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PALOMAR HOLDINGS, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
The discussion and analysis below includes certain forward-looking statements that are subject to risks, uncertainties and other factors described in part II, item 1A of this Quarterly Report. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors. The results of operations for the three months endedMarch 31, 2022 are not necessarily indicative of the results that may be expected for the full year endedDecember 31, 2022 , 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 theSEC onFebruary 24, 2022 .
References to the "Company," "
Holdings, Inc.
Overview
We are a rapidly growing and innovative insurer focused on providing specialty
insurance to residential and commercial customers. Our underwriting and
analytical expertise allow us to concentrate on certain markets that we believe
are underserved by other insurance companies, such as the markets for
earthquake, hurricane, inland marine, and flood insurance. We use proprietary
data analytics and a modern technology platform to offer our customers flexible
products with customized and granular pricing for both the admitted and excess
and surplus lines ("E&S") markets.
We provide admitted insurance products through our Oregon domiciled insurance
company, Palomar Specialty Insurance Company ("PSIC"), and non-admitted
insurance products through our Arizona domiciled surplus lines insurance
company, Palomar Excess and Surplus Insurance Company ("PESIC"). We distribute
our products through multiple channels, including retail agents, program
administrators, wholesale brokers, and partnerships with other insurance
companies. Our business strategy is supported by a comprehensive risk transfer
program with reinsurance coverage that we believe reduces earnings volatility
and provides appropriate levels of protection from catastrophic events. Our
management team combines decades of insurance industry experience across
specialty underwriting, reinsurance, program administration, distribution, and
analytics.
Founded in 2014, we have significantly grown our business and have generated
attractive returns. We have organically increased gross written premiums from
$16.6 million in our first year of operations to $535.2 million for the year
ended December 31, 2021 , which reflects a compound annual growth rate of
approximately 64%. For the three months ended March 31, 2022 , 46% of our gross
written premiums were generated by our Residential Earthquake, Commercial
Earthquake and Hawaii Hurricane lines of business, all of which are not subject
to attritional losses. We experienced average monthly premium retention rates
above 91% overall for these lines of business, providing strong visibility into
future revenue.
In February 2014 , PSIC was awarded an "A-" rating from A.M. Best Company ("A.M.
Best"), a leading rating agency for the insurance industry. An "A-" rating is
categorized by A.M. Best as an excellent rating and indicates a stable outlook.
In July 2020 , PESIC was also awarded an "A-" rating by A.M. Best . In May 2021 ,
A.M. Best affirmed the "A-" rating of PSIC and PESIC. These ratings reflect A.M.
Best's opinion of our subsidiaries' financial strength, operating performance,
and ability to meet obligations to policyholders and are not an evaluation
directed towards the protection of investors.
We believe that our market opportunity, distinctive products, and differentiated
business model position us to grow our business profitably.
COVID-19 Update
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The COVID-19 Pandemic (the "Pandemic") continues to impact businesses,
households, communities, and financial markets.
Since the beginning of the Pandemic, our focus has been to protect the health of the public and our employees while serving our policyholders and ensuring business continuity. We recently began allowing all employees to return to our offices on a voluntary basis, with established protocols designed to ensure operational reliability and employee safety. In addition, we have taken extra physical security and cybersecurity measures to safeguard our systems to serve the operational needs of our workforce and ensure uninterrupted service to our brokers and policyholders. We have experienced business interruption claims related to the Pandemic. Our All Risk and Commercial Earthquake (Difference in Conditions or "DIC") policies offer business interruption coverage for insureds for a loss in business income caused by physical damage to the structure. Each of our All Risk policies has a virus and/or communicable disease exclusion. Our DIC policies require physical damage to the structure caused by the covered peril, whether it be an earthquake or flood. We do not expect additional business interruption claims from the Pandemic and have acknowledged and adjusted each claim received. The Pandemic's ultimate impact on our results of operations remains uncertain. Since the onset of the Pandemic, we have experienced volatility in the fair value of our investment portfolio due to unrealized losses and gains on our fixed income securities. Additional financial volatility caused by the Pandemic may have a negative impact on our investment portfolio and results of operations. Inflationary pressures caused by the Pandemic may increase our operating expenses and the average size of our loss claims. We have not seen a significant impact on the growth rate of our gross written premiums since the beginning of the Pandemic. However, the Pandemic continues to impact many aspects of the economy and society and the macroeconomic effects of the Pandemic may persist for an indefinite period, even after the Pandemic has subsided. We cannot anticipate all the ways in which the Pandemic or other similar global health crises could adversely impact our business in the future.
