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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 and six months endedJune 30, 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 continue to develop product offerings for lines of business that harness our
core competencies and where we believe we can generate attractive risk adjusted
returns; recent examples include our casualty and fronting offerings. 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 six months ended June 30, 2022 , 45% 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 93% 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 June 2022 ,
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.
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COVID-19 Update
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 have 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, 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 and equity securities. 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. The majority of our insurance policies 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 incurred on borrowings from our FHLB line of credit.
Net Investment Income
We earn investment income on our portfolio of invested assets. We invest primarily 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 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. Our balance of invested capital may be impacted in the future by repurchases of shares of our common stock or borrowings under our credit agreements.
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 and include unrealized gains and losses on 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. 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.
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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.
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Results of Operations
Three months ended
The following table summarizes our results for the three months endedJune 30, 2022 and 2021: Three months ended June 30, 2022 2021 Change % Change ($ in thousands, except per share data) Gross written premiums$ 218,689 $ 129,359 $ 89,330 69.1 % Ceded written premiums (122,627) (51,568) (71,059) 137.8 % Net written premiums 96,062 77,791 18,271 23.5 % Net earned premiums 80,265 54,215 26,050 48.0 % Commission and other income 990 1,006 (16) (1.6) %
Total underwriting revenue (1) 81,255 55,221 26,034 47.1 % Losses and loss adjustment expenses 14,398
7,235 7,163 99.0 % Acquisition expenses 28,663 22,424 6,239 27.8 % Other underwriting expenses 18,195 12,539 5,656 45.1 % Underwriting income (1) 19,999 13,023 6,976 53.6 % Interest expense (111) - (111) NM Net investment income 3,140 2,194 946 43.1 %
Net realized and unrealized gains (losses) on investments (4,735)
300 (5,035) NM Income before income taxes 18,293 15,517 2,776 17.9 % Income tax expense 3,704 3,177 527 16.6 % Net income$ 14,589 $ 12,340 $ 2,249 18.2 % Adjustments:
Stock-based compensation expense 2,704 907 1,797 198.1 % Amortization of intangibles 313 252 61 24.2 % Expenses associated with catastrophe bond, net of rebate 1,792
16 1,776 NM Tax impact (695) (278) (417) 150.0 % Adjusted net income (1)$ 18,703 $ 13,237 $ 5,466 41.3 % Key Financial and Operating Metrics Annualized return on equity 15.4 % 13.1 % Annualized adjusted return on equity (1) 19.7 %
14.1 % Loss ratio 17.9 % 13.3 % Expense ratio 57.1 % 62.6 % Combined ratio 75.1 % 76.0 % Adjusted combined ratio (1) 69.1 % 73.8 % Diluted earnings per share$ 0.57 $ 0.47
Diluted adjusted earnings per share (1)$ 0.73
$ 0.51 Catastrophe losses$ 548 $ (1,137) Catastrophe loss ratio (1) 0.7 % (2.1) %
Adjusted combined ratio excluding catastrophe losses (1) 68.4 % 75.9 % Adjusted underwriting income (1)$ 24,808 $ 14,198 $ 10,610 74.7 % 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$89.3 million , or 69.1% to$218.7 million for the three months endedJune 30, 2022 compared to$129.4 million for the three months endedJune 30, 2021 . Premium growth was primarily due to an increased volume of policies written across our lines of business which was driven by new business generated with existing partners, strong premium retention rates for existing business, expansion of our distribution footprint, and new partnerships. The following table summarizes our gross written premiums by line of business and shows each line's percentage of total gross written
premiums for each period:
Three Months Ended June 30,
2022 2021
($ in thousands)
% of % of %
Amount GWP Amount GWP Change Change
Product
Residential Earthquake $ 54,090 24.7 % $ 42,192 32.6 % $ 11,898 28.2 %
Fronting Premiums 42,154 19.3 % - - % 42,154 NM
