Palomar(PLMR) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents Palomar Holdings, Inc.'s unaudited condensed consolidated financial statements, highlighting asset growth, increased net income, and a decrease in equity due to investment losses Condensed Consolidated Balance Sheets Total assets increased to $1.22 billion, liabilities rose to $848.6 million, and stockholders' equity decreased to $367.8 million due to comprehensive loss Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2022 (Unaudited) | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $1,216,466 | $925,734 | | Total Investments | $512,262 | $465,943 | | Premiums receivable, net | $186,850 | $88,012 | | Total Liabilities | $848,621 | $531,565 | | Reserve for losses and LAE | $205,823 | $173,366 | | Unearned premiums | $443,463 | $284,665 | | Total Stockholders' Equity | $367,845 | $394,169 | Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) Net income increased to $33.4 million for the nine-month period, driven by a 41% rise in net earned premiums and substantial growth in gross written premiums Income Statement Summary (in thousands, except per share data) | Metric | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Gross written premiums | $642,751 | $385,267 | | Net earned premiums | $234,239 | $165,988 | | Total revenues | $238,461 | $174,620 | | Losses and LAE | $60,251 | $31,288 | | Net income | $33,411 | $29,215 | | Diluted earnings per share | $1.29 | $1.12 | Condensed Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity decreased to $367.8 million, primarily due to a $47.9 million other comprehensive loss and $23.3 million in share repurchases, partially offset by net income - Key drivers for the change in stockholders' equity during the first nine months of 2022 include net income of $33.4 million, offset by a $47.9 million other comprehensive loss and $23.3 million in common stock repurchases[15] Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities significantly increased to $94.5 million, while investing activities used $121.4 million, resulting in a $20.8 million net decrease in cash Cash Flow Summary (in thousands) | Activity | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $94,544 | $37,030 | | Net cash used in investing activities | ($121,422) | ($15,805) | | Net cash provided by (used in) financing activities | $6,051 | ($13,377) | | Net decrease in cash | ($20,827) | $7,848 | Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, investment portfolio changes including increased unrealized losses, significant gross written premium growth, and specifics of the reinsurance program and credit facilities - Gross unrealized losses on fixed maturity securities increased significantly to $54.2 million as of September 30, 2022, from $2.7 million at year-end 2021, primarily due to the interest rate environment[28] Gross Written Premiums by Product (Nine Months Ended Sep 30, in thousands) | Product | 2022 | 2021 | | :--- | :--- | :--- | | Fronting Premiums | $154,232 | $0 | | Residential Earthquake | $159,995 | $128,165 | | Commercial Earthquake | $90,894 | $66,052 | | Inland Marine | $72,214 | $39,047 | | Total GWP | $642,751 | $385,267 | - The company's catastrophe event retention is $12.5 million for all perils, with XOL reinsurance protection up to $2.08 billion for earthquake events and $900 million for Hawaii hurricane events[78] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, highlighting significant Q3 gross written premium growth, improved net income despite catastrophe losses, strong liquidity, and a robust reinsurance program Results of Operations Q3 2022 gross written premiums grew 66.2% to $253.1 million, driven by new fronting business, with net income improving despite $12.5 million in catastrophe losses Q3 2022 vs Q3 2021 Performance (in thousands) | Metric | Q3 2022 | Q3 2021 | | :--- | :--- | :--- | | Gross written premiums | $253,128 | $152,332 | | Net earned premiums | $77,942 | $64,720 | | Catastrophe losses | $12,500 | $17,487 | | Net income | $4,286 | $246 | | Combined ratio | 94.8% | 102.8% | - The growth in gross written premiums was primarily driven by the launch of the fronting business (PLMR-FRONT) in Q4 2021, which contributed $82.2 million in GWP in Q3 2022[129] - Catastrophe losses for Q3 2022 were $12.5 million, related to Hurricane Ian, compared to $17.5 million in Q3 2021 from Hurricanes Ida and Nicholas[138] Liquidity and Capital Resources The company maintains sufficient liquidity from premiums and investment income, supported by credit facilities, despite a decrease in stockholders' equity due to unrealized investment losses and share repurchases - The company's primary sources of cash are written premiums, investment income, and reinsurance recoveries; management believes liquidity is sufficient for the foreseeable future[199][201] - The company has a $100 million revolving credit facility (undrawn) and an FHLB line of credit with $26.4 million outstanding[209][212] - Under its $100 million share repurchase program, the company purchased 399,198 shares for $23.3 million during the first nine months of 2022[207] Reinsurance The company employs a robust reinsurance program, including traditional reinsurers and ILS, to mitigate catastrophe losses with a $12.5 million retention and coverage up to $2.08 billion for earthquake events - The company's reinsurance program is