Combinations. As the acquisition did not meet the significance thresholds under Rule 3-05 of Regulation S-X, separate financial statements of FIA are not required to be filed.
In connection with the acquisition, the Company recognized the acquired assets and assumed liabilities of FIA at their estimated fair values as of the acquisition date. Accordingly, the Company’s financial statements as of March 31, 2025 reflect adjustments to record opening balances for the assets acquired and liabilities assumed. These adjustments primarily result from purchase accounting fair value measurements and cause some balances as of January 1, 2025 to differ from the amounts reported as of December 31, 2024.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 appear throughout this report. These forward looking statements generally include words such as “expect,” “predict,” “estimate,” “will,” “should,” “anticipate,” “believe” and similar expressions. Such assumptions are, in turn, based on information available and internal estimates and analyses of general economic conditions, competitive factors, conditions specific to the property and casualty insurance and reinsurance industries, claims development and the impact thereof on our loss reserves, the adequacy and financial security of our reinsurance programs, developments in the securities market and the impact on our investment portfolio, regulatory changes and conditions and other factors. These assumptions are subject to various risks, uncertainties and other factors, including, without limitation those set forth in “Item 1A. Risk Factors” within the Annual Report on Form 10-K for the year ended December 31, 2024 and Part II within this report. Actual results could differ materially from those expressed in, or implied by, these forward looking statements. Forward looking statements reflect the Company’s expectations, plans or forecasts of future events and views as of the date of this report. While the Company may elect to update these forward looking statements at some point in the future, the Company specifically disclaims any obligation to do so. You should review the various risks, uncertainties and other factors listed from time to time in our Securities and Exchange Commission filings.
The results of operations for the three months ended March 31, 2025 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2025, or for any other future period. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report, and in conjunction with our audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K as filed with the SEC on February 25, 2025.
References to the "Company," "Palomar," "we," "us," and "our" are to Palomar Holdings, Inc. and its subsidiaries, unless the context otherwise requires.
Overview
We are a specialty insurance company that provides property and casualty insurance products to individuals and businesses. We use our underwriting and analytical expertise to provide innovative solutions in five product categories: Earthquake, Inland Marine and Other Property, Casualty, Fronting, and Crop. 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. Our insurance company subsidiaries, Palomar Specialty Insurance Company (“PSIC”), and Palomar Excess and Surplus Insurance Company (“PESIC”) carry an “A” rating from A.M. Best Company (“A.M. Best”), a leading rating agency for the insurance industry. First Indemnity of America Insurance Co. ("FIA") carries an “A-” (Stable) rating from A.M. Best.
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 $1.5 billion for the year ended December 31, 2024, which reflects a compound annual growth rate of approximately 57%. We have also been profitable since 2016 and our net income growth since 2016 reflects a compound annual growth rate of 43%.
We seek to continuously grow our income by developing product offerings for lines of business that harness our core competencies and where we believe we can generate attractive risk adjusted returns. In recent years, we have introduced several new products including Crop, Environmental Liability, and E&S Casualty. These new products diversify our book of business and broaden our product portfolio. We believe that our market opportunity, distinctive products, and differentiated business model position us to grow our business profitably.
Recent Developments
In April 2025, the Company completed the acquisition of Advanced AgProtection (“AAP”), a Texas-domiciled managing general agent specializing in Crop insurance. The AAP team brings extensive industry experience, longstanding client, carrier and reinsurer relationships, and a demonstrated track record of performance in the Crop insurance sector.
The Company is currently in the market with a 144A catastrophe bond which is scheduled to close during the second quarter of 2025.
Components of Our Results of Operations
Gross Written Premiums
Gross written premiums are the amounts received or to be received for insurance policies written or assumed by us during a specific period of time without reduction for policy acquisition costs, reinsurance costs or other deductions. The volume of our gross written premiums in any given period is generally influenced by:
| ● |
Volume of new business submissions in existing products or partnerships; |
| ● |
Binding of new business submissions in existing products or partnerships into policies; |
| ● |
Entrance into new partnerships or the offering of new types of insurance products; |
| ● |
Exits from existing partnerships or reducing or ceasing to offer existing insurance products; |
| ● |
Renewal rates of existing policies; and |
| ● |
Average size and premium rate of bound policies. |
Our gross written premiums are also impacted when we assume unearned in-force premiums due to new partnerships or other business reasons. In periods where we assume a large volume of unearned premiums, our gross written premiums may increase significantly compared to prior periods and the increase may not be indicative of future trends. The majority of our Crop written premiums are recognized in the third quarter, as we receive the requisite reporting from insureds at that time.
Ceded Written Premiums
Ceded written premiums are the amount of gross written premiums ceded to reinsurers. We enter into reinsurance contracts to limit our exposure to potential losses and to provide additional capacity for growth. We cede premiums through excess of loss (“XOL”) agreements, quota share agreements, and fronting agreements. Ceded written premiums are earned pro-rata over the period of risk covered. The volume of our ceded written premiums is impacted by the amount of our gross written premiums and our decisions to increase or decrease limits or retention levels in our XOL agreements and co-participation levels in our quota share agreements. The volume of ceded written premiums is also impacted by the amount of premium we write under fronting agreements.
Our ceded written premiums can be impacted significantly in certain periods due to changes in quota share agreements. In periods where we modify a quota share agreement, ceded written premiums may increase or decrease significantly compared to prior periods and these fluctuations may not be indicative of future trends. Our XOL costs as a percentage of gross earned premiums also may vary each period due to changes in cost of XOL between contract periods, changes of premium in-force during the XOL contract period, or due to acceleration of XOL charges or the need to purchase additional XOL reinsurance due to losses. In addition, the volume of premiums ceded in fronting agreements each period may vary due to the timing of entering new fronting partnerships and terminations of fronting partnerships.
Net Earned Premiums
Net earned premiums represent the earned portion of our gross written premiums, less the earned portion that is ceded to third-party reinsurers under our reinsurance agreements. The majority of our insurance policies have a term of one year and premiums are earned pro rata over the terms of the policies. Crop premiums are earned ratably over the risk period. The requisite reporting of Crop premiums is primarily received in the third quarter, after the start of the risk period, and earned premium is caught up to cover the period between the start of the risk period and receipt of reporting. Generally, this process results in most of the Crop earned premiums being recognized in the third quarter of each year.
Commission and Other Income
Commission and other income consist of commissions earned on policies written on behalf of third-party insurance companies where we have no exposure to the insured risk and certain fees earned in conjunction with underwriting policies. Commission and other income are earned on the effective date of the underlying policy.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses represent the costs incurred for losses, net of any losses ceded to reinsurers. These expenses are a function of the size and term of the insurance policies we write and the loss experience associated with the underlying coverage. Certain policies we write subject us to attritional losses such as building fires or casualty claims. In addition, many of the policies we write subject us to catastrophe losses. Catastrophe losses are certain losses resulting from events involving multiple claims and policyholders, including earthquakes, hurricanes, floods, convective storms, terrorist acts or other aggregating events. Our losses and loss adjustment expenses are generally affected by:
| ● |
The occurrence, frequency, and severity of catastrophe events in the areas where we underwrite policies relating to these perils; |
| ● |
The occurrence, frequency, and severity of non‑catastrophe attritional losses; |
| ● |
The mix of business written by us; |
| ● |
The reinsurance agreements we have in place at the time of a loss; |
| ● |
The geographic location and characteristics of the policies we underwrite; |
| ● |
Changes in the legal or regulatory environment related to the business we write; |
| ● |
Trends in legal defense costs; |
| ● |
Inflation in housing and construction costs; and |
| ● |
Increases in amounts awarded by courts and juries. |
Losses and loss adjustment expenses are based on an actuarial analysis of the estimated losses, including losses incurred during the period and changes in estimates from prior periods. Losses and loss adjustment expenses may be paid out over multiple years.
Acquisition Expenses
Acquisition expenses are principally comprised of the commissions we pay retail agents, program administrators and wholesale brokers, net of ceding commissions and fronting fees we receive on business ceded under quota share and fronting reinsurance agreements. In addition, acquisition expenses include premium‑related taxes and other fees. Acquisition expenses related to each policy we write are deferred and expensed pro rata over the term of the policy. We earn fronting fees consistent with how we earn premiums on the underlying insurance policies, on a pro-rata basis over the terms of the policies.
Other Underwriting Expenses
Other underwriting expenses represent the general and administrative expenses of our insurance operations including employee salaries and benefits, software and technology costs, office rent, stock-based compensation, licenses and fees, and professional services fees such as legal, accounting, and actuarial services.
Interest Expense
Interest expense consists of interest incurred on borrowings from our U.S. Bank credit agreement and FHLB line of credit and the unused line fee and amortization of the commitment fee on our U.S. Bank credit agreement.
Net Investment Income
We earn investment income on our portfolio of invested assets. We invest primarily in investment grade fixed maturity securities, including U.S. government issues, state government issues, mortgage and asset-backed obligations, and corporate bonds with a small portion of our portfolio in equity securities and cash and cash equivalents. The principal factors that influence net investment income are the size of our investment portfolio, the yield on that portfolio, and investment management expenses. As measured by amortized cost, which excludes fair value fluctuations from changes in interest rates or other factors, the size of our investment portfolio is mainly a function of our invested capital along with premium we receive from our insureds, less payments on policyholder claims and other operating expenses.
Net Realized and Unrealized Gains and Losses on Investments
Net realized and unrealized gains and losses on investments are a function of the difference between the amount received by us on the sale of a security and the security’s cost-basis, mark-to-market adjustments, credit losses recognized in earnings, and unrealized gains and losses on equity securities and equity method investments. Unrealized gains and losses on fixed maturity securities are recognized as a component of other comprehensive income and do not impact our net income.
Income Tax Expense
Currently our income tax expense consists mainly of federal income taxes imposed on our operations. Our effective tax rates are dependent upon the components of pretax earnings and the related tax effects.
Key Financial and Operating Metrics
We discuss certain key financial and operating metrics, described below, which provide useful information about our business and the operational factors underlying our financial performance.
Underwriting revenue is a non‑GAAP financial measure defined as total revenue, excluding net investment income and net realized and unrealized gains and losses on investments. See “Reconciliation of Non‑GAAP Financial Measures” for a reconciliation of total revenue calculated in accordance with GAAP to underwriting revenue.
Underwriting income is a non‑GAAP financial measure defined as income before income taxes excluding net investment income, net realized and unrealized gains and losses on investments, and interest expense. See “Reconciliation of Non‑GAAP Financial Measures” for a reconciliation of income before income taxes calculated in accordance with GAAP to underwriting income.