Commercial Earthquake 33,103 15.1 % 17,343 13.4 % 15,760 90.9 %
Inland Marine 23,134 10.6 % 11,681 9.0 % 11,453 98.0 %
Commercial All Risk 21,213 9.7 % 14,976 11.6 % 6,237 41.6 %
Specialty Homeowners 13,891 6.4 % 19,135 14.8 % (5,244) (27.4) %
Hawaii Hurricane 8,240 3.8 % 7,788 6.0 % 452 5.8 %
Residential Flood 3,583 1.6 % 2,865 2.2 % 718 25.1 %
Other 19,281 8.8 % 13,379 10.4 % 5,902 44.1 %
Total Gross Written Premiums$ 218,689 100.0 %$ 129,359 100.0 %$ 89,330 69.1 % 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. During the second quarter of 2022, we ceased writing Specialty Homeowners business outside ofTexas and converted our Texas Specialty Homeowners business to a fronting arrangement beginningJune 1, 2022 . These underwriting changes caused the decline in Specialty Homeowners premiums shown above. The following table summarizes our gross written premiums by insurance subsidiary: Three Months Ended June 30, 2022 2021 ($ in thousands) % of % of % Amount GWP Amount GWP Change Change Subsidiary PSIC$ 116,338 53.2 %$ 95,271 73.6 %$ 21,067 22.1 % PESIC 102,351 46.8 % 34,088 26.4 % 68,263 200.3 % Total Gross Written Premiums$ 218,689 100.0 %$ 129,359 100.0 %$ 89,330 69.1 % Ceded Written Premiums Ceded written premiums increased$71.1 million , or 137.8%, to$122.6 million for the three months endedJune 30, 2022 from$51.6 million for the three months endedJune 30, 2021 . The increase was primarily due to increased 27 premiums ceded under fronting agreements due to growth in fronting premiums written and increased ceding under quota share arrangements due to growth in the volume of written premiums subject to quota shares. In addition, we incurred increased excess of loss ("XOL") reinsurance expense due to growth in exposure. During the three months endedJune 30, 2021 , our XOL reinsurance expense was impacted by Winter Storm Uri ("Uri"). Catastrophe losses from Uri caused us to utilize certain layers of our XOL program and incur approximately$3.9 million of expense associated with the reinstatement of our reinsurance program. Ceded written premiums as a percentage of gross written premiums increased to 56.1% for the three months endedJune 30, 2022 from 39.9% for the three months endedJune 30, 2021 . This increase was primarily due to increased fronting and quota share cessions as previously described.
Net Written Premiums
Net written premiums increased$18.3 million , or 23.5%, to$96.1 million for the three months endedJune 30, 2022 from$77.8 million for the three months endedJune 30, 2021 . The increase was primarily due to an increase in gross written premiums, primarily in our Commercial Earthquake and Residential Earthquake lines, partially offset by increased ceded written premiums.
Net Earned Premiums
Net earned premiums increased$26.1 million , or 48.0%, to$80.3 million for the three months endedJune 30, 2022 from$54.2 million for the three months endedJune 30, 2021 due primarily to the earning of increased gross written premiums offset by the earning of ceded written premiums under reinsurance agreements. The table below shows the amount of premiums we earned on a gross and net basis and net earned premiums as a percentage of gross earned premiums in each period presented: Three Months Ended June 30, 2022 2021 Change % Change ($ in thousands) Gross earned premiums$ 158,142 $ 102,520 $ 55,622 54.3 % Ceded earned premiums (77,877) (48,305) (29,572) 61.2 % Net earned premiums$ 80,265 $ 54,215 $ 26,050 48.0 % Net earned premium ratio 50.8% 52.9%
Commission and Other Income
Commission and other income was approximately$1.0 million for both the three months endedJune 30, 2022 andJune 30, 2021 . The balance remained materially consistent due to an increase in policy related fees associated with an increased volume of premiums written offset by a decrease in commissions from a lower volume of policies written through our internal managing general agency,Palomar Insurance Agency . 28
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses increased$7.2 million , or 99.0% to$14.4 million for the three months endedJune 30, 2022 from$7.2 million for the three months endedJune 30, 2021 . Losses and loss adjustment expenses consisted of the following elements during the respective periods: Three Months Ended June 30, 2022 2021 Change % Change ($ in thousands) Catastrophe losses$ 548 $ (1,137) $ 1,685 NM Non-catastrophe losses 13,850 8,372
5,478 65.4 %
Total losses and loss adjustment expenses
Our catastrophe loss ratio was 0.7% during the three months ended
Catastrophe losses were related to unfavorable development on prior year
catastrophe events.
