10-Q 1 plmr20240930_10q.htm FORM 10-Q plmr20240930_10q.htm
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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2024

or

 

 

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

 

Commission File Number: 001-38873

 

Palomar Holdings, Inc.

 

(Exact name of registrant as specified in its charter)

 

Delaware

 

83-3972551

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer Identification No.)

   

7979 Ivanhoe Avenue, Suite 500

La Jolla, California

 

92037

(Address of principal executive offices)

 

(Zip Code)

 

 

(619) 567-5290

Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

PLMR

The Nasdaq Stock Market LLC

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒     No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒    No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☒

Accelerated filer ☐

Non-accelerated filer ☐  

Smaller reporting company ☐

Emerging growth company ☐ 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐ 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ☐    No ☒ 

 

Number of shares of the registrant’s common shares outstanding at October 31, 2024: 26,465,867

 
Table of Contents

 

 

PALOMAR HOLDINGS, INC.

 

TABLE OF CONTENTS

 

   

Page

PART I. FINANCIAL INFORMATION

  
     

Item 1.

Financial Statements

  
 

Condensed Consolidated Balance Sheets at September 30, 2024 (Unaudited) and December 31, 2023

3
 

Condensed Consolidated Statements of Income and Comprehensive Income (Loss) (Unaudited) for the Three and Nine Months Ended September 30, 2024 and 2023

4
 

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Three and Nine Months Ended September 30, 2024 and 2023

5
 

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2024 and 2023

7
 

Notes to Condensed Consolidated Financial Statements (Unaudited)

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

46

Item 4.

Controls and Procedures

47
     

PART II. OTHER INFORMATION

  
     

Item 1.

Legal Proceedings

48

Item 1A.

Risk Factors

48

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

71

Item 3.

Defaults Upon Senior Securities

71

Item 4.

Mine Safety Disclosures

71

Item 5.

Other Information

71

Item 6.

Exhibits

72
 

Signatures

73
 

 

2
Table of Contents

 

 

Part I: FINANCIAL INFORMATION

Item 1: Financial Statements

 

Palomar Holdings, Inc. and Subsidiaries

 

Condensed Consolidated Balance Sheets

 

(in thousands, except shares and par value data)

 

  

September 30,

  

December 31,

 
  

2024

  

2023

 
  

(Unaudited)

     

Assets

        

Investments:

        

Fixed maturity securities available for sale, at fair value (amortized cost: $896,775 in 2024; $675,130 in 2023)

 $882,980  $643,799 

Equity securities, at fair value (cost: $32,987 in 2024; $43,003 in 2023)

  40,196   43,160 

Equity method investment

  2,499   2,617 

Other investments

  5,207   — 

Total investments

  930,882   689,576 

Cash and cash equivalents

  86,479   51,546 

Restricted cash

  105   306 

Accrued investment income

  7,495   5,282 

Premiums receivable

  326,674   261,972 

Deferred policy acquisition costs, net of ceding commissions and fronting fees

  86,408   60,990 

Reinsurance recoverable on paid losses and loss adjustment expenses

  58,889   32,172 

Reinsurance recoverable on unpaid losses and loss adjustment expenses

  360,164   244,622 

Ceded unearned premiums

  298,509   265,808 

Prepaid expenses and other assets

  104,831   72,941 

Deferred tax assets, net

  4,019   10,119 

Property and equipment, net

  409   373 

Goodwill and intangible assets, net

  11,147   12,315 

Total assets

 $2,276,011  $1,708,022 

Liabilities and stockholders' equity

        

Liabilities:

        

Accounts payable and other accrued liabilities

 $75,424  $42,376 

Reserve for losses and loss adjustment expenses

  497,438   342,275 

Unearned premiums

  739,623   597,103 

Ceded premium payable

  235,157   181,742 

Funds held under reinsurance treaty

  25,056   13,419 

Income taxes payable

  —   7,255 

Borrowings from credit agreements

  —   52,600 

Total liabilities

  1,572,698   1,236,770 

Stockholders' equity:

