Palomar(PLMR) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Presents Palomar Holdings, Inc.'s unaudited condensed consolidated financial statements for Q2 and H1 2023, including balance sheets, income, equity, cash flows, and detailed notes Condensed Consolidated Balance Sheets | Balance Sheet Highlights | June 30, 2023 (Unaudited) | December 31, 2022 | | :--- | :--- | :--- | | Total Investments | $601.5 million | $553.6 million | | Total Assets | $1,546.3 million | $1,306.5 million | | Total Liabilities | $1,132.6 million | $921.7 million | | Total Stockholders' Equity | $413.7 million | $384.8 million | Condensed Consolidated Statements of Income and Comprehensive Income (Loss) | Income Statement Highlights | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | | :--- | :--- | :--- | | Gross Written Premiums | $274.3 million | $218.7 million | | Net Earned Premiums | $83.1 million | $80.3 million | | Net Income | $17.6 million | $14.6 million | | Diluted Earnings Per Share | $0.69 | $0.57 | | Income Statement Highlights | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Gross Written Premiums | $524.4 million | $389.6 million | | Net Earned Premiums | $166.3 million | $156.3 million | | Net Income | $34.9 million | $29.1 million | | Diluted Earnings Per Share | $1.37 | $1.13 | Condensed Consolidated Statements of Changes in Stockholders' Equity - Total stockholders' equity increased to $413.7 million at June 30, 2023, from $384.8 million at December 31, 2022. The increase was primarily driven by net income of $34.9 million, partially offset by $15.6 million in common stock repurchases during the six-month period[13] Condensed Consolidated Statements of Cash Flows | Cash Flow Summary (Six Months Ended June 30) | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $23.2 million | $82.8 million | | Net cash used in investing activities | ($52.9 million) | ($101.5 million) | | Net cash provided by financing activities | $20.1 million | $4.8 million | | Net (decrease) in cash, cash equivalents and restricted cash | ($9.6 million) | ($13.9 million) | Notes to Condensed Consolidated Financial Statements - As of June 30, 2023, the company's catastrophe event retention is $17.5 million for all perils. Its excess of loss (XOL) reinsurance provides protection up to $2.66 billion for earthquake events, $900 million for Hawaii hurricane events, and $100 million for continental U.S. hurricane events[70] - The company utilizes catastrophe bonds to supplement its reinsurance program. In Q2 2023, it closed a $200 million 144A catastrophe bond effective June 1, 2023, which provides indemnity-based reinsurance for earthquake events through June 1, 2026[71] | Gross Written Premiums by Product (Q2 2023) | Amount | % of GWP | | :--- | :--- | :--- | | Fronting Premiums | $80.2M | 29.2% | | Residential Earthquake | $65.1M | 23.7% | | Commercial Earthquake | $42.8M | 15.6% | | Inland Marine | $35.5M | 13.0% | | California (by State) | $157.1M | 57.3% | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's Q2 and H1 2023 financial performance, covering GWP growth, operational drivers, liquidity, and capital resources Results of Operations - Three Months Ended June 30, 2023 vs 2022 Q2 2023 GWP grew 25.4% to $274.3 million driven by Fronting premiums, net income rose 20.4% to $17.6 million, and the combined ratio increased to 79.0% due to higher loss ratio | Key Metrics (Q2 2023 vs Q2 2022) | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Gross Written Premiums | $274.3M | $218.7M | | Net Income | $17.6M | $14.6M | | Adjusted Net Income (Non-GAAP) | $21.8M | $22.4M | | Loss Ratio | 21.5% | 17.9% | | Combined Ratio | 79.0% | 75.1% | | Adjusted Combined Ratio (Non-GAAP) | 72.2% | 69.1% | - The 25.4% growth in GWP was led by a $38.1 million (90.3%) increase in Fronting Premiums. Significant growth was also seen in Residential Earthquake (+$11.0M), Commercial Earthquake (+$9.7M), and Inland Marine (+$12.4M)[120] - The increase in the loss ratio was driven by $2.2 million in catastrophe losses, primarily from severe convective storms, compared to $0.5 million in the prior year period. The non-catastrophe loss ratio also increased to 18.9% from 17.2%[129][130] Results of Operations - Six Months Ended June 30, 2023 vs 2022 H1 2023 GWP increased 34.6% to $524.4 million driven by Fronting premiums, net income grew 19.7% to $34.9 million, and the combined ratio rose to 78.5% due to higher loss ratio | Key Metrics (Six Months 2023 vs 2022) | H1 2023 | H1 2022 | | :--- | :--- | :--- | | Gross Written Premiums | $524.4M | $389.6M | | Net Income | $34.9M | $29.1M | | Adjusted Net Income (Non-GAAP) | $42.2M | $41.0M | | Loss Ratio | 23.2% | 18.8% | | Combined Ratio | 78.5% | 75.8% | | Adjusted Combined Ratio (Non-GAAP) | 72.8% | 70.5% | - Ceded written premiums increased by 60.0% to $339.5 million, driven by growth in fronting and quota share agreements. This raised the ceded premium ratio to 64.7% from 54.5% in the prior year period[144][145] - Catastrophe losses for the six-month period were $4.0 million (2.4% loss ratio), related to floods and severe convective storms, compared to $1.0 million (0.7% loss ratio) in the prior year[151] Liquidity and Capital Resources The company maintains strong liquidity with $660.2 million in cash and investments and $413.7 million in stockholders' equity as of June 30, 2023 - Cash flow from operations was $23.2 million for the first six months of 2023, a decrease from $82.8 million in the same period of 2022, with the variation attributed to the timing of premium receipts, claim payments, and reinsurance activities[195][196] - The company repurchased 301,162 shares for $15.6 million in the first six months of 2023, with $50.0 million remaining available under its share repurchase program[200] - Total stockholders' equity increased to $413.7 million, and tangible stockholders' equity (a non-GAAP measure) increased to $400.6 million as of June 30, 2023[206] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate and credit risk, managed conservatively with high-quality fixed maturity securities - The company manages credit risk by investing primarily in high-quality securities. As of June 30, 2023, approximately 78.9% of the fixed maturity portfolio was rated 'A-' or better, and 1.6% was rated below investment grade or unrated[220] - The fixed income investment portfolio had a book yield of 3.60% as of June 30, 2023, an increase from 3.30% as of December 31, 2022[208] Item 4. Controls and Procedures As of June 30, 2023, disclosure controls and procedures were effective, with no material changes to internal control over financial reporting - Management, including 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[223] - No changes in internal control over financial reporting occurred during the quarter ended June 30, 2023, that have materially affected, or are reasonably likely to materially affect, internal controls[224] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in ordinary course legal proceedings, not expected to materially adversely affect its financial position - The company states that ongoing legal proceedings are not expected to have a material adverse effect on its consolidated financial position[227] Item 1A. Risk Factors Outlines significant risks including catastrophe events, reinsurance reliance, loss reserve adequacy, geographic concentration, competition, and regulatory changes - A primary risk is exposure to unpredictable and severe catastrophe events. The company's reinsurance coverage exhausts at $2.66 billion for earthquake events and $900 million for Hawaii hurricane events, with a catastrophe event retention of $17.5 million for all perils[231][238] - The business is geographically concentrated, with California and Texas representing 57% and 9% of gross written premiums, respectively, for the six months ended June 30, 2023, exposing the company to regional loss activity and regulatory environments[269] - The company relies on a select group of brokers and program administrators. For the six months ended June 30, 2023, the two largest program administrators distributed 31.3% and 14.7% of gross written premiums, respectively[276] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Details the company's share repurchase activity during Q2 2023, totaling 166,482 shares under its publicly announced plan | Share Repurchases (Q2 2023) | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | April 2023 | 84,547 | $54.02 | | May 2023 | 68,061 | $49.52 | | June 2023 | 13,874 | $54.96 | | Total | 166,482 | | - As of June 30, 2023, approximately $50.0 million remained available for future repurchases under the company's $100 million share repurchase program, which extends through March 31, 2024[375][376] Item 5. Other Information A new executive employment agreement was approved, specifying severance benefits for executive officers upon termination or change in control - A new form of executive employment agreement was approved, providing for severance payments equal to 12 months' base salary plus a pro-rata target bonus upon termination without cause or for good reason[380][381] - If termination without cause or resignation for good reason occurs within 12 months of a change in control, the executive is entitled to severance pay and acceleration of unvested equity awards[382]