Our catastrophe loss ratio was negative 2.1% during the three months endedJune 30, 2021 . The negative catastrophe loss ratio was due to favorable development on catastrophe losses from 2020 Hurricanes and due to reinsurance recoveries. Our non-catastrophe loss ratio was 17.2% for the three months endedJune 30, 2022 compared to 15.4% during the three months endedJune 30, 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$6.2 million , or 27.8%, to$28.7 million for the three months endedJune 30, 2022 from$22.4 million for the three months endedJune 30, 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 18.1% for the three months endedJune 30, 2022 compared to 21.9% for the three months endedJune 30, 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$5.7 million , or 45.1%, to$18.2 million for the three months endedJune 30, 2022 from$12.5 million for the three months endedJune 30, 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 endedJune 30, 2022 compared to 12.2% for the three months endedJune 30, 2021 . Excluding the impact of expenses relating to stock-based compensation, amortization of intangibles, and catastrophe bonds, other underwriting expenses as a percentage of gross earned premiums were 8.5% for the three months endedJune 30, 2022 compared to 11.1% for the three months endedJune 30, 2021 . This percentage decreased due to an increase in net 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. 29
Net Investment Income and Net Realized and Unrealized Gains (Losses) on
Investments
Net investment income increased$0.9 million , or 43.1%, to$3.1 million for the three months endedJune 30, 2022 from$2.2 million for the three months endedJune 30, 2021 . The increase was primarily due to a higher average balance of investments during the three months endedJune 30, 2022 and higher yields on invested assets. The Company incurred$4.7 million of net realized and unrealized losses on investments for the three months endedJune 30, 2022 compared to$0.3 million of net realized and unrealized gains for the three months endedJune 30, 2021 due to higher unrealized losses on our equity securities during the period endedJune 30, 2022 . Unrealized gains and losses on fixed maturity securities are recognized as a component of other comprehensive income and do not impact our net income. The following table summarizes the components of our investment income for each period presented: Three Months Ended June 30, 2022 2021 Change % Change ($ in thousands) Interest income$ 3,082 $ 2,262 $ 820 36.3 % Dividend income 185 58 127 219.0 %
Investment management fees and expenses (127) (126) (1) 0.8 % Net investment income 3,140 2,194 946 43.1 % Net realized and unrealized gains (losses) on investments (4,735) 300 (5,035) NM % Total$ (1,595) $ 2,494 $ (4,089) (164.0) % Income Tax Expense
Income tax expense increased$0.5 million or 16.6% to$3.7 million for the three months endedJune 30, 2022 from$3.2 million for the three months endedJune 30, 2021 due to higher pre-tax income for the period endedJune 30, 2022 . During the three months endedJune 30, 2022 , our income tax rate of 20.2% was lower than the statutory rate of 21% due primarily to the tax impact of the permanent component of employee stock option exercises. For the three months endedJune 30, 2021 our income tax rate of 20.5% was lower than the statutory rate also due primarily to the tax impact of the permanent component of employee stock option exercises. 30 Results of Operations
Six months ended
The following table summarizes our results for the six months endedJune 30, 2022 and 2021: Six months ended June 30, 2022 2021 Change % Change ($ in thousands, except per share data) Gross written premiums$ 389,623 $ 232,936 $ 156,687 67.3 % Ceded written premiums (212,179) (94,932) (117,247) 123.5 % Net written premiums 177,444 138,004 39,440 28.6 % Net earned premiums 156,297 101,268 55,029 54.3 % Commission and other income 1,767 1,717 50 2.9 %
Total underwriting revenue (1) 158,064 102,985 55,079 53.5 % Losses and loss adjustment expenses 29,351
2,813 26,538 NM Acquisition expenses 56,718 41,737 14,981 35.9 % Other underwriting expenses 34,119 26,786 7,333 27.4 % Underwriting income (1) 37,876 31,649 6,227 19.7 % Interest expense (204) - (204) NM Net investment income 5,719 4,413 1,306 29.6 %