Adjusted net income is a non‑GAAP financial measure defined as net income excluding the impact of certain items that may not be indicative of underlying business trends, operating results, or future outlook, net of tax impact. We calculate the tax impact only on adjustments which would be included in calculating our income tax expense using the estimated tax rate at which the company received a deduction for these adjustments. See “Reconciliation of Non‑GAAP Financial Measures” for a reconciliation of net income calculated in accordance with GAAP to adjusted net income.
Annualized return on equity is net income expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period.
Annualized adjusted return on equity is a non‑GAAP financial measure defined as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period. See “Reconciliation of Non‑GAAP Financial Measures” for a reconciliation of return on equity calculated using unadjusted GAAP numbers to adjusted return on equity.
Loss ratio, expressed as a percentage, is the ratio of losses and loss adjustment expenses, to net earned premiums.
Expense ratio, expressed as a percentage, is the ratio of acquisition and other underwriting expenses, net of commission and other income to net earned premiums.
Combined ratio is defined as the sum of the loss ratio and the expense ratio. A combined ratio under 100% generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss.
Adjusted combined ratio is a non‑GAAP financial measure defined as the sum of the loss ratio and the expense ratio calculated excluding the impact of certain items that may not be indicative of underlying business trends, operating results, or future outlook. See “Reconciliation of Non‑GAAP Financial Measures” for a reconciliation of combined ratio calculated using unadjusted GAAP numbers to adjusted combined ratio.
Diluted adjusted earnings per share is a non‑GAAP financial measure defined as adjusted net income divided by the weighted-average common shares outstanding for the period, reflecting the dilution which could occur if equity-based awards are converted into common share equivalents as calculated using the treasury stock method. See “Reconciliation of Non‑GAAP Financial Measures” for a reconciliation of diluted earnings per share calculated in accordance with GAAP to diluted adjusted earnings per share.
Catastrophe loss ratio is a non‑GAAP financial measure defined as the ratio of catastrophe losses to net earned premiums. See “Reconciliation of Non‑GAAP Financial Measures” for a reconciliation of loss ratio calculated using unadjusted GAAP numbers to catastrophe loss ratio.
Adjusted combined ratio excluding catastrophe losses is a non‑GAAP financial measure defined as adjusted combined ratio excluding the impact of catastrophe losses. See “Reconciliation of Non‑GAAP Financial Measures” for a reconciliation of combined ratio calculated using unadjusted GAAP numbers to adjusted combined ratio excluding catastrophe losses.
Adjusted underwriting income is a non-GAAP financial measure defined as underwriting income excluding the impact of certain items that may not be indicative of underlying business trends, operating results, or future outlook. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of income before income taxes calculated in accordance with GAAP to adjusted underwriting income.
Tangible stockholders’ equity is a non‑GAAP financial measure defined as stockholders’ equity less intangible assets. See “Reconciliation of Non‑GAAP Financial Measures” for a reconciliation of stockholders’ equity calculated in accordance with GAAP to tangible stockholders’ equity.
Results of Operations
Three months ended March 31, 2025 compared to three months ended March 31, 2024
The following table summarizes our results for the three months ended March 31, 2025 and 2024:
| Three Months Ended |
||||||||||||||||
| March 31, |
||||||||||||||||
| 2025 |
2024 |
Change |
% Change |
|||||||||||||
| ($ in thousands, except per share data) |
||||||||||||||||
| Gross written premiums |
$ | 442,163 | $ | 368,078 | $ | 74,085 | 20.1 | % | ||||||||
| Ceded written premiums |
(230,745 | ) | (228,171 | ) | (2,574 | ) | 1.1 | % | ||||||||
| Net written premiums |
211,418 | 139,907 | 71,511 | 51.1 | % | |||||||||||
| Net earned premiums |
164,070 | 107,866 | 56,204 | 52.1 | % | |||||||||||
| Commission and other income |
830 | 528 | 302 | 57.2 | % | |||||||||||
| Total underwriting revenue (1) |
164,900 | 108,394 | 56,506 | 52.1 | % | |||||||||||
| Losses and loss adjustment expenses |
38,743 | 26,837 | 11,906 | 44.4 | % | |||||||||||
| Acquisition expenses, net of ceding commissions and fronting fees |
46,359 | 31,798 | 14,561 | 45.8 | % | |||||||||||
| Other underwriting expenses |
35,733 | 24,804 | 10,929 | 44.1 | % | |||||||||||
| Underwriting income (1) |
44,065 | 24,955 | 19,110 | 76.6 | % | |||||||||||
| Interest expense |
(85 | ) | (740 | ) | 655 | (88.5 | )% | |||||||||
| Net investment income |
12,071 | 7,139 | 4,932 | 69.1 | % | |||||||||||
| Net realized and unrealized (losses) gains on investments |
(2,338 | ) | 3,002 | (5,340 | ) | (177.9 | )% | |||||||||
| Income before income taxes |
53,713 | 34,356 | 19,357 | 56.3 | % | |||||||||||
| Income tax expense |
10,791 | 7,974 | 2,817 | 35.3 | % | |||||||||||
| Net income |
$ | 42,922 | $ | 26,382 | $ | 16,540 | 62.7 | % | ||||||||
| Adjustments: |
||||||||||||||||
| Net realized and unrealized losses (gains) on investments |
2,338 | (3,002 | ) | 5,340 | (177.9 | )% | ||||||||||
| Expenses associated with transactions |
2,088 | — | 2,088 | — | % | |||||||||||
| Stock-based compensation expense |
4,745 | 3,820 | 925 | 24.2 | % | |||||||||||
| Amortization of intangibles |
707 | 390 | 317 | 81.3 | % | |||||||||||
| Tax impact |
(1,494 | ) | 204 | (1,698 | ) | NM | ||||||||||
| Adjusted net income (1) |
$ | 51,306 | $ | 27,794 | $ | 23,512 | 84.6 | % | ||||||||
| Key Financial and Operating Metrics |
||||||||||||||||
| Annualized return on equity |
22.6 | % | 21.7 | % | ||||||||||||
| Annualized adjusted return on equity (1) |
27.0 | % | 22.9 | % | ||||||||||||
| Loss ratio |
23.6 | % | 24.9 | % | ||||||||||||
| Expense ratio |
49.5 | % | 52.0 | % | ||||||||||||
| Combined ratio |
73.1 | % | 76.9 | % | ||||||||||||
| Adjusted combined ratio (1) |
68.5 | % | 73.0 | % | ||||||||||||
| Diluted earnings per share |
$ | 1.57 | $ | 1.04 | ||||||||||||
| Diluted adjusted earnings per share (1) |
$ | 1.87 | $ | 1.09 | ||||||||||||
| Catastrophe losses |
$ | (542 | ) | $ | 3,359 | |||||||||||
| Catastrophe loss ratio (1) |
(0.3 | )% | 3.1 | % | ||||||||||||
| Adjusted combined ratio excluding catastrophe losses (1) |
68.9 | % | 69.8 | % | ||||||||||||
| Adjusted underwriting income (1) |
$ | 51,605 | $ | 29,165 | $ | 22,440 | 76.9 | % | ||||||||
| 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. |
Gross Written Premiums
Gross written premiums increased $74.1 million, or 20.1%, to $442.2 million for the three months ended March 31, 2025 compared to $368.1 million for the three months ended March 31, 2024. Premium growth was primarily due to an increased volume of policies in the majority of our lines of business which was driven by new business generated with existing partners, strong premium retention rates for existing business, expansion of our distribution footprint, and new partnerships. The following table summarizes our gross written premiums by line of business and shows each line’s percentage of total gross written premiums for each period:
| Three Months Ended March 31, |
||||||||||||||||||||||||
| 2025 |
2024 |
|||||||||||||||||||||||
| ($ in thousands) |
||||||||||||||||||||||||
| % of |
% of |
% |
||||||||||||||||||||||
| Amount |
GWP |
Amount |
GWP |
Change |
Change |
|||||||||||||||||||
| Product |
||||||||||||||||||||||||
| Earthquake |
$ | 130,245 | 29.5 | % | $ | 105,729 | 28.7 | % | $ | 24,516 | 23.2 | % | ||||||||||||
| Casualty |
110,487 | 25.0 | % | 51,935 | 14.1 | % | 58,552 | 112.7 | % | |||||||||||||||
| Inland Marine and Other Property |
99,284 | 22.5 | % | 76,876 | 20.9 | % | 22,408 | 29.1 | % | |||||||||||||||
| Fronting |
53,927 | 12.2 | % | 94,831 | 25.8 | % | (40,904 | ) | (43.1 | )% | ||||||||||||||
| Crop |
48,220 | 10.9 | % | 38,707 | 10.5 | % | 9,513 | 24.6 | % | |||||||||||||||
| Total Gross Written Premiums |
$ | 442,163 | 100.0 | % | $ | 368,078 | 100.0 | % | $ | 74,085 | 20.1 | % | ||||||||||||
Fronting premiums represent premium where we subsequently cede the majority of the premium and risk in exchange for a fronting fee, which is our primary source of profit in the arrangement. The volume of fronting premiums written each period may vary due to the timing of entering new fronting partnerships and terminations of existing fronting partnerships. A large fronting partnership terminated in the third quarter of 2024, causing the decline in fronting premiums shown above.
The following table summarizes our gross written premiums by insurance subsidiary:
| Three Months Ended March 31, |
||||||||||||||||||||||||
| 2025 |
2024 |
|||||||||||||||||||||||
| ($ in thousands) |
||||||||||||||||||||||||
| % of |
% of |
% |
||||||||||||||||||||||
| Amount |
GWP |
Amount |
GWP |
Change |
Change |
|||||||||||||||||||
| Subsidiary |
||||||||||||||||||||||||
| PSIC |
$ | 230,917 | 52.2 | % | $ | 222,657 | 60.5 | % | $ | 8,260 | 3.7 | % | ||||||||||||
| PESIC |
190,786 | 43.1 | % | 136,493 | 37.1 | % | 54,293 | 39.8 | % | |||||||||||||||
| Laulima |
16,037 | 3.7 | % | 8,928 | 2.4 | % | 7,109 | 79.6 | % | |||||||||||||||
| FIA |
4,423 | 1.0 | % | — | — | % | 4,423 | — | % | |||||||||||||||
| Total Gross Written Premiums |
$ | 442,163 | 100.0 | % | $ | 368,078 | 100.0 | % | $ | 74,085 | 20.1 | % | ||||||||||||
Ceded Written Premiums
Ceded written premiums increased $2.6 million, or 1.1%, to $230.7 million for the three months ended March 31, 2025 from $228.2 million for the three months ended March 31, 2024. The increase was primarily due to an increase in XOL reinsurance expense driven by growth in exposure, offset by a decrease in quota share cessions primarily driven by lower fronting written premiums.