        

Preferred stock, $0.0001 par value, 5,000,000 shares authorized, 0 shares issued and outstanding as of September 30, 2024 and December 31, 2023

  —   — 

Common stock, $0.0001 par value, 500,000,000 shares authorized, 26,452,242 and 24,772,987 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively

  3   3 

Additional paid-in capital

  486,198   350,597 

Accumulated other comprehensive loss

  (10,139)  (23,991)

Retained earnings

  227,251   144,643 

Total stockholders' equity

  703,313   471,252 

Total liabilities and stockholders' equity

 $2,276,011  $1,708,022 

 

See accompanying notes.

 

3
Table of Contents
 

 

Palomar Holdings, Inc. and Subsidiaries

 

Condensed Consolidated Statements of Income and Comprehensive Income (Loss) (Unaudited)

 

(in thousands, except shares and per share data)

 

   

Three Months Ended

    

Nine Months Ended

  
   

September 30,

    

September 30,

  
   

2024

    

2023

    

2024

    

2023

  

Revenues:

                                

Gross written premiums

   $ 414,977     $ 313,998     $ 1,168,239     $ 838,406  

Ceded written premiums

     (255,267 )     (203,336 )     (692,620 )     (542,789 )

Net written premiums

     159,710       110,662       475,619       295,617  

Change in unearned premiums

     (24,064 )     (24,845 )     (109,823 )     (43,453 )

Net earned premiums

     135,646       85,817       365,796       252,164  

Net investment income

     9,408       6,029       24,506       16,690  

Net realized and unrealized gains (losses) on investments

     2,734       (1,376 )     5,768       (103 )

Commission and other income

     715       465       2,035       1,781  

Total revenues

     148,503       90,935       398,105       270,532  

Expenses:

                                

Losses and loss adjustment expenses

     40,315       16,139       97,583       54,696  

Acquisition expenses, net of ceding commissions and fronting fees

     41,469       27,004       109,072       78,740  

Other underwriting expenses

     28,129       22,390       84,165       63,962  

Interest expense

     87       867       1,052       2,952  

Total expenses

     110,000       66,400       291,872       200,350  

Income before income taxes

     38,503       24,535       106,233       70,182  

Income tax expense

     8,006       6,103       23,625       16,877  

Net income

   $ 30,497     $ 18,432     $ 82,608     $ 53,305  

Other comprehensive income, net:

                                

Net unrealized gains (losses) on securities available for sale

     17,916       (8,494 )     13,852       (6,706 )

Net comprehensive income

   $ 48,413     $ 9,938     $ 96,460     $ 46,599  

Per Share Data:

                                

Basic earnings per share

   $ 1.18     $ 0.75     $ 3.28     $ 2.15  

Diluted earnings per share

   $ 1.15     $ 0.73     $ 3.19     $ 2.10  
                                 

Weighted-average common shares outstanding:

                                

Basic

     25,766,697       24,740,455       25,194,114       24,847,164  

Diluted

     26,479,566       25,244,828       25,877,257       25,340,602  

 

See accompanying notes.

 

4
Table of Contents
 

 

Palomar Holdings, Inc. and Subsidiaries

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

 

(in thousands, except share data)

 

  

Number of

          

Accumulated

         
  

Common

      

Additional

  

Other

      

Total

 
  

Shares

  

Common

  

Paid-In

  

Comprehensive

  

Retained

  

Stockholders'

 
  

Outstanding

  

Stock

  

Capital

  

Income (Loss)

  

Earnings

  

Equity

 

Balance at December 31, 2023

  24,772,987  $3  $350,597  $(23,991) $144,643  $471,252 

Other comprehensive loss, net of tax

  —   —   —   (2,514)  —   (2,514)