Components of Our Results of Operations
Gross Written Premiums
Gross written premiums are the amounts received or to be received for insurance policies written or assumed by us during a specific period of time without reduction for policy acquisition costs, reinsurance costs or other deductions. The volume of our gross written premiums in any given period is generally influenced by: ? Volume of new business submissions in existing products or partnerships;
? Binding of new business submissions in existing products or partnerships into
policies;
? Entrance into new partnerships or the offering of new types of insurance
products;
? Renewal rates of existing policies; and
? Average size and premium rate of bound policies.
Our gross written premiums are also impacted when we assume unearned in-force
premiums due to new partnerships or other business reasons. In periods where we
assume a large volume of unearned premiums, our gross written premiums may
increase significantly compared to prior periods and the increase may not be
indicative of future trends.
Ceded Written Premiums
Ceded written premiums are the amount of gross written premiums ceded to
reinsurers. We enter into reinsurance contracts to limit our exposure to
potential losses and to provide additional capacity for growth. We cede premiums
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
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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 of premium in-force during the XOL contract period or
due to acceleration of XOL charges or the need to purchase additional
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. Our insurance policies generally have a term of one year and premiums are earned pro rata over the terms of the policies.
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. 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; and
? Inflation in housing and construction costs.
Losses and loss adjustment expenses are based on an actuarial analysis of the
estimated losses, including losses incurred during the period and changes in
estimates from prior periods. Losses and loss adjustment expenses may be paid
out over multiple years.
Acquisition Expenses
Acquisition expenses are principally comprised of the commissions we pay retail
agents, program administrators and wholesale brokers, net of ceding commissions
and fronting fees we receive on business ceded under
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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 in a manner consistent with the recognition
of the earned 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 the unused line fee and amortization of the
commitment fee on our credit agreement with
interest accrued on borrowings from our FHLB loan.
Net Investment Income
We earn investment income on our portfolio of invested assets. Our invested assets are primarily comprised of fixed maturity securities, and may also include cash and cash equivalents, and equity securities. The principal factors that influence net investment income are the size of our investment portfolio, the yield on that portfolio, and investment management expenses. As measured by amortized cost, which excludes changes in fair value, caused by changes in interest rates, the size of our investment portfolio is mainly a function of our invested capital along with premium we receive from our insureds, less payments on policyholder claims and other operating expenses. Our balance of invested capital may be impacted in the future by repurchases of shares of our common stock.
Net Realized and Unrealized Gains and Losses on Investments
Net realized and unrealized gains and losses on investments are a function of the difference between the amount received by us on the sale of a security and the security's cost-basis, mark-to-market adjustments, and credit losses recognized in earnings.
Income Tax Expense
Currently our income tax expense consists mainly of federal income taxes imposed on our operations. Our effective tax rates are dependent upon the components of pretax earnings and the related tax effects.
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 and net realized and unrealized
gains and losses on investments. 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
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estimated tax rate at which the company received a deduction for these
adjustments. See "Reconciliation of Non-GAAP Financial Measures" for a
reconciliation of net income calculated in accordance with GAAP to adjusted net
income.
Return on equity is net income expressed on an annualized basis as a percentage
of average beginning and ending stockholders' equity during the period.
Adjusted return on equity is a non-GAAP financial measure defined as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending stockholders' equity during the period. See "Reconciliation of Non-GAAP Financial Measures" for a reconciliation of return on equity calculated using unadjusted GAAP numbers to adjusted return on equity.
Loss ratio, expressed as a percentage, is the ratio of losses and loss
adjustment expenses, to net earned premiums.
Expense ratio, expressed as a percentage, is the ratio of acquisition and other
underwriting expenses, net of commission and other income to net earned
premiums.
Combined ratio is defined as the sum of the loss ratio and the expense ratio. A combined ratio under 100% generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss. Adjusted combined ratio is a non-GAAP financial measure defined as the sum of the loss ratio and the expense ratio calculated excluding the impact of certain items that may not be indicative of underlying business trends, operating results, or future outlook. See "Reconciliation of Non-GAAP Financial Measures" for a reconciliation of combined ratio calculated using unadjusted GAAP numbers to adjusted combined ratio. Diluted adjusted earnings per share is a non-GAAP financial measure defined as adjusted net income divided by the weighted-average common shares outstanding for the period, reflecting the dilution which could occur if equity-based awards are converted into common share equivalents as calculated using the treasury stock method. See "Reconciliation of Non-GAAP Financial Measures" for a reconciliation of diluted earnings per share calculated in accordance with GAAP to diluted adjusted earnings per share.
Catastrophe loss ratio is a non-GAAP financial measure defined as the ratio of
catastrophe losses to net earned premiums. See "Reconciliation of Non-GAAP
Financial Measures" for a reconciliation of loss ratio calculated using
unadjusted GAAP numbers to catastrophe loss ratio.