Although our volume of ceded written premiums increased, ceded written premiums as a percentage of gross written premiums decreased to 52.2% for the three months ended March 31, 2025 from 62.0% for the three months ended March 31, 2024. This percentage decrease was driven by changes in our composition of business whereby premiums written in the current period were subject to lower quota share or XOL cession percentages compared to premiums written in the prior period.
Net Written Premiums
Net written premiums increased $71.5 million, or 51.1%, to $211.4 million for the three months ended March 31, 2025 from $139.9 million for the three months ended March 31, 2024. The increase was primarily due to an increase in gross written premiums, primarily in our Casualty and Earthquake lines, partially offset by increased ceded written premiums.
Net Earned Premiums
Net earned premiums increased $56.2 million, or 52.1%, to $164.1 million for the three months ended March 31, 2025 from $107.9 million for the three months ended March 31, 2024 due primarily to the earning of increased gross written premiums offset by the earning of ceded written premiums under reinsurance agreements. The table below shows the amount of premiums we earned on a gross and net basis and net earned premiums as a percentage of gross earned premiums in each period presented:
| Three Months Ended |
||||||||||||||||
| March 31, |
||||||||||||||||
| 2025 |
2024 |
Change |
% Change |
|||||||||||||
| ($ in thousands) |
||||||||||||||||
| Gross earned premiums |
$ | 375,776 | $ | 302,872 | $ | 72,904 | 24.1 | % | ||||||||
| Ceded earned premiums |
(211,706 | ) | (195,006 | ) | (16,700 | ) | 8.6 | % | ||||||||
| Net earned premiums |
$ | 164,070 | $ | 107,866 | $ | 56,204 | 52.1 | % | ||||||||
| Net earned premium ratio |
43.7 | % | 35.6 | % | ||||||||||||
Our net earned premium ratio increased due to changes in our composition of business whereby premiums earned in the current period were subject to lower quota share or XOL cession percentages compared to premiums earned in the prior period.
Commission and Other Income
Commission and other income increased $0.3 million to $0.8 million for the three months ended March 31, 2025 from $0.5 million for the three months ended March 31, 2024. The balance increased due to an increase in commissions and policy related fees driven by increased premiums written.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses increased $11.9 million, or 44.4% to $38.7 million for the three months ended March 31, 2025 from $26.8 million for the three months ended March 31, 2024. Losses and loss adjustment expenses consisted of the following elements during the respective periods:
| Three Months Ended |
||||||||||||||||
| March 31, |
||||||||||||||||
| 2025 |
2024 |
Change |
% Change |
|||||||||||||
| ($ in thousands) |
||||||||||||||||
| Catastrophe losses |
$ | (542 | ) | $ | 3,359 | $ | (3,901 | ) | (116.1 | )% | ||||||
| Non-catastrophe losses |
39,285 | 23,478 | 15,807 | 67.3 | % | |||||||||||
| Total losses and loss adjustment expenses |
$ | 38,743 | $ | 26,837 | $ | 11,906 | 44.4 | % | ||||||||
| Catastrophe loss ratio |
(0.3 | )% | 3.1 | % | ||||||||||||
| Non-catastrophe loss ratio |
23.9 | % | 21.8 | % | ||||||||||||
| Total loss ratio |
23.6 | % | 24.9 | % | ||||||||||||
Catastrophe loss activity for the quarter ended March 31, 2025 was related to favorable development on prior period catastrophe events.
Catastrophe loss activity for the quarter ended March 31, 2024 was primarily related to flood losses.
Non-catastrophe losses increased for the three months ended March 31, 2025 compared to the three months ended March 31, 2024 due mainly to higher attritional losses driven by premium growth on lines of business subject to attritional losses such as Casualty and Inland Marine and Other Property.
Acquisition Expenses
Acquisition expenses increased $14.6 million, or 45.8%, to $46.4 million for the three months ended March 31, 2025 from $31.8 million for the three months ended March 31, 2024. The increase was primarily due to higher commissions and premium-related taxes resulting from higher gross earned premiums. Acquisition expenses as a percentage of gross earned premiums were 12.3% for the three months ended March 31, 2025 compared to 10.5% for the three months ended March 31, 2024. Acquisition expenses as a percentage of gross earned premiums increased due to higher commissions and premium-related taxes as a percentage of gross earned premiums and lower ceded commissions and fronting fees as a percentage of gross earned premiums due to changes in the composition of our business.
Other Underwriting Expenses
Other underwriting expenses increased $10.9 million, or 44.1%, to $35.7 million for the three months ended March 31, 2025 from $24.8 million for the three months ended March 31, 2024. The increase was primarily due to the Company incurring higher payroll, technology, and stock-based compensation expenses associated with growth of the Company.
Other underwriting expenses as a percentage of gross earned premiums were 9.5% for the three months ended March 31, 2025 compared to 8.2% for the three months ended March 31, 2024. Excluding the impact of expenses relating to transactions, stock-based compensation, and amortization of intangibles, other underwriting expenses as a percentage of gross earned premiums were 7.5% for the three months ended March 31, 2025 compared to 6.8% for the three months ended March 31, 2024. Other underwriting expenses as a percentage of gross earned premiums may fluctuate period over period based on timing of certain expenses relative to premium growth.
Net Investment Income and Net Realized and Unrealized Gains (Losses) on Investments
Net investment income increased $4.9 million, or 69.1%, to $12.1 million for the three months ended March 31, 2025 from $7.1 million for the three months ended March 31, 2024. The increase was primarily due to a higher average balance of investments during the three months ended March 31, 2025 due primarily to the use of proceeds from our August 2024 secondary offering and also due to higher yields on invested assets versus the prior year.
The Company incurred $2.3 million of net realized and unrealized losses on investments for the three months ended March 31, 2025 compared to $3.0 million of net realized and unrealized gains for the three months ended March 31, 2024 In both periods, the balance was primarily driven by unrealized gains and losses on our equity securities. Unrealized gains and losses on fixed maturity securities are recognized as a component of other comprehensive income and do not impact our net income. The following table summarizes the components of our investment income for each period presented:
| Three Months Ended |
||||||||||||||||
| March 31, |
||||||||||||||||
| 2025 |
2024 |
Change |
% Change |
|||||||||||||
| ($ in thousands) |
||||||||||||||||
| Interest income |
$ | 11,965 | $ | 7,326 | $ | 4,639 | 63.3 | % | ||||||||
| Dividend income |
317 | 197 | 120 | 60.9 | % | |||||||||||
| Investment management fees and expenses |
(211 | ) | (384 | ) | 173 | (45.1 | )% | |||||||||
| Net investment income |
12,071 | 7,139 | 4,932 | 69.1 | % | |||||||||||
| Net realized and unrealized (losses) gains on investments |
(2,338 | ) | 3,002 | (5,340 | ) | (177.9 | )% | |||||||||
| Total |
$ | 9,733 | $ | 10,141 | $ | (408 | ) | (4.0 | )% | |||||||
Income Tax Expense
Income tax expense increased $2.8 million to $10.8 million for the three months ended March 31, 2025 from $8.0 million for the three months ended March 31, 2024 due to higher pre-tax income for the period ended March 31, 2025. During the three months ended March 31, 2025, our income tax rate of 20.1% was lower than the statutory rate of 21% due primarily to permanent component of employee stock option exercises offset by non-deductible executive compensation expense. During the three months ended March 31, 2024, our income tax rate of 23.2% was higher than the statutory rate of 21% due primarily to non-deductible executive compensation expense.
Reconciliation of Non‑GAAP Financial Measures
Underwriting Revenue
We define underwriting revenue as total revenue excluding net investment income and net realized and unrealized gains and losses on investments. Underwriting revenue represents revenue generated by our underwriting operations and allows us to evaluate our underwriting performance without regard to investment results. We use this metric as we believe it gives our management and other users of our financial information useful insight into our underlying business performance. Underwriting revenue should not be viewed as a substitute for total revenue calculated in accordance with GAAP, and other companies may define underwriting revenue differently.
Total revenue calculated in accordance with GAAP reconciles to underwriting revenue as follows:
| Three Months Ended |
||||||||
| March 31, |
||||||||
| 2025 |
2024 |
|||||||
| (in thousands) |
||||||||
| Total revenue |
$ | 174,633 | $ | 118,535 | ||||
| Net investment income |
(12,071 | ) | (7,139 | ) | ||||
| Net realized and unrealized losses (gains) on investments |
2,338 | (3,002 | ) | |||||
| Underwriting revenue |
$ | 164,900 | $ | 108,394 | ||||
Underwriting Income and Adjusted Underwriting Income
We define underwriting income as income before income taxes excluding net investment income, net realized and unrealized gains and losses on investments, and interest expense. Underwriting income represents the pre‑tax profitability of our underwriting operations and allows us to evaluate our underwriting performance without regard to investment results. We use this metric as we believe it gives our management and other users of our financial information useful insight into our underlying business performance. Underwriting income should not be viewed as a substitute for pre‑tax income calculated in accordance with GAAP, and other companies may define underwriting income differently.
We define adjusted underwriting income as underwriting income excluding the impact of certain items that may not be indicative of underlying business trends, operating results, or future outlook. We use this metric as we believe it gives our management and other users of our financial information useful insight into our underlying business performance. Adjusted underwriting income should not be viewed as a substitute for pre‑tax income calculated in accordance with GAAP. Other companies may define adjusted underwriting income differently.
Income before income taxes calculated in accordance with GAAP reconciles to underwriting income and adjusted underwriting income as follows:
| Three Months Ended |
||||||||
| March 31, |
||||||||
| 2025 |
2024 |
|||||||
| (in thousands) |
||||||||
| Income before income taxes |
$ | 53,713 | $ | 34,356 | ||||
| Net investment income |
(12,071 | ) | (7,139 | ) | ||||
| Net realized and unrealized losses (gains) on investments |
2,338 | (3,002 | ) | |||||
| Interest expense |
85 | 740 | ||||||
| Underwriting income |
$ | 44,065 | $ | 24,955 | ||||
| Expenses associated with transactions |
2,088 | — | ||||||
| Stock-based compensation expense |
4,745 | 3,820 | ||||||
| Amortization of intangibles |
707 | 390 | ||||||
| Adjusted underwriting income |
$ | 51,605 | $ | 29,165 | ||||
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.