Net realized and unrealized losses on investments (6,014)
(439) (5,575) NM Income before income taxes 37,377 35,623 1,754 4.9 % Income tax expense 8,251 6,653 1,598 24.0 % Net income$ 29,126 $ 28,970 $ 156 0.5 % Adjustments:
Expenses associated with transactions 85 411 (326) (79.3) % Stock-based compensation expense 5,463 1,845 3,618 196.1 % Amortization of intangibles 628 589 39 6.6 % Expenses associated with catastrophe bond, net of rebate 1,992
1,698 294 17.3 % Tax impact (1,019) (990) (29) 2.9 % Adjusted net income (1)$ 36,275 $ 32,523 $ 3,752 11.5 % Key Financial and Operating Metrics Annualized return on equity 15.1 % 15.6 % Annualized adjusted return on equity (1) 18.8 %
17.6 % Loss ratio 18.8 % 2.8 % Expense ratio 57.0 % 66.0 % Combined ratio 75.8 % 68.7 % Adjusted combined ratio (1) 70.5 % 64.3 % Diluted earnings per share$ 1.13 $ 1.11
Diluted adjusted earnings per share (1)$ 1.41
$ 1.24 Catastrophe losses$ 1,029 $ (10,768) Catastrophe loss ratio (1) 0.7 % (10.6) %
Adjusted combined ratio excluding catastrophe losses (1) 69.9 % 74.9 % Adjusted underwriting income (1)$ 46,044 $ 36,192 $ 9,852 27.2 % 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.
31
Gross Written Premiums
Gross written premiums increased$156.7 million , or 67.3% to$389.6 million for the six months endedJune 30, 2022 compared to$232.9 million for the six months endedJune 30, 2021 . Premium growth was primarily due to an increased volume of policies written across our lines of business which was driven by new business generated with existing partners, strong premium retention rates for existing business, expansion of our distribution footprint, and new partnerships. The following table summarizes our gross written premiums by line of business and shows each line's percentage of total gross written premiums for each period: Six Months Ended June 30, 2022 2021 ($ in thousands) % of % of Amount GWP Amount GWP Change Change Product Residential Earthquake$ 100,426 25.8 %$ 78,090 33.5 %$ 22,336 28.6 % Fronting Premiums 71,999 18.5 % - 0.0 % 71,999 NM % Commercial Earthquake 58,247 14.9 % 38,619 16.6 % 19,628 50.8 % Inland Marine 41,371 10.6 % 19,515 8.4 % 21,856 112.0 % Commercial All Risk 31,791 8.2 % 23,165 9.9 % 8,626 37.2 % Specialty Homeowners 30,176 7.7 % 33,138 14.2 % (2,962) (8.9) % Hawaii Hurricane 15,154 3.9 % 13,925 6.0 % 1,229 8.8 % Residential Flood 6,577 1.7 % 5,149 2.2 % 1,428 27.7 % Other 33,882 8.7 % 21,335 9.2 % 12,547 58.8 % Total Gross Written Premiums$ 389,623 100.0 %$ 232,936 100.0 %$ 156,687 67.3 %
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. During the second quarter of 2022, we ceased writing Specialty Homeowners business outside ofTexas and converted our Texas Specialty Homeowners business to a fronting arrangement beginningJune 1, 2022 . These underwriting changes caused the decline in Specialty Homeowners premiums shown above. The following table summarizes our gross written premiums by insurance subsidiary: Six Months Ended June 30, 2022 2021 ($ in thousands) % of % of % Amount GWP Amount GWP Change Change Subsidiary PSIC$ 220,342 56.6 %$ 175,117 75.2 %$ 45,225 25.8 % PESIC 169,281 43.4 % 57,819 24.8 % 111,462 192.8 % Total Gross Written Premiums$ 389,623 100.0 %$ 232,936 100.0 %$ 156,687 67.3 % 32 Ceded Written Premiums Ceded written premiums increased$117.2 million , or 123.5%, to$212.2 million for the six months endedJune 30, 2022 from$94.9 million for the six months endedJune 30, 2021 . The increase was primarily due to increased premium ceded under fronting agreements due to growth in fronting premiums written and increased ceding under quota share arrangements due to growth in the volume of written premiums subject to quota shares. In addition, we incurred increased excess of loss ("XOL") reinsurance expense due to growth in exposure. During the six months endedJune 30, 2021 , our XOL 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$7.9 million of expense associated with the reinstatement of our reinsurance program. Ceded written premiums as a percentage of gross written premiums increased to 54.5% for the six months endedJune 30, 2022 from 40.8% for the six months endedJune 30, 2021 . This increase was primarily due increased quota share and fronting cessions as previously described.