Adjusted combined ratio excluding catastrophe losses is a non-GAAP financial
measure defined as adjusted combined ratio excluding the impact of catastrophe
losses. See "Reconciliation of Non-GAAP Financial Measures" for a reconciliation
of combined ratio calculated using unadjusted GAAP numbers to adjusted combined
ratio excluding catastrophe losses.
Tangible stockholders' equity is a non-GAAP financial measure defined as
stockholders' equity less intangible assets. See "Reconciliation of Non-GAAP
Financial Measures" for a reconciliation of stockholders' equity calculated in
accordance with GAAP to tangible stockholders' equity.
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Results of Operations
Three months ended
The following table summarizes our results for the three months endedMarch 31, 2022 and 2021: Three months ended March 31, 2022 2021 Change % Change ($ in thousands, except per share data) Gross written premiums$ 170,934 $ 103,577 $ 67,357 65.0 % Ceded written premiums (89,552) (43,364) (46,188) 106.5 % Net written premiums 81,382 60,213 21,169 35.2 % Net earned premiums 76,032 47,053 28,979 61.6 %
Commission and other income 777 711 66 9.3 % Total underwriting revenue (1) 76,809 47,764 29,045 60.8 % Losses and loss adjustment expenses 14,954 (4,423) 19,377 NM Acquisition expenses 28,054 19,313 8,741 45.3 % Other underwriting expenses 15,925
14,248 1,677 11.8 % Underwriting income (1) 17,876 18,626 (750) (4.0) % Interest expense (93) - (93) NM Net investment income 2,579 2,219 360 16.2 %
Net realized and unrealized losses on investments (1,278) (739) (539) 72.9 % Income before income taxes 19,084 20,106 (1,022) (5.1) % Income tax expense 4,547 3,476 1,071 30.8 % Net income$ 14,537 $ 16,630 $ (2,093) (12.6) % Adjustments: Expenses associated with transactions and stock offerings 86 410 (324) (79.0) % Stock-based compensation expense 2,760 938 1,822 194.2 % Amortization of intangibles 315 337 (22) (6.5) % Expenses associated with catastrophe bond, net of rebate 200
1,683 (1,483) NM Tax impact (325) (712) 387 NM Adjusted net income (1)$ 17,573 $ 19,286 $ (1,713) (8.9) % Key Financial and Operating Metrics Annualized return on equity 15.0 % 18.0 % Annualized adjusted return on equity (1) 18.1 %
20.8 % Loss ratio 19.7 % (9.4) % Expense ratio 56.8 % 69.8 % Combined ratio 76.5 % 60.4 % Adjusted combined ratio (1) 72.1 % 53.3 % Diluted earnings per share$ 0.56 $ 0.63
Diluted adjusted earnings per share (1)$ 0.68
$ 0.73 Catastrophe losses$ 481 $ (9,631) Catastrophe loss ratio (1) 0.6 % (20.5) %
Adjusted combined ratio excluding catastrophe losses (1) 71.4 % 73.7 % NM- not meaningful
Indicates non-GAAP financial measure; see "Reconciliation of Non-GAAP
(1) Financial Measures" for a reconciliation of the non-GAAP financial measures
to their most directly comparable financial measures prepared in accordance
with GAAP.
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Gross Written Premiums
Gross written premiums increased$67.3 million , or 65.0% to$170.9 million for the three months endedMarch 31, 2022 compared to$103.6 million for the three months endedMarch 31, 2021 . Premium growth was primarily due to an increased volume of policies written across our lines of business which was driven by new business generated with existing partners, strong premium retention rates for existing business, expansion of our distribution footprint, and new partnerships. The following table summarizes our gross written premiums by line of business and shows each line's percentage of total gross written
premiums for each period:
Three Months Ended March 31,
2022 2021
($ in thousands)
% of % of %
Amount GWP Amount GWP Change Change
Product
Residential Earthquake $ 46,336 27.1 % $ 35,898 34.7 % $ 10,438 29.1 %
Fronting Premiums 29,845 17.5 % - - % 29,845 NM
Commercial Earthquake 25,144 14.7 % 21,277 20.5 % 3,867 18.2 %
Inland Marine 18,237 10.7 % 7,834 7.6 % 10,403 132.8 %
Specialty Homeowners 16,284 9.5 % 14,002 13.5 % 2,282 16.3 %
Commercial All Risk 11,210 6.6 % 8,190 7.9 % 3,020 36.9 %
Hawaii Hurricane 6,914 4.0 % 6,137 5.9 % 777 12.7 %
Residential Flood 2,993 1.8 % 2,283 2.2 % 710 31.1 %
Other 13,971 8.1 % 7,956 7.7 % 6,015 75.6 %