Stock-based compensation

  —   —   3,820   —   —   3,820 

Issuance of common stock via employee stock purchase plan

  9,806   —   434   —   —   434 

Issuance of common stock via equity incentive plan

  138,267   —   1,857   —   —   1,857 

Policyholder contribution to surplus

  —   —   427   —   —   427 

Net income

  —   —   —   —   26,382   26,382 

Balance at March 31, 2024

  24,921,060  $3  $357,135  $(26,505) $171,025  $501,658 

Other comprehensive loss, net of tax

  —   —   —   (1,550)  —   (1,550)

Stock-based compensation

  —   —   3,968   —   —   3,968 

Issuance of common stock via employee stock purchase plan

  —   —   —   —   —   — 

Issuance of common stock via equity incentive plan

  63,578   —   2,112   —   —   2,112 

Policyholder contribution to surplus

  —   —   689   —   —   689 

Net income

  —   —   —   —   25,729   25,729 

Balance at June 30, 2024

  24,984,638  $3  $363,904  $(28,055) $196,754  $532,606 

Other comprehensive income, net of tax

  —   —   —   17,916   —   17,916 

Stock-based compensation

  —   —   4,117   —   —   4,117 

Issuance of common stock in stock offering, net of offering costs

  1,380,000   —   115,724   —   —   115,724 

Issuance of common stock via employee stock purchase plan

  7,294   —   468   —   —   468 

Issuance of common stock via equity incentive plan

  80,310   —   1,064   —   —   1,064 

Policyholder contribution to surplus

  —   —   921   —   —   921 

Net income

  —   —   —   —   30,497   30,497 

Balance at September 30, 2024

  26,452,242  $3  $486,198  $(10,139) $227,251  $703,313 

 

See accompanying notes.

 

5
Table of Contents

Palomar Holdings, Inc. and Subsidiaries

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

 

(in thousands, except share data)

 

  

Number of

          

Accumulated

         
  

Common

      

Additional

  

Other

      

Total

 
  

Shares

  

Common

  

Paid-In

  

Comprehensive

  

Retained

  

Stockholders'

 
  

Outstanding

  

Stock

  

Capital

  

Income (Loss)

  

Earnings

  

Equity

 

Balance at December 31, 2022

  25,027,467  $3  $333,558  $(36,515) $87,708  $384,754 

Other comprehensive income, net of tax

  —   —   —   5,474   —   5,474 

Stock-based compensation

  —   —   3,450   —   —   3,450 

Issuance of common stock via employee stock purchase plan

  7,724   —   394   —   —   394 

Issuance of common stock via equity incentive plan

  41,685   —   90   —   —   90 

Repurchases of common stock

  (134,680)  —   —   —   (6,826)  (6,826)

Net income

  —   —   —   —   17,313   17,313 

Balance at March 31, 2023

  24,942,196  $3  $337,492  $(31,041) $98,195  $404,649 

Other comprehensive income, net of tax

  —   —   —   (3,685)  —   (3,685)

Stock-based compensation

  —   —   3,697   —   —   3,697 

Issuance of common stock via employee stock purchase plan

  —   —   —   —   —   — 

Issuance of common stock via equity incentive plan

  18,555   —   224   —   —   224 

Repurchases of common stock

  (166,482)  —   —   —   (8,739)  (8,739)

Net income

  —   —   —   —   17,562   17,562 

Balance at June 30, 2023

  24,794,269  $3  $341,413  $(34,726) $107,018  $413,708 

Other comprehensive loss, net of tax

  —   —   —   (8,495)  —   (8,495)

Stock-based compensation

  —   —   3,589   —   —   3,589 

Issuance of common stock via employee stock purchase plan

  9,356   —   406   —   —   406 

Issuance of common stock via equity incentive plan

  44,999   —   265   —   —   265 

Repurchases of common stock

  (117,739)  —   —   —   (6,571)  (6,571)

Net income

  —   —   —   —   18,432   18,432 

Balance at September 30, 2023

  24,730,885  $3  $345,673  $(43,221) $118,879  $421,334 

 

See accompanying notes.