Net Written Premiums
Net written premiums increased$39.4 million , or 28.6%, to$177.4 million for the six months endedJune 30, 2022 from$138.0 million for the six months endedJune 30, 2021 . The increase was primarily due to an increase in gross written premiums, primarily in our Residential Earthquake and Inland Marine lines partially offset by increased ceded written premiums.
Net Earned Premiums
Net earned premiums increased$55.0 million , or 54.3%, to$156.3 million for the six months endedJune 30, 2022 from$101.3 million for the six months endedJune 30, 2021 due primarily to the earning of increased gross written premiums offset by the earning of ceded written premiums under reinsurance agreements. The table below shows the amount of premiums we earned on a gross and net basis and net earned premiums as a percentage of gross earned premiums in each period presented. Six Months Ended June 30, 2022 2021 Change % Change ($ in thousands) Gross earned premiums$ 297,067 $ 193,812 $ 103,255 53.3 % Ceded earned premiums (140,770) (92,544) (48,226) 52.1 % Net earned premiums$ 156,297 $ 101,268 $ 55,029 54.3 % Net earned premium ratio 52.6% 52.3%
Commission and Other Income
Commission and other income increased by$0.1 million , or 2.9%, to$1.8 million for the six months endedJune 30, 2022 , from$1.7 million for the six months endedJune 30, 2021 . This was due to an increase in policy related fees associated with an increased volume of premiums written. 33
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses increased$26.5 million to$29.4 million for the six months endedJune 30, 2022 from$2.8 million for the six months endedJune 30, 2021 . Losses and loss adjustment expenses consisted of the following elements during the respective periods: Six Months Ended June 30, 2022 2021 Change % Change ($ in thousands) Catastrophe losses$ 1,029 $ (10,768) $ 11,797 NM Non-catastrophe losses 28,322 13,581
14,741 108.5 %
Total losses and loss adjustment expenses
NM- not meaningful
Our catastrophe loss ratio was 0.7% during the six months ended
Catastrophe losses were related to unfavorable development on prior year
catastrophe events.
Our catastrophe loss ratio was negative 10.6% during the six months endedJune 30, 2021 . The negative catastrophe loss ratio was due to favorable development on catastrophe losses from 2020 Hurricanes and due to reinsurance recoveries. Our non-catastrophe loss ratio was 18.1% for the six months endedJune 30, 2022 compared to 13.4% during the six months endedJune 30, 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$15.0 million , or 35.9%, to$56.7 million for the six months endedJune 30, 2022 from$41.7 million for the six months endedJune 30, 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 19.1% for the six months endedJune 30, 2022 compared to 21.5% for the six months endedJune 30, 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 due to changes in mix of business produced.
Other Underwriting Expenses
Other underwriting expenses increased$7.3 million , or 27.4%, to$34.1 million for the six months endedJune 30, 2022 from$26.8 million for the six months endedJune 30, 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 six months endedJune 30, 2022 compared to 13.8% for the six months endedJune 30, 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 8.7% for the six months endedJune 30, 2022 compared to 11.5% for the six months endedJune 30, 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. 34
Net Investment Income and Net Realized and Unrealized Gains (Losses) on
Investments
Net investment income increased$1.3 million , or 29.6%, to$5.7 million for the six months endedJune 30, 2022 from$4.4 million for the six months endedJune 30, 2021 . The increase was primarily due to a higher average balance of investments during the six months endedJune 30, 2022 and higher yields on invested assets. The Company incurred$6.0 million of net realized and unrealized losses on investments for the six months endedJune 30, 2022 compared to$0.4 million of net realized and unrealized losses for the six months endedJune 30, 2021 due to higher unrealized losses on our equity securities during the period endedJune 30, 2022 . Unrealized gains and losses on fixed maturity securities are recognized as a component of other comprehensive income and do not impact our net income. The following table summarizes the components of our investment income for each period presented: Six Months Ended June 30, 2022 2021 Change % Change ($ in thousands) Interest income$ 5,640 $ 4,501 $ 1,139 25.3 % Dividend income 340 157 183 116.6 %