Total Gross Written Premiums$ 170,934 100.0 %$ 103,577 100.0 %$ 67,357 65.0 % NM- not meaningful During the fourth quarter of 2021, we launched our fronting business, known as PLMR-FRONT. In a fronting agreement, we write the premium and then cede the majority of the premium and risk in exchange for a fronting fee, which is our primary source of profit in the arrangement. We expect to continue to write fronting premiums for the foreseeable future. The volume of fronting premiums written each period may vary due to the timing of entering new fronting partnerships and terminations of fronting partnerships. The following table summarizes our gross written premiums by insurance subsidiary: Three Months Ended March 31, 2022 2021 ($ in thousands) % of % of % Amount GWP Amount GWP Change Change Subsidiary PSIC$ 104,004 60.8 %$ 79,845 77.1 %$ 24,159 30.3 % PESIC 66,930 39.2 % 23,732 22.9 % 43,198 182.0 % Total Gross Written Premiums$ 170,934 100.0 %$ 103,577 100.0 %$ 67,357 65.0 % Ceded Written Premiums
Ceded written premiums increased$46.2 million , or 106.5%, to$89.6 million for the three months endedMarch 31, 2022 from$43.4 million for the three months endedMarch 31, 2021 . The increase was primarily due to increased premium ceded under quota share arrangements due to growth in the volume of written premiums subject to quota shares and due to increased ceding under fronting agreements. In addition, we incurred increased excess of loss ("XOL") reinsurance expense due to growth in exposure. During the three months endedMarch 31, 2021 , our XOL 26 reinsurance expense was impacted by Winter Storm Uri ("Uri"). Catastrophe losses from Uri caused us to utilize certain layers of our XOL program causing us to incur approximately$4.0 million of expense associated with the reinstatement of our reinsurance program in the prior year. Ceded written premiums as a percentage of gross written premiums increased to 52.4% for the three months endedMarch 31, 2022 from 41.9% for the three months endedMarch 31, 2021 . This increase was primarily due increased quota share and fronting cessions as previously described.
Net Written Premiums
Net written premiums increased$21.2 million , or 35.2%, to$81.4 million for the three months endedMarch 31, 2022 from$60.2 million for the three months endedMarch 31, 2021 . The increase was primarily due to an increase in gross written premiums, primarily in our Fronting, Residential Earthquake and Inland Marine lines partially offset by increased ceded written premiums.
Net Earned Premiums
Net earned premiums increased$28.9 million , or 61.6%, to$76.0 million for the three months endedMarch 31, 2022 from$47.1 million for the three months endedMarch 31, 2021 due primarily to the earning of increased gross written premiums offset by the earning of ceded written premiums under reinsurance agreements. The table below shows the amount of premiums we earned on a gross and net basis and net earned premiums as a percentage of gross earned premiums in each period presented: Three Months Ended March 31, 2022 2021 Change % Change ($ in thousands) Gross earned premiums$ 138,924 $ 91,293 $ 47,631 52.2 % Ceded earned premiums (62,892) (44,240) (18,652) 42.2 % Net earned premiums$ 76,032 $ 47,053 $ 28,979 61.6 % Net earned premium ratio 54.7% 51.5%
Commission and Other Income
Commission and other income increased by$0.1 million , or 9.3%, to$0.8 million for the three months endedMarch 31, 2022 , from$0.7 million for the three months endedMarch 31, 2021 . This was due to an increase in policy related fees associated with an increased volume of premiums written.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses increased$19.4 million , or 438.1% to$15.0 million for the three months endedMarch 31, 2022 from negative$4.4 million for the three months endedMarch 31, 2021 . Losses and loss adjustment expenses consisted of the following elements during the respective periods: Three Months Ended March 31, 2022 2021 Change % Change ($ in thousands) Catastrophe losses$ 481 $ (9,631) $ 10,112 (105.0) % Non-catastrophe losses 14,473 5,208
9,265 177.9 %
Total losses and loss adjustment expenses
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Our catastrophe loss ratio was 0.6% during the three months ended
2022
catastrophe events.
Our catastrophe loss ratio was negative 20.5% during the three months ended
development on catastrophe losses from 2020 Hurricanes and due to reinsurance
recoveries.
Our non-catastrophe loss ratio was 19.1% for the three months endedMarch 31, 2022 compared to 11.1% during the three months endedMarch 31, 2021 . Non-catastrophe losses increased due mainly to higher attritional losses on lines of business subject to attritional losses such as Commercial All Risk, Specialty Homeowners, Flood, and Inland Marine.