Net income calculated in accordance with GAAP reconciles to adjusted net income as follows:
| Three Months Ended |
||||||||
| March 31, |
||||||||
| 2025 |
2024 |
|||||||
| (in thousands) |
||||||||
| Net income |
$ | 42,922 | $ | 26,382 | ||||
| Adjustments: |
||||||||
| Net realized and unrealized losses (gains) on investments |
2,338 | (3,002 | ) | |||||
| Expenses associated with transactions |
2,088 | — | ||||||
| Stock-based compensation expense |
4,745 | 3,820 | ||||||
| Amortization of intangibles |
707 | 390 | ||||||
| Tax impact |
(1,494 | ) | 204 | |||||
| Adjusted net income |
$ | 51,306 | $ | 27,794 | ||||
Annualized Adjusted Return on Equity
We define annualized adjusted return on equity as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period. We use annualized adjusted return on equity as an internal performance measure in the management of our operations because we believe it gives our management and financial statement users useful insight into our results of operations and our underlying business performance. Annualized adjusted return on equity should not be viewed as a substitute for return on equity calculated using unadjusted GAAP numbers, and other companies may define adjusted return on equity differently.
Annualized adjusted return on equity is calculated as follows:
| Three Months Ended |
||||||||
| March 31, |
||||||||
| 2025 |
2024 |
|||||||
| (in thousands) |
||||||||
| Annualized adjusted net income |
$ | 205,224 | $ | 111,176 | ||||
| Average stockholders' equity |
$ | 759,739 | $ | 486,455 | ||||
| Annualized adjusted return on equity |
27.0 | % | 22.9 | % | ||||
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.
Adjusted combined ratio is calculated as follows:
| Three Months Ended |
||||||||
| March 31, |
||||||||
| 2025 |
2024 |
|||||||
| (in thousands) |
||||||||
| Numerator: Sum of losses and loss adjustment expenses, acquisition expenses, and other underwriting expenses, net of commission and other income |
$ | 120,005 | $ | 82,911 | ||||
| Denominator: Net earned premiums |
$ | 164,070 | $ | 107,866 | ||||
| Combined ratio |
73.1 | % | 76.9 | % | ||||
| Adjustments to numerator: |
||||||||
| Expenses associated with transactions |
$ | (2,088 | ) | $ | — | |||
| Stock-based compensation expense |
(4,745 | ) | (3,820 | ) | ||||
| Amortization of intangibles |
(707 | ) | (390 | ) | ||||
| Adjusted combined ratio |
68.5 | % | 73.0 | % | ||||
Diluted Adjusted Earnings Per Share
We define diluted adjusted earnings per share as adjusted net income divided by the weighted-average common shares outstanding for the period, reflecting the dilution which could occur if equity-based awards are converted into common share equivalents as calculated using the treasury stock method. We use diluted adjusted earnings per share as an internal performance measure in the management of our operations because we believe it gives our management and financial statement users useful insight into our results of operations and our underlying business performance. Diluted adjusted earnings per share should not be viewed as a substitute for diluted earnings per share calculated in accordance with GAAP, and other companies may define diluted adjusted earnings per share differently.
Diluted adjusted earnings per share is calculated as follows:
| Three Months Ended |
||||||||
| March 31, |
||||||||
| 2025 |
2024 |
|||||||
| (in thousands, except per share data) |
||||||||
| Adjusted net income |
$ | 51,306 | $ | 27,794 | ||||
| Weighted-average common shares outstanding, diluted |
27,399,997 | 25,468,564 | ||||||
| Diluted adjusted earnings per share |
$ | 1.87 | $ | 1.09 | ||||
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.
Loss ratio and catastrophe loss ratio are calculated as follows:
| Three Months Ended |
||||||||
| March 31, |
||||||||
| 2025 |
2024 |
|||||||
| (in thousands) |
||||||||
| Numerator: Losses and loss adjustment expenses |
$ | 38,743 | $ | 26,837 | ||||
| Denominator: Net earned premiums |
$ | 164,070 | $ | 107,866 | ||||
| Loss ratio |
23.6 | % | 24.9 | % | ||||
| Numerator: Catastrophe losses |
$ | (542 | ) | $ | 3,359 | |||
| Denominator: Net earned premiums |
$ | 164,070 | $ | 107,866 | ||||
| Catastrophe loss ratio |
(0.3 | )% | 3.1 | % | ||||
Adjusted Combined Ratio Excluding Catastrophe Losses
Adjusted combined ratio excluding catastrophe losses is defined as adjusted combined ratio excluding the impact of catastrophe losses. Although we are inherently subject to catastrophe losses, the frequency and severity of catastrophe losses is unpredictable and their impact on our operating results may vary significantly between periods and obscure other trends in our business. Therefore, we are providing this metric because we believe it gives our management and other financial statement users useful insight into our results of operations and trends in our financial performance without the volatility caused by catastrophe losses. Adjusted combined ratio excluding catastrophe losses should not be viewed as a substitute for combined ratio calculated using unadjusted GAAP numbers, and other companies may define adjusted combined ratio excluding catastrophe losses differently.
Adjusted combined ratio excluding catastrophe losses is calculated as follows:
| Three Months Ended |
||||||||
| March 31, |
||||||||
| 2025 |
2024 |
|||||||
| (in thousands) |
||||||||
| Numerator: Sum of losses and loss adjustment expenses, acquisition expenses, and other underwriting expenses, net of commission and other income |
$ | 120,005 | $ | 82,911 | ||||
| Denominator: Net earned premiums |
$ | 164,070 | $ | 107,866 | ||||
| Combined ratio |
73.1 | % | 76.9 | % | ||||
| Adjustments to numerator: |
||||||||
| Expenses associated with transactions |
$ | (2,088 | ) | $ | — | |||
| Stock-based compensation expense |
(4,745 | ) | (3,820 | ) | ||||
| Amortization of intangibles |
(707 | ) | (390 | ) | ||||
| Catastrophe losses |
542 | (3,359 | ) | |||||
| Adjusted combined ratio excluding catastrophe losses |
68.9 | % | 69.8 | % | ||||
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:
| March 31, |
December 31, |
|||||||
| 2025 |
2024 |
|||||||
| (in thousands) |
||||||||
| Stockholders' equity |
$ | 790,449 | $ | 729,030 | ||||
| Goodwill and intangible assets |
(24,925 | ) | (13,242 | ) | ||||
| Tangible stockholders' equity |
$ | 765,524 | $ | 715,788 | ||||
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, PESIC and FIA, 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 statutes 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 $99.6 million in 2025 without approval by the California and Oregon Insurance Commissioners.
Under Arizona statute which governs PESIC, dividends paid in a consecutive twelve month period cannot exceed the lesser of (i) 10% of an insurance company’s statutory policyholders’ surplus as of December 31 of the preceding year, or (ii) 100% of its statutory net income for the preceding calendar year. Based on the above restrictions, PESIC may pay a dividend or distribution of no greater than $4.2 million in 2025 without approval of the Arizona Insurance Commissioner.
The Company is subject to New Jersey law, such that all dividend payments require 30-day prior approval of the New Jersey Commissioner of Banking and Insurance ("the Commissioner"). The maximum dividend, which may be paid in any twelve-month period, is limited to the greater of 10% of statutory surplus as of December 31 of the preceding year or the net gain from operations of the preceding calendar year. Cash dividends may only be paid out of surplus derived from realized net profits. Based on these limitations, FIA has capacity to pay a dividend of $2.3 million in 2025, conditional upon the Commissioner's approval.
State insurance regulators have broad powers to prevent the reduction of statutory surplus to inadequate levels, and there is no assurance that dividends up to the maximum amounts calculated under any applicable formula would be permitted. In addition, state insurance regulators may adopt statutory provisions and dividend limitations more restrictive than those currently in effect in the future.
Bermuda regulations limit the amount of dividends and return of capital paid by a regulated entity. A Class 3A insurer is prohibited from declaring or paying a dividend if it is in breach of its minimum solvency margin, its enhanced capital requirement, or its minimum liquidity ratio, or if the declaration or payment of such dividend would cause such a breach. If a Class 3A insurer has failed to meet its minimum solvency margin on the last day of any financial year, it will also be prohibited, without the approval of the Bermuda Monetary Authority ("BMA"), from declaring or paying any dividends during the next financial year. Furthermore, the Insurance Act limits the ability of PSRE to pay dividends or make capital distributions by stipulating certain margin and solvency requirements and by requiring approval from the BMA prior to a reduction of 15% or more of a Class 3A insurer’s total statutory capital as reported on its prior year statutory balance sheet. Moreover, an insurer must submit an affidavit to the BMA, sworn by at least two directors and the principal representative in Bermuda of the Class 3A insurer, at least seven days prior to payment of any dividend which would exceed 25% of that insurer’s total statutory capital and surplus as reported on its prior year statutory balance sheet. The affidavit must state that in the opinion of those swearing the declaration of such dividend, such dividend has not caused the insurer to fail to meet its relevant margins.
Further, under the Companies Act (as defined below), PSRE may only declare or pay a dividend, or make a distribution out of contributed surplus, if it has no reasonable grounds for believing that: (1) it is, or would after the payment be, unable to pay its liabilities as they become due or (2) the realizable value of its assets would be less than its liabilities.
Pursuant to Bermuda regulations, the maximum amount of dividends and return of capital available to be paid by a reinsurer is determined pursuant to a formula. Under this formula, the maximum amount of dividends and return of capital available from PSRE during 2025 is calculated to be approximately $4.2 million. However, this dividend amount is subject to annual enhanced solvency requirement calculations.
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.
Cash Flows
Our primary sources of cash flow are written premiums, investment income, reinsurance recoveries, sales and redemptions of investments, and proceeds from borrowings on our lines of credit. We use our cash flows primarily to pay reinsurance premiums, operating expenses, losses and loss adjustment expenses, and income taxes.
Our cash flows from operations may differ substantially from our net income due to non‑cash charges or due to changes in balance sheet accounts.
The timing of our cash flows from operating activities can also vary among periods due to the timing by which payments are made or received. Some of our payments and receipts, including loss settlements and subsequent reinsurance receipts, can be significant. Therefore, their timing can influence cash flows from operating activities in any given period. The potential for a large claim under an insurance or reinsurance contract means that our insurance subsidiaries may need to make substantial payments within relatively short periods of time, which would have a negative impact on our operating cash flows.
Management believes that our current liquidity and cash receipts from written premiums, investment income, proceeds from investment sales and redemptions, and reinsurance recoveries, if necessary, are sufficient to cover cash outflows for each of the Company’s insurance subsidiaries in the foreseeable future.