 

6
Table of Contents
 

 

Palomar Holdings, Inc. and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

(in thousands)

 

  

Nine Months Ended

 
  

September 30,

 
  

2024

  

2023

 

Operating activities

        

Net cash provided by operating activities

 $188,520  $93,836 

Investing activities

        

Purchases of property and equipment

  (194)  (15)

Capitalized software costs

  (4,115)  (5,324)

Purchases of fixed maturity securities

  (448,968)  (190,560)

Purchases of equity securities

  (202)  (945)

Purchase of equity method investment

  —   (3,000)

Sales and maturities of fixed maturity securities

  227,748   104,505 

Sales of equity securities

  9,014   295 

Change in securities receivable or payable, net

  (2,960)  (3,576)

Investments in limited partnerships

  (5,207)  — 

Acquisitions, net of cash acquired

  —   (5,536)

Net cash used in investing activities

  (224,884)  (104,156)

Financing activities

        

Net (payments on) proceeds from line of credit

  (52,600)  16,200 

Proceeds from stock offering, net of offering costs

  115,724   — 

Proceeds from common stock issued via employee stock purchase plan

  902   799 

Proceeds from common stock issued via stock option exercises

  5,033   579 

Policy holder contribution to surplus

  2,037   — 

Repurchases of common stock

  —   (22,134)

Net cash provided by (used in) financing activities

  71,096   (4,556)

Net increase (decrease) in cash, cash equivalents and restricted cash

  34,732   (14,876)

Cash, cash equivalents and restricted cash at beginning of period

  51,852   68,164 

Cash, cash equivalents and restricted cash at end of period

 $86,584  $53,288 

Supplementary cash flow information:

        

Cash paid for income taxes

 $29,299  $21,093 

Cash paid for interest

 $968  $2,428 

 

The following table summarizes our cash and cash equivalents and restricted cash and cash equivalents within the condensed consolidated balance sheets (in thousands):

 

   

September 30,

    

December 31,

  
   

2024

    

2023

  
   

(unaudited)

          

Cash and cash equivalents

   $ 86,479     $ 51,546  

Restricted cash

     105       306  

Cash and cash equivalents and restricted cash

   $ 86,584     $ 51,852  

 

See accompanying notes.

 

7
Table of Contents

 

Palomar Holdings, Inc. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

1. Summary of Operations and Basis of Presentation

 

Summary of Operations

 

Palomar Holdings, Inc. (the “Company”) is a Delaware incorporated insurance holding company that was founded in 2014. The Company has several wholly owned subsidiaries including an Oregon domiciled insurance company, Palomar Specialty Insurance Company (“PSIC”), a Bermuda based reinsurance company, Palomar Specialty Reinsurance Company Bermuda Ltd. (“PSRE”), an Arizona domiciled surplus lines insurance company, Palomar Excess and Surplus Insurance Company (“PESIC”), a California domiciled property and casualty insurance agency, Palomar Insurance Agency, DBA Palomar General Insurance Agency (“PGIA”), and a Delaware incorporated management company, Palomar Underwriters Exchange Organization, Inc. ("PUEO"), that provides services to Laulima Exchange (“Laulima”), a Hawaii domiciled reciprocal exchange, as its attorney-in-fact.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and include the accounts of the Company and its wholly‑owned subsidiaries. The condensed consolidated financial statements also include the accounts of Laulima, as Laulima is a variable interest entity ("VIE") for which the Company is the primary beneficiary. Within footnote 7, certain prior year amounts have been reclassified to conform to the current year presentation.