Acquisition Expenses
Acquisition expenses increased$8.7 million , or 45.3%, to$28.0 million for the three months endedMarch 31, 2022 from$19.3 million for the three months endedMarch 31, 2021 . The increase was primarily due to higher earned premiums which resulted in higher commissions and premium-related taxes. The higher commissions and premium-related taxes were partially offset by higher earned ceding commissions and fronting fees due to an increase in premiums subject to a quota share or fronting agreement. Acquisition expenses as a percentage of gross earned premiums were 20.2% for the three months endedMarch 31, 2022 compared to 21.2% for the three months endedMarch 31, 2021 . Acquisition expenses as a percentage of gross earned premiums decreased due to the recognition of higher ceding commission and fronting fee income as a percentage of gross earned premiums resulting from changes in mix of business produced.
Other Underwriting Expenses
Other underwriting expenses increased$1.7 million , or 11.8%, to$15.9 million for the three months endedMarch 31, 2022 from$14.2 million for the three months endedMarch 31, 2021 . The increase was primarily due to the Company incurring higher payroll, technology, stock-based compensation, and professional fees expenses associated with growth of the Company. Other underwriting expenses as a percentage of gross earned premiums were 11.5% for the three months endedMarch 31, 2022 compared to 15.6% for the three months endedMarch 31, 2021 . Excluding the impact of expenses relating to transactions, stock-based compensation, amortization of intangibles, and catastrophe bonds other underwriting expenses as a percentage of gross earned premiums were 9.0% for the three months endedMarch 31, 2022 compared to 11.9% for the three months endedMarch 31, 2021 . This percentage decreased due to an increase in earned premiums without a corresponding increase in operating expenses. 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$0.4 million , or 16.2%, to$2.6 million for the three months endedMarch 31, 2022 from$2.2 million for the three months endedMarch 31, 2021 . The increase was primarily due to a higher average balance of investments during the three months endedMarch 31, 2022 . 28 The Company incurred$1.3 million of net realized and unrealized losses on investments for the three months endedMarch 31, 2022 compared to$0.7 million of net realized and unrealized losses for the three months endedMarch 31, 2021 due to higher unrealized losses on our equity securities during the period endedMarch 31, 2022 . Currently, we invest in investment grade fixed maturity securities, includingU.S. government issues, state government issues, mortgage and asset-backed obligations, and corporate bonds with a small portion of our portfolio in equity securities. The following table summarizes the components of our investment income for each period presented: Three Months Ended March 31, 2022 2021 Change % Change ($ in thousands) Interest income$ 2,558 $ 2,238 $ 320 14.3 % Dividend income 155 99 56 56.6 %
Investment management fees and expenses (134) (118) (16) 13.6 % Net investment income 2,579 2,219 360 16.2 % Net realized and unrealized gains (losses) on investments (1,278) (739) (539) 72.9 % Total$ 1,301 $ 1,480 $ (179) (12.1) % Income Tax Expense
Income tax expense increased$1.0 million or 30.8% to$4.5 million for the three months endedMarch 31, 2022 from$3.5 million for the three months endedMarch 31, 2021 due to a higher effective tax rate during the three months endedMarch 31, 2022 . During the three months endedMarch 31, 2022 , our income tax rate of 23.8% was higher than the statutory rate of 21% due primarily to non-deductible executive compensation expense. For the three months endedMarch 31, 2021 our income tax rate of 17.3% was lower than the statutory rate due primarily to the tax impact of the permanent component of employee stock option exercises.
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,
2022 2021
(in thousands)
Total revenue $ 78,110 $ 49,244
Net investment income (2,579) (2,219)
Net realized and unrealized (gains) losses on investments 1,278
739 Underwriting revenue$ 76,809 $ 47,764 Underwriting Income We define underwriting income as income before income taxes excluding net investment income and net realized and unrealized gains and losses on investments. 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 29 our underlying business performance. Underwriting income should not be viewed as a substitute for pre-tax income calculated in accordance with GAAP, and other companies may define underwriting income differently.
Income before income taxes calculated in accordance with GAAP reconciles to
underwriting income as follows:
Three Months Ended
March 31,
2022 2021
(in thousands)
Income before income taxes $ 19,084 $ 20,106
Net investment income (2,579) (2,219)
Net realized and unrealized (gains) losses on investments 1,278
739 Underwriting income$ 17,876 $ 18,626 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,
2022 2021
(in thousands)
Net income $ 14,537 $ 16,630
Adjustments:
Expenses associated with transactions and stock offerings 86
410
Stock-based compensation expense 2,760
938
Amortization of intangibles 315
337
Expenses associated with catastrophe bond, net of rebate 200
1,683 Tax impact (325) (712) Adjusted net income$ 17,573 $ 19,286
Annualized Adjusted Return on Equity
We define adjusted return on equity as adjusted net income expressed on an
annualized basis as a percentage of average beginning and ending stockholders'
equity during the period. We use adjusted return on equity as an internal
performance measure in the management of our operations because we believe it
gives our management and financial statement users useful insight into our
results of operations and our underlying business performance. Adjusted return
on equity should not be viewed as a substitute for return on equity calculated
using unadjusted GAAP numbers, and other companies may define adjusted return on
equity differently.