The following table summarizes our cash flows for the three months ended March 31, 2025 and 2024:
| Three Months Ended |
||||||||
| March 31, |
||||||||
| 2025 |
2024 |
|||||||
| ($ in thousands) |
||||||||
| Cash provided by (used in): |
||||||||
| Operating activities |
$ | 87,183 | $ | 33,125 | ||||
| Investing activities |
(51,944 | ) | (16,331 | ) | ||||
| Financing activities |
3,549 | (6,882 | ) | |||||
| Change in cash, cash equivalents, and restricted cash |
$ | 38,788 | $ | 9,912 | ||||
Our cash flow from operating activities was positive during the three months ended March 31, 2025 and 2024 due to net income and a decrease in net operating assets in each period.
Variations in operating cash flow between periods are primarily driven by variations in our gross and ceded written premiums and the volume and timing of premium receipts, claim payments, reinsurance payments, and reinsurance recoveries on paid losses. In addition, fluctuations in losses and loss adjustment expenses and other insurance operating expenses impact operating cash flows.
Cash used in investing activities for the three months ended March 31, 2025 and 2024 related primarily to purchases of fixed maturity securities in excess of sales and maturities in each period.
Cash provided by financing activities for the three months ended March 31, 2025 was related to the receipt of $2.4 million in proceeds from stock option exercises, the receipt of $0.5 million in proceeds from our employee stock purchase plan and the receipt of $0.8 million in proceeds from policy holder contributions of surplus, offset by $0.1 million in offering costs from the August 2024 Secondary Offering. Cash used in financing activities for three months ended March 31, 2024 was related to $9.6 million in payments on our FHLB line of credit, offset by the receipt of $1.9 million in proceeds from stock option exercises and the receipt of $0.4 million in proceeds from our employee stock purchase plan.
We do not have any current plans for material capital expenditures other than current operating requirements. We believe that we will generate sufficient cash flows from operations to satisfy our liquidity requirements for at least the next 12 months and beyond. The key factor that will affect our future operating cash flows is the frequency and severity of catastrophe losses. To the extent our future operating cash flows are insufficient to cover our net losses from catastrophic events, we had $1,168.7 million in cash and investment securities available at March 31, 2025. We also have the ability to access additional capital through pursuing third‑party borrowings, sales of our equity or debt securities or entrance into a reinsurance arrangement.
Share Repurchases
Our share repurchase program expired on March 31, 2024 and we did not make any share repurchases during the three months ended March 31, 2025.
Credit Agreements
We have the ability to access additional capital through multiple credit agreements.
In December 2021, we entered into a Credit Agreement (the “Credit Agreement”) with U.S. Bank National Association which provides a revolving credit facility of up to $100 million through December 8, 2026. Interest on the credit facility accrues on each SOFR rate loan at the applicable SOFR (as defined in the Credit Agreement) plus 1.75% and on each base rate loan at the applicable Alternate Base Rate (as defined in the Credit Agreement) plus 0.75%. A loan may be either a SOFR rate loan or a base rate loan, at our discretion. Outstanding amounts under the Credit Agreement may be prepaid in full or in part at any time with no prepayment premium and may be reduced in full or in part at any time upon prior notice. Currently, $5.6 million of the borrowing capacity of the Credit Agreement is pledged as collateral and not able to be utilized.
As of March 31, 2025, we had no borrowings outstanding through the Credit Agreement.
Our PSIC subsidiary is a member of the Federal Home Loan Bank of San Francisco (“FHLB”). Membership in the FHLB provides PSIC access to collateralized advances, which can be drawn for general corporate purposes and used to enhance liquidity management. All borrowings are fully secured by a pledge of specific investment securities of PSIC and the borrowing capacity is equal to 10% of PSIC’s statutory admitted assets. All advances have predetermined term and the interest rate varies based on the term of the advance.
As of March 31, 2025, we had no borrowings outstanding through the FHLB line of credit.
Stockholders’ Equity
At March 31, 2025 total stockholders’ equity was $790.4 million and tangible stockholders’ equity was $765.5 million, compared to total stockholders’ equity of $729.0 million and tangible stockholders’ equity of $715.8 million as of December 31, 2024. Stockholders' equity increased due to net income earned for the period, activity related to stock-based compensation, and unrealized gains on fixed maturity securities.
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 March 31, 2025, the majority of our investment portfolio, or $991.8 million, was comprised of fixed maturity securities that are classified as available‑for‑sale and carried at fair value with unrealized gains and losses on these securities, net of applicable taxes, reported as a separate component of accumulated other comprehensive income. Also included in our investment portfolio were $44.4 million of equity securities, $2.3 million of equity method investments and $11.0 million of investments in limited partnerships. In addition, we maintained a non‑restricted cash and cash equivalent balance of $119.3 million at March 31, 2025. Our fixed maturity securities, including cash equivalents, had a weighted average effective duration of 4.09 and 4.04 years and an average rating of “A1/A+” and “A1/A+” at March 31, 2025 and December 31, 2024, respectively. Our fixed income investment portfolio had a book yield of 4.65% as of March 31, 2025, compared to 4.59% as of December 31, 2024.
At March 31, 2025 and December 31, 2024 the amortized cost and fair value on available‑for‑sale securities were as follows:
| Amortized |
Fair |
% of Total |
||||||||||
| March 31, 2025 |
Cost or Cost |
Value |
Fair Value |
|||||||||
| ($ in thousands) |
||||||||||||
| Fixed maturities: |
||||||||||||
| U.S. Governments |
$ | 16,567 | $ | 16,166 | 1.6 | % | ||||||
| U.S. States, Territories, and Political Subdivisions |
19,876 | 18,388 | 1.9 | % | ||||||||
| Special revenue excluding mortgage/asset-backed securities |
19,440 | 17,060 | 1.7 | % | ||||||||
| Corporate and other |
520,041 | 508,628 | 51.3 | % | ||||||||
| Mortgage/asset-backed securities |
439,968 | 431,517 | 43.5 | % | ||||||||
| Total available-for-sale investments |
$ | 1,015,892 | $ | 991,759 | 100.0 | % | ||||||
| Amortized |
Fair |
% of Total |
||||||||||
| December 31, 2024 |
Cost or Cost |
Value |
Fair Value |
|||||||||
| ($ in thousands) |
||||||||||||
| Fixed maturities: |
||||||||||||
| U.S. Governments |
$ | 33,449 | $ | 32,806 | 3.5 | % | ||||||
| U.S. States, Territories, and Political Subdivisions |
10,606 | 9,778 | 1.0 | % | ||||||||
| Special revenue excluding mortgage/asset-backed securities |
30,283 | 26,634 | 2.8 | % | ||||||||
| Corporate and other |
492,395 | 475,491 | 50.6 | % | ||||||||
| Mortgage/asset-backed securities |
406,597 | 394,337 | 42.0 | % | ||||||||
| Total available-for-sale investments |
$ | 973,330 | $ | 939,046 | 100.0 | % | ||||||
The following tables provide the credit quality of investment securities as of March 31, 2025 and December 31, 2024:
| Estimated |
% of |
|||||||
| March 31, 2025 |
Fair Value |
Total |
||||||
| ($ in thousands) |
||||||||
| Rating |
||||||||
| AAA |
$ | 139,730 | 14.1 | % | ||||
| AA |
306,807 | 30.9 | % | |||||
| A |
284,674 | 28.7 | % | |||||
| BBB |
246,269 | 24.9 | % | |||||
| BB |
13,186 | 1.3 | % | |||||
| B |
1,092 | 0.1 | % | |||||
| CCC & Below |
1 | — | % | |||||
| $ | 991,759 | 100.0 | % | |||||
| Estimated |
% of |
|||||||
| December 31, 2024 |
Fair Value |
Total |
||||||
| ($ in thousands) |
||||||||
| Rating |
||||||||
| AAA |
$ | 130,161 | 13.9 | % | ||||
| AA |
305,267 | 32.5 | % | |||||
| A |
254,890 | 27.1 | % | |||||
| BBB |
236,855 | 25.2 | % | |||||
| BB |
10,614 | 1.1 | % | |||||
| B |
1,258 | 0.1 | % | |||||
| CCC & Below |
1 | 0.0 | % | |||||
| $ | 939,046 | 100.0 | % | |||||
The amortized cost and fair value of our available‑for‑sale investments in fixed maturity securities summarized by contractual maturity as of March 31, 2025 were as follows:
| Amortized |
Fair |
% of Total |
||||||||||
| March 31, 2025 |
Cost |
Value |
Fair Value |
|||||||||
| ($ in thousands) |
||||||||||||
| Due within one year |
$ | 70,521 | $ | 70,386 | 7.1 | % | ||||||
| Due after one year through five years |
204,784 | 200,660 | 20.2 | % | ||||||||
| Due after five years through ten years |
184,930 | 179,685 | 18.1 | % | ||||||||
| Due after ten years |
115,689 | 109,511 | 11.0 | % | ||||||||
| Mortgage and asset-backed securities |
439,968 | 431,517 | 43.5 | % | ||||||||
| $ | 1,015,892 | $ | 991,759 | 100.0 | % | |||||||
Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.
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 coverage, in which the reinsurer(s) agree to assume all or a portion of the ceding company’s losses relating to a group of policies occurring in relation to specified events, subject to customary exclusions, in excess of a specified amount. Additionally, we buy program specific reinsurance coverage for specific lines of business on a quota share, property per risk or a facultative basis. In quota share reinsurance, the reinsurer agrees to assume a specified percentage of the ceding company’s losses arising out of a defined class of business in exchange for a corresponding percentage of premiums, net of a ceding commission. Property per risk coverage is similar to catastrophe XOL coverage except that the treaty applies in individual property losses rather than in the aggregate for all claims associated with a single catastrophic loss occurrence. Facultative coverage refers to a reinsurance contract on individual risks as opposed to a group or class of business. We use facultative reinsurance selectively to supplement limits or to cover risks or perils excluded from other reinsurance contracts.
We have a robust program utilizing a mix of traditional reinsurers and insurance linked securities. We currently purchase reinsurance from over 100 reinsurers, who either have an “A−” (Excellent) (Outlook Stable) or better financial strength rating by A.M. Best or post collateral. Our reinsurance contracts include special termination provisions that allow us to cancel and replace any participating reinsurer that is downgraded below a rating of “A−” (Excellent) (Outlook Stable) from A.M. Best, or whose surplus drops by more than 20%.