 

These condensed consolidated financial statements do not contain all information and footnotes required by U.S. GAAP for complete consolidated financial statements. For a more complete description of the Company’s business and accounting policies, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 23, 2024 (the “2023 Annual Report on Form 10-K”). In the opinion of management, all adjustments necessary for a fair presentation of the condensed consolidated financial statements have been included. Such adjustments consist only of normal recurring items. All intercompany balances and transactions have been eliminated in consolidation. Interim results are not necessarily indicative of results of operations for the full year.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the condensed consolidated financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein. All revisions to accounting estimates are recognized in the period in which the estimates are revised. Significant estimates reflected in the Company’s condensed consolidated financial statements include, but are not limited to, reserves for losses and loss adjustment expenses, reinsurance recoverables on unpaid losses, and the fair values of investments.

 

Recent Accounting Pronouncements

 

Recently adopted accounting pronouncements

 

The Company has not adopted any new accounting guidance during the nine months ended September 30, 2024.

 

Recently issued accounting pronouncements not yet adopted

 

Segment Reporting

 

In  November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses, allowing financial statement users to better understand the components of a segment's profit or loss to assess potential future cash flows for each reportable segment and the entity as a whole. The amendments expand a public entity's segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker ("CODM"), clarifying when an entity  may report one or more additional measures to assess segment performance, requiring enhanced interim disclosures, providing new disclosure requirements for entities with a single reportable segment, and requiring other new disclosures. ASU 2023-07 is effective for fiscal years beginning after  December 15, 2023, and interim periods within fiscal years beginning after  December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.

 

Income Taxes

 

In  December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. ASU 2023-09 requires public business entities to disclose additional information with respect to the reconciliation of the effective tax rate to the statutory rate. Additionally, public business entities will need to disaggregate federal, state and foreign taxes paid in their financial statements. ASU 2023-09 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after  December 15, 2024. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.

 

8
Table of Contents
 
 

2. Investments

 

The Company’s available‑for‑sale investments are summarized as follows:

 

      

Gross

  

Gross

  

Allowance

     
  

Amortized

  

Unrealized

  

Unrealized

  

for

  

Fair

 

September 30, 2024

 

Cost or Cost

  

Gains

  

Losses

  

Credit Losses

  

Value

 
  

(in thousands)

 

Fixed maturities:

                    

U.S. Governments

 $32,839  $16  $(660) $—  $32,195 

U.S. States, Territories, and Political Subdivisions

  10,615   105   (678)  —   10,042 

Special revenue excluding mortgage/asset-backed securities

  30,755   189   (2,884)  —   28,060 

Corporate and other

  467,290   6,776   (11,080)  (904)  462,082 

Mortgage/asset-backed securities

  355,276   3,604   (8,279)  —   350,601 

Total available-for-sale investments

 $896,775  $10,690  $(23,581) $(904) $882,980 

 

      

Gross

  

Gross

  

Allowance

     
  

Amortized

  

Unrealized

  

Unrealized

  

for

  

Fair

 

December 31, 2023

 

Cost or Cost

  

Gains

  

Losses

  

Credit Losses

  

Value

 
  

(in thousands)

 

Fixed maturities:

                    

U.S. Governments

 $40,836  $—  $(1,416) $—  $39,420 

U.S. States, Territories, and Political Subdivisions

  10,641   100   (839)  —   9,902 

Special revenue excluding mortgage/asset-backed securities

  32,513   147   (3,149)  —   29,511 

Corporate and other

  316,590   1,750   (17,197)  (904)  300,239 

Mortgage/asset-backed securities

  274,550   1,879   (11,702)  —   264,727 

Total available-for-sale investments

 $675,130  $3,876  $(34,303) $(904) $643,799 

 

Security holdings in an unrealized loss position

 

As of September 30, 2024, the Company held 399 fixed maturity securities in an unrealized loss position with a total estimated fair value of $387.5 million and total gross unrealized losses of $23.6 million. As of December 31, 2023, the Company held 483 fixed maturity securities in an unrealized loss position with a total estimated fair value of $451.0 million and total gross unrealized losses of $34.3 million.