Investment management fees and expenses (261) (245) (16) 6.5 % Net investment income 5,719 4,413 1,306 29.6 % Net realized and unrealized gains (losses) on investments (6,014) (439) (5,575) NM % Total$ (295) $ 3,974 $ (4,269) (107.4) % Income Tax Expense
Income tax expense increased$1.6 million or 24.0% to$8.3 million for the six months endedJune 30, 2022 from$6.7 million for the six months endedJune 30, 2021 due to higher pre-tax income and a higher effective tax rate during the six months endedJune 30, 2022 . During the six months endedJune 30, 2022 , our income tax rate of 22.1% was higher than the statutory rate of 21% due primarily to non-deductible executive compensation expense. For the six months endedJune 30, 2021 our income tax rate of 18.7% 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 Six Months Ended
June 30, June 30,
2022 2021 2022 2021
(in thousands) (in thousands)
Total revenue $ 79,660 $ 57,715 $ 157,769 $ 106,959
Net investment income (3,140) (2,194) (5,719) (4,413)
Net realized and unrealized (gains) losses on
investments 4,735 (300) 6,014 439
Underwriting revenue $ 81,255 $ 55,221 $ 158,064 $ 102,985
35
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 Six Months Ended
June 30, June 30,
2022 2021 2022 2021
(in thousands) (in thousands)
Income before income taxes $ 18,293 $ 15,517 $ 37,377 $ 35,623
Net investment income (3,140) (2,194) (5,719) (4,413)
Net realized and unrealized (gains) losses on
investments 4,735 (300) 6,014 439
Interest expense 111 - 204 -
Underwriting income $ 19,999 $ 13,023 $ 37,876 $ 31,649
Expenses associated with transactions - - 85 411 Stock-based compensation expense 2,704 907 5,463 1,845 Amortization of intangibles 313 252 628 589 Expenses associated with catastrophe bond, net of rebate 1,792 16 1,992 1,698 Adjusted underwriting income$ 24,808 $ 14,198
$ 46,044 $ 36,192 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.
36
Net income calculated in accordance with GAAP reconciles to adjusted net income
as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
(in thousands) (in thousands)
Net income $ 14,589 $ 12,340 $ 29,126 $ 28,970
Adjustments:
Expenses associated with transactions - - 85 411 Stock-based compensation expense 2,704 907 5,463 1,845 Amortization of intangibles 313 252 628 589 Expenses associated with catastrophe bond, net of rebate 1,792 16 1,992 1,698 Tax impact (695) (278) (1,019) (990) Adjusted net income$ 18,703 $ 13,237 $ 36,275 $ 32,523
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 Six Months Ended
June 30, June 30,
2022 2021 2022 2021
($ in thousands) ($ in thousands)
Annualized adjusted net income$ 74,812 $ 52,948 $ 72,550 $ 65,046 Average stockholders' equity$ 379,232 $ 376,563 $ 386,117 $ 370,229 Annualized adjusted return on equity 19.7 % 14.1 %
18.8 % 17.6 %
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.
37
Adjusted combined ratio is calculated as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
($ in thousands) ($ in thousands)
Numerator: Sum of losses and loss adjustment
expenses, acquisition expenses, and other
underwriting expenses, net of commission and
other income $ 60,266 $ 41,192 $ 118,421 $ 69,619
Denominator: Net earned premiums $ 80,265 $ 54,215 $ 156,297 $ 101,268
Combined ratio 75.1 % 76.0 % 75.8 % 68.7 %
Adjustments to numerator:
Expenses associated with transactions $ - $ - $ (85) $ (411)
Stock-based compensation expense (2,704) (907) (5,463) (1,845)
Amortization of intangibles (313) (252) (628) (589)
Expenses associated with catastrophe bond,
net of rebate (1,792) (16) (1,992) (1,698)
Adjusted combined ratio 69.1 % 73.8 % 70.5 % 64.3 %
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.