In addition to reinsurance from traditional reinsurers, we utilize collateralized protection via catastrophe bonds. We currently have $895 million of multi-year indemnity-based reinsurance coverage for earthquake events, all issued through Torrey Pines Re Ltd, a Bermuda-domiciled special purpose insurer.
Our catastrophe event retention is $20 million for earthquake events and $15.5 million for hurricane events and all other perils. Our reinsurance coverage exhausts at $3.2 billion for earthquake events, $735 million for Hawaii hurricane events, and $117.5 million for continental U.S. hurricane events, providing coverage in excess of our 1 in 250-year peak zone PML and in excess of our A.M. Best requirement. In addition, we maintain reinsurance coverage equivalent to or better than the 1 in 250-year PML for our other lines.
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.”
Critical Accounting Estimates
We identified the accounting estimates which are critical to the understanding of our financial position and results of operations. Critical accounting estimates are defined as those estimates that are both important to the portrayal of our financial condition and results of operations and require us to exercise significant judgment. We use significant judgment concerning future results and developments in applying these critical accounting estimates and in preparing our condensed consolidated financial statements. These judgments and estimates affect our reported amounts of assets, liabilities, revenues and expenses and the disclosure of our material contingent assets and liabilities. Actual results may differ materially from the estimates and assumptions used in preparing the condensed consolidated financial statements. We evaluate our estimates regularly using information that we believe to be relevant. Our critical accounting policies and estimates are described in our annual consolidated financial statements and the related notes in our 2024 Annual Report on Form 10-K.
There have been no material changes in our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Operations included in our 2024 Annual Report on Form 10-K.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Market risk is a general term describing the potential economic loss associated with adverse changes in the fair value of financial instruments. Our condensed 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.
Credit risk is the potential loss resulting from adverse changes in an issuer’s ability to repay its debt obligations. In general, we manage the exposure to credit risk in our investment 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 73.7% rated “A−” or better. At March 31, 2025, 1.4% 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.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports we file under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required financial disclosure.
As of the end of the period covered by this Quarterly Report on Form 10‑Q, we carried out an evaluation, under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures defined under Rules 13a‑15(e) and 15d‑15(e) under the Exchange Act. Based upon this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective.
Changes in Internal Controls over Financial Reporting
No changes in our internal control over financial reporting (as defined in Rules 13a‑15(f) and 15d‑15(f) under the Exchange Act) occurred during the quarter ended March 31, 2025 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
The effectiveness of any system of controls and procedures is subject to certain limitations, and, as a result, there can be no assurance that our controls and procedures will detect all errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be attained.
We are party to legal proceedings which arise in the ordinary course of business. We believe that the outcome of such matters, individually and in the aggregate, will not have a material adverse effect on our condensed consolidated financial position.
Summary Risk Factors
Our business is subject to numerous risks and uncertainties. These risks include, but are not limited to, the following:
Risks Related to Our Business and Industry:
| ● |
Claims arising from unpredictable and severe catastrophe events, including those caused by global climate change, could reduce or eliminate our earnings and stockholders' equity, and limit our ability to underwrite new insurance policies; |
| ● |
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 loss reserves are established based on estimates and may be inadequate to cover actual incurred losses which could have a material adverse impact on our results of operations and 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. |
| ● |
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; |
| ● |
Our business is concentrated in California and we are exposed more significantly to California loss activity and regulatory environments; |
| ● |
We rely on a select group of brokers and program administrators, and such relationships may not continue; |
| ● |
There is intense competition for business in our industry; |
| ● |
Volatility in crop prices, as a result of weather conditions or other events, could adversely impact our results of operations; |
Risks Related to the Economic Environment:
| ● |
Adverse economic factors, including recession, inflation, periods of high unemployment or lower economic activity could affect our growth and profitability; |
| ● |
Changes in global trade policies, including the imposition of tariffs, along with broader economic uncertainty, could contribute to financial market volatility, shifts in interest rates, and disruptions to the sectors we insure; |
Risks Related to Technology:
| ● |
The failure of our information technology and telecommunications systems could adversely affect our business; |
| ● |
Security breaches or cyber-attacks could expose us to liability and damage our reputation and business; |
Risks Related to Laws and Regulations:
| ● |
We are subject to extensive regulation, which may adversely affect our ability to achieve our business objectives; |
| ● |
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; |
| ● |
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 |
Risks Related to Ownership of our Common Stock:
| ● |
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 or eliminate 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, wildfires, and other severe events. We have incurred significant losses from catastrophe events multiple times in our history and we may incur significant losses from future catastrophe events. 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. These events could impact our business even where we do not have insured exposure, such as the 2025 California wildfires, as homes and businesses lost due to such events may cancel or not renew their policies with us which could 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 of insured property due to higher material and labor costs, increases in 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. 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 reinsurance coverage currently exhausts at $3.2 billion for earthquake events, $735 million for Hawaii hurricane events, and $117.5 million for continental U.S. 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 threshold. Our catastrophe event retention is currently $20 million for earthquake events and $15.5 million for hurricane events and all other perils. In addition to our event retention, we may also incur additional reinsurance expenses upon a catastrophe event. While we only select reinsurers whom we believe to have acceptable credit, if our reinsurers are unable to pay the claims for which they are responsible, we retain primary liability. Our earthquake policies do not provide coverage for fire damage arising from an earthquake. Catastrophe events which cause our reinsurers to incur losses may increase the cost of reinsurance in future periods or make it more difficult to obtain reinsurance on commercially acceptable terms. While we believe our risk transfer program reduces exposure to catastrophe losses and earnings volatility, one or more severe catastrophe events could result in claims that exceed the limits of our reinsurance coverage.
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. While our current reinsurance program is designed to limit our risk retention, 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.
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 catastrophe event were to occur and our reinsurers were unable to satisfy their commitments to us, we may be unable to satisfy our policyholder liabilities which would adversely impact our results of operations and financial condition. 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 March 31, 2025, we had $391.6 million of aggregate reinsurance recoverables.
Our loss reserves are established based on estimates which may be inadequate to cover actual incurred losses and could have a material adverse impact on our results of operations and financial condition.
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 seek to establish adequate reserves; however, our ultimate liability may be greater than our estimate.
The process of estimating the reserves for losses and loss adjustment expenses requires a high degree of judgment and is subject to several variables. 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.
We are subject to uncertainties which impact the adequacy of our reserves. For example, when we write “occurrence” policies, we are obligated to pay covered claims, up to the contractually agreed amount, for any covered loss that occurs while the policy is in force. Accordingly, claims may arise in years after a policy has lapsed. In addition, there may be significant reporting lags between the occurrence of an insured event and the time it is actually reported to us and additional lags between the time of reporting and final settlement of any claims. Consequently, estimates of loss associated with specified claims can increase as new information emerges, which could cause the reserves for the claim to become inadequate.
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.
If our loss reserves should prove to be inadequate, we will be required to increase our reserves resulting in a reduction in our net income and stockholders’ equity in the period where the inadequacy is identified. Material increases to our reserves may impact our liquidity, our financial rating, and our ability to comply with debt covenants.
For further information on our loss reserving methodology, see “Management’s Discussion and Analysis-Critical Accounting Policies and Estimates- Reserve for Losses and Loss Adjustment Expenses” in our 2024 Annual Report on Form 10-K.
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 buy multiple types of reinsurance including treaty excess of loss (“XOL”) coverage and program specific reinsurance coverage on a quota share, property per risk or a facultative basis. 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.
The reinsurance market historically has been a cyclical market characterized by periods of sufficient or excess capital (soft market cycle) as well as shortages of capital (hard market cycle). 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. Hard market cycles may increase our cost of reinsurance, force us to increase our loss retention, or limit the amount of reinsurance we are able to purchase, all of which would have an adverse impact on our business and results of operations.
In addition to reinsurance purchased from traditional reinsurers, we have historically incorporated collateralized protection from the insurance linked securities market via catastrophe bonds. The catastrophe bond was completed through Torrey Pines Re Pte. Ltd. (“Torrey Pines Re Pte.”). Torrey Pines Re Pte. is a special purpose reinsurance vehicle incorporated in Singapore that provided Palomar with indemnity-based reinsurance covering earthquake events through June 1, 2024. During the second quarter of 2022, we closed a $275 million 144A catastrophe bond which became effective June 1, 2022. This catastrophe bond was completed through Torrey Pines Re Ltd., a Bermuda-domiciled special purpose insurer that provides indemnity-based reinsurance covering earthquake events through June 1, 2025. During the second quarter of 2023, we also closed a $200 million 144A catastrophe bond which became effective June 1, 2023. This catastrophe bond was also completed through Torrey Pines Re Ltd and provides indemnity-based reinsurance covering earthquake events through June 1, 2026. During the second quarter of 2024, we also closed a $420 million 144A catastrophe bond which became effective June 1, 2024. This catastrophe bond was also completed through Torrey Pines Re Ltd and provides indemnity-based reinsurance covering earthquake events through June 1, 2027.
We may seek similar catastrophe bond offerings in the future. However, there can be no assurance that we will be able to complete such offerings on acceptable terms, if at all.
If we are unable to renew our expiring reinsurance contracts on acceptable terms or expand our reinsurance coverage through traditional reinsurers, catastrophe bonds, or otherwise, our loss exposure may increase, which would increase our potential losses related to catastrophe or non-catastrophe events. If we are unwilling to bear an increase in loss exposure, we may have to reduce our written premiums. These outcomes could adversely affect our business, financial condition, and results of operations.
In addition, as we grow our written premiums and enter new lines of business we will seek new types of reinsurance and will need to purchase reinsurance on commercially acceptable terms in order to reduce the risk associated with entering new lines of business. The inability to purchase appropriate reinsurance for new lines of business could negatively impact our ability to grow our written premiums and maintain our desired level of profitability.
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 of the occurrence of catastrophe events and their severity and impact on our 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, regular review of aggregate exposure and probable maximum loss reports, which report the maximum amount of expected losses 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.
In addition, output from our risk modeling software is based on third-party data that we believe to be accurate and 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 such as lumber 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 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:
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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); |
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The models may not accurately reflect the true frequency or severity of events; |
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The models may not accurately reflect a risk’s vulnerability or susceptibility to damage for a given event characteristic; |
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The models may not account for unusual or unprecedented catastrophe events; |
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The models may not adequately consider the impact of inflation on the magnitude of modeled losses; |
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The models may not accurately represent loss potential to insurance or reinsurance contract coverage limits, terms and conditions; and |
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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 could adversely impact our financial results.
A decline in our financial strength rating may adversely affect the amount of business we write and impact compliance with our debt covenants.