designed to reduce volatility and exposure to catastrophe losses, utilizing over 80 reinsurers and insurance-linked securities[219][220] - The company's catastrophe event retention is $12.5 million for all perils; reinsurance coverage exhausts at $2.08 billion for earthquake events and $900 million for Hawaii hurricane events[222] - The company has secured $25 million of aggregate XOL reinsurance, which attaches at $30 million of losses across all perils, providing further protection against frequent catastrophe events[223] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are equity price and interest rate fluctuations, with credit risk managed through high-quality, diversified fixed maturity investments averaging 'AA-' rating - Primary market risks include equity price risk and interest rate risk from the investment portfolio[225] - Credit risk is managed by investing in high-quality securities; the fixed maturity portfolio has an average rating of 'AA-' and approximately 78.8% is rated 'A-' or better[227] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[230] - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2022[231] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in ordinary course legal proceedings not expected to materially affect its consolidated financial position - The company is involved in ordinary course legal proceedings which are not expected to have a material adverse effect on its financial position[234] Item 1A. Risk Factors The company faces various risks including severe catastrophe events, reinsurer non-payment, reserve inadequacy, business concentration, economic downturns, technology failures, and extensive regulation Risks Related to Our Business and Industry Key business risks include severe catastrophe events, reinsurer default, inadequate loss reserves, geographic concentration in California and Texas, and intense competition - Claims from unpredictable and severe catastrophe events, potentially exacerbated by climate change, could eliminate earnings and stockholders' equity[238] - The company is exposed to reinsurer credit risk; if reinsurers fail to pay claims, Palomar remains primarily liable to policyholders[244] - A significant portion of business is concentrated in California (46% of GWP) and Texas (11% of GWP for the nine months ended Sep 30, 2022), increasing exposure to localized events and regulatory environments[268] Risks related to the Economic Environment Economic risks include the COVID-19 pandemic's impact, potential economic downturns reducing demand and increasing claims, and investment portfolio vulnerabilities to interest rate and credit risks - The COVID-19 pandemic and its economic effects could disrupt operations, reduce demand for products, and negatively impact the investment portfolio[298] - Adverse economic factors like recession and inflation could lead to fewer policies sold, an increase in claims frequency, and premium defaults[300] - The investment portfolio is subject to market risks, including interest rate changes and credit quality deterioration, which could adversely affect financial results[303][304][305] Risks related to Technology Technology risks include high dependence on IT systems, potential for system failures, security breaches, or cyber-attacks, leading to operational disruption and data exposure - The business is highly dependent on IT and telecommunications systems, and failures could severely limit the ability to write business, process claims, and operate[315] - Security breaches or cyber-attacks could expose the company to liability, reputational damage, and operational disruptions due to the processing and storage of confidential data[317][319] Risks Related to Laws and Regulations The company faces risks from extensive regulation, including capital and dividend restrictions, and potential adverse impacts from changes in laws or their interpretation, particularly concerning policy coverage and holding company dividend capacity - The company is subject to extensive regulation regarding capital, investments, dividends, and solvency, which may adversely affect business objectives[324][325] - Unexpected changes in the judicial or regulatory interpretation of policy coverage and exclusions could broaden coverage beyond underwriting intent, leading to higher losses[331] - As a holding company, the ability to pay dividends is dependent on receiving dividends from its insurance subsidiaries, which are restricted by state and Bermuda regulations[342] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company's Board approved a $100 million share repurchase plan, under which $23.3 million of common stock was repurchased during the first nine months of 2022 - The company has a $100 million share repurchase program authorized through March 2024[382] - In the nine months ended September 30, 2022, the company repurchased $23.3 million of its stock, with $76.7 million remaining under the authorization[383] Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported - None[384] Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[385] Item 5. Other Information No other material information is reported in this section - None[386] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including officer certifications and Inline XBRL data files - Lists exhibits filed with the report, including Sarbanes-Oxley certifications and XBRL data[387]