 

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The aggregate fair value and gross unrealized losses of the Company’s investments aggregated by investment category and the length of time these individual securities have been in a continuous unrealized loss position as of September 30, 2024 and December 31, 2023, are as follows:

 

  

Less Than 12 Months

  

More Than 12 Months

  

Total

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 

September 30, 2024

 

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

 
  

(in thousands)

 

Fixed maturity securities:

                        

U.S. Governments

 $16,037  $(27) $15,122  $(633) $31,159  $(660)

U.S. States, Territories, and Political Subdivisions

  508   (8)  6,353   (670)  6,861   (678)

Special revenue excluding mortgage/asset-backed securities

  2,006   (282)  23,232   (2,602)  25,238   (2,884)

Corporate and other

  19,821   (243)  182,025   (10,837)  201,846   (11,080)

Mortgage/asset-backed securities

  24,195   (917)  98,170   (7,362)  122,365   (8,279)

Total available-for-sale investments

 $62,567  $(1,477) $324,902  $(22,104) $387,469  $(23,581)

 

  

Less Than 12 Months

  

More Than 12 Months

  

Total

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 

December 31, 2023

 

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

 
  

(in thousands)

 

Fixed maturity securities:

                        

U.S. Governments

 $738  $(1) $38,063  $(1,415) $38,801  $(1,416)

U.S. States, Territories, and Political Subdivisions

  —   —   6,196   (839)  6,196   (839)

Special revenue excluding mortgage/asset-backed securities

  —   —   26,736   (3,149)  26,736   (3,149)

Corporate and other

  28,872   (480)  204,034   (16,717)  232,906   (17,197)

Mortgage/asset-backed securities

  29,334   (245)  117,016   (11,457)  146,350   (11,702)

Total available-for-sale investments

 $58,944  $(726) $392,045  $(33,577) $450,989  $(34,303)

 

The Company reviews all securities with unrealized losses on a quarterly basis to assess whether the decline in the securities fair value necessitates the recognition of an allowance for credit losses. The Company considers numerous factors in its review as described in Footnote 1 of the Notes to the Consolidated Financial Statements in the 2023 Annual Report on Form 10-K.

 

The Company has recorded an immaterial allowance for credit losses for two investment securities. Based on the Company’s review as of September 30, 2024, for the remainder of securities, the Company determined that the fixed maturity securities’ unrealized losses were primarily the result of the interest rate environment and not the credit quality of the issuers. The Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before the recovery of their amortized cost basis.

 

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Table of Contents
 

Contractual maturities of available‑for‑sale fixed maturity securities

 

The amortized cost and fair value of fixed maturity securities at September 30, 2024, by contractual maturity, are shown below.

 

  

Amortized

  

Fair

 
  

Cost

  

Value

 
  

(in thousands)

 

Due within one year

 $80,152  $78,731 

Due after one year through five years

  183,202   180,227 

Due after five years through ten years

  176,607   172,654 

Due after ten years

  101,538   100,767 

Mortgage and asset-backed securities

  355,276   350,601 
  $896,775  $882,980 

 

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.

 

Net investment income summary

 

Net investment income is summarized as follows:

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2024

  

2023

  

2024

  

2023

 
  

(in thousands)

  

(in thousands)

 

Interest income

 $9,365  $5,952  $24,317  $16,468 

Dividend income

  220   211   675   602 

Investment expense

  (177)  (134)  (486)  (380)

Net investment income

 $9,408  $6,029  $24,506  $16,690 

 

Net realized and unrealized investment gains and losses

 

The following table presents net realized and unrealized investment gains and losses:

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2024

  

2023

  

2024

  

2023

 
  

(in thousands)

  

(in thousands)

 

Realized gains:

                

Gains on sales of fixed maturity securities

 $42  $—  $59  $65 

Total realized gains

  42   —   59   65 

Realized losses:

                

Losses on sales of fixed maturity securities

  (328)  —   (330)  (32)

Losses on sales of equity securities

  —   —   (1,204)  — 

Total realized losses

  (328)  —   (1,534)  (32)

Net realized investment (losses) gains

  (286)  —   (1,475)  33 

Change in allowance for credit losses

  327   —   —   (667)

Net unrealized gains (losses) on equity securities

  2,434   (1,299)  7,052   608 

Net unrealized gains (losses) on equity method investment

  148   (77)  (118)  (77)

Net unrealized gains on other investments

  111   —   309   — 

Net realized and unrealized gains (losses) on investments

 $2,734  $(1,376) $5,768  $(103)

 

Realized gains and losses on disposition of investments are based on specific identification of the investments sold on the settlement date.