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 March 31, 2025, A.M. Best has assigned a financial strength rating of “A” (Excellent) (Outlook Stable) to our insurance company subsidiaries, Palomar Specialty Insurance Company (“PSIC”) and Palomar Excess and Surplus Insurance Company (“PESIC”). First Indemnity of America Insurance Co. ("FIA") carries an “A-” (Stable) rating from A.M. Best.
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 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; |
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If unfavorable financial, regulatory or market trends affect us, including excess market capacity; |
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If our losses exceed our loss reserves; |
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If we have unresolved issues with government regulators; |
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If we are unable to retain our senior management or other key personnel; |
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If our investment portfolio incurs significant losses; or |
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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:
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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; |
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Severely limiting or preventing us from writing new and renewal insurance contracts; or |
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Causing us to be out of compliance with the financial covenants in our credit agreement. |
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, 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.
We and our customers could be negatively and adversely impacted by pandemics, disease outbreaks and other public health crises.
The extent of the impact of a pandemic, disease outbreak or other public health crisis on our operational and financial performance depends on several factors, including the ultimate duration and severity of the event, the emergence and severity of variant strains, actions taken and restrictions imposed by the government and health officials in response, the effectiveness and adoption of vaccines and therapeutics, 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. While policy terms and conditions in the lines of business written by us would be expected to preclude coverage for virus-related claims, court decisions and governmental actions may challenge the validity of any exclusions or our interpretation of how such terms and conditions operate.
Global health crises have historically contributed to financial market volatility, supply chain disruptions, price inflation, and material and labor shortages, all of which may have a negative impact on our business. Furthermore, since our results of operations are partially dependent on the performance of our investment portfolio, a global health crisis' impact on the economy and financial markets could reduce our net investment income and result in realized investment losses in future periods. The macroeconomic effects of a global health crisis may persist for an indefinite period, even after it has subsided. We cannot anticipate all the ways in which global health crises could adversely impact our business in the future.
Our business is concentrated in California and, as a result, we are exposed more significantly to California loss activity and regulatory environments.
Our policyholders and insurance risks are currently concentrated in California, which generated 43% of our gross written premiums for the year ended December 31, 2024 and 32% for the three months ended March 31, 2025. 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 with a lower concentration of their premiums in California. Any single, major catastrophe event, series of events or other condition causing significant losses in California could materially adversely affect our business, financial condition and results of operations. This may include catastrophes even where we do not insure against the loss, such as the 2025 California wildfires, as homes and businesses lost or damaged due to catastrophe may otherwise cancel our policies following such event. Additionally, unfavorable business, economic or regulatory conditions in California may result in a significant reduction of our premiums or increase our loss exposure. Changes to insurance-related laws or regulations in California could also have a negative impact on our business.
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 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 Founder, Chief Executive Officer and Chairman, Mac Armstrong, our Chief Financial Officer, Christopher Uchida and our President, Jon Christianson. 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, Hawaii Hurricane, and Fronting products through relationships with certain program administrators. Each of the products managed by the program administrators operates as a separate program that is governed by an independent, separately negotiated agreement with unique terms and conditions, including geographic scope, key person provisions, economics and exclusivity. These programs also feature separate managerial oversight and leadership, policy administration systems and retail agents originating policies.
For the year ended December 31, 2024, our largest program administrator distributed $403.4 million or 26.2% of our gross written premiums. There were no other program administrators which distributed greater than 10% of our gross written premiums for the year ended December 31, 2024.
For the three months ended March 31, 2025, our largest program administrator distributed $95.1 million or 21.5% of our gross written premiums. There were no other program administrators which distributed greater than 10% of our gross written premiums for the three months ended March 31, 2025.
Our largest program administrator, Arrowhead General Insurance Agency, distributes our Value Select Residential Earthquake program, which represents the majority of our Residential Earthquake premium and is administered through a mutually exclusive agreement for the states of California, Oregon and Washington. The agreement remains in effect until terminated by either party upon 180 days’ prior written notice to the other party for cause. 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.
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 from our agents and brokers or the failure or inability of these agents and brokers to successfully market our insurance products 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 regularly meet and communicate with our brokers, monitor broker behavior, and review broker 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.
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.
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 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.
Certain new, proposed or potential industry or legislative developments could further increase competition in our industry. For example, an increase in capital-raising by companies with whom we compete could result in new entrants to our markets and an excess of capital in the industry. Additionally, the possibility of federal regulatory reform of the insurance industry 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.
If actual renewals of our existing policies do not meet expectations, our written premium in future years and our future results of operations could be materially adversely affected.
Most of our insurance policies 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 policies. 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, the volume of fronting premiums written may vary significantly in future periods due to the timing of entering large fronting partnerships and terminations of large fronting partnerships.
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, our ability to develop or select and implement appropriate procedures and systems to support our claims functions and other factors. Our failure to evaluate and pay claims accurately and timely could lead to regulatory and administrative actions or material litigation, 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 manage our volume of claims, our ability to manage our claims 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 results of operations.
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 and take other steps 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.
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 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, 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 only available on unfavorable terms. Equity financings would result in dilution to our stockholders. Debt financings could subject us to covenants that restrict our ability to freely operate our business. 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, technology development, and skilled personnel. To grow effectively, we must be able to meet our capital needs and expand our systems, technology, and internal controls effectively. We also must allocate our human resources optimally, including identifying, hiring, and retaining qualified employees, and effectively incorporating 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.
We face risks associated with the evaluation of potential acquisitions, the integration of acquired businesses, and the introduction of new products, lines of business, and markets.
As part of our business strategy, we may make acquisitions, including acquisitions in lines of business that are natural adjacencies. For example, we recently completed the acquisition of FIA in January 2025 and the acquisition of AAP in April 2025. The success of our acquisition strategy is dependent upon our ability to identify appropriate acquisition targets, negotiate transactions on favorable terms, complete transactions, have adequate access to financing and the ability to finance acquisitions on acceptable terms, and successfully integrate them into our existing businesses. We may not realize the anticipated benefits of acquisitions we have completed or may complete in the future, and we may not be able to incorporate any acquired lines of business with our existing operations, or integrate personnel from the acquired businesses, in which case our business, financial condition and results of operations could be harmed.
If acquisitions are made, we may not realize the anticipated benefits of such acquisitions, including, but not limited to, revenue growth, operational efficiencies, or expected synergies. Many of the businesses and assets that we have acquired or may acquire have unaudited historical financial statements or records that have been, or will be, prepared by the management of such companies and have not been, or will not be, independently reviewed or audited. We cannot be certain that the financial statements or records of companies or assets we have acquired or may acquire would not, or will not, be materially different if such statements were independently reviewed or audited. If such statements were to be materially different, the tangible and intangible assets we acquire may be more susceptible to impairment charges, which could have a material adverse effect on us.
In addition, many of the businesses that we acquire and develop will likely have smaller scales of operations prior to the implementation of our growth strategy. If our growth continues, it may place a significant strain on our management team and on our operational and financial systems, procedures, and controls. If we are not able to manage the growing complexity of these businesses, including improving, refining, or revising our systems and operational practices, enlarging the scale and scope of the businesses, and integrating the new business into our culture and operations, our business may be adversely affected.
From time to time, either through acquisitions or internal development, we enter new distribution channels or lines of business or offer new products and services within existing lines of business. These new distribution channels, lines of business, or new products and services present additional risks, particularly in instances where the markets are not fully developed. Such risks include the investment of significant time and resources to recruit, hire, and retain personnel and develop the products, the risks involved with the management of the integration process and development of new processes and systems to accommodate complex programs, and the risk of financial guarantees and additional liabilities associated with these efforts.
Failure to manage these risks arising from acquisitions or development of new businesses could materially and adversely affect our business, results of operations, and financial condition.
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 and 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, volatility in investment performance, including gains and losses on our equity securities, and the cost of reinsurance coverage.
In addition, the insurance and reinsurance business historically has been a cyclical industry characterized by periods of intense price competition due to excess underwriting capacity (soft market cycle) as well as periods when shortages of capacity increase premium levels (hard market cycle). We expect our business and results of operations to be continuously impacted by these market cycles.
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, reinsurance expenses, loss expenses, and other underwriting expenses 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.
Our Credit Agreement contains restrictions and covenants that limit our flexibility in operating our business and any debt borrowed under our Credit Agreement exposes us to additional risk and may adversely affect our financial condition and future financial results.
In December 2021, we entered into a Credit Agreement (the “Credit Agreement”) with certain lenders which provides a revolving credit facility of up to $100.0 million. Borrowings under the Credit Agreement may impact our business and financial condition by:
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Requiring the dedication of a portion of our expected cash flows from operations to service our debt, thereby reducing the amount of expected cash flows available for other purposes, including investing, and paying claims and operating expenses and; |
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Exposing us to interest rate risk since the interest rate in the credit agreement is a variable rate |
In addition, the Credit Agreement contains financial covenants, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness and dividends and other distributions. The financial covenants in the Credit agreement require the Company not to exceed a maximum leverage ratio and maintain a minimum net worth at the end of each quarter. The Company’s insurance subsidiaries are also required to maintain a minimum Risk Based Capital Ratio at the end of each year and must always maintain a minimum AM Best Financial Strength rating. All of these covenants and restrictions impact how we operate our business and may limit our flexibility in planning for, or reacting to, changes in our business and industry. Our ability to comply with these covenants may be affected by events beyond our control. If we breach any of the covenants and do not obtain a waiver from the noteholders or lenders, then, subject to applicable cure periods, any outstanding debt may be declared immediately due and payable.
Volatility in crop prices, as a result of weather conditions or other events, could adversely impact our results of operations.
Weather conditions, including too much moisture (flooding or excessive rain), not enough moisture (droughts), and the level of crop prices in the commodities market heavily impact our crop insurance products. These factors are inherently unpredictable and could result in significant volatility in our operating results from one year to the next. Our results could also be negatively impacted by pests and plant disease. A large decline in the commodity prices of one or more of the major crops that we insure could have a material adverse effect on our results of operations or financial condition.
Instability in the surety market, resulting from construction defaults, contractual disputes, or evolving regulatory requirements, could negatively impact the performance of our surety products;
Fluctuations in construction industry performance, defaults on bonded projects, contractual disagreements and regulatory changes are inherent risks in the surety insurance industry. These events may lead to significant challenges in underwriting, claims management, and regulatory compliance. Depending on our ability to effectively manage the impact of these risks, we could face increased loss reserves, higher underwriting losses, and rising operational costs, all of which could materially affect our financial performance and overall profitability.