Diluted adjusted earnings per share is calculated as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
(in thousands, except per share data) (in thousands, except per share data)
Adjusted net income $ 18,703 $ 13,237 $ 36,275 $ 32,523
Weighted-average common shares
outstanding, diluted 25,746,780 26,104,880 25,817,442 26,181,206
Diluted adjusted earnings per share $ 0.73 $
0.51 $ 1.41 $ 1.24 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:
38
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
($ in thousands) ($ in thousands)
Numerator: Losses and loss adjustment expenses$ 14,398 $ 7,235 $ 29,351 $ 2,813 Denominator: Net earned premiums$ 80,265 $ 54,215
$ 156,297 $ 101,268 Loss ratio 17.9 % 13.3 % 18.8 % 2.8 % Numerator: Catastrophe losses$ 548 $ (1,137) $ 1,029 $ (10,768)
Denominator: Net earned premiums$ 80,265 $ 54,215
$ 156,297 $ 101,268 Catastrophe loss ratio 0.7 % (2.1) % 0.7 % (10.6) %
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 Six Months Ended
June 30, June 30,
2022 2021 2022 2021
($ in thousands) ($ in thousands)
Numerator: Sum of losses and loss adjustment
expenses, acquisition expenses, and other
underwriting expenses, net of commission and
other income $ 60,266 $ 41,192 $ 118,421 $ 69,619
Denominator: Net earned premiums $ 80,265 $ 54,215 $ 156,297 $ 101,268
Combined ratio 75.1 % 76.0 % 75.8 % 68.7 %
Adjustments to numerator:
Expenses associated with transactions $ - $ - $ (85) $ (411)
Stock-based compensation expense (2,704) (907) (5,463) (1,845)
Amortization of intangibles (313) (252) (628) (589)
Expenses associated with catastrophe bond,
net of rebate (1,792) (16) (1,992) (1,698)
Catastrophe losses (548) 1,137 (1,029) 10,768
Adjusted combined ratio excluding
catastrophe losses 68.4 % 75.9 % 69.9 % 74.9 %
39
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:
June 30, December 31,
2022 2021
(in thousands)
Stockholders' equity $ 378,065 $ 394,169
Intangible assets (8,888) (9,501)
Tangible stockholders' equity $ 369,177 $ 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 pay a dividend or distribution of no greater than$45.7 million in 2022 without approval by theCalifornia and Oregon Insurance Commissioners.
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 40 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$4.2 million . However, this dividend amount is subject to annual enhanced solvency requirement calculations. Cash Flows Our primary sources of cash flow are written premiums, investment income, reinsurance recoveries, sales and redemptions of investments, and proceeds from borrowings on our lines of credit. We use our cash flows primarily to pay reinsurance premiums, operating expenses, losses and loss adjustment expenses, and income taxes.
Our cash flows from operations may differ substantially from our net income due
to non-cash charges or due to changes in balance sheet accounts.
The timing of our cash flows from operating activities can also vary among periods due to the timing by which payments are made or received. Some of our payments and receipts, including loss settlements and subsequent reinsurance receipts, can be significant. Therefore, their timing can influence cash flows from operating activities in any given period. The potential for a large claim under an insurance or reinsurance contract means that our insurance subsidiaries may need to make substantial payments within relatively short periods of time, which would have a negative impact on our operating cash flows. Management believes that our current liquidity and cash receipts from written premiums, investment income, proceeds from investment sales and redemptions, and reinsurance recoveries, if necessary, are sufficient to cover cash outflows for each of the Company's insurance subsidiaries in the foreseeable future. The following table summarizes our cash flows for the six months endedJune 30, 2022 and 2021: Six months ended June 30, 2022 2021 ($ in thousands) Cash provided by (used in): Operating activities$ 82,799 $ (7,067) Investing activities (101,497) 13,194 Financing activities 4,835 (14,294)
Change in cash, cash equivalents, and restricted cash
Our cash flow from operating activities was positive during the six months endedJune 30, 2022 due to net income and a decrease in net operating assets. Our cash flow from operating activities was negative during the six months endedJune 30, 2021 due to an increase in net operating assets primarily related to timing
of
payments on claims.
41
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 six months ended June 30, 2022 related
primarily to purchases of fixed maturity and equity securities in excess of
sales and maturities. Cash provided by investing activities for the six months
ended June 30, 2021 related primarily to sales and maturities of fixed maturity
and equity securities in excess of purchases.