 

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Proceeds from the sale of fixed maturity securities were $3.2 million and insignificant for the three months ended September 30, 2024 and 2023, respectively.

 

Proceeds from the sale of fixed maturity securities were $5.4 and $9.8 million for the nine months ended September 30, 2024 and 2023, respectively.

 

The Company places securities on statutory deposit with certain state agencies to retain the right to do business in those states. These securities are included in available‑for‑sale investments on the balance sheet. As of September 30, 2024 and December 31, 2023, the carrying value of securities on deposit with state regulatory authorities was $7.8 million and $8.6 million, respectively.

 

The Company has investments in limited partnerships, recorded in the Other Investments line of the Unaudited Condensed Consolidated Balance Sheets. These investments are measured at estimated fair value utilizing a net asset value per share (or its equivalent) as a practical expedient. As of  September 30, 2024, the Company had unfunded commitments to invest an additional $50.1 million in these limited partnerships.

 
 

3. Fair Value Measurements

 

Fair value is defined as the price that the Company would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment.

 

The three‑tier hierarchy of inputs is summarized in the three broad levels listed below:

 

Level 1—Unadjusted quoted prices are available in active markets for identical investments as of the reporting date.

 

Level 2—Pricing inputs are quoted prices for similar investments in active markets; quoted prices for identical or similar investments in inactive markets; or valuations based on models where the significant inputs are observable or can be corroborated by observable market data.

 

Level 3—Pricing inputs into models are unobservable for the investment. The unobservable inputs require significant management judgment or estimation.

 

To measure fair value, the Company obtains quoted market prices for its investment securities from its outside investment managers. If a quoted market price is not available, the Company uses prices of similar securities. The fair values obtained from the outside investment managers are reviewed for reasonableness and any discrepancies are investigated for final valuation.

 

The fair value of the Company’s investments in fixed maturity securities is estimated using relevant inputs, including available market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. An Option Adjusted Spread model is also used to develop prepayment and interest rate scenarios. Industry standard models are used to analyze and value securities with embedded options or prepayment sensitivities. These fair value measurements are estimated based on observable, objectively verifiable market information rather than market quotes. Therefore, these investments are classified and disclosed in Level 2 of the hierarchy.

 

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The following tables present the hierarchy for financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2024 and December 31, 2023.

 

September 30, 2024

 

Level 1

  

Level 2

  

Level 3

  

Total

 
  

(in thousands)

 

Assets:

                

Fixed maturity securities

                

U.S. Governments

 $—  $32,195  $—  $32,195 

U.S. States, Territories, and Political Subdivisions

  —   10,042   —   10,042 

Special revenue excluding mortgage/asset-backed securities

  —   28,060   —   28,060 

Corporate and other

  —   462,082   —   462,082 

Mortgage/asset-backed securities

  —   350,601   —   350,601 

Equity securities

  40,196   —   —   40,196 

Cash, cash equivalents, and restricted cash

  86,584   —   —   86,584 

Total assets

 $126,780  $882,980  $—  $1,009,760 

 

December 31, 2023

 

Level 1

  

Level 2

  

Level 3

  

Total

 
  

(in thousands)

 

Assets:

                

Fixed maturity securities

                