30
Annualized adjusted return on equity is calculated as follows:
Three Months Ended
March 31,
2022 2021
($ in thousands)
Annualized adjusted net income
Average stockholders' equity
$ 387,284 $ 370,048
Annualized adjusted return on equity 18.1 % 20.8 %
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,
2022 2021
($ in thousands)
Numerator: Sum of losses and loss adjustment expenses,
acquisition expenses, and other underwriting expenses, net
of commission and other income
$ 58,156 $ 28,427 Denominator: Net earned premiums$ 76,032 $ 47,053 Combined ratio 76.5 % 60.4 % Adjustments to numerator: Expenses associated with transactions and stock offerings$ (86) $ (410) Stock-based compensation expense (2,760)
(938)
Amortization of intangibles (315)
(337)
Expenses associated with catastrophe bond, net of rebate (200)
(1,683) Adjusted combined ratio 72.1 % 53.3 %
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.
31
Diluted adjusted earnings per share is calculated as follows:
Three Months Ended
March 31,
2022 2021
(in
thousands, except per share data)
Adjusted net income $ 17,573 $ 19,286 Weighted-average common shares outstanding, diluted 25,899,290 26,256,281 Diluted adjusted earnings per share $
0.68 $ 0.73 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
Catastrophe loss ratio is calculated as follows:
Three Months Ended
March 31,
2022 2021
($ in thousands)
Numerator: Losses and loss adjustment expenses
Denominator: Net earned premiums
$ 76,032 $ 47,053 Loss ratio 19.7 % (9.4) % Numerator: Catastrophe losses$ 481 $ (9,631) Denominator: Net earned premiums$ 76,032 $ 47,053 Catastrophe loss ratio 0.6 % (20.5) %
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.
32
Adjusted combined ratio excluding catastrophe losses is calculated as follows:
Three Months Ended
March 31,
2022 2021
($ in thousands)
Numerator: Sum of losses and loss adjustment expenses,
acquisition expenses, and other underwriting expenses, net
of commission and other income
$ 58,156 $ 28,427 Denominator: Net earned premiums$ 76,032 $ 47,053 Combined ratio 76.5 % 60.4 % Adjustments to numerator: Expenses associated with transactions and stock offerings$ (86) $ (410) Stock-based compensation expense (2,760)
(938)
Amortization of intangibles (315)
(337)
Expenses associated with catastrophe bond, net of rebate (200)
(1,683)
Catastrophe losses (481)
9,631
Adjusted combined ratio excluding catastrophe losses 71.4 %
73.7 % 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,
2022 2021
(in thousands)
Stockholders' equity $ 380,400 $ 394,169
Intangible assets (9,201) (9,501)
Tangible stockholders' equity $ 371,199 $ 384,668
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
restricted by the statutes as to the amount of dividends that they may pay
without prior approval by state insurance commissioners.
UnderCalifornia andOregon statute which govern PSIC, dividends paid in a consecutive twelve month period cannot exceed the greater of (i) 10% of an insurance company's statutory policyholders' surplus as ofDecember 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, underOregon 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
33
pay a dividend or distribution of no greater than
approval by the
Under
twelve month period cannot exceed the lesser of (i) 10% of an insurance
company's statutory policyholders' surplus as of
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
Arizona Insurance Commissioner.
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 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 inBermuda of the Class 3A insurer, at least seven days prior to payment of any dividend which would exceed 25% of that insurer's total statutory capital and surplus as reported on its prior year statutory balance sheet. The affidavit must state that in the opinion of those swearing the declaration of such dividend has not caused the insurer to fail to meet its relevant margins. Further, under the Companies Act, 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 toBermuda 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 2022 is calculated to be approximately$4.2 million . However, this dividend amount is subject to annual enhanced solvency requirement calculations. Cash Flows Our primary sources of cash flow are written premiums, investment income, reinsurance recoveries, sales and redemptions of investments, and proceeds from offerings of equity securities. We use our cash flows primarily to pay reinsurance premiums, operating expenses, losses and loss adjustment expenses, and income taxes.
Our cash flows from operations may differ substantially from our net income due
to non-cash charges or due to changes in balance sheet accounts.
The timing of our cash flows from operating activities can also vary among
periods due to the timing by which payments are made or received. Some of our
payments and receipts, including loss settlements and subsequent reinsurance
receipts, can be significant. Therefore, their timing can influence cash flows
from operating activities in any given period. The potential for a large claim
under an insurance or reinsurance contract means that our insurance subsidiaries
may need to make substantial payments within relatively short periods of time,
which would have a negative impact on our operating cash flows.