Risks Related to the Economic Environment
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 general 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 could be 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.
We underwrite a significant portion of our insurance in California. An economic downturn which particularly impacts California could have an adverse effect on our financial condition and results of operations.
Changes in global trade policies, including the imposition of tariffs, along with broader economic uncertainty, could contribute to financial market volatility, shifts in interest rates, and disruptions to the sectors we insure.
Ongoing global economic uncertainty, including the effects of inflation, interest rate volatility, and changes in international trade policies such as the imposition of tariffs, could have wide-ranging impacts on the markets in which we operate. These conditions may lead to shifts in consumer behavior, changes in exposure levels across personal and commercial lines, and increased costs associated with claims, operations, and policy administration. In addition, market volatility may negatively impact the performance of our investment portfolio and influence policyholder behavior. Together, these developments could adversely affect our financial results, capital position, and ability to execute our long-term business strategy.
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. Interest rate fluctuations can also impact the business and results of operations of the companies that issue fixed maturity securities and may cause a decline in fair value of their securities. Some fixed maturity securities have call or prepayment options, which create 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. Such deteriorations may be caused or magnified by interest rate fluctuations. 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. These securities are carried on the balance sheet at fair market value and are subject to potential losses and declines in market value based on the performance of equity markets. Our equity invested assets totaled $44.4 million as of March 31, 2025.
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”), and the respective state insurance departments regulating each of our insurance company subsidiaries.
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 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.
We may, in certain circumstances, invest a small percentage of our investment portfolio in private companies or limited partnerships which we believe provide strategic opportunities. These types of investments are typically illiquid, and we have limited ability to take actions that protect or increase the value of this type of investment. Net losses from these investments or impairment of these investments may negatively impact our operating results.
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, a significant catastrophe event, 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
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, cyber-attacks, 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.
A portion of our employees work remotely and outside of our primary offices on a regular basis. We believe 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.
Security breaches or cyber-attacks could expose us to liability and damage our reputation and 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.
Cyberthreats are constantly evolving and becoming increasingly sophisticated and complex, making it increasingly difficult to detect and successfully defend against them. In addition, cyber-attackers (which may include individuals or groups, as well as sophisticated groups such as nation-state and state-sponsored attackers, which can deploy significant resources to plan and carry out exploits) also develop and deploy viruses, worms, credential stuffing attack tools and other malicious software programs, some of which may be specifically designed to attack our products, information systems or networks. Outside parties have in the past and may in the future attempt to fraudulently induce our employees or users of our products or services to disclose sensitive, personal or confidential information via illegal electronic spamming, phishing or other tactics.
While we have implemented security measures and employee training 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. While we maintain insurance coverage that may, subject to policy terms and conditions, cover certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses.
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.
We employ third‑party licensed software for use in our business, and the inability to maintain these licenses, problems with the software we license, or increases to the cost of software licenses could 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. In addition, the cost of third-party software is significant and we expect it to increase in the future. If we have issues with the functionality or expense of third-party software, we may not be able to find acceptable alternatives in a timely manner 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.
Any control weakness or failure in cloud-based software could adversely affect our business.
We use cloud-based third-party software to host applications and for key financial and operational systems and we expect to expand their use in the future. We will increasingly rely on third-party software providers to maintain appropriate controls and safeguards to protect the integrity of our data and any information we transmit, including personal, personally identifiable, sensitive, confidential or proprietary information. While we conduct due diligence on these cloud providers with respect to their security and business controls, we may not have the visibility to effectively monitor the implementation and efficacy of these controls. If these controls do not operate effectively, we may not be able to rely on their software and cyber attackers may be able to exploit vulnerabilities, resulting in operational disruption, data loss, defects or a cybersecurity event. Migrating our software to the cloud increases the risk of operational disruption should internet service be interrupted. While we have implemented business contingency and other plans to facilitate continuous internet access, sustained or concurrent service denials or similar failures could limit our ability to write and process new and renewal business, provide customer service, pay claims in a timely manner, maintain our accounting function, or otherwise operate our business. Any such event or failure could have a material adverse effect on our business, financial condition and results of operations.
The growth and evolution of artificial intelligence may impact our business and operations
In the future, we may seek to deploy and/or further rely on technologies such as artificial intelligence or machine learning in operating our business. If we are unable to deploy this technology effectively or if our competitors are better able to deploy this technology our business may be adversely impacted. Our third-party software vendors and service providers are increasingly incorporating artificial intelligence into their processes and this may expose us to additional risks should they not be able to incorporate the technology effectively. The evolution and increased reliance on artificial intelligence may exacerbate our information technology and cybersecurity risks. Furthermore, regulations around artificial intelligence continue to evolve and we may be subject to increased regulation around artificial intelligence in the future.
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.
Our insurance company subsidiaries, PSIC, PESIC and FIA, are subject to extensive rules and regulations enforced by the insurance regulator of the state in which they are commercially domiciled. To a lesser degree, they are also subject to regulations in the other states in which they operate. 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 our business objectives.
Our U.S. insurance subsidiaries are part of an “insurance holding company system” within the meaning of applicable state 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 respective state regulator, at least 30 days prior to engaging in the transaction, and the regulator 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, we may be subject to significant fines and penalties and our working relationship with the state insurance regulators may be impaired.
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 the laws of the state in which they are domiciled. 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 is 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 these requirements.
Laulima is subject to regulation from the Hawaii Department of Commerce and Consumer Affairs, Hawaii Insurance Division which requires that Laulima comply with Hawaii Statutes and Insurance Code. If Laulima is unable to comply with the applicable insurance regulations in Hawaii, it may be subject to significant fines and penalties and its working relationship with the Hawaii Department of Commerce and Consumer Affairs, Hawaii Insurance Division may be impaired.
FIA is subject to regulation from the New Jersey Department of Banking and Insurance, which requires that FIA comply with New Jersey Statutes and Insurance Code. Failure to meet these regulatory requirements could result in substantial fines or penalties and may negatively affect FIA’s relationship with the New Jersey Department of Banking and Insurance.
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, including additional regulation around cybersecurity, 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 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 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.
Additionally, in response to the growing threat of cyber-attacks in the insurance industry, cybersecurity regulations have been adopted, which, among other things, require insurance companies to establish and maintain a cybersecurity program and implement and maintain cybersecurity policies and procedures. On October 24, 2017, the NAIC adopted its Insurance Data Security Model Law, intended to serve as model legislation for states to enact in order to govern cybersecurity and data protection practices of insurers, insurance agents, and other licensed entities registered under state insurance laws. We are required to abide by the provisions of and file compliance certifications pertaining to this legislation.
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.
While we have implemented cybersecurity policies and procedures, there is no guarantee our policies and procedures will protect our systems against all attacks or comply with all provisions of these evolving regulations.
Changes in tax laws as a result of the enactment of tax legislation could impact our operations and profitability.
Any future tax legislation or changes to tax laws such as changing the corporate or personal tax rate or changes to allowed tax deductions could have a negative impact on our results of operations and profitability by causing us to incur additional tax expense or by having a financial impact on our policyholders.
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 based on 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 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 48 states. As PSIC grows, its share of any assessments in each state in which it underwrites business on an admitted basis may increase. 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. Assessments may be 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. 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 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.
Because we are a holding company and substantially all 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, PSRE and FIA. State insurance laws, including the laws of Oregon, California, Arizona, New Jersey, 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 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.
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, many of our subsidiaries 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 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 finance staff and consultants with 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. We expect disclosure requirements to increase in the future and expand to areas such as climate change and greenhouse gas emissions. 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; |
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define and expand the roles and the duties of our Board of Directors and its committees; |
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institute comprehensive compliance and investor relations functions; and |
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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. 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 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 state insurance laws and regulations which govern our subsidiaries' operations, 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. State 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 state insurance laws and regulations, absent a disclaimer of control filing and its acceptance by the respective state 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, 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:
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market conditions in the broader stock market; |
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actual or anticipated fluctuations in our quarterly financial and operating results; |
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introduction of new products or services by us or our competitors; |
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issuance of new or changed securities analysts’ reports or recommendations; |
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results of operations that vary from expectations of securities analysis and investors; |
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short sales, hedging and other derivative transactions in our common stock; |
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guidance, if any, that we provide to the public, any changes in this guidance or our failure to meet this guidance; |
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strategic actions by us or our competitors; |
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announcement by us, our competitors or our acquisition targets; |
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sales, or anticipated sales, of large blocks of our stock, including by our directors, executive officers and principal stockholders; |
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additions or departures in our Board or Directors, senior management or other key personnel; |
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regulatory, legal or political developments; |
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public response to press releases or other public announcements by us or third parties, including our filings with the SEC; |
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litigation and governmental investigations; |
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changing economic conditions; |
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changes in accounting principles; |
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any indebtedness we may incur or securities we may issue in the future; |
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default under agreements governing our indebtedness; |
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exposure to capital and credit market risks that adversely affect our investment portfolio or our capital resources; |
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changes in our credit ratings; |
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changes in corporate tax rates; |
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interest or exchange rate fluctuations; and |
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other events or factors, including those from natural disasters, war, pandemics, acts of terrorism, cyber-attacks 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.
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:
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permit the Board of Directors to establish the number of directors and fill any vacancies and newly created directorships; |
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provide, through 2027, that our Board of Directors are classified into three classes with staggered, three year terms and that directors may only be removed for cause; |
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require super‑majority voting to amend provisions in our certificate of incorporation and bylaws; |
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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; |
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eliminate the ability of our stockholders to call special meetings of stockholders; |
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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; |
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prohibit stockholder action by other than unanimous written consent; |
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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; |
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prohibit cumulative voting in the election of directors; and |
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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:
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any derivative action or proceeding brought on our behalf; |
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any action asserting a claim of breach of a fiduciary duty by any of our directors, officers, employees or agents or our stockholders; |
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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; |
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any action to interpret, apply, enforce or determine the validity of our certificate of incorporation or our bylaws; or |
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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 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Rule 10b5-1 Trading Plans
During the quarter ended March 31, 2025, of our directors or officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934) adopted, terminated or modified a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K).
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Management contract or compensatory plan or arrangement. |
Pursuant to the requirements 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.
| Palomar Holdings, Inc. |
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| Date: May 6, 2025 |
By: |
/s/ Mac Armstrong |
| Mac Armstrong |
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| Chairman of the Board and Chief Executive Officer (Principal Executive Officer) |
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| Date: May 6, 2025 |
By: |
/s/ T. Christopher Uchida |
| T. Christopher Uchida |
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| Chief Financial Officer (Principal Financial and Accounting Officer) |
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