Cash provided by financing activities for six months ended June 30, 2022 was
related to $23.0 million in borrowings from our FHLB line of credit, the receipt
of $1.8 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 $20.3 million of our common stock. Cash used in financing
activities for six months ended June 30, 2021 was related to the repurchase of
$15.8 million of our common stock offset by the receipt of $1.2 million from the
issuance of common stock via stock option exercises and the receipt of $0.3
million in proceeds related to the issuance of common stock via 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 $552.5 million in cash and investment securities
available at June 30, 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 in accordance with federal securities laws. We purchased 347,013 shares for$20.3 million under this program during the six months endedJune 30, 2022 and$79.7 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. 42
As of
through the FHLB line of credit.
Stockholders' Equity
AtJune 30, 2022 total stockholders' equity was$378.1 million and tangible stockholders' equity was$369.2 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 partially 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 ofJune 30, 2022 , the majority of our investment portfolio, or$478.5 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$37.5 million of equity securities. In addition, we maintained a non-restricted cash and cash equivalent balance of$36.5 million atJune 30, 2022 . Our fixed maturity securities, including cash equivalents, had a weighted average effective duration of 4.18 and 3.99 years and an average rating of "A1/A+" and "A1/A" atJune 30, 2022 andDecember 31, 2021 , respectively. Our fixed income investment portfolio had a book yield of 2.61% as ofJune 30, 2022 , compared to 2.23% as ofDecember 31, 2021 .
At
available-for-sale securities were as follows:
Amortized Fair % of Total
June 30, 2022 Cost or Cost Value Fair Value
($ in thousands)
Fixed maturities:
U.S. Governments $ 46,397 $ 45,168 9.4 %
States, territories, and possessions 5,866 5,580 1.2 %
Political subdivisions 6,744 6,043 1.2 %
Special revenue excluding mortgage/asset-backed securities 43,126 38,977 8.1 %
Corporate and other 265,896 246,407 51.6 %
Mortgage/asset-backed securities 145,137 136,301 28.5 %
Total available-for-sale investments $ 513,166 $ 478,476 100.0 %
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 %
43
Corporate and other 245,064 249,046 57.5 %
Mortgage/asset-backed securities 110,960 111,874 25.9 %
Total available-for-sale investments
The following tables provide the credit quality of investment securities as of
Estimated % of
June 30, 2022 Fair Value Total
($ in thousands)
Rating
AAA $ 152,616 31.9 %
AA 62,916 13.1 %
A 158,716 33.2 %
BBB 95,785 20.0 %
BB 8,103 1.7 %
B 460 0.1 %
CCC & Below (119) - %
$ 478,477 100.0 %
Estimated % of
December 31, 2021 Fair Value Total
($ 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 ofJune 30, 2022
were
as follows:
Amortized Fair % of Total
June 30, 2022 Cost Value Fair Value
($ in thousands)
Due within one year $ 32,742 $ 32,461 4.8 %
Due after one year through five years 174,358 166,479 32.1 %
Due after five years through ten years 126,703 114,076 25.2 %
Due after ten years 34,226 29,160 10.5 %
Mortgage and asset-backed securities 145,137 136,301 27.4 %
$ 513,166 $ 478,477 100.0 %
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations.
44
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
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 80 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 via catastrophe bonds. During the first quarter of 2021, the
Company closed a $400 million 144A catastrophe bond which became effective June
1, 2021 . The catastrophe bond was completed through Torrey Pines Re Pte. Ltd.
("Torrey Pines Re Pte. "). Torrey Pines Re Pte. is a special purpose reinsurance
vehicle incorporated in Singapore that provides Palomar with indemnity-based
reinsurance covering earthquake events through June 1, 2024 . During the second
quarter of 2022, the Company also closed a $275 million 144A catastrophe bond
which became effective June 1, 2022 . This catastrophe bond was completed through
Torrey Pines Re Ltd. , a Bermuda -domiciled special purpose insurer that provides
indemnity-based reinsurance covering earthquake events through June 1, 2025 .
Our catastrophe event retention is currently $12.5 million for all perils. Our
reinsurance coverage exhausts at $2.08 billion for earthquake events and $900
million for 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.
45
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 net 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 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
Bradesco 2Q22 – Press Release
2Q22 Earnings Presentation
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