U.S. Governments

 $—  $39,420  $—  $39,420 

U.S. States, Territories, and Political Subdivisions

  —   9,902   —   9,902 

Special revenue excluding mortgage/asset-backed securities

  —   29,511   —   29,511 

Corporate and other

  —   300,239   —   300,239 

Mortgage/asset-backed securities

  —   264,727   —   264,727 

Equity securities

  43,160   —   —   43,160 

Cash, cash equivalents, and restricted cash

  51,852   —   —   51,852 

Total assets

 $95,012  $643,799  $—  $738,811 

 

The carrying amounts of financial assets and liabilities reported in the accompanying condensed consolidated balance sheet including cash and cash equivalents, restricted cash, receivables, reinsurance recoverable, and accounts payable and other accrued liabilities approximate fair value due to their short term‑maturity. The carrying amount of any borrowings under the Federal Home Loan Bank (“FHLB”) line of credit and U.S. Bank credit agreement (the “Credit Agreement”) approximate fair value as the credit agreements have variable rates which frequently reprice at market rates.

 

Transfers between Level 3 and Level 2 securities result from changes in the availability of observable market inputs and are recorded at the beginning of the reporting period. As of September 30, 2024 and December 31, 2023, the Company had no fixed income securities classified as Level 3.

 

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4. Reserve for Losses and Loss Adjustment Expenses

 

The following table represents a reconciliation of changes in the ending reserve balances for losses and loss adjustment expenses (“LAE”):

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2024

  

2023

  

2024

  

2023

 
  

(in thousands)

  

(in thousands)

 

Reserve for losses and LAE net of reinsurance recoverables at beginning of period

 $118,761  $81,300  $97,653  $77,520 

Add: Incurred losses and LAE, net of reinsurance, related to:

                

Current year

  40,536   15,116   100,225   50,954 

Prior years

  (221)  1,023   (2,642)  3,742 

Total incurred

  40,315   16,139   97,583   54,696 

Deduct: Loss and LAE payments, net of reinsurance, related to:

                

Current year

  16,153   6,646   27,909   14,215 

Prior years

  5,649   (1,385)  30,053   25,823 

Total payments

  21,802   5,261   57,962   40,038 

Reserve for losses and LAE net of reinsurance recoverables at end of period

  137,274   92,178   137,274   92,178 

Add: Reinsurance recoverables on unpaid losses and LAE at end of period

  360,164   232,170   360,164   232,170 

Reserve for losses and LAE gross of reinsurance recoverables on unpaid losses and LAE at end of period

 $497,438  $324,348  $497,438  $324,348 

 

Considerable variability is inherent in the estimate of the reserve for losses and LAE. Although management believes the liability recorded for losses and LAE is adequate, the variability inherent in this estimate could result in changes to the ultimate liability, which may be material to stockholders’ equity.

 

The Company experienced favorable prior year development of $0.2 million and adverse prior year development $1.0 million during the three months ended  September 30, 2024 and 2023, respectively.

 

The Company experienced favorable prior year development of $2.6 million and adverse prior year development of $3.7 million during the nine months ended  September 30, 2024 and 2023, respectively.

 

Favorable prior year development during the three months ended September 30, 2024 was primarily due to lower than anticipated severity of attritional losses. Adverse prior year development during the three months ended September 30, 2023 was primarily due to higher than anticipated severity of attritional losses, offset by lower than anticipated severity of catastrophe losses.

 

Favorable prior year development during the nine months ended September 30, 2024 was primarily due to lower than anticipated severity of attritional losses. Adverse prior year development during the nine months ended September 30, 2023 was primarily due to higher than anticipated severity of attritional losses, offset by lower than anticipated severity of catastrophe losses.

 
 

5. Stockholders’ Equity

 

As of September 30, 2024 and December 31, 2023, the Company had 5,000,000 preferred shares authorized with a par value of $0.0001 and no preferred shares issued and outstanding. As of September 30, 2024 and December 31, 2023, the Company had 500,000,000 common shares authorized and 26,452,242 and 24,772,987 common shares issued and outstanding, respectively, with a par value of $0.0001. Additional paid in capital was $486.2 million as of September 30, 2024 and $350.6 million as of