34
Management believes that our current liquidity and cash receipts from written
premiums, investment income, proceeds from investment sales and redemptions, and
reinsurance recoveries, if necessary, are sufficient to cover cash outflows for
each of the Company's insurance subsidiaries in the foreseeable future.
The following table summarizes our cash flows for the three months ended March
31, 2022 and 2021:
Three months ended
March 31,
2022 2021
($ in thousands)
Cash provided by (used in):
Operating activities $ 47,801 $ (13,054)
Investing activities (53,630) 1,816
Financing activities 2,397 1,300
Change in cash, cash equivalents, and restricted cash
Our cash flow from operating activities was positive during the three months endedMarch 31, 2022 due to net income and a decrease in net operating assets. Our cash flow from operating activities was negative during the three months endedMarch 31, 2021 due to an increase in net operating assets primarily related to payment on claims in excess of reinsurance recoveries. 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 endedMarch 31, 2022 related primarily to purchases of fixed maturity and equity securities in excess of sales and maturities. Cash provided by investing activities for the three months endedMarch 31, 2021 related primarily to sales and maturities of fixed maturity and equity securities in excess of purchases. Cash provided by financing activities for three months endedMarch 31, 2022 was related to$15.0 million in borrowings from our FHLB line of credit, the receipt of$0.1 million in proceeds from stock option exercises and the receipt of$0.3 million in proceeds from our employee stock purchase plan, offset by the repurchase of$13.0 million of our common stock. Cash provided by financing activities for three months endedMarch 31, 2021 was related to the receipt of$0.3 million in proceeds from our employee stock purchase plan, and the receipt of$1.0 million in proceeds from stock option exercises. 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$533.2 million in cash and investment securities available atMarch 31, 2022 . 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
We also have implemented a share repurchase plan and have used and may use our
cash in the future to purchase outstanding shares of our common stock. Under our
current share repurchase program, shares may be repurchased from time to time in
the open market or negotiated transactions at prevailing market rates, or by
other means
35
in accordance with federal securities laws. The Company purchased 219,061 shares
for $13.0 million under this program during the three months ended March 31,
2022 and $87.0 million remains available for future repurchases.
Credit Agreements
We have the ability to access additional capital through multiple credit
agreements.
InDecember 2021 , we entered into a Credit Agreement (the "Credit Agreement") withU.S. Bank National Association which provides a revolving credit facility of up to$100 million throughDecember 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.
As of
Agreement, but we may seek to borrow under the Credit Agreement in the future.
Our PSIC subsidiary is a member of theFederal Home Loan Bank of San Francisco ("FHLB"). Membership in the FHLB provides PSIC access to collateralized advances, which can be drawn for general corporate purposes and used to enhance liquidity management. All borrowings are fully secured by a pledge of specific investment securities of PSIC and the borrowing capacity is equal to 5% of PSIC's statutory admitted assets. All advances have predetermined term and the interest rate varies based on the term of the advance.
As of
through the FHLB line of credit.
Stockholders' Equity
AtMarch 31, 2022 total stockholders' equity was$380.4 million and tangible stockholders' equity was$371.2 million , compared to total stockholders' equity of$394.2 million and tangible stockholders' equity of$384.7 million as ofDecember 31, 2021 . Stockholder's equity decreased primarily due to unrealized losses on fixed maturity securities and repurchases of shares of our common stock and was offset by the net income we earned for the period and activity related to stock-based compensation.
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 ofMarch 31, 2022 , the majority of our investment portfolio, or$444.4 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$42.0 million of equity securities. In addition, we maintained a non-restricted cash and cash equivalent balance of$46.9 million atMarch 31, 2022 . Our fixed maturity securities, including cash equivalents, had a weighted average effective duration of 4.17 and 3.99 years and an 36 average rating of "A1/A+" and "A1/A" atMarch 31, 2022 andDecember 31, 2021 , respectively. Our fixed income investment portfolio had a book yield of 2.34% as ofMarch 31, 2022 , compared to 2.23% as ofDecember 31, 2021 .
At
available-for-sale securities were as follows:
Amortized Fair % of Total
March 31, 2022 Cost or Cost Value Fair Value
($ in thousands)
Fixed maturities:
U.S. Governments $ 34,100 $ 33,436 7.5 %
States, territories, and possessions 3,786 3,628 0.8 %
Political subdivisions 6,282 5,891 1.3 %
Special revenue excluding mortgage/asset-backed securities 44,412 42,206 9.5 %
Industrial and miscellaneous 246,481 237,136 53.4 %
Mortgage/asset-backed securities 126,145 122,023 27.5 %
Total available-for-sale investments $ 461,206 $ 444,320 100.0 %
Amortized Fair % of Total
December 31, 2021 Cost or Cost Value Fair Value
($ in thousands)
Fixed maturities:
U.S. Governments $ 16,713 $ 16,870 3.9 %
States, territories, and possessions 3,789 4,014 0.9 %
Political subdivisions 6,295 6,380 1.5 %
Special revenue excluding mortgage/asset-backed securities 43,301 44,498 10.3 %
Industrial and miscellaneous 245,064 249,046 57.5 %
Mortgage/asset-backed securities 110,960 111,874 25.9 %
Total available-for-sale investments $ 426,122 $ 432,682 100.0 %
37
The following tables provide the credit quality of investment securities as of
Estimated % of
March 31, 2022 Fair Value Total
($ in thousands)
Rating
AAA $ 124,482 28.0 %
AA 62,165 14.0 %
A 159,169 35.8 %
BBB 90,523 20.4 %
BB 7,565 1.7 %
B 503 0.1 %
CCC & Below (86) - %
$ 444,320 100.0 %
Estimated % of
($ in thousands)
Rating
AAA $ 97,209 22.5 %
AA 65,308 15.1 %
A 165,770 38.3 %
BBB 93,051 21.5 %
BB 11,057 2.5 %
B 268 0.1 %
CCC&Below 125 - %
$ 432,788 100.0 %
The amortized cost and fair value of our available-for-sale investments in fixed maturity securities summarized by contractual maturity as ofMarch 31, 2022
were
as follows:
Amortized Fair % of Total
March 31, 2022 Cost Value Fair Value
($ in thousands)
Due within one year $ 21,245 $ 21,261 4.8 %
Due after one year through five years 146,073 142,553 32.1 %
Due after five years through ten years 118,053 111,966 25.2 %
Due after ten years 49,690 46,517 10.5 %
Mortgage and asset-backed securities 126,145 122,023 27.4 %
$ 461,206 $ 444,320 100.0 %
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
38
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
excess of loss ("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 90 reinsurers,
who either have an "A-" (Excellent) (Outlook Stable) or better financial
strength rating by A.M. Best or post collateral. Our reinsurance contracts
include special termination provisions that allow us to cancel and replace any
participating reinsurer that is downgraded below a rating of "A-" (Excellent)
(Outlook Stable) from A.M. Best , or whose surplus drops by more than 20%.
In addition to reinsurance purchased from traditional reinsurers, we have
historically incorporated collateralized protection from the insurance linked
securities market (e.g. catastrophe bonds). During the first quarter of 2021,
the Company closed a $400 million 144A catastrophe bond which became effective
June 1, 2021 . The catastrophe bond was completed through Torrey Pines Re Pte.
Ltd. ("Torrey Pines Re"). Torrey Pines Re. is a special purpose insurer
established in Singapore whereby Torrey Pines Re provides Palomar with
indemnity-based reinsurance covering earthquake events.
The Company is currently seeking to expand its catastrophe XOL coverage through
a catastrophe bond offering, which is expected to close in the second quarter of
2022, and may seek similar catastrophe bond offerings in the future. There can
be no assurances that the catastrophe bond offering will close in the expected
timeline, on acceptable terms or at all.
Our catastrophe event retention is currently $12.5 million for all perils. Our
reinsurance coverage exhausts at $1.71 billion for earthquake events and $700
million for hurricane events, providing coverage in excess of our 1:250 year
peak zone PML and in excess of our A.M. Best requirement. In addition, we
maintain reinsurance coverage equivalent to or better than the 1 in 250 year PML
for our other lines.
In the event that multiple catastrophe events occur in a period, many of our
contracts include the right to reinstate reinsurance limits for potential future
recoveries during the same contract year and preserve our limit for subsequent
events. This feature for subsequent event coverage is known as a
"reinstatement." In addition, to provide further coverage against the potential
for frequent catastrophe events, the Company has historically obtained aggregate
reinsurance coverage. Beginning April 1, 2021 and renewing on April 1, 2022 , we
have secured $25 million of aggregate XOL reinsurance limit. This coverage,
applying within our per occurrence retention, has an attachment point of $30
million and applies across all perils including but not limited to earthquakes,
hurricanes, convective storms, and floods above a qualifying level of $2.0
million in ultimate gross loss.
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
39
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 2021 Annual Report on Form 10-K.
There have been no significant 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 2021 Annual Report on Form 10-K
Reports from University of Michigan Advance Knowledge in Blood Research (Considerations When Aggregating Data To Measure Performance Across Levels of the Health Care System): Blood Research
PRUDENTIAL FINANCIAL